UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~September~~June 30, ~~2021~~2022


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file ~~number~~number: 001-41009

Arhaus, Inc.

(Exact name of registrant as specified in its charter)


Delaware						87-1729256
(State or other jurisdiction of incorporation or organization)						(I.R.S. Employer Identification No.)

51 E. Hines Hill Road, Boston Heights, Ohio

(Address of Principal Executive Offices)

44236

(Zip Code)

(440) 439-7700

(Registrant's telephone number, including area ~~code~~code)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Class A common stock, $0.001 par value per share	ARHS	The Nasdaq Global Select Market

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. Yes ☐☒ No ☒☐

Indicate by check mark whether the registrant has submitted electronically ~~if any,~~ every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated

filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. ~~(Check one):~~


Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☐
		Emerging growth company	☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒

As of ~~December 1, 2021 136,946,392~~August 4, 2022 the registrant had 52,947,617 shares of ~~the registrant’s~~Class A common stock ~~were~~and 87,115,600 shares of Class B common stock outstanding.

Table of Contents

~~TABLE OF CONTENTS~~Table of Contents


		Page
Part I - Financial Information		32
Item 1 A .1.	Financial Statements of Arhaus, Inc. and Subsidiaries	3
	~~Condensed Balance Sheet (unaudited)~~	3
	~~Notes to Condensed~~Ba ~~lance Sheets~~ ~~(unaudited)~~	4
~~Item 1~~B .	~~Financial Statements of Arhaus, LLC. and Subsidiarie~~s	72
	Condensed Consolidated Balance Sheets (unaudited)	72
	Condensed Consolidated Statements of Comprehensive Income (unaudited)	83
	Condensed Consolidated Statements of Changes in ~~Mezzanine~~Stockholders’ Equity ~~and Members’ Deficit~~(Deficit) (unaudited)	94
	Condensed Consolidated Statements of Cash Flows (unaudited)	116
	Notes to Condensed Consolidated Financial Statements (unaudited)	127
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2518
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	3728
Item 4.	Controls and Procedures	3828
Part II. Other Information		4131
Item 1.	Legal Proceedings	4131
Item 1A.	Risk Factors	4131
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	4131
Item 3.	Defaults Upon Senior Securities	4131
Item 4.	Mine Safety Disclosures	4131
Item 5.	Other Information	4131
Item 6.	Exhibits	4232
Signatures		4333

~~Explanatory Note~~

Unless otherwise indicated or the context requires, “Arhaus,” the “Company,” “we,” “our” and “us” refer collectively to Arhaus, LLC and its subsidiaries. On November 8, 2021, Arhaus, Inc. completed an initial public offering (the “IPO”) of 12,903,226 shares of Class A common stock. In connection with the IPO, the Company completed the reorganization transactions described in Note 5 of the condensed balance sheets for Arhaus, Inc. and Note 12 of the condensed consolidated financial statements for Arhaus, LLC. For accounting purposes, the historical results included herein represent the assets, liabilities and results of operations of Arhaus, Inc. since the date of its formation and Arhaus, LLC and its subsidiaries prior to the IPO.

Part I - Financial Information

Item ~~1A.~~1. Financial Statements of Arhaus, Inc. and Subsidiaries

Arhaus, Inc.

and Subsidiaries
Condensed Consolidated Balance Sheets ~~(unaudited)~~
(Unaudited, amounts in thousands, except share and per share data)


	September 30, 2021		July 14, 2021
~~Assets~~
~~Cash and cash equivalents~~	$	—	$	—
~~Total assets~~	$	—	$	—

~~Commitments and contingencies (Note 4)~~	$	—	$	—

~~Stockholders’ Equity~~
~~Common stock, $0.001 par value per share, 1,000 shares authorized, no shares issued and outstanding~~	$	—	$	—
~~Total stockholders’ equity~~	$	—	$	—


	June 30, 2022		December 31, 2021
Assets
Current assets
Cash and cash equivalents	$	144,628	$	123,777
Restricted cash equivalents	6,985		7,131
Accounts receivable, net	1,500		228
Merchandise inventory, net	272,478		208,343
Prepaid and other current assets	29,509		28,517
Total current assets	455,100		367,996
Operating right-of-use assets	231,667		—
Financing right-of-use assets	39,602		—
Property, furniture and equipment, net	116,620		179,631
Deferred tax asset	22,833		27,684
Goodwill	10,961		10,961
Other noncurrent assets	249		278
Total assets	$	877,032	$	586,550

Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable	$	62,331	$	51,429
Accrued taxes	8,594		7,302
Accrued wages	13,911		16,524
Accrued other expenses	26,718		61,047
Client deposits	276,968		264,929
Current portion of operating lease liabilities	37,624		—
Current portion of financing lease liabilities	513		—
Total current liabilities	426,659		401,231
Operating lease liabilities, long-term	268,061		—
Financing lease liabilities, long-term	51,981		—
Capital lease obligation	—		50,525
Deferred rent and lease incentives	2,433		63,037
Other long-term liabilities	4,004		1,992
Total liabilities	$	753,138	$	516,785
Commitments and contingencies (Note 9)	0		0
Stockholders' equity
Class A shares, par value $0.001 per share (600,000,000 shares authorized, 51,360,235 and 50,427,390 shares issued and outstanding as of June 30, 2022 and December 31, 2021, respectively)	51		50
Class B shares, par value $0.001 per share (100,000,000 shares authorized, 87,115,600 and 86,519,002 shares issued and outstanding as of June 30, 2022 and December 31, 2021, respectively)	87		87
Accumulated Deficit	(63,884)		(116,581)
Additional Paid-in Capital	187,640		186,209
Total Arhaus, Inc. stockholders' equity	123,894		69,765
Total liabilities and stockholders' equity	$	877,032	$	586,550

The accompanying notes are an integral part of ~~the~~these unaudited condensed ~~balance sheets.~~consolidated financial statements.

Table of Contents


Arhaus, Inc. and Subsidiaries Condensed Consolidated Statements of Comprehensive Income (Unaudited, amounts in thousands, except share and per share data)


	Six months ended June 30,				Three months ended June 30,
	2022		2021		2022		2021
Net revenue	$	552,565	$	355,357	$	306,265	$	184,043
Cost of goods sold	321,822		207,188		173,239		106,209
Gross margin	230,743		148,169		133,026		77,834
Selling, general and administrative expenses	157,622		128,177		82,774		69,139
Loss on disposal of assets	—		14		—		—
Income from operations	73,121		19,978		50,252		8,695

Interest expense	2,616		2,726		1,316		1,359
Other income	(475)		—		(117)		—
Income before taxes	70,980		17,252		49,053		7,336
Income tax expense	18,283		1,204		12,414		500
Net and comprehensive income	$	52,697	$	16,048	$	36,639	$	6,836
Less: Net income attributable to noncontrolling interest	—		9,268		—		3,951
Net and comprehensive income attributable to Arhaus, Inc.	$	52,697	$	6,780	$	36,639	$	2,885

Net and comprehensive income per share, basic
Weighted-average number of common shares outstanding, basic	137,662,601		112,058,742		137,840,691		112,058,742
Net and comprehensive income per share, basic	$	0.38	$	0.06	$	0.27	$	0.03
Net and comprehensive income per share, diluted
Weighted-average number of common shares outstanding, diluted	139,394,055		112,058,742		139,454,109		112,058,742
Net and comprehensive income per share, diluted	$	0.38	$	0.06	$	0.26	$	0.03

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


~~Notes to Condensed Balance Sheets~~ ~~(unaudited)~~

~~1. Organization~~

Arhaus, Inc. (the “Company”) was formed as a Delaware corporation on July 14, 2021. The Company was formed for the purpose of completing a public offering and related transactions in order to carry on the business of Arhaus, LLC and its subsidiaries (“Arhaus”). Following the reorganization transactions described in Note 5, Arhaus, LLC became a wholly owned indirect subsidiary of the Company.

~~2. Basis of Presentation and Summary of Significant Accounting Policies~~

~~A summary of significant accounting policies applied in the preparation of the condensed balance sheets are as follows.~~

~~Basis of Presentation~~

The accounting and reporting policies of the Company are in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP). Separate statements of operations, comprehensive income, changes in stockholders’ equity, and cash flows have not been presented because the Company has not engaged in any business or other activities except in connection with its formation.

~~Use of Estimates~~

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the balance sheet. Actual results could differ from those estimates.

~~3. Stockholders’ Equity~~

~~On July 14, 2021, the Company was authorized to issue 1,000 shares of common stock, par value $0.001 per share.~~

~~4. Commitments and Contingencies~~

The Company may be subject to legal proceedings that arise in the ordinary course of business. There are currently no proceedings to which the Company is a party, nor does the Company have knowledge of any proceedings that are threatened against the Company.

~~5. Subsequent Events~~

The Company has evaluated subsequent events through the date of the issuance of the condensed balance sheets, and no additional matters were identified requiring recognition or disclosure in the financial statements, except for events described below.

~~Reorganization and Initial Public Offering~~

In connection with the IPO, the Company reorganized its ownership structure from a limited liability company to a corporation for the purpose of issuing common stock on a publicly traded exchange. Arhaus, Inc. serves as a holding company that indirectly wholly owns Arhaus, LLC and its subsidiaries. Pursuant to the terms of the Integrated Contribution Agreement by and among the Company, FS Arhaus Holding, Inc. (“FS Arhaus”), a Delaware corporation, Homeworks Holdings Inc. (“Homeworks”) and the unit holders of Arhaus, the following series of transactions were completed on November 8, 2021, which we refer to, collectively, as the Reorganization. These transactions included:

•the amendment and restatement of the certificate of incorporation of the Company, to authorize two classes of common stock, Class A common stock and Class B common stock and to authorize the Company to issue up to 750,000,000 shares of common stock, consisting of 600,000,000 share of Class A common stock, par value of $0.001 per share, 100,000,000


~~Notes to Condensed Balance Sheets~~ ~~(unaudited)~~

~~shares of Class B common stock, par value of $0.001 and 50,000,000 shares of Preferred Stock; and~~

◦the Company’s acquisition of the units of Arhaus currently held by FS Arhaus, Homeworks, John Reed (“Reed”) through the John P Reed Trust dated April 29, 1985, as Amended (“Reed Revocable Trust”) and the members of management who hold incentive units (“Management Unitholders”), pursuant to the mergers and exchange described below, and the issuance in those transactions of Class A common stock to the holders of FS Arhaus and the Management Unitholders and Class B common stock to Homeworks, Reed and the Reed Revocable Trust.

~~The following steps describe the transactions that were completed to effect the Reorganization on November 8, 2021:~~

•~~Step 1: The Company formed two wholly owned subsidiaries, Ash Merger Sub 1, Inc. (“Merger Sub 1”), a Delaware corporation, and Ash Merger Sub 2, Inc. (“Merger Sub 2”), a Delaware corporation;~~

◦Step 2(a): Merger Sub 1 merged with and into FS Arhaus, with FS Arhaus surviving the merger, or Surviving Corporation 1, and became a wholly owned subsidiary of the Company and the holders of FS Arhaus received shares of Class A common stock;

◦Step 2(b): Merger Sub 2 merged with and into Homeworks, with Homeworks surviving the merger, or Surviving Corporation 2, and became a wholly owned subsidiary of the Company and the owners of Homeworks, received shares of Class B common stock;

◦~~Step 2(c): The Management Unitholders contributed their units of Arhaus to the Company in exchange for shares of Class A common stock;~~

◦~~Step 2(d): Reed and the Reed Revocable Trust contributed their respective units of Arhaus to the Company in exchange for shares of Class B common stock; and~~

◦Step 2(e): The Company contributed the units of Arhaus that it owns directly to Surviving Corporation 1 and Surviving Corporation 2 in proportion to the units of Arhaus owned by Surviving Corporation 1 and Surviving Corporation 2; and

◦~~Step 3: The Company issued shares of our Class A common stock to the purchasers in the IPO.~~

As a result of the Reorganization, a total of 39,623,041 shares of Class A common stock and 87,536,950 shares of Class B common stock were issued to the former holders of FS Arhaus, the former holders of Homeworks, Reed, the Reed Revocable Trust and the Management Unitholders. Of the total 127,159,991 shares of common stock, 2,520,227 shares of Class A common stock and 596,598 shares of Class B common stock issued to Management Unitholders are subject to certain vesting conditions specified in individual award agreements and were issued as restricted shares with similar time-based vesting provisions as the incentive units that were exchanged for such shares. If the vesting conditions of the restricted stock are not satisfied, such restricted stock will be forfeited and canceled.

On November 8, 2021, the Company consummated its IPO of 12,903,226 shares of Class A common stock at an IPO price of $13.00 per share. Shares of the Company’s Class A common stock began trading on the NASDAQ Global Select Market under the ticker symbol “ARHS” on November 4, 2021.

~~Revolving Credit Facilities~~

On November 4, 2021 Arhaus terminated its revolving credit facility dated June 25, 2020, of which there were no borrowings drawn. The termination of the revolving credit facility resulted in the Company paying a $0.6 million early termination fee and writing off the remaining unamortized loan costs of $0.8 million.

On November 8, 2021, the Company entered into a new revolving credit facility agreement (the “2021 Credit Facility”). The 2021 Credit Facility provides for, among other things, (1) a revolving credit facility, in an aggregate amount not to exceed at any time outstanding the amount of such lender’s commitment, (2) a letter of credit commitment, in an amount equal to the lesser of (a) $10 million, and (b) the amount of the revolving credit facility as of such date, and (3) a swingline loan, in an amount equal to the lesser of (a) $5 million, and (b) the amount of the revolving credit facility as of such date. The aggregate amount of all commitments of all lenders under the 2021 Credit Facility is $50 million,


~~Notes to Condensed Balance Sheets~~ ~~(unaudited)~~

which may be increased pursuant to the terms of the 2021 Credit Facility. The 2021 Credit Facility contains restrictive covenants and has certain financial covenants, including a minimum rent-adjusted total leverage ratio and minimum fixed charge ratio. The 2021 Credit Facility bears variable interest rates at the prevailing Bloomberg Short-Term Bank Yield index rate plus the applicable margin (1.75% at origination), whereas the applicable margin is adjusted quarterly based on the Company’s consolidated rent-adjusted total leverage ratio.

~~Item 1B. Financial Statements of Arhaus, LLC and Subsidiaries~~

~~Arhaus, LLC~~ and Subsidiaries

Condensed Consolidated ~~Balance Sheets~~

Statements of Changes in Stockholders’ Equity (Deficit)

(Unaudited, amounts in thousands)

September 30,
2021 December 31,
2020
Assets
Current assets
Cash and cash equivalents $ 149,246 $ 50,739
Restricted cash equivalents 5,880 6,909
Accounts receivable, net 360 600
Merchandise inventory, net 170,555 108,022
Prepaid and other current assets 20,380 19,733
Total current assets 346,421 186,003
Property, furniture and equipment, net 137,013 117,696
Goodwill 10,961 10,961
Other noncurrent assets 885 1,284
Total assets $ 495,280 $ 315,944
Liabilities and Members’ Deficit
Current liabilities
Accounts payable 30,383 29,113
Accrued taxes 10,102 7,910
Accrued wages 18,634 9,660
Accrued other expenses 17,412 11,317
Client deposits 260,204 154,128
Total current liabilities 336,735 212,128
Capital lease obligation 50,550 47,600
Deferred rent and lease incentives 76,534 71,213
Other long-term liabilities 51,310 21,094
Total liabilities 515,129 352,035
Commitments and contingencies (Note 10) 0 0
Members’ deficit
Accumulated Deficit (22,654) (37,761)
Additional Paid-in Capital 2,805 1,670
Total members’ deficit (19,849) (36,091)
Total liabilities and members’ deficit $ 495,280 $ 315,944


	Six months ended
	Common Shares in Homeworks Holdings, Inc.						Common Stock						Total Stockholders' Equity (Deficit)
	Voting			Non-Voting			Class A			Class B
	Shares	Amount		Shares	Amount		Shares	Amount		Shares	Amount		Retained Earnings (Accumulated Deficit)		Additional Paid-in Capital		Noncontrolling Interest		Total Stockholders' Equity (Deficit)
Balances as of December 31, 2021	—	$	—	—	$	—	50,428	$	50	86,519	$	87	$	(116,581)	$	186,209	$	—	$	69,765
Net income	—	—		—	—		—	—		—	—		52,697		—		—		52,697
Shareholder capital contribution	—	—		—	—		—	—		—	—		—		43		—		43
Equity based compensation	—	—		—	—		932	1		597	—		—		1,388		—		1,389
Balances as of June 30, 2022	—	$	—	—	$	—	51,360	$	51	87,116	$	87	$	(63,884)	$	187,640	$	—	$	123,894



	Six months ended
	Common Shares in Homeworks Holdings, Inc.						Common Stock						Total Stockholders' Equity (Deficit)
	Voting			Non-Voting			Class A			Class B
	Shares	Amount		Shares	Amount		Shares	Amount		Shares	Amount		Retained Earnings (Accumulated Deficit)		Additional Paid-in Capital		Noncontrolling Interest		Total Stockholders' Equity (Deficit)
Balances as of December 31, 2020	645	$	—	4,158	$	—	—	$	—	—	$	—	$	(28,422)	$	1,670	$	(7,689)	$	(34,441)
Net income	—	—		—	—		—	—		—	—		6,780		—		9,268		16,048
Tax distribution	—	—		—	—		—	—		—	—		—		—		(7,865)		(7,865)
Shareholder distribution	—	—		—	—		—	—		—	—		(12,350)		—		—		(12,350)
Equity based compensation	—	—		—	—		—	—		—	—		—		427		—		427
Balances as of June 30, 2021	645	$	—	4,158	$	—	—	$	—	—	$	—	$	(33,992)	$	2,097	$	(6,286)	$	(38,181)

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

Table of Contents


Arhaus, Inc. and Subsidiaries Condensed Consolidated Statements of Changes in Stockholders’ Equity (Deficit) (continued) (Unaudited, amounts in thousands)


	Three months ended
	Common Shares in Homeworks Holdings, Inc.						Common Stock						Total Stockholders' Equity (Deficit)
	Voting			Non-Voting			Class A			Class B
	Shares	Amount		Shares	Amount		Shares	Amount		Shares	Amount		Retained Earnings (Accumulated Deficit)		Additional Paid-in Capital		Noncontrolling Interest		Total Stockholders' Equity (Deficit)
Balances as of March 31, 2022	—	$	—	—	$	—	51,232	$	51	86,519	$	87	$	(100,523)	$	186,929	$	—	$	86,544
Net income	—	—		—	—		—	—		—	—		36,639		—		—		36,639
Shareholder capital contribution	—	—		—	—		—	—		—	—		—		19		—		19
Equity based compensation	—	—		—	—		128	—		597	—		—		692		—		692
Balances as of June 30, 2022	—	$	—	—	$	—	51,360	$	51	87,116	$	87	$	(63,884)	$	187,640	$	—	$	123,894



	Three months ended
	Common Shares in Homeworks Holdings, Inc.						Common Stock						Total Stockholders' Equity (Deficit)
	Voting			Non-Voting			Class A			Class B
	Shares	Amount		Shares	Amount		Shares	Amount		Shares	Amount		Retained Earnings (Accumulated Deficit)		Additional Paid-in Capital		Noncontrolling Interest		Total Stockholders' Equity (Deficit)
Balances as of March 31, 2021	645	$	—	4,158	$	—	—	$	—	—	$	—	$	(24,527)	$	1,746	$	(7,015)	$	(29,796)
Net income	—	—		—	—		—	—		—	—		2,885		—		3,951		6,836
Tax distribution	—	—		—	—		—	—		—	—		—		—		(3,222)		(3,222)
Shareholder distribution	—	—		—	—		—	—		—	—		(12,350)		—		—		(12,350)
Equity based compensation	—	—		—	—		—	—		—	—				351		—		351
Balances as of June 30, 2021	645	$	—	4,158	$	—	—	$	—	—	$	—	$	(33,992)	$	2,097	$	(6,286)	$	(38,181)

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

Table of Contents


Arhaus, Inc. and Subsidiaries Condensed Consolidated Statements of Cash Flows (Unaudited, amounts in thousands)


	Six months ended June 30,
	2022		2021

Cash flows from operating activities
Net income	$	52,697	$	16,048
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization	11,995		8,909
Amortization of operating lease right-of-use asset	14,508		—
Amortization of deferred financing fees and interest on finance lease in excess of principal paid	5,489		825
Equity based compensation	1,389		427
Deferred tax assets	4,851		—
Derivative expense	—		29,805
Loss on disposal of property, furniture and equipment	—		14
Amortization and write-off of lease incentives	(144)		(3,801)
Changes in operating assets and liabilities
Accounts receivable	(1,272)		132
Merchandise inventory	(64,135)		(28,077)
Prepaid and other current assets	(5,095)		4,112
Other noncurrent liabilities	264		(890)
Accounts payable	15,197		616
Accrued expenses	8,728		3,852
Operating lease liabilities	(15,401)		—
Deferred rent and lease incentives	—		5,415
Client deposits	12,039		72,116
Net cash provided by operating activities	41,110		109,503

Cash flows from investing activities
Purchases of property, furniture and equipment	(20,355)		(13,691)
Net cash used in investing activities	(20,355)		(13,691)

Cash flows from financing activities
Issuance of related party notes	—		(1,000)
Proceeds from related party notes	—		1,000
Principal payments under capital leases	—		(127)
Principal payments under finance leases	(50)		—
Shareholder distributions	—		(12,350)
Distributions to noncontrolling interest holders	—		(7,865)
Net cash used in financing activities	(50)		(20,342)
Net increase in cash, cash equivalents and restricted cash equivalents	20,705		75,470

Cash, cash equivalents and restricted cash equivalents
Beginning of period	130,908		64,002
End of period	$	151,613	$	139,472

Supplemental disclosure of cash flow information
Interest paid in cash	$	2,155	$	2,799
Income taxes paid in cash	15,342		1,257

Noncash operating activities:
Lease incentives	4,494		665

Noncash investing activities:
Purchase of property, furniture and equipment in accounts payable	1,673		241

Noncash financing activities:
Derecognition of build-to-suit assets as a result of ASC 842 adoption	(31,017)		—
Capital contributions	43		—

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

Table of Contents


Arhaus, ~~LLC and Subsidiaries~~ ~~Condensed Consolidated Statements of Comprehensive Income~~ ~~(Unaudited, amounts in thousands, except unit and per share data)~~

Nine Months Ended September 30, Three Months Ended September 30,
2021 2020 2021 2020
Net revenue $ 558,690 $ 344,606 $ 203,333 $ 120,501
Cost of goods sold 325,710 214,817 118,522 75,289
Gross margin 232,980 129,789 84,811 45,212
Selling, general and administrative expenses 196,212 105,122 68,137 40,964
Loss on disposal of assets 466 — 452 —
Income from operations 36,302 24,667 16,222 4,248
Interest expense 4,018 9,335 1,339 2,734
Income before taxes 32,284 15,332 14,883 1,514
State and local taxes 1,704 900 500 731
Net and comprehensive income $ 30,580 $ 14,432 $ 14,383 $ 783
Net and comprehensive income (loss) attributable to the shareholders $ 30,580 $ 10,058 $ 14,383 $ (686)
Net and comprehensive income (loss) per share
Basic and diluted $ 0.27 $ 0.09 $ 0.13 $ (0.01)
Weighted-average number of shares outstanding
Basic and diluted 112,058,742 112,058,742 112,058,742 112,058,742

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


~~Arhaus, LLC and Subsidiaries~~ ~~Condensed Consolidated Statements of Changes in Mezzanine Equity and Members’ Deficit~~ ~~(Unaudited, amounts in thousands)~~

Nine Months Ended
Mezzanine Equity Members' Deficit
Class A Preferred Class B Preferred Class A Class B
Units Amount Units Amount Units Amount Units Amount Accumulated
Deficit Additional
Paid-in Capital Total
Members'
Deficit
Balances as of December 31, 2020 — $ — — $ — 20,939 $ — 7,488 $ — $ (37,761) $ 1,670 $ (36,091)
Net income — — — — — — — — 30,580 — 30,580
Tax distribution — — — — — — — — (15,473) — (15,473)
Incentive unit compensation — — — — — — — — — 1,135 1,135
Balances as of September 30, 2021 — $ — — $ — 20,939 $ — 7,488 $ — $ (22,654) $ 2,805 $ (19,849)
Balances as of December 31, 2019 1,250 $ 18,206 1,250 $ 18,206 20,939 $ — 7,488 $ — $ (34,747) $ 1,367 $ (33,380)
Net income — — — — — — — — 14,432 — 14,432
Tax distribution — — — — — — — — (8,845) — (8,845)
Preferred units dividend unpaid — 2,187 — 2,187 — — — — (4,374) — (4,374)
Incentive unit compensation — — — — — — — — — 226 226
Balances as of September 30, 2020 1,250 $ 20,393 1,250 $ 20,393 20,939 $ — 7,488 $ — $ (33,534) $ 1,593 $ (31,941)

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

~~Table of Contents~~


~~Arhaus, LLC and Subsidiaries~~ ~~Condensed Consolidated Statements of Changes in Mezzanine Equity and Members’ Deficit (continued)~~ ~~(Unaudited, amounts in thousands)~~

Three Months Ended
Mezzanine Equity Members' Deficit
Class A Preferred Class B Preferred Class A Class B
Units Amount Units Amount Units Amount Units Amount Accumulated
Deficit Additional
Paid-in Capital Total
Members'
Deficit
Balances as of June 30, 2021 — $ — — $ — 20,939 $ — 7,488 $ — $ (37,037) $ 2,097 $ (34,940)
Net income — — — — — — — — 14,383 — 14,383
Incentive unit compensation — — — — — — — — — 708 708
Balances as of September 30, 2021 — $ — — $ — 20,939 $ — 7,488 $ — $ (22,654) $ 2,805 $ (19,849)
Balances as of June 30, 2020 1,250 $ 19,659 1,250 $ 19,658 20,939 $ — 7,488 $ — $ (24,003) $ 1,517 $ (22,486)
Net income — — — — — — — — 783 — 783
Tax distribution — — — — — — — — (8,845) — (8,845)
Preferred units dividend unpaid — 734 — 735 — — — — (1,469) — (1,469)
Incentive unit compensation — — — — — — — — — 76 76
Balances as of September 30, 2020 1,250 $ 20,393 1,250 $ 20,393 20,939 $ — 7,488 $ — $ (33,534) $ 1,593 $ (31,941)

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

~~Table of Contents~~


~~Arhaus, LLC and Subsidiaries~~ ~~Condensed Consolidated Statements of Cash Flows~~ ~~(Unaudited, amounts in thousands)~~

Nine Months Ended September 30,
2021 2020
Cash flows from operating activities
Net income $ 30,580 $ 14,432
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization 17,206 12,682
Amortization of deferred financing fees, payment-in-kind interest and interest on capital lease in excess of principal paid 839 2,522
Incentive unit compensation expense 1,135 326
Derivative expense 29,905 500
Loss on disposal of assets 466 —
Amortization and write-off of lease incentives (5,890) (6,807)
Changes in operating assets and liabilities
Accounts receivable 240 185
Merchandise inventory (62,533) 8,004
Prepaid and other current assets (647) (424)
Other noncurrent assets — (1,041)
Other noncurrent liabilities 335 (80)
Accounts payable 1,698 4,288
Accrued expenses 16,221 4,109
Deferred rent and lease incentives 6,958 12,645
Client deposits 106,076 63,779
Net cash provided by operating activities 142,589 115,120
Cash flows from investing activities
Purchases of property, furniture and equipment (29,531) (11,129)
Net cash used in investing activities (29,531) (11,129)
Cash flows from financing activities
Proceeds from revolving debt — 20,500
Payments on revolving debt — (9,500)
Payments on long-term debt — (11,220)
Repurchase of incentive units — (100)
Principal payments under capital leases (107) —
Distributions to owners (15,473) (8,845)
Net cash used in financing activities (15,580) (9,165)
Net increase in cash, cash equivalents and restricted cash equivalents 97,478 94,826
Cash, cash equivalents and restricted cash equivalents
Beginning of period 57,648 18,559
End of period $ 155,126 $ 113,385
Supplemental disclosure of cash flow information
Interest paid in cash $ 3,877 $ 6,549
Income taxes paid in cash $ 1,292 $ 1,079
Noncash operating activities:
Lease incentives $ 4,253 $ 1,717
Noncash investing activities:
Purchase of property, furniture and equipment in accounts payable $ (428) $ 220
Noncash financing activities:
Property, furniture and equipment additions due to build-to-suit lease transaction $ 1,040 $ —
Capital lease obligations $ 2,591 $ —
Dividends - unpaid $ — $ 4,374

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

~~Table of Contents~~


~~Arhaus, LLC~~Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited)

1. Nature of Business and Basis of Presentation

Nature of Business

Arhaus, ~~LLC~~Inc. (the “Company,” “we” or “Arhaus”) is a Delaware ~~limited liability company~~corporation and is a premium retailer in the home furnishings market, specializing in livable luxury supported by heirloom quality merchandise. We offer merchandise in a number of categories, including furniture, outdoor, lighting, textiles and décor. Our curated assortments are presented across our sales channels in sophisticated, family friendly and unique lifestyle settings. ~~We offer merchandise assortments across a number of categories, including furniture, lighting, textiles, décor, and outdoor.~~We position our retail locations as Showrooms for our brand, while our website acts as a virtual extension of our Showrooms. The Company operated 7780 Showrooms asat June 30, 2022.

Arhaus was formed on July 14, 2021 for the purpose of ~~September 30, 2021.~~

~~At September 30, 2021~~completing an initial public offering (“IPO”) of its common stock and ~~December 31, 2020, all~~related transactions in order to carry on the business of Arhaus, LLC (“LLC”) and its subsidiaries. Pursuant to the corporate reorganization and completion of the ~~Company’s Class A units are owned~~IPO in November 2021, the Company became a holding company for LLC and its subsidiaries.

In connection with the IPO, the Company reorganized its ownership structure from a limited liability company to a corporation. Pursuant to the terms of the Integrated Contribution Agreement by and among the Company, FS Arhaus Holding, Inc. (“FS Arhaus,” “Class B Units,” or “noncontrolling interest”), a Delaware corporation, Homeworks Holdings Inc. (“~~Homeworks”~~Homeworks,” or “Class A Units”) and ~~John Reed~~the unit holders (“~~Reed”~~Management Unitholders”) ~~through the John P Reed Trust dated April 29, 1985, as Amended (“Reed Revocable Trust”). All shares~~ of ~~Homeworks are owned by the Reed Revocable Trust and related party trusts~~LLC, a series of ~~Reed. All of the Company’s Class B units are owned by FS Arhaus Holding, Inc., a Delaware corporation. See Note 12 for our discussion of the reorganization of the Company that was consummated~~transactions were completed on November 8, ~~2021.~~

~~Effects of COVID-19 on Our Business~~

~~The COVID-19 outbreak~~2021, which we refer to, collectively, as the “Reorganization.” LLC and Homeworks were identified as entities under common control, in which both entities are ultimately controlled by the ~~first quarter of fiscal year 2020 caused disruption to our business operations.~~same party before and after the Reorganization and therefore resulted in a change in reporting entity. In ~~our initial response~~accordance with ASC 805-50-45-5, for transactions between entities under common control, the condensed consolidated financial statements for periods prior to the COVID-19 health crisis, we undertook immediate adjustments to our business operations including temporarily closing all retail locations, furloughing employees, minimizing expenses and delaying investments, including pausing some inventory orders while we assessed the status of our business. Our approach to the crisis evolved quickly as our business trends substantially improved during the second through fourth quarters of fiscal year 2020 as a result of both the reopening of our Showrooms and strong consumer demand for our products. We had reopened all of our Showrooms and Outlet stores by June 30, 2020, although currently many of our Showrooms and Outlets continue to conduct business with occupancy limitations and other operational restrictions.

~~While we~~Reorganization have been ~~able~~adjusted to ~~serve our clients and operate our business through~~retrospectively combine the ongoing COVID-19 health crisis, there can be no assurance that future events will not have an impact on our business, results of operations or financial condition since the extent and duration of the health crisis remains uncertain. Future adverse developments in connection with the COVID-19 crisis, including additional waves or resurgences of COVID-19 outbreaks, new strains or variants of the virus, evolving international, federal, state and local restrictions and safety regulations in response to COVID-19 risks, changes in consumer behavior and health concerns, the pace of economic activity in the wake of the COVID-19 crisis, or other similar issues could adversely affect our business, results of operations or financial condition in the future, or our financial results and business performance in future periods.

Various constraints in our merchandise supply chain have resulted in delays in our ability to convert demand into net revenue at normal historical rates. We anticipate that the business conditions related to COVID-19 will continue to adversely affect the capacity of our vendors and supply chain to meet our demand during fiscal year 2021. We expect that our supply chain may catch up to demand in the foreseeable future, but business circumstances and operational conditions in numerous international locations where our vendors operate cannot be predicted with certainty.

Depending on the future course of the pandemic and further outbreaks, we may experience further restrictions and closures of our physical operations in our Showrooms, Design Studios and Outlet stores. Although we experienced strong demandpreviously separate entities for our products during fiscal year 2020 and the nine months ended September 30, 2021, some of the demand may have been driven by stay-at-home restrictions that were in place throughout many parts of the United States. The exact impact of future changes to these stay-at-home restrictions cannot be predicted with certainty.

~~Table of Contents~~


~~Arhaus, LLC and Subsidiaries~~ ~~Notes to Condensed Consolidated Financial Statements~~ ~~(Unaudited)~~

presentation purposes.

Basis of Presentation

The condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The accompanying condensed consolidated financial statements include our accounts and those of our wholly owned subsidiaries. Accordingly, all intercompany balances and transactions have been eliminated through the consolidation process. Certain reclassifications have been made to prior years' condensed consolidated financial statements to conform to the current year's presentation.

~~Unaudited Interim Condensed Financial Statements~~

The accompanying condensed consolidated balance ~~sheet~~sheets at ~~September~~June 30, 2022 and December 31, 2021, the condensed consolidated statements of comprehensive income and changes in ~~mezzanine equity and members’ deficit~~stockholders’equity (deficit) for the ~~nine~~six and three months ended ~~September~~June 30, ~~2021~~2022 and ~~2020,~~2021, the condensed consolidated statements of cash flows for the ~~nine~~six months ended ~~September~~June 30, ~~2021~~ 2022 and ~~2020,~~2021 and the related interim condensed consolidated disclosures are unaudited and have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements.

In management’s opinion, the accompanying condensed consolidated financial statements contain all adjustments, consisting of only normal recurring adjustments, necessary for a fair statement of the Company’s financial position at ~~September~~June 30, ~~2021;~~2022; the results of operations and changes in ~~mezzanine equity and members’ deficit~~stockholders’equity (deficit) for the ~~nine~~six and three months ended ~~September~~June 30, 2022 and 2021 and ~~2020; and~~the condensed consolidated statements of cash flows for the ~~nine~~six months ended ~~September~~June 30, ~~2021~~ 2022 and ~~2020.~~2021. The condensed consolidated balance sheet as of December 31, ~~2020~~2021 included herein was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP.

The results for the ~~nine~~six and three months ended ~~September~~June 30, ~~2021~~2022 and ~~2020~~2021 are not necessarily indicative of the operating results to be expected for the full fiscal year or any future period. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. Therefore, these condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the ~~Company's final prospectus filed with the SEC pursuant to Rule 424(b)(4) under the Securities Act~~year ended December 31, 2021.

Table of ~~1933, as amended, dated November 3, 2021.~~Contents


Arhaus, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited)

Use of Estimates

The preparation of our condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The accounting estimates and other matters included within our condensed consolidated financial statements and notes to the condensed consolidated financial statements ~~and management’s discussion and analysis~~ are revenue recognition, including a reserve for merchandise returns, goodwill and fair value of financial instruments which include, but are not limited to, accounts receivable, payables, lease obligations, ~~incentive unit~~derivative and equity based compensation ~~and a derivative instrument.~~instruments.

Client Deposits

Client deposits represent payments made by clients on orders. At the time of purchase, the Company collects deposits for all orders equivalent to at least 50 percent of the clients’ purchase price. Orders are recognized as revenue when the merchandise is delivered to the client and at the time of delivery the client deposit is no longer recorded as a liability. The Company expects ~~that~~substantially all client deposits as of ~~September~~June 30, ~~2021~~2022 will be recognized as net revenue within the next 12 months as the performance obligations are satisfied.

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~~Arhaus, LLC and Subsidiaries~~ ~~Notes to Condensed Consolidated Financial Statements~~ ~~(Unaudited)~~

Gift Cards

The Company sells gift cards to clients in our Showrooms and through our website. Such gift cards do not have expiration dates. We defer revenue when payments are received in advance of performance for unsatisfied obligations related to our gift cards. The liability related to unredeemed gift cards of ~~$0.8~~$0.9 million and ~~$0.8~~$0.9 million at June 30, 2022 and December 31, 2021, respectively, is recorded in the accrued other expenses line item of the condensed consolidated balance ~~sheets at September 30, 2021 and December 31, 2020, respectively.~~sheets. The Company recognizes income associated with breakage proportional to actual gift card redemptions.

Fair Values of Financial Instruments

The Company’s primary financial ~~instruments~~instruments are cash and cash equivalents, accounts receivable, payables, lease obligations, ~~incentive unit~~derivative and equity based compensation ~~and a derivative instrument.~~instruments. Due to the ~~short-term~~short-term maturities of cash and cash equivalents, accounts receivable and payables, the Company believes the fair values of these instruments approximate their respective carrying values at ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020.~~2021. See Note 4 for discussion of our derivative, Note 5 for discussion of our lease obligations and Note 76 for discussion of our ~~incentive unit~~equity based compensation instruments.

The Company has established a hierarchy to measure our financial instruments at fair value, which requires us to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Observable inputs represent market data obtained from independent sources, whereas unobservable inputs reflect the Company’s own market assumptions, which are used if observable inputs are not reasonably available without undue cost and effort. The hierarchy defines three levels of inputs that may be used to measure fair value:

Level 1Unadjusted quoted prices in active markets for identical, unrestricted assets and liabilities that the reporting entity has the ability to access at the measurement date.

Level 2Inputs other than quoted prices included within Level 1 that are observable for the asset and liability or can be corroborated with observable market data for substantially the entire contractual term of the asset or liability.

Level 3Unobservable inputs that reflect the entity’s own assumptions about the assumptions market participants would use in the pricing of the asset or liability and are consequently not based on market activity but rather through particular valuation techniques.

~~Correction~~

Table of ~~an Immaterial Error~~Contents

During the third quarter of 2021, the Company recorded an out-of-period adjustment to correct prior period overstatements of property, furniture and equipment, net and the cumulative understatement of selling, general and administrative expenses of $3.0 million. The errors were primarily caused by a capital lease asset being depreciated over a longer incorrect useful life. Management evaluated the impacts of the out-of-period adjustments to correct the errors for the nine and three months ended September 30, 2021 and for prior periods, both individually and in the aggregate, and concluded that the adjustment was not material to the Company’s consolidated annual or interim financial statements for all impacted periods.


Arhaus, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited)

2. Recently Issued Accounting Standards

New Accounting Standards ~~or Updates Not Yet~~ Adopted

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, Leases which, for operating leases, requires a lessee to recognize a right-of-use asset and a lease liability, initially measured at the present value of the lease payments, onin its balance sheets. While it will still be necessary for lessees to distinguish between “operating” and “financing” (formerly known as “capital”) leases, ~~and for lessors to distinguish between sales-type, direct financing, and operating leases,~~ these distinctions will primarily affect how a lessee ~~or lessor~~ must recognize expense ~~or income, respectively,~~ in its income statement. The new guidance is effective for financial statements issued for annual periods beginning after December 15, ~~2021,~~2021.

The Company adopted ASC 842 as of January 1, 2022, using the modified retrospective approach by applying the transition provisions at the beginning of the period of adoption. Comparative periods will continue to be presented in accordance with ASC 840. The Company elected the package of practical expedients permitted under the transition guidance, which allowed the Company to carryforward the historical lease classification, lease identification and initial direct costs. The Company did not elect the “Land Easements” or “Hindsight” practical expedients. Additionally, the Company made the following accounting policy elections in connection with the adoption:

•Exclude short-term leases from our consolidated balance sheets; and

•Include both the lease and non-lease components as a single component and account for it as a lease.

As a result, the ~~Company. Early adoption is permitted.~~Company measured the right-of-use asset and lease liability for operating and finance leases as of January 1, 2022, using the remaining portion of the lease term that was determined under ASC 840. The adoption ~~of this ASU will result~~resulted in ~~a material increase~~$242.0 million recognized as total right-of-use assets and $326.5 million recognized as total lease liabilities on ~~the Company’s~~

~~Table of Contents~~


~~Arhaus, LLC and Subsidiaries~~ ~~Notes to Condensed Consolidated Financial Statements~~ ~~(Unaudited)~~

~~condensed~~our consolidated balance sheets ~~for lease liabilities~~as of January 1, 2022. For certain previous operating and ~~right-of-use assets. While~~capital leases, we qualified as the ~~Company is continuing to evaluate all potential impacts~~deemed owner of the ~~standard,~~construction project due to our significant involvement during the construction period under build-to-suit lease accounting requirements within ASC 840. As part of our adoption of ASC 842, we ~~do not expect~~derecognized the ~~adoption to have a material impact~~cost of these construction projects of $31.0 million, which were previously recorded in property, furniture and equipment, net with an offsetting obligation in accrued other expenses on ~~the Company’s~~our consolidated ~~net earnings or cash flows. The Company plans to adopt ASU 2016-02 in 2022.~~balance sheets at December 31, 2021. See Note 5 — Leases for additional information.

In October 2020, the FASB issued ASU 2020-10, “Codification Improvements.” The amendments in this update represent changes to clarify the Codification or correct unintended application of guidance that are not expected to have a significant effect on current accounting practice. The amendments in this update affect a wide variety of Topics in the Codification and apply to all reporting entities within the scope of the affected accounting guidance. ASU 2020-10 is effective for annual periods beginning after December 15, 2021 for non-public business entities. Early application is permitted. The amendments in this update should be applied retrospectively. The Company ~~does not expect~~adopted the standard as of January 1, 2022. The adoption of this standard todid not have a material impact on ~~its~~our condensed consolidated financial statements.

3. Merchandise Warranties

The ~~Company~~Company warrants certain merchandise to be free of defects in both construction materials and workmanship from the date the performance obligation was fulfilled to the client for three to ten years depending on the merchandise category. The Company accounts for merchandise warranties by accruing an estimated liability when we recognize revenue on the sale of warrantied merchandise. We estimate future warranty claims based on claim experience which includes materials and labor costs to perform the ~~repairs.~~repairs or replace products. We use judgment in making our estimates. We record differences between our estimated and actual costs when the differences are known.

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Arhaus, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited)

A reconciliation of the changes in our limited merchandise warranty liability is as follows (amounts in thousands):


		Nine Months Ended September 30,				Three Months Ended September 30,					Six months ended June 30,				Three months ended June 30,
		2021		2020		2021		2020			2022		2021		2022		2021
Balance as of beginning of period	Balance as of beginning of period	$	3,326	$	3,164	$	3,868	$	3,020	Balance as of beginning of period	$	4,724	$	3,326	$	4,963	$	3,577
Accruals during the period	Accruals during the period	5,652		3,211		2,138		1,112		Accruals during the period	5,104		3,514		2,908		1,922
Settlements during the period	Settlements during the period	(4,712)		(3,306)		(1,740)		(1,063)		Settlements during the period	(4,416)		(2,972)		(2,459)		(1,631)
Balance as of end of the period (1)	Balance as of end of the period (1)	$	4,266	$	3,069	$	4,266	$	3,069	Balance as of end of the period (1)	$	5,412	$	3,868	$	5,412	$	3,868

(1) ~~- $2.4~~$3.2 million and ~~$1.8~~$2.7 million were recorded in accrued other expenses at ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively. The remainder is recorded in other long-term ~~liabilities.~~liabilities on our condensed consolidated balance sheets.

We recorded accruals during the periods presented in the table above, primarily to reflect charges that relate to limited merchandise warranties issued during the respective periods.

4. Long-Term Debt

On June 25, 2020, the Company entered into a credit agreement (“Revolver”), which ~~includes~~included a revolving credit facility of $30.0 million with availability limited pursuant to a borrowing base ~~formulated~~formula based on specified percentages of eligible inventory, net of reserves. The Company’s borrowings under the Revolver ~~bears~~bore variable interest rates at the LIBOR index rate (“LIBOR”) plus the applicable margin (5.5% at ~~September~~June 30, 2021). In the event LIBOR ~~ceases~~ceased to be available during the term of the Revolver, the Revolver ~~provides~~provided procedures to determine an Alternate Base Rate.

At September 30, 2021, we had no availability on the Revolver based on the borrowing base formula. The Company has the option, subject to terms and conditions, to borrow on the Revolver by means of LIBOR loans. The Revolver ~~has certain financial covenants, including a minimum fixed charge ratio and minimum EBITDA requirements. The Revolver carries a non-use fee of 0.50% per annum.~~ was to expire on June 25, 2023.

Loan costs related to the Revolver of $1.5 million were recorded in other noncurrent assets and were amortized over the term of the debt on a straight-line basis, which approximated the effective interest method. Amortization expense was $0.3 million and $0.2 million for the six and three months ended June 30, 2021, respectively, and was included in interest expense within the condensed consolidated statements of comprehensive income. On November 4, 2021, the Company terminated the Revolver of which there were no borrowings drawn.

On November 8, 2021, the Company entered into a new revolving credit facility (the “2021 Credit Facility”). The 2021 Credit Facility provides for, among other things, (1) a revolving credit facility in an aggregate amount not to exceed at any time outstanding the amount of such lender’s commitment, (2) a letter of credit commitment in an amount equal to the lesser of (a) $10.0 million, and (b) the amount of the revolving credit facility as of such date, and (3) a swingline loan in an amount equal to the lesser of (a) $5.0 million, and (b) the amount of the revolving credit facility as of such date. The aggregate amount of all commitments of all lenders under the 2021 Credit Facility is $50.0 million, which may be increased pursuant to the terms of the 2021 Credit Facility. The 2021 Credit Facility contains restrictive covenants and has certain financial covenants, including a minimum rent-adjusted total leverage ratio and a minimum fixed charge ratio. The 2021 Credit Facility bears variable interest rates at the prevailing Bloomberg Short-Term Bank Yield index rate plus the applicable margin (1.50% at June 30, 2022), whereas the applicable margin is adjusted quarterly based on the Company’s consolidated rent-adjusted total leverage ratio. The 2021 Credit Facility expires on November 8, 2026.

At June 30, 2022 and December 31, 2021, we had no borrowings on the 2021 Credit Facility. Deferred financing costs related to the 2021 Credit Facility of $0.3 millionare recorded in other noncurrent assets ~~net~~ on the

~~Table of Contents~~


~~Arhaus, LLC and Subsidiaries~~ ~~Notes to Condensed Consolidated Financial Statements~~ ~~(Unaudited)~~

~~condensed~~ consolidated balance sheets and ~~are~~will be amortized over the term of the debt on a straight-line basis, which approximates the effective interest method. Amortization expense was $0.4 million and $0.1 million for the nine and three months ended September 30, 2021, and is included in interest expense within the condensed consolidated statements of comprehensive income. Accumulated amortization related to loan costs for the revolver was $0.6 million as of September 30, 2021. The Revolver expires on June 25, 2023.

Prior to the Company entering into the Revolver and 2021 Credit Facility, the debt structure (“Prior Credit Facilities”) included a revolving credit facility ~~of $30.0 million~~ (the “Prior Revolver”) ~~with availability limited pursuant to a borrowing base formula based on specified percentages of eligible inventories~~ and ~~accounts receivable.~~

The Company had the option, subject to terms and conditions, to borrow on the Prior Revolver by means of any combination of Base Rate Loans or LIBOR Loans. The Company’s borrowings under the Prior Revolver bore variable interest rates for Base Rate Loans of the greater of (a) the Federal Funds Rate plus 0.5%, (b) the Prime Rate, (c) the LIBOR Rate plus 1%, and (d) 4.00% and at LIBOR loans at LIBOR plus the applicable margin. The Prior Revolver carried a non-use fee of 0.50% per annum. Loan costs related to the Prior Revolver were recorded in other noncurrent assets, net and were amortized over the term of the debt on a straight-line basis. Amortization expense was $0.2 million and $0.0 million for the nine and three months ended September 30, 2020, and is included in interest expense within the condensed consolidated statements of comprehensive income. The unamortized balance of the loan costs of $0.6 million as of June 25, 2020 were written off as interest expense within the condensed consolidated statements of comprehensive income, as the Company entered into a new credit agreement with different lenders.

~~The Company’s Prior Credit Facilities also included~~ a term loan ~~of $40.0 million~~ (the “Term Loan”). The ~~Term Loan bore interest at a rate equal to 16.0% per annum, of which 12.0% per annum~~Prior Revolver was ~~to be paid in cash and 4.0% per annum was to be paid in kind by capitalizing such amount and adding it to the principal amount of the loan each quarter. The Company was required to make a prepayment~~terminated on ~~the Term Loan in an amount not less than 50 percent of the Company’s Excess Cash Flow, as defined, on or before May 15~~thJune 25, 2020 of the year following such fiscal year. Other than the mandatory Excess Cash Flow payments, as defined, which were calculated at the end of each fiscal year, the Term Loan had no required periodic principal payments during the term. The Term Loan facility permitted early principal payments subject to a 1.0% prepayment premium through December 26, 2020, and ~~none thereafter. The~~ Term Loan was paid in full on December 28, 2020.

Financing costs related to the Term Loan were amortized over the term of the Term Loan, on a straight-line basis, which approximated the effective interest method. Amortization expense was $0.5 million and $0.2 million for the nine and three months ended September 30, 2020, and is included in interest expense within the condensed consolidated statements of comprehensive income.

The Company’s Term Loan had an exit fee clause which allowed the holder of the Term Loan to receive either $3.0 million upon repayment of the Term Loan or a payout equivalent to 4.0% of the total equity value of the Company. The 4.0% of the total equity value of the Company payout iswas payable upon a change of control, qualified IPO or sale of all or substantially all assets of the Company. In connection with the repayment of the Term Loan on December 28, 2020, the

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Arhaus, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited)

holder informed the Company they would decline the option to receive the $3.0 million and elect to receive a payout equivalent to 4.0% of the equity value of the Company. The exit fee iswas treated as a derivative and adjusted to fair value each reporting period. The Company recorded ~~a liability~~derivative expense of ~~$49.5~~$29.8 million and ~~$19.6~~$18.3 million ~~at September~~ for the six and three months ended June 30, 2021, respectively, which was included in selling, general and ~~December 31, 2020, respectively, related to the derivative that is classified~~administrative expense within ~~other long-term liabilities on~~ the condensed consolidated ~~balance sheets.~~statements of comprehensive income. The Company used a portion of the net proceeds from the IPO to pay the derivative liability on November 8, 2021.

At ~~September~~June 30, 2021, the Company’s valuation of the derivative liability was measured using the probability-weighted expected return model (“PWERM”). The PWERM is a scenario-based methodology that estimates the fair value of the derivative based upon an analysis of future values for the Company. The Company considered two different scenarios:(a) remain private; and (b) IPO. Under

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~~Arhaus, LLC and Subsidiaries~~ ~~Notes to Condensed Consolidated Financial Statements~~ ~~(Unaudited)~~

the remain private scenario, as of ~~September~~June 30, 2021, the Company estimated the enterprise value by weighting the guideline public company method and the discounted cash flow method, and then relied on the option pricing method (“OPM”) and applied a discount for lack of marketability (“DLOM”). The OPM estimated the value using the Black-Scholes OPM. The ~~Company will continue to evaluate the above assumptions for each reporting period. The~~ fair value of the exit fee ~~has been~~was determined utilizing unobservable inputs and therefore is a Level 3 measurement under the fair value hierarchy.

The key assumptions used within the Black-Scholes OPM as of ~~September~~June 30, 2021 ~~are~~were as follows:


	~~September~~June 30, 2021
Term	10 years
Risk-free rate of return	~~1.50%~~1.50	%
Volatility	~~40.00%~~40.00	%
Dividend yield	0%0.00

At December 31, 2020, the Company used a discounted cash flow method and guideline public company method to determine the fair value of equity which was used to calculate the fair value of the derivative liability. The key assumptions used within the valuation as December 31, 2020 are as follows:


			December 31, 2020%
~~Term~~			~~10 years~~
~~Risk-free rate of return~~DLOM			~~0.90%~~
~~Volatility~~24.70			~~40.00%~~
~~Dividend yield~~			0%%

The assumed volatility assumption is based on that of an identified group of comparable public companies. The fair value of the exit fee has been determined utilizing unobservable inputs and therefore is a Level 3 measurement under the fair value hierarchy.

The Company was in compliance with all applicable debt covenants at ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020. See Note 12 for a discussion of the termination of the revolver and the entering into a new revolving credit facility agreement.~~2021.

5. Leases

The Company leases real estate and equipment under operating and finance leases, some of which are from related ~~parties.~~parties as discussed in Note 10 —Related Party Transactions. The most significant ~~obligations~~obligations under these lease agreements require the payments of periodic rentals, real estate taxes, insurance and maintenance costs. Rent expense for the nine months ended September 30, 2021 and 2020 was $47.1 million and $43.5 million, respectively. Rent expense for the three months ended September 30, 2021 and 2020 was $15.8 million and $14.5 million, respectively. Amortization of landlord improvements for the nine months ended September 30, 2021 and 2020 was $8.7 million and $7.8 million, respectively. Amortization of landlord improvements for the three months ended September 30, 2021 and 2020 was $3.1 million and $2.7 million, respectively. Depending on particular Showroom leases, the Company can also owe a percentage rent payment if particular Showrooms meet certain sales figures. ~~Percentage rent expense for~~

The following table summarizes the ~~nine months ended September~~amounts recognized in our condensed consolidated balance sheets related to leases as of June 30, ~~2021 and 2020 was $2.5 million and $0.7 million, respectively. Percentage rent expense for the three months ended September 30, 2021 and 2020 was $1.3 million and $0.1 million, respectively.~~

~~In March, 2021, the Company entered into a lease agreement with a related party for a distribution center and manufacturing building, with construction expected to be completed~~2022 (amounts in ~~the fourth quarter of~~thousands):

1711

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Arhaus, ~~LLC~~Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited)


	Condensed Consolidated Balance Sheet Classification	June 30, 2022

Assets
Operating lease assets	Operating right-of-use assets	$	231,667
Finance lease assets	Financing right-of-use assets	39,602
Total leased assets		$	271,269

Liabilities
Current operating leases	Current portion of operating lease liabilities	$	37,624
Non-current operating leases	Operating lease liabilities, long-term	268,061
Total operating lease liabilities		305,685

Current finance leases	Current portion of financing lease liabilities	513
Non-current finance leases	Financing lease liabilities, long-term	51,981
Total finance lease liabilities		52,494
Total lease liabilities		$	358,179

The components of lease cost recognized within our condensed consolidated statements of comprehensive income for the six and three months ended June 30, 2022 are as follows (amounts in thousands):


		Six months ended June 30,		Three months ended June 30,
	Condensed Consolidated Income Statement Classification	2022			2022
Lease costs:
Operating lease costs	Cost of goods sold	$	17,082		$	8,677
Operating lease costs	Selling, general and administrative expenses	2,788			1,701
Finance lease costs
Amortization of right-of-use assets	Selling, general and administrative expenses	976			518
Interest expense on lease liabilities	Interest expense	2,488			1,257
Other lease costs (1)	Cost of goods sold	16,803			8,885
Other lease costs (1)	Selling, general and administrative expenses	337			249
Total lease costs		$	40,474		$	21,287

(1) Other lease costs includes short-term lease costs and variable lease costs.

Rent expense, amortization of landlord improvements and percentage rent expense calculated under ASC 840 were $31.3 million, $5.6 million and $1.2 million for the six months ended June 30, 2021, respectively. Rent expense, amortization of landlord improvements and percentage rent expense calculated under ASC 840 were $15.6 million, $2.8 million and $0.7 million for the three months ended June 30, 2021, respectively.

We often have options to renew lease terms for Showrooms and other assets. The exercise of lease renewal options is generally at our sole discretion. In addition, certain lease agreements may be terminated prior to their original expiration date at our discretion. We evaluate each renewal and termination options at the lease commencement date to determine if

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Arhaus, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited)

we are reasonably certain to exercise the option on the basis of economic factors. The table below summarizes the weighted average remaining lease terms as of June 30, 2022.


Weighted Average Remaining Lease Term (In Years)						June 30, 2022
Operating leases						8.74
Finance leases						22.87

The discount rate implicit within our finance leases was determined at the time of lease commencement. However, the discount rate implicit within our operating leases is generally not determinable at the time of lease commencement and therefore the Company determines the discount rate based on its incremental borrowing rate. For all operating leases, the Company utilized a market-based approach to estimate the incremental borrowing rate (“IBR”), which required significant judgment. The Company estimated the base IBR based on an analysis of (i) yields on the Company’s 2021 Credit Facility, as well as comparable companies and (ii) unsecured yields and discount rates. The Company applied adjustments to the base IBRs to account for full collateralization and lease term. The table below summarizes the weighted average discount rate used to measure our lease liabilities as of June 30, 2022.


Weighted Average Discount Rate	June 30, 2022
Operating leases	4.32	%
Finance leases	9.72	%

Future lease liabilities at June 30, 2022 are as follows (amounts in thousands):


Year Ending December 31,	Operating Lease Liabilities (1)		Finance Lease Liabilities		Total Lease Liabilities
Remainder of 2022	$	24,016	$	2,666	$	26,682
2023	50,355		5,333		55,688
2024	45,518		5,153		50,671
2025	39,776		5,153		44,929
2026	37,153		5,612		42,765
2027	33,633		5,423		39,056
Thereafter	143,388		115,168		258,556
Total lease payments	373,839		144,508		518,347
Less: Amounts representing interest	(68,154)		(92,014)		(160,168)
Total	$	305,685	$	52,494	$	358,179

(1) Includes leases with related parties. See Note 10 —Related Party Transactions for amounts leased from related parties.

At June 30, 2022, the Company has entered into leases for the expansion of our Boston Heights distribution center and Showrooms which have not yet commenced with expected lease terms ranging from 10 to 24 years. The aggregate minimum rental payments over the term of the leases of approximately $148.4 million are not included in the above table.

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Arhaus, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited)

Future minimum lease payments for operating and capital leases under ASC 840 at December 31, 2021, were as follows (amounts in thousands):


Year Ending December 31,	Operating Leases (1)		Capital Leases		Total Future Lease Payments
2022	$	45,892	$	4,673	$	50,565
2023	43,507		4,673		48,180
2024	38,659		4,673		43,332
2025	33,125		4,673		37,798
2026	29,903		5,132		35,035
Thereafter	129,498		120,390		249,888
	320,584		144,214		464,798
Less: Amounts representing interest	—		(94,064)		(94,064)
Total	$	320,584	$	50,150	$	370,734

(1) Includes leases with related parties. See Note 10 —Related Party Transactions for amounts leased from related parties.

Supplemental cash flow information related to leases for the six months ended June 30, 2022, is as follows (amounts in thousands):


	Six months ended June 30, 2022
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows for operating leases	$	23,501
Operating cash flows for finance leases	2,488
Financing cash flows for finance leases	50
Right-of-use assets obtained in exchange for lease obligations:
Operating leases	$	42,001
Finance leases	2,018

6. Equity Based Compensation

The Company recorded equity based compensation expense of $1.4 million and $0.4 million for the six months ended June 30, 2022 and 2021, respectively. Equity based compensation expense was $0.7 million and $0.3 million for the three months ended June 30, 2022 and 2021, respectively. Equity based compensation expense is recorded within the selling, general and administrative expenses line item of the condensed consolidated statements of comprehensive income. Total unrecognized compensation cost for equity based compensation to be recognized in future periods is $10.2 million at June 30, 2022, and will be recognized over a weighted average period of 3.84 years.


	Class A			Class B
	Shares	Weighted Average Grant Date Fair Value		Shares	Weighted Average Grant Date Fair Value
Unvested at December 31, 2021	2,520,229	$	16.28	596,598	$	0.13
Granted	—	—		—	—
Forfeited	—	—		—	—
Vested	(932,847)	18.02		(596,598)	0.10
Unvested at June 30, 2022	1,587,382	$	17.93	—	$	—

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Arhaus, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited)

7. Segment Reporting

Our chief operating decision maker is our Chief Executive Officer (“CEO”), who reviews financial information presented on a consolidated basis for purposes of making decisions, assessing financial performance and allocating resources. We operate our business as 1 operating segment and therefore we have 1 reportable segment that offers an assortment of merchandise across a number of categories, including furniture, outdoor, lighting, textiles, and décor. The assortment of merchandise can be purchased through our retail and eCommerce sales channels.

The majority of our net revenue is generated through sales to clients in the United States. Sales to clients outside of the United States are not significant. Further, no single client represents more than ten percent or more of our net revenue.

The following table shows net revenue by merchandise sales channel for the six and three months ended June 30, 2022 and 2021, respectively (amounts in thousands):


	Six months ended June 30,				Three months ended June 30,
	2022		2021		2022		2021
Retail	$	458,965	$	290,511	$	256,395	$	151,719
eCommerce	93,600		64,846		49,870		32,324
Total net revenue	$	552,565	$	355,357	$	306,265	$	184,043

8. Net and Comprehensive Income per Share

As a result of the Reorganization and IPO, existing Class A and Class B Unitholders of LLC were issued Class B and Class A common stock in the Company, respectively. The Class A Unitholders received 80,792,206 shares of Class B common stock and the Class B Unitholders received 31,266,536 shares of Class A common stock. Accordingly, all share and per share amounts for all periods presented in the condensed consolidated statements of comprehensive income and this note have been adjusted retroactively, where applicable, to reflect the Reorganization.

Basic and diluted net and comprehensive income per share for the six and three months ended June 30, 2022 and 2021, was calculated by adjusting net and comprehensive income attributable to Arhaus, Inc. for net and comprehensive income attributable to noncontrolling interest, and dividing by basic and diluted weighted-average number of common shares outstanding. Management Incentive Unitholders did not participate in the earnings or losses of the Company as of June 30, 2021 and therefore were not participating securities. As such, they were not included within the calculation of basic or diluted earnings per share as of June 30, 2021.

Basic and diluted net and comprehensive income per share for the six and three months ended June 30, 2022 and 2021, is as follows (amounts in thousands except share and per share data):

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Arhaus, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited)


	Six months ended June 30,				Three months ended June 30,
	2022		2021		2022		2021
Numerator
Net and comprehensive income	$	52,697	$	16,048	$	36,639	$	6,836

Less: Net and comprehensive income attributable to noncontrolling interest	—		9,268		—		3,951
Net and comprehensive income attributable to Arhaus, Inc.	$	52,697	$	6,780	$	36,639	$	2,885

Denominator—Weighted Average Shares Outstanding
Weighted-average number of common shares outstanding, basic	137,662,601		112,058,742		137,840,691		112,058,742
Effect of dilutive restricted stock (1)	1,731,454		—		1,613,418		—
Weighted-average number of common shares outstanding, diluted	139,394,055		112,058,742		139,454,109		112,058,742

Net and Comprehensive Income Per Share
Net and comprehensive income per share, basic	$	0.38	$	0.06	$	0.27	$	0.03
Net and comprehensive income per share, diluted	$	0.38	$	0.06	$	0.26	$	0.03

(1) During the six and three months ended June 30, 2022, 618,387 and 554,070 shares of unvested restricted stock were excluded from the computation of diluted earnings per share because their effect would have been anti-dilutive.

9. Commitments and Contingencies

The Company is involved in litigation and claims that are incidental to its business. Although the outcome of these matters cannot be determined at the present time, the Company believes that the ultimate resolution of these matters will not have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.

From time to time, the Company has received inquiries from a number of state and local taxing agencies with respect to the remittance of sales, use, telecommunications, excise, and income taxes. Several jurisdictions are currently conducting tax audits of the Company's records. The Company collects, or has accrued for, taxes that it believes are required to be remitted. The amounts that have been remitted have historically been within the accruals established by the Company. The Company adjusts its accrual when facts relating to specific exposures warrant such adjustment. As of June 30, 2022 and December 31, 2021, we recorded liabilities of $1.2 million and $1.2 million, respectively, in accrued taxes on the condensed consolidated balance sheets for non-income tax matters that were probable and reasonably estimable.

10. Related Party Transactions

Leasing transactions

In November 2000, the Company entered into a lease agreement with Pagoda Partners, LLC, a company of which John Reed, our CEO, indirectly owns 50%, for our warehouse in Walton Hills, Ohio. The base lease term was 17 years with a 5-year renewal option. In August 2020, the Company amended the lease agreement to extend the lease term to April 2024 with the ability to extend the lease in 12-month increments thereafter. The monthly rental payments are $0.1 million. Rent expense was $0.7 million and $0.7 million for the six months ended June 30, 2022 and 2021, respectively. Rent expense was $0.4 million and $0.4 million for the three months ended June 30, 2022 and 2021, respectively.

In July 2010, the Company entered into a lease agreement with Brooklyn Arhaus, a company of which our CEO and Mr. Beargie, a Director of the Company, own 85% and 15%, respectively, for our Outlet in Brooklyn, Ohio. The base lease term is 15 years with no lease renewal options. The monthly rental payments are $20 thousand. Rent expense was $0.2

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Arhaus, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited)

million and $0.2 million for the six months ended June 30, 2022 and 2021, respectively. Rent expense was $0.1 million and $0.1 million for the three months ended June 30, 2022 and 2021, respectively.

In September 2014, the Company entered into a lease agreement with Premier Arhaus, LLC, a company of which our CEO indirectly owned 50% during 2021, on a triple net basis for our headquarters building and distribution center, with construction completed during 2016. The base lease term is 17 years, with a 10-year renewal option at fixed rental payments, and with two additional 5-year renewal options at fair market rent. The monthly rental payments range from $0.2 million to $0.5 million during the 17-year base lease term and from $0.5 million to $0.6 million during the 10-year renewal period. In September 2021, the Company amended the existing finance lease agreement to extend the lease term for an additional three years, which included monthly rental payments of $0.6 million. Further, the amended lease agreement provides for the expansion of the Company’s distribution center and monthly rental payments range from $0.1 million to $0.2 million. During the fourth quarter of 2021, the lessor sold its interest in the leased assets to a third party. As a result, the lease is no longer with a related party of the Company. Rent expense was $2.9 million and $1.5 million for the six and three months ended June 30, 2021, respectively.

In March 2021, the Company entered into a lease agreement with Premier Conover, LLC, a company of which our CEO indirectly owned 10%, for a distribution center and manufacturing building, for which construction was completed in the fourth quarter of 2021. The base lease term is for ~~12-years,~~12 years, with a 10-year renewal option and two additional 5-year renewal options at the higher of the minimum base rent or the fair market rent at the time of renewal execution. The monthly rental payments range from $0.2 million to $0.3 million during the 12-year base lease term and from $0.4 million to $0.5 million during the 10-year renewal ~~period. The Company has concluded that~~period. Rent expense was $1.8 million and $0.9 million for the ~~lease is an operating lease.~~six and three months ended June 30, 2022, respectively.

~~Future minimum rental payments required under operating leases with initial or remaining noncancelable lease terms as of September 30, 2021, are as follows (amounts in thousands):~~

Year Ending December 31, Third Party Related Party Total
Remainder of 2021 $ 10,234 $ 1,143 $ 11,377
2022 40,802 4,596 45,398
2023 36,813 4,686 41,499
2024 32,614 3,873 36,487
2025 28,135 3,455 31,590
2026 24,569 3,374 27,943
Thereafter 104,163 25,564 129,727
$ 277,330 $ 46,691 $ 324,021

Other transactions

In ~~September, 2014,~~accordance with the Company entered into a lease agreement with a related party on a triple net basis for our headquarters building and distribution center, with construction completed during 2016. The base lease term is 17-years, with a 10-year renewal option at fixed rental payments, and with two additional 5-year renewal options atchange in reporting entity, the fair market rental payments. The monthly rental payments range from $0.2 million to $0.5 million during the 17-year base lease term and from $0.5 million to $0.6 million during the 10-year renewal period. The Company has concluded that the lease is a capital lease. The capital lease obligation and related asset were valued at $45 million and were recorded in 2016 when the Company took control of the property. In September 2021, the Company amended the existing capital lease agreement to extend the lease term for an additional three years, which increased the capital lease obligation by $2.4 million and includes monthly rental payments of $0.6 million.

~~Further, the amended capital lease agreement provides for the expansion of the~~ Company’s distribution center and monthly rental payments that have not been determined as of September 30, 2021. As part of the amended capital lease agreement, we qualify as the deemed owner of the expansion project due to significant involvement during the construction period under build-to-suit lease accounting requirements. We recorded the cost of the expansion in property, furniture and equipment, net and the offsetting lease financing obligations is recorded in accrued other expenses on our condensed consolidated balance sheets. As of September 30, 2021, we have recognized an asset and recorded a build-to-suit financing obligation of $1.1 million in accrued other expenses. During the fourth quarter of 2021 the related party lessor sold its interest in the leased assets to a third party. As a result, the lease will no longer be with a related party of the Company. Accumulated amortization was $9.5 million and $5.3 million at September 30, 2021 and December 31, 2020, respectively.

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~~Arhaus, LLC and Subsidiaries~~ ~~Notes to Condensed Consolidated Financial Statements~~ ~~(Unaudited)~~

~~Future minimum lease payments at September 30, 2021, for the capital lease related to the Company’s corporate headquarters and distribution center, are as follows (amounts in thousands):~~

Year Ending December 31,
Remainder of 2021 $ 1,168
2022 4,673
2023 4,673
2024 4,673
2025 4,673
2026 5,132
Thereafter 120,392
145,384
Less: Amount representing interest (95,287)
$ 50,097

~~The Company has received certain rent abatements and has scheduled rent increases under various real estate leases. The~~ condensed consolidated statements of ~~comprehensive income reflects rent expense on~~cash flows include the payment and receipt of a ~~straight-line basis over the terms of the respective leases. A deferred rental obligation of $76.5~~related-party receivable and a related-party note receivable between Homeworks and our CEO for $0.1 million and ~~$71.2~~$1.0 million, ~~related~~respectively for the six months ended June 30, 2021. The receivable and the full principal on the note receivable, including accrued interest, were paid back to the ~~lease incentives~~Company by the CEO in May 2021.

In accordance with the Reorganization, the Company has accounts payable due to noncontrolling interests of LLC for state and federal income tax refunds filed for tax periods prior to the ~~straight-line rent expense is reflected in~~Reorganization. The accounts payable due to related parties were $0.2 million and $2.9 million at June 30, 2022 and December 31, 2021, respectively, and are included within accounts payable on the condensed consolidated balance sheets ~~at September 30, 2021~~.

11. Income Taxes

Income taxes were $18.3 million and ~~December 31, 2020, respectively,~~$1.2 million in the ~~deferred rent~~six months ended June 30, 2022 and ~~lease incentives line item.~~

~~6. Mezzanine Equity~~

~~In connection with the issuance of the Prior Credit Facilities discussed in Note 4, the Class A~~2021, respectively. Income taxes were $12.4 million and ~~Class B unit equity holders made an aggregate $25.0~~$0.5 million capital contribution to the Company in exchange for 1,250,000 Class A Preferred Units and 1,250,000 Class B Preferred Units, respectively (collectively, the “Preferred Units”). The Preferred Units were issued pursuant to the Third Amended and Restated Limited Liability Company Agreement of the Company dated June 26, 2017 (the “2017 LLC Agreement”), and accrue a 16% per annum (compounded annually) preferred return. The Preferred Units have no voting rights and do not participate in profits or losses. Preferred Unit holders are entitled to receive distributions in excess of tax distributions to Class A and B members in proportion to the accrued and unpaid preferred return and unreturned capital contributions. Further, Preferred Unit holders are entitled to receive proceeds upon a capital transaction before other unit holders in proportion to the accrued and unpaid preferred return and unreturned capital contributions. The Company can redeem the Preferred Units at our discretion, however, because the Preferred Unit holders control the Board and could force the Company to redeem the Preferred Units they are recorded as mezzanine equity within the condensed consolidated balance sheets.

~~The accumulated 16% preferred return was $15.8 million at September 30, 2020. On December 29, 2020, the Preferred Units were repaid in full including the preferred return.~~

~~7. Incentive Unit Compensation Arrangements~~

In May of 2021, the 2017 LLC Agreement and 2017 Equity Plan were amended to authorize the Company to issue up to 967,987 Class G Units. Additionally, in accordance with the amendments the authorized Class F and Class F-1 Units that could be issued were reduced to 2,190,514 and 2,190,514, respectively. No changes to the Company’s Class C and D incentive units were made. The Class C, D, F, F-1 and G Units are collectively referred to as the “Incentive Units.”

~~In May, June and July of 2021, the Company granted Class G Units that vest over a~~ ~~five~~ ~~year term and become fully vested~~ in the ~~event of a change in control, death or disability, as long as the holder of the~~

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~~Arhaus, LLC and Subsidiaries~~ ~~Notes to Condensed Consolidated Financial Statements~~ ~~(Unaudited)~~

~~Class G Units is employed by the Company on the date of such events. Further, certain unit holders who are terminated without cause will have unvested units fully vest upon that event.~~

three months ended June 30, 2022 and 2021, respectively. The ~~holders of the Class G Units do not share in distributions of operating cash flows. Upon the Class G Unit holder’s termination of employment, all unvested Class G Units are forfeited,~~effective tax rate was 25.8% and the Company has the right to purchase all vested Class G Units at a per unit price equal to the fair market value of Class G Unit determined at the date of such right is exercised as determined by an independent appraisal firm to be mutually agreed to by the Company and unit holder; provided; however, all vested and unvested Class G Units are forfeited without compensation in the event of termination with cause.

~~The Company has recorded Incentive Unit compensation expense of $1.1 million and $0.3 million~~7.0% for the ~~nine~~six months ended ~~September~~June 30, 2022 and 2021, respectively. The effective tax rate was 25.3% and ~~2020, respectively. Incentive Unit compensation expense was $0.7 million and $0.0 million~~6.8% for the three months ended September 30, 2021 and 2020, respectively. Incentive Unit compensation expense is recorded within the selling, general and administrative expenses line item of the condensed consolidated statements of comprehensive income. Total unrecognized compensation cost for the Incentive Units to be recognized in future periods is $12.3 million at September 30, 2021, and will be recognized over a weighted average period of 4.55 years. The total grant-date fair value of incentive units that vested as of September 30, 2021 and December 31, 2020, were $0.3 million and $0.4 million, respectively.

~~Incentive Unit activity through September 30, 2021, is as follows:~~

Class C Class D Class F/F-1 Class G
Units Weighted
Average
Grant Date
Fair Value Units Weighted
Average
Grant Date
Fair Value Units Weighted
Average
Grant Date
Fair Value
(1) Units Weighted
Average
Grant
Date Fair
Value
December 31, 2020 1,868,913 $ 0.57 96,318 $ 0.83 4,381,030 $ 0.63 — $ —
Granted — — — — — — 701,965 18.10
Forfeited — — — — (109,916) 0.77 — —
September 30, 2021 1,868,913 $ 0.57 96,318 $ 0.83 4,271,114 $ 0.63 701,965 $ 18.10

~~(1) - For each Class F Unit a corresponding Class F-1 Unit is authorized, issued and outstanding. The Class F Units and Class F-1 Units are aggregated for purposes of valuation.~~

~~Vested Incentive Units as of September 30, 2021 and December 31, 2020, are as follows:~~

Class C Class D Class F/F-1 Class G
September 30, 2021 1,653,476 96,318 2,982,442 —
December 31, 2020 1,653,476 96,318 2,167,547 —

At September 30, 2021, the Company’s valuation of the Incentive Units granted in May, June and July of 2021 were measured using the PWERM. The PWERM is a scenario-based methodology that estimates the fair value of the Incentive Units awarded based upon an analysis of future values for the Company. The Company considered two different scenarios: (a) remain private; and (b) IPO. Under the remain private scenario, as of June 30, 2022 and 2021, respectively. Prior to the Reorganization, the Company estimated the enterprise value by weighting the guideline public company method and the discounted cash flow method, and then relied on the OPM and applied a DLOM. The OPM estimated the value using the Black-Scholes OPM. The fair value of the Incentive Units have been determined utilizing unobservable inputs and therefore is a Level

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~~Arhaus, LLC and Subsidiaries~~ ~~Notes to Condensed Consolidated Financial Statements~~ ~~(Unaudited)~~

~~3 measurement under the fair value hierarchy.~~


			~~2021 Awards~~
~~Term~~			~~10 years~~
~~Risk-free rate of return~~			~~1.50%~~
~~Volatility~~			~~40.00%~~
~~Dividend yield~~			0%

The expected term represents our expected time until a liquidity event as of the valuation date. The assumed volatility assumption is based on that of an identified group of comparable public companies over a similar term. The risk-free rate of return is based on the yields of U.S. Treasury securities with maturities similar to the expected term. We used an expected divided yield of zero, as we do not plan to pay cash dividends for the foreseeable future.

~~The fair values of each class of Incentive Units have been determined utilizing unobservable inputs, and therefore are Level 3 measurements under the fair value hierarchy.~~

Additionally, a probability distribution of possible future equity values is completed and incorporated into the calculation of respective Incentive Unit fair values. This is necessary as upon the occurrence of a liquidity event in the future, the proceeds thereof will be allocated in accordance with the distribution waterfall defined within the 2017 LLC Agreement.

~~8. Segment Reporting~~

Our chief operating decision maker (“CODM”) is our Chief Executive Officer, who reviews financial information presented on a consolidated basis for purposes of making decisions, assessing financial performance and allocating resources. We operate our business as 1 operating segment and therefore we have 1 reportable segment that offers an assortment of merchandise across a number of categories, including furniture, lighting, textiles, décor, and outdoor. The assortment of merchandise can be purchased through our Showroom and eCommerce sales channels.

The majority of our net revenue is generated through sales to clients in the United States. Sales to clients outside of the United states are not significant. Further, no single client represents more than ten percent or more of our net revenue.

~~The following table shows net revenue by merchandise sales channel for the nine and three months ended September 30, 2021 and 2020, respectively (amounts in thousands):~~

Nine Months Ended September 30, Three Months Ended September 30,
2021 2020 2021 2020
Retail $ 457,439 $ 283,286 $ 166,928 $ 98,894
eCommerce 101,251 61,320 36,405 21,607
Total net revenue $ 558,690 $ 344,606 $ 203,333 $ 120,501

~~9. Net and Comprehensive Income per Share~~

~~As discussed in Note 12, the Company reorganized its ownership structure from~~was a limited liability company under the Internal Revenue Code that had elected to be taxed as a ~~corporation~~partnership and did not pay federal or most state corporate income taxes on its taxable income, but rather its members were liable for ~~the purpose of issuing common stock on a publicly traded exchange. As a result~~their respective portions of the ~~Reorganization~~taxable income (loss) of LLC. The income tax provision included state and ~~IPO, existing Class A and Class B Unitholders of the Company were issued Class A and Class B common stock~~local tax in ~~Arhaus, Inc., in accordance with the distribution waterfall defined in the Company’s 2017 LLC Agreement. The Class A Unitholders received 80,792,206 shares~~

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~~Arhaus, LLC and Subsidiaries~~ ~~Notes to Condensed Consolidated Financial Statements~~ ~~(Unaudited)~~

~~of Class B common stock and the Class B Unitholders received 31,266,536 shares of Class A common stock.~~

Accordingly, all share and per share amounts for all periods presented in the condensed consolidated statements of comprehensive income and this note have been adjusted retroactively, where applicable, to reflect the reorganization transaction.

Basic and diluted net and comprehensive income per share for the nine and three months ended September 30, 2021 and 2020, was calculated by adjusting net and comprehensive income attributable to Arhaus, LLC for preferred dividends, and dividing by basic and diluted weighted-average number of common shares outstanding (amounts in thousands except unit and per share data). Management Incentive Unitholders and Preferred Unitholders do not participate in the earnings or losses of the Company as of September 30, 2021 and 2020 and therefore are not participating securities. As such, they are not included within the calculation of basic or diluted earnings per share as of September 30, 2021 and 2020.

Nine Months Ended September 30, Three Months Ended September 30,
2021 2020 2021 2020
Numerator
Net and comprehensive income $ 30,580 $ 14,432 $ 14,383 $ 783
Less: Preferred units dividend — 4,374 — 1,469
Net and comprehensive income (loss) attributable to the shareholders $ 30,580 $ 10,058 $ 14,383 $ (686)
Denominator - Basic and Diluted
Weighted-average number of common shares outstanding 112,058,742 112,058,742 112,058,742 112,058,742
Net and comprehensive income (loss) per share, basic and diluted $ 0.27 $ 0.09 $ 0.13 $ (0.01)

~~10. Commitments and Contingencies~~

The Company is involved in litigation and claims that are incidental to its business. Although the outcome of these matters cannot be determined at the present time, management of the Company believes that the ultimate resolution of these matters will not have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.

~~11. Related Party Transactions~~

~~For the Company’s discussion of related party transactions see Note 5.~~

~~12. Subsequent Event~~

The Company has evaluated subsequent events through the date of the issuance of the condensed consolidated financial statements, and no additional matters were identified requiring recognition or disclosure in the financial statements, except for events described below.

~~Reorganization and Initial Public Offering~~

In connection with the IPO, the Company reorganized its ownership structure from a limited liability company to a corporation for the purpose of issuing common stock on a publicly traded exchange. Arhaus, Inc. serves as a holding company that indirectly wholly owns Arhaus, LLC and its subsidiaries. Pursuantcertain jurisdictions prior to the terms of the Integrated Contribution Agreement by and among Arhaus, Inc., a Delaware corporation, FS Arhaus Holding, Inc. (“FS Arhaus”), a Delaware corporation, Homeworks Holdings Inc. (“Homeworks”) and the members of management who hold incentive units (“Management Unitholders”)

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~~Arhaus, LLC and Subsidiaries~~ ~~Notes to Condensed Consolidated Financial Statements~~ ~~(Unaudited)~~

~~of the Company, the following series of transactions were completed on November 8, 2021, which we refer to, collectively, as the~~ Reorganization. ~~These transactions included:~~

•the amendment and restatement of the certificate of incorporation of Arhaus, Inc., to authorize two classes of common stock, Class A common stock and Class B common stock and to authorize the Company to issue up to 750,000,000 shares of common stock, consisting of 600,000,000 share of Class A common stock, par value of $0.001 per share, 100,000,000 shares of Class B common stock, par value of $0.001 and 50,000,000 shares of Preferred Stock; and

•Arhaus, Inc.’s acquisition of the units of the Company currently held by FS Arhaus, Homeworks, John Reed (“Reed”) through the John P Reed Trust dated April 29, 1985, as Amended (“Reed Revocable Trust”) and the Management Unitholders, pursuantSubsequent to the ~~mergers and exchange described below, and the issuance in those transactions of Class A common stock~~Reorganization, LLC’s taxable income flows through to ~~the holders of~~ FS Arhaus and ~~the Management Unitholders and Class B common stock to~~ Homeworks ~~Reed and the Reed Revocable Trust.~~

~~The following steps describe the transactions that were completed to effect the Reorganization on November 8, 2021:~~

•~~Step 1: Arhaus, Inc. formed two wholly owned subsidiaries, Ash Merger Sub 1, Inc. (“Merger Sub 1”), a Delaware corporation, and Ash Merger Sub 2, Inc. (“Merger Sub 2”), a Delaware corporation;~~

•Step 2(a): Merger Sub 1 merged with and into FS Arhaus, with FS Arhaus surviving the merger, or Surviving Corporation 1, and became a wholly owned subsidiary of Arhaus, Inc. and the holders of FS Arhaus received shares of Class A common stock;

•Step 2(b): Merger Sub 2 merged with and into Homeworks, with Homeworks surviving the merger, or Surviving Corporation 2, and became a wholly owned subsidiary of Arhaus, Inc. and the owners of Homeworks, received shares of Class B common stock;

•~~Step 2(c): The Management Unitholders contributed their units of the Company to Arhaus, Inc. in exchange for shares of Class A common stock;~~

•~~Step 2(d): Reed and the Reed Revocable Trust contributed their respective units of the Company to Arhaus, Inc. in exchange for shares of Class B common stock;~~

•Step 2(e): Arhaus, Inc. contributed the units of the Company that it owns directly to Surviving Corporation 1 and Surviving Corporation 2 in proportion to the units of the Company owned by Surviving Corporation 1 and Surviving Corporation 2; and

•~~Step 3: Arhaus, Inc. issued shares of our Class A common stock to the purchasers in the IPO.~~

As a result of the Reorganization, a total of 39,623,041 shares of Class A common stock and 87,536,950 shares of Class B common stock were issued to the former holders of FS Arhaus, the former holders of Homeworks, Reed, the Reed Revocable Trust and the Management Unitholders. Of the total 127,159,991 shares of common stock, 2,520,227 shares of Class A common stock and 596,598 shares of Class B common stock issued to Management Unitholderswho are subject to ~~certain vesting conditions specified in individual award agreements~~U.S. federal and ~~were issued as restricted shares with similar time-based vesting provisions as the incentive units that were exchanged for such shares. If the vesting conditions~~state corporate income taxes.

As of ~~the restricted stock are not satisfied, such restricted stock will be forfeited and canceled.~~

On November 8, 2021, Arhaus, Inc. consummated its IPO of 12,903,226 shares of Class A common stock at an IPO price of $13.00 per share. Shares of Arhaus, Inc.’s Class A common stock began trading on the NASDAQ Global Select Market under the ticker symbol “ARHS” on November 4, 2021.

Arhaus, Inc. used a portion of the net proceeds received from the IPO to pay the term loan exit fee of $64.1 million in connection with the term loan that was repaid on December 28, 2020, as discussed in Note 4.June 30, 2022, no unrecognized tax benefits have been recognized. The Company ~~will record an additional $14.6 million~~files income tax returns in the U.S. and various state and local jurisdictions. The tax years after 2017 remain open to examination by the state taxing jurisdictions in which the Company is subject to tax. As of ~~selling, general and administrative~~June 30, 2022, the Company was not under examination by the Internal Revenue Service or any state tax jurisdiction.

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~~Arhaus, LLC and Subsidiaries~~ ~~Notes to Condensed Consolidated Financial Statements~~ ~~(Unaudited)~~

~~expenses in the fourth quarter of 2021 related to the change in fair value of the term loan exit fee as a result of the IPO.~~

~~Revolving Credit Facilities~~

On November 4, 2021 the Company terminated the Revolver dated June 25, 2020 of which there were no borrowings drawn. The termination of the Revolver resulted in the Company paying an $0.6 million early termination fee and writing off the remaining unamortized loan costs of $0.8 million.

On November 8, 2021, Arhaus, Inc. entered into a new revolving credit facility agreement (the “2021 Credit Facility”). The 2021 Credit Facility provides for, among other things, (1) a revolving credit facility, in an aggregate amount not to exceed at any time outstanding the amount of such lender’s commitment, (2) a letter of credit commitment, in an amount equal to the lesser of (a) $10 million, and (b) the amount of the revolving credit facility as of such date, and (3) a swingline loan, in an amount equal to the lesser of (a) $5 million, and (b) the amount of the revolving credit facility as of such date. The aggregate amount of all commitments of all lenders under the 2021 Credit Facility is $50 million, which may be increased pursuant to the terms of the 2021 Credit Facility. The 2021 Credit Facility contains restrictive covenants and has certain financial covenants, including a minimum rent-adjusted total leverage ratio and minimum fixed charge ratio. The 2021 Credit Facility bears variable interest rates at the prevailing Bloomberg Short-Term Bank Yield index rate plus the applicable margin (1.75% at origination), whereas the applicable margin is adjusted quarterly based on Arhaus, Inc.’s consolidated rent-adjusted total leverage ratio.

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~~MANAGEMENT’SDISCUSSIONANDANALYSISOF FINANCIALCONDITIONANDRESULTSOF OPERATIONS~~Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion and analysis of our financial condition and results of operations together with our condensed consolidated financial statements and the related notes included elsewhere in this Form 10-Q and our ~~final prospectus filed with~~Annual Report on Form 10-K for the ~~Securities and Exchange Commission pursuant to Rule 424(b)(4) under the Securities Act of 1933, as amended, dated November 3, 2021 (the “Prospectus”).~~ year ended December 31, 2021. This Quarterly Report on Form 10-Q contains forward looking statements that involve risks and uncertainties, as well as assumptions that, if they do not fully materialize or are proven incorrect, could cause our business and results of operations to differ materially from those expressed or implied by such forward-looking statements. Forward-looking statements can generally be identified by the use of forward-looking terminology, including, but not limited to, “may,” “could,” “seek,” “guidance,” “predict,” “potential,” “likely,” “believe,” “will,” “expect,” “anticipate,” “estimate,” “plan,” “intend,” “believe,” “forecast,” or variations of these terms and similar expressions, or the negative of these terms or similar expressions. Past performance is not a guarantee of future results or returns and no representation or warranty is made regarding future performance. Such forward-looking statements involve known and unknown risks, uncertainties and other important factors beyond our control that could cause our actual results, performance or achievements to be materially different from the expected results, performance or achievements expressed or implied by such forward-looking statements. ~~These risks and uncertainties~~Such factors include, but are not limited ~~to: our~~to, the following risks:

•Our reliance on third-party transportation carriers and risks associated with increased freight and transportation costs; ~~disruption~~

•Disruption in our receiving and distribution system, including ~~a delay~~delays in the ~~anticipated opening~~integration of our new distribution centers and ~~manufacturing center; our~~the possibility that we may not realize the anticipated benefits of multiple distribution centers;

•Our ability to obtain quality merchandise in sufficient quantities; ~~risks~~

•Risks as a result of constraints in our supply chain; a

•A failure of our vendors to meet our quality standards; ~~the COVID-19 pandemic and its effect on our business; declines~~

•Declines in general economic conditions that affect consumer confidence and consumer spending that could adversely affect our revenue; our ability to manage and maintain the growth rate of our business; our ability to anticipate changes in consumer preferences; risks related to maintaining and increasing showroom traffic and sales; our ability to compete in our market; our ability to adequately protect our intellectual property; the

•The possibility of cyberattacks and our ability to maintain adequate cybersecurity systems and procedures; ~~loss,~~

•Loss, corruption and misappropriation of data and information relating to clients and employees; ~~changes~~

•Changes in and compliance with applicable data privacy rules and regulations; ~~compliance~~

•Our ability to manage and maintain the growth rate of our business;

•Our ability to anticipate changes in consumer preferences;

•Risks related to maintaining and increasing Showroom traffic and sales;

•Our ability to compete in our market;

•Our ability to adequately protect our intellectual property;

•Compliance with applicable governmental regulations; ~~effectively~~

•The COVID-19 pandemic and its effect on our business;

•Effectively managing our eCommerce business and digital marketing efforts; and ~~compliance~~

•Compliance with SEC rules and regulations as a public reporting company. These factors should not be construed as exhaustive. Furthermore, the potential impact of the COVID-19 pandemic on our business operations and financial results and on the world economy as a whole may heighten the risks and uncertainties that affect our forward-looking statements described above.

The risks, uncertainties and assumptions referred to above that could cause our results to differ materially from the results expressed or implied by such forward-looking statements include, but are not limited to, those discussed under ~~the heading “Risk Factors”~~Item 1A. Risk Factors, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations, and elsewhere in our ~~final prospectus filed with~~Annual Report on Form 10-K for the Securities and Exchange Commission pursuant to Rule 424(b)(4) under the Securities Act of 1933, as amended, dated November 3, 2021 (the “Prospectus”), and the risks, uncertainties and assumptions discussed from time to time in our other public filings and public announcements.year ended December 31, 2021. All forward-looking statements included in this document are based on information available to us as of the date hereof, and we assume no obligation to update these forward-looking statements. ~~In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject.~~ These statements are based on information available to us as of the date of this Form 10-Q. While we believe that information provides a reasonable basis for these statements, that information may be limited or incomplete. Our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all relevant information. These statements are inherently uncertain, and investors are cautioned not to unduly rely on these statements.

The following discussion contains references to ~~calendar year 2020 and~~ the ~~nine~~six and three months ended ~~September~~June 30, ~~2021~~2022 and ~~September 30, 2020,~~2021, which represents the condensed consolidated financial results of Arhaus, ~~LLC~~Inc. and subsidiaries for the ~~year ended December 31, 2020~~six and ~~the nine and the~~ three months ended ~~September~~June 30, ~~2021~~2022 and ~~2020,~~2021, respectively.

Overview

Arhaus is a rapidly growing lifestyle brand and premium retailer in the home furnishings market, specializing in livable luxury supported by ~~globally sourced, heirloom quality~~globally-sourced, heirloom-quality merchandise. We offer a differentiated ~~direct-to-~~

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~~consumer~~direct-to-consumer approach to furniture and décor. Our curated assortments are presented across our sales channels in sophisticated, family

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friendly and unique lifestyle settings. We offer merchandise assortments across a number of categories, including furniture, lighting, textiles, décor, and outdoor. Our products, designed to be used and enjoyed throughout the home, are sourced directly from factories and suppliers with no wholesale or dealer markup, allowing us to offer an exclusive assortment at an attractive value. Our direct sourcing network consists of more than 400 vendors, some of whom we have had relationships with since our founding. Our product development teams work alongside our direct sourcing partners to bring to market proprietary merchandise that is a great value to clients, while delivering attractive margins.

We ~~position~~believe in providing a dynamic and welcoming experience in our Showrooms and online with the conviction that retail is theater. Our national omni-channel business positions our retail locations as Showrooms for our brand, while our website acts as a virtual extension of our Showrooms. Our theater-like ~~Showrooms~~Showrooms are highly inspirational and function as an invaluable brand awareness vehicle. Our seasoned sales associates and in-home designers provide ~~valued insight~~expert advice and ~~advice~~assistance to our client base that drives significant client engagement. Our omni-channel model allows clients to begin or end their shopping ~~experience~~journey online, while also experiencing our theater-like Showrooms throughout the shopping ~~process.~~ journey.

We ~~offer an in-home designer services program, through which our in-home designers provide expert advice and assistance to our clients.~~

have one reportable segment as of June 30, 2022. At ~~September~~June 30, ~~2021,~~2022, we ~~operated 77~~operated 80 Showrooms, 5459 with ~~in-home~~in-home interior designers. At December 31, ~~2020~~2021, we operated 7479 Showrooms, 4558 with in-home interior designers.

September 30,
2021 December 31,
2020
Traditional showrooms 72 70
Design Studios 2 1
Outlets 3 3
Total retail locations 77 74
Total square footage (in thousands) 1,288 1,258


	June 30, 2022	December 31, 2021
Traditional showrooms	72	71
Design Studios	5	5
Outlets	3	3
Total Showroom locations	80	79
Total square footage (in thousands)	1,296	1,288

For the ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, we generated ~~$558.7~~$552.6 million of net revenue, $230.7 million of gross margin ~~as a percent of net revenue of 41.7%~~ and ~~$30.6~~$52.7 million of net and comprehensive income. For the three months ended ~~September~~June 30, ~~2021,~~2022, we generated ~~$203.3~~$306.3 million of net revenue, $133.0 million ofgross margin ~~as a percent of revenue of 41.7%~~ and ~~$14.4~~$36.6 million of net and comprehensive income. ~~We have~~ ~~one reportable segment that offers an assortment of merchandise across a number of categories, including furniture, lighting, textiles, décor, and outdoor.~~

Effects of COVID-19 on Our Business

The COVID-19 outbreak in the first quarter of fiscal year 2020 caused disruption to our business operations. In our initial response to the COVID-19 health crisis, we undertook immediate adjustments to our business operations including temporarily closing all retail locations, furloughing employees, minimizing expenses and delaying investments, including pausing some inventory orders while we assessed the status of our business. Our approach to the crisis evolved quickly as our business trends substantially improved during the second through fourth quarters of fiscal year 2020 as a result of both the reopening of our Showrooms and strong consumer demand for our products. We had reopened all of our Showrooms and Outlet stores by June 30, 2020, although currently many of our Showrooms and Outlets continue to conduct business with occupancy limitations and other operational restrictions.

While we have been able to serve our clients and operate our business through the ongoing COVID-19 ~~health crisis,~~pandemic, there can be no assurance that future events will not have an impact on our business, results of operations or financial condition since the extent and duration of the ~~health crisis~~pandemic remains uncertain. Future adverse developments in connection with the COVID-19 ~~crisis,~~pandemic, including additional waves or resurgences of COVID-19 outbreaks, new strains or variants of the virus, evolving international, federal, state and local restrictions and safety regulations in response to COVID-19 risks, changes in consumer behavior and health concerns, the pace of economic activity in the wake of the COVID-19 ~~crisis,~~pandemic, or other similar issues could adversely affect our business, results of operations or financial condition in the ~~future, or our financial results and business performance in future periods.~~

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future.

Various constraints in our merchandise supply chain have resulted in delays in our ability to convert demand ~~and recognize as~~into net revenue at normal historical rates. We anticipate that the business conditions related to the COVID-19 pandemic will continue to adversely affect the capacity of our vendors and supply chain to meet our demand during fiscal year ~~2021.~~2022. We expect that our supply chain may catch up to demand in the foreseeable future, but business circumstances and operational conditions in numerous international locations where our vendors operate ~~cannot be predicted with certainty.~~

Depending on the future course of the pandemic and further outbreaks, we may experience further restrictions and closures of our physical operations in our Showrooms, Design Studios and Outlet stores. Although we experienced strong demand for our products during fiscal year 2020 and the nine months ended September 30, 2021, some of the demand may have been driven by stay-at-home restrictions that were in place throughout many parts of the United States. The exact impact of changes to these stay-at-home restrictions cannot be predicted with certainty.

How We Assess the Performance of Our Business

In addition to U.S. GAAP results, this Form 10-Q contains references to the non-GAAP financial measures below. We use these non-GAAP measures to help assess the performance of our business, identify trends affecting our business, formulate business plans and make strategic decisions. In addition to our results determined in accordance with U.S. GAAP, we believe that providing these non-GAAP financial measures are useful to our investors as they present an informative supplemental view of our results from period to period by removing the effect of non-recurring items.

The non-GAAP financial measures presented herein are specific to us and may not be comparable to similar measures disclosed by other companies because of differing methods used by other companies in calculating them. These measures are also not intended to be measures of free cash flow for management’s discretionary use, as they do not reflect tax payments, debt service requirements and certain other cash costs that may recur in the future, including, among other things, cash requirements for working capital needs. Management compensates for these limitations by relying on our U.S.

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GAAP results in addition to using these non-GAAP financial measures. The non-GAAP financial measures should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items. WeWe consider the following financial and operating measures that affect our results of operations:

Net Revenue and ~~Demand.~~ Demand. Net revenue is recognized when a client obtains control of the merchandise. We also track demand in our business which is a key performance indicator linked to the level of client orders placed. Demand is an operating metric that we use ~~in reference~~ to measure the dollar value of orders (based on purchase price) ~~measured~~ at the time the order is placed, net of the dollar value of cancellations and returns (based on unpaid purchase price and amount credited to ~~the~~ client). These orders are recognized as net revenue ~~upon~~when a client ~~obtaining~~obtains control of the merchandise. Because demand is measured net of cancellations, all demand will eventually become net revenue, with appropriate reserves, when delivered to the client.

Comparable ~~Growth.~~ Growth. Comparable growth is the year-over-year percentage change of the dollar value of orders delivered (based on purchase price), net of the dollar value of returns (based on amount credited to ~~the~~ client), from ~~our~~ comparable Showrooms and eCommerce, including through our ~~direct-mail catalog.~~catalogs and other mailings. This metric is a key performance indicator used by management to evaluate Showroom performance for locations that have been opened for at least 15 consecutive months, which enables management to view the performance of those Showrooms without the dollar value of orders delivered for new Showrooms being included. Comparable Showrooms are defined as permanent Showrooms open for at least 15 consecutive months, including relocations in the same market. Showrooms record demand immediately upon opening, while orders delivered take additional time because product must be delivered to the client. Comparable Showrooms that were temporarily closed during ~~the year due to COVID-19~~portions of 2021 were not excluded from the comparable Showroom calculation. ~~Outlet comparable locations’~~The dollar value of orders delivered for Outlet comparable locations are included.

Demand Comparable ~~Growth.~~ Growth. Demand comparable growth is the year-over-year percentage change of demand from our comparable Showrooms and eCommerce, including through our direct-mail catalog. This metric is a key performance indicator used by management to evaluate Showroom demand performance for locations that have been opened for at least 13 consecutive months, which enables management to view the performance of those Showrooms without new Showroom demand included. ~~Comparable~~For demand purposes, comparable Showrooms are defined as permanent Showrooms open for at least 13 consecutive months, including relocations in the same market. Comparable Showrooms that were

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temporarily closed during ~~the year due to COVID-19~~portions of 2021 were not excluded from the comparable Showroom calculation. Outlet comparable location demand is included.

Demand comparable growth provides insight into business ~~performance~~levels in a particular period by comparing the dollar value of orders (based on purchase price) placed in that period to the prior comparable period. Although these orders do not result in net revenue until the order is delivered at a later point in time, management utilizes this metric to evaluate core performance.

Comparable growth is an additional measure that management utilizes to compare the dollar value of orders delivered (based on purchase price) in a period compared to the prior comparable period. Since delivery generally coincides with recognition of net revenue, with appropriate reserves, comparable growth trends will more closely track trends in reported net revenue than demand comparable growth trends. While increases or decreases in demand comparable growth will translate into increases or decreases in comparable growth over time, the trends do not necessarily correlate in any particular period. This is partially due to the general lag in time between when an order is placed and when an order is delivered. When the time gap from order to delivery increases, due to supply chain challenges for example, it may take longer for comparable growth to reflect demand comparable growth. Notwithstanding these limitations, management considers it useful to assess both measures together to get a more complete picture of overall performance trends, and believes these measures can be useful to investors for the same purpose, when viewed together with our reported results and other metrics.

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

Selling, General and Administrative Expenses. Selling, general and administrative, or SG&A, expenses include all operating costs not included in cost of goods sold. These expenses include payroll and payroll related expenses, Showroom expenses other than occupancy and expenses related to many of our operations at our corporate headquarters, including

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marketing, information technology, utilities and depreciation and amortization ~~warehouse expenses and marketing~~ expense. Payroll includes both fixed compensation and variable compensation. Variable compensation includes Showroom commissions and Showroom bonus compensation related to demand, likely ~~earned~~ before the client obtains control of the merchandise. Variable compensation is not significant in our eCommerce channel. All new Showroom opening expenses, other than occupancy, are included in SG&A expenses and are expensed as incurred. We expect certain of these expenses to continue to increase as we open new Showrooms, develop new product categories and otherwise pursue our current business initiatives. SG&A expenses as a percentage of net revenue isare usually higher in lower-volume quarters and lower in higher-volume quarters because a significant portion of the costs are relatively fixed.

EBITDA. We define EBITDA as consolidated net income before depreciation and amortization, interest

expense and ~~state and local taxes.~~

income tax expense.

Adjusted EBITDA. ~~We define adjusted EBITDA as EBITDA adjusted for items that we believe are not reflective of underlying operating performance in a particular period.~~ We believe that adjusted EBITDA is a useful measure of operating performance as the adjustments eliminate items that we believe are not reflective of underlying operating performance in a particular period. ~~This~~Adjusted EBITDA facilitates a comparison of our operating performance on a consistent basis from period-to-period and provides for a more complete understanding of factors and trends affecting our business.

Because adjusted EBITDA omits certain non-cash items and items that we believe are not reflective of underlying operating performance in a particular period, ~~as well as non-cash items,~~ we feel that it is less susceptible to variances in actual performance resulting from depreciation, amortization and other non-cash charges and can be more reflective of our operating performance in a particular period. We also use adjusted EBITDA as a method for planning and forecasting overall expected performance and for evaluating, ~~actual results against such expectations~~ on a quarterly and annual ~~basis.~~basis, actual results against such expectations.

The following is a reconciliation of our net and comprehensive income to EBITDA and adjusted EBITDA for the periods presented:

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Nine Months Ended Three Months Ended
(In thousands) September 30,
2021 September 30,
2020 September 30,
2021 September 30,
2020
Net income $ 30,580 $ 14,432 $ 14,383 $ 783
Interest expense 4,018 9,335 1,339 2,734
State and local taxes 1,704 900 500 731
Depreciation and amortization 17,206 12,682 8,297 4,244
EBITDA 53,508 37,349 24,519 8,492
Incentive unit compensation expense 1,135 326 708 76
Derivative expense(1) 29,905 500 100 167
Other expenses(2) 5,806 2,727 5,188 944
Adjusted EBITDA $ 90,354 $ 40,902 $ 30,515 $ 9,679

~~___________~~


	Six months ended June 30,				Three months ended June 30,
(In thousands)	2022		2021		2022		2021
Net and comprehensive income	$	52,697	$	16,048	$	36,639	$	6,836
Interest expense	2,616		2,726		1,316		1,359
Income tax expense	18,283		1,204		12,414		500
Depreciation and amortization	11,995		8,909		6,119		4,446
EBITDA	85,591		28,887		56,488		13,141
Equity based compensation	1,389		427		692		351

Derivative expense (1)	—		29,805		—		18,258
Other expenses (2)	4,658		618		3,258		2,504
Adjusted EBITDA	$	91,638	$	59,737	$	60,438	$	34,254

(1)We repaid our term loan in full on December 28, 2020. The derivative expense relates to the change in the fair value of the exit fee at the end of each reporting period.The Company used a portion of the net proceeds from the IPO to pay the derivative liability on November 8, 2021.

(2)Other expenses represent costs and investments not indicative of ongoing business performance, such as third-party consulting costs, one-time project start-up costs, ~~one-time costs related to the Reorganization and IPO,~~ severance, signing bonuses, recruiting and project-based strategic initiatives. For the ~~nine~~six and three months ended ~~September~~June 30, ~~2021,~~2022, these other expenses consisted ~~primarily~~largely of ~~$5.0~~$3.1 million and $2.5 million of costs related to the ~~Reorganization~~opening and ~~IPO and $1.5 million~~set-up of ~~severance, signing bonuses and recruiting costs~~. For the three months ended September 30, 2021, these other expenses consisted primarily of $3.5 million of costs related to the Reorganization and IPO and $0.5 million of severance, signing bonuses and recruiting costs.our Dallas distribution center, respectively.

Factors Affecting the Comparability of our Results of Operations

Our results over the past two years have been affected by the following events, which must be understood in order to assess the comparability of our period-to-period financial performance and condition.

Showroom Openings and Closings

New Showrooms contribute incremental expense ~~new Showroom opening expense~~ and net revenue to the Company. In the ~~nine~~six months ended ~~September~~June 30, 2022, we opened two Showrooms and closed one Showroom. In 2021, we opened ~~six~~ten Showrooms and closed ~~three~~five Showrooms. ~~In fiscal year 2020, we opened seven Showrooms and closed three Showrooms. All~~Of the five Showroom closures in 2021, three were related to relocations ~~with the exception~~in 2021.

Table of ~~one Showroom that was closed permanently in fiscal year 2020.~~

Contents

Financing Transactions

We repaid our Term Loan in full on December 28, 2020. The derivative expense relates to the change in the fair value of the exit fee at the end of each reporting period. The exit fee, which was payable in cash at the time the ~~initial public offering~~IPO was consummated, was calculated as 4% of the total equity value of the Company, based on the valuation determined in connection with the ~~initial public offering,~~IPO, which valuation included, among other factors, (a) the ~~initial public offering~~IPO price, plus (b) cash, minus (c) any outstanding indebtedness, minus (d) transaction expenses, minus (e) the equity value of the preferred equity interests of ~~Arhaus,~~ LLC and all subsidiaries received on the closing date of the term loan, minus (f) the value of management incentive units in effect on the closing date of the term loan or issued after the closing date pursuant to management incentive plans in existence on the closing date. For the ~~nine~~six and three months ended ~~September~~June 30, 2021, the derivative expense related to the change in fair value of the exit fee was ~~$29.9~~$29.8 million and ~~the derivative liability as of September 30, 2021 was~~ ~~$49.5 million.~~ $18.3 million, respectively. The Company used a portion of the net proceeds from the IPO to pay the derivative liability of $64.1 million in full on ~~November~~November 8, 2021.

Results of Operations

The following tables summarize key components of our results of operations for the periods indicated. The following discussion should be read in conjunction with our condensed consolidated financial statements and related notes.

Statement of Condensed Consolidated Comprehensive Income Data:


	Six months ended June 30,				Three months ended June 30,
	2022		2021		2022		2021
Net revenue	$	552,565	$	355,357	$	306,265	$	184,043
Cost of goods sold	321,822		207,188		173,239		106,209
Gross margin	230,743		148,169		133,026		77,834
Selling, general and administrative expenses	157,622		128,177		82,774		69,139
Loss on disposal of assets	—		14		—		—
Income from operations	73,121		19,978		50,252		8,695
Interest expense	2,616		2,726		1,316		1,359

Other income	(475)		—		(117)		—
Income before taxes	70,980		17,252		49,053		7,336
Income tax expense	18,283		1,204		12,414		500
Net and comprehensive income	$	52,697	$	16,048	$	36,639	$	6,836
Less: Net income attributable to noncontrolling interest	—		9,268		—		3,951
Net and comprehensive income attributable to Arhaus, Inc.	$	52,697	$	6,780	$	36,639	$	2,885

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~~Statement of Condensed Consolidated Comprehensive Income Data:~~

Nine Months Ended Three Months Ended
(In thousands) September 30,
2021 September 30,
2020 September 30,
2021 September 30,
2020
Net revenue $ 558,690 $ 344,606 $ 203,333 $ 120,501
Cost of goods sold 325,710 214,817 118,522 75,289
Gross margin 232,980 129,789 84,811 45,212
Selling, general and administrative expenses 196,212 105,122 68,137 40,964
Loss on disposal of assets 466 — 452 —
Income from operations 36,302 24,667 16,222 4,248
Interest expense 4,018 9,335 1,339 2,734
Income before taxes 32,284 15,332 14,883 1,514
State and local taxes 1,704 900 500 731
Net and comprehensive income $ 30,580 $ 14,432 $ 14,383 $ 783

Other Operational Data:


		Nine Months Ended(1)						Three Months Ended(1)							Six months ended June 30,						Three months ended June 30,
(Dollars In thousands)	(Dollars In thousands)	September 30, 2021			September 30, 2020			September 30, 2021			September 30, 2020			(Dollars In thousands)	2022			2021			2022			2021
Net revenue	Net revenue	$	558,690		$	344,606		$	203,333		$	120,501		Net revenue	$	552,565		$	355,357		$	306,265		$	184,043
Comparable growth (decline)		56.0		%	(6.0)		%	61.3		%	(3.7)		%
Comparable growth														Comparable growth	53.1		%	53.1		%	65.2		%	71.4		%
Demand comparable growth	Demand comparable growth	58.4		%	12.6		%	28.3		%	43.7		%	Demand comparable growth	14.7		%	82.0		%	22.5		%	72.9		%
Gross margin as a % of net revenue	Gross margin as a % of net revenue	41.7		%	37.7		%	41.7		%	37.5		%	Gross margin as a % of net revenue	41.8		%	41.7		%	43.4		%	42.3		%
Selling, general and administrative expenses as a % of net revenue	Selling, general and administrative expenses as a % of net revenue	35.1		%	30.5		%	33.5		%	34.0		%	Selling, general and administrative expenses as a % of net revenue	28.5		%	36.1		%	27.0		%	37.6		%
Income from operations as a % of net revenue	Income from operations as a % of net revenue	6.5		%	7.2		%	8.0		%	3.5		%	Income from operations as a % of net revenue	13.2		%	5.6		%	16.4		%	4.7		%
Net income		$	30,580		$	14,432		$	14,383		$	783
Net income as a % of net revenue		5.5		%	4.2		%	7.1		%	0.6		%
Net and comprehensive income														Net and comprehensive income	$	52,697		$	16,048		$	36,639		$	6,836
Net and comprehensive income as a % of net revenue														Net and comprehensive income as a % of net revenue	9.5		%	4.5		%	12.0		%	3.7		%
Adjusted EBITDA(1)	Adjusted EBITDA(1)	$	90,354		$	40,902		$	30,515		$	9,679		Adjusted EBITDA(1)	$	91,638		$	59,737		$	60,438		$	34,254
Adjusted EBITDA as a % of net revenue	Adjusted EBITDA as a % of net revenue	16.2		%	11.9		%	15.0		%	8.0		%	Adjusted EBITDA as a % of net revenue	16.6		%	16.8		%	19.7		%	18.6		%
Total retail location count at end of period		77			73			77			73
Total Showrooms at end of period														Total Showrooms at end of period	80			75			80			75

(1)See “How We Assess the Performance of Our Business,” for a definition of adjusted EBITDA and a reconciliation of adjusted EBITDA to net and comprehensive income.

Comparison of the ~~Nine Months Ended September~~six months ended June 30, ~~2021~~2022 and ~~September 30, 2020~~2021

Net Revenue

Net revenue increased ~~$214.1~~$197.2 million, or ~~62.1%~~55.5%, to ~~$558.7~~$552.6 million in the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 compared to ~~$344.6~~$355.4 million in the ~~nine~~six months ended ~~September~~June 30, ~~2020.~~2021. The increase ~~in net revenue~~ was driven primarily by increased demand for our ~~product~~products in both eCommerce and Showrooms, as well as elements of our supply chain ~~beginning~~continuing to catch up with client demand. Net revenue for the nine months ended September 30, 2020 was negatively impacted by temporary Showroom closures, occupancy limitations and other operational restrictions, macroeconomic conditions and disruptions across our global supply chain resulting from COVID-19.

Comparable growth was ~~56.0%~~53.1% in the ~~nine~~six months ended ~~September~~June 30, ~~2021 compared to a decrease of 6.0% in the nine months ended September 30, 2020.~~2022 and 2021. Demand comparable growth was ~~58.4%~~14.7% in the ~~nine~~six months ended ~~September~~June 30, 2022 compared to 82.0% in the six months ended June 30, 2021. Demand comparable growth for the six months ended June 30, 2021 ~~compared to 12.6%~~was positively impacted by Showroom closures in 2020 as a result of the ~~nine months ended September 30, 2020.~~

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Gross Margin

Gross margin increased ~~$103.2~~$82.6 million, or ~~79.5%~~55.7%, to ~~$233.0~~$230.7 million in the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 compared to ~~$129.8~~$148.2 million in the ~~nine~~six months ended ~~September~~June 30, ~~2020. Gross margin improvement in the nine months ended September 30, 2021 versus nine months ended September 30, 2020 was driven by the increase in net revenue, partially offs~~2021. et by $77.7 million of higher product costs and $19.7 million of transportation costs due to the increase in net revenue and $5.4 million of higher credit card fees related to higher demand during these time periods. Net revenue in the nine months ended September 30, 2020 was compressed due to supply chain constraints and disruption arising from COVID-19.

As a percentage of net revenue, gross margin increased 400 basis points to 41.7% of net revenue in the nine months ended September 30, 2021 compared to 37.7% of net revenue in the nine months ended September 30, 2020. The gross margin improvement was ~~primarily the result of leverage as a result of the significant increase in revenue, as certain components of our cost~~ of goods sold are fixed or otherwise do not move in line with revenues. In particular, non-variable Showroom occupancy costs, which are not dependent on revenue levels, were lower as a percentage of net revenue, contributing 410 basis ~~points to the margin improvement.~~

~~Selling, General and Administrative Expenses~~

~~SG&A expen~~ses increased $91.1 million, or 86.7%, to $196.2 million in the nine months ended September 30, 2021 compared to $105.1 million in the nine months ended September 30, 2020. The increase was primarily driven by derivative expense related to the change in the fair value of the term loan exit fee of $29.4 million, an increase in selling expenses of $28.8 million primarily related to compensation, higher corporate and warehouse expenses of $16.2 million to support the growth of the business and higher payroll as payroll for the nine months ended September 30, 2020 was suppressed as a result of the temporary employee furloughs related to COVID-19, increased marketing investment of $6.3 million, one-time costs related to the IPO of $5.0 million and an out-of-period adjustment for depreciation of $3.0 million.

As a percentage of net revenue, SG&A expenses increased 460 basis points to 35.1% of net revenue in the nine months ended September 30, 2021 compared to 30.5% of net revenue in the nine months ended September 30, 2020.

~~Interest expense~~

Interest expense decreased $5.3 million to $4.0 million in the nine months ended September 30, 2021 compared to $9.3 million in the nine months ended September 30, 2020. For the nine months ended September 30, 2021, interest expense was primarily related to our capital lease obligations. For the nine months ended September 30, 2020, ~~interest expense was primarily related to our Term Loan, which was paid off in December 2020, our capital lease~~ ~~obligations, and borrowings on our revolving credit~~ ~~facility.~~

~~State and Local Taxes~~

State and local taxes were $1.7 million in the nine months ended September 30, 2021 compared to $0.9 million in the nine months ended September 30, 2020. This includes state and local tax in the locations where we operate. As a limited liability company, Arhaus, LLC was a pass-through entity for the nine months ended September 30, 2021 and September 30, 2020.

~~Net and Comprehensive Income~~

Net and comprehensive income increased $16.2 million to $30.6 million in the nine months ended September 30, 2021 compared to $14.4 million in the nine months ended September 30, 2020. The increase was driven by the factors described above.

~~Comparison of the Three Months Ended September 30, 2021 and September 30, 2020~~

~~Net Revenue~~

Net revenue increased $82.8 million, or 68.7%, to $203.3 million in the three months ended September 30, 2021 compared to $120.5 million in the three months ended September 30, 2020. Net revenue was driven by

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increased demand for our product in both eCommerce and Showrooms, as well as elements of our supply chain beginning to catch up with client demand. Net revenue for the three months ended September 30, 2020 was negatively impacted by temporary Showroom occupancy limitations and other operational restrictions, macroeconomic conditions and disruptions across our global supply chain resulting from COVID-19.

Comparable growth was 61.3% in the three months ended September 30, 2021 compared to a decrease of 3.7% in the three months ended September 30, 2020. Demand comparable growth was 28.3% in the three months ended September 30, 2021 compared to an increase of 43.7% in the three months ended September 30, 2020.

~~Gross Margin~~

~~Gross margin increased $39.6 million, or 87.6%, to $84.8 million in the three months ended September 30, 2021 compared to $45.2 million in the three months ended September 30, 2020.~~ Gross margin improvement was driven by the increase in net revenue, partially offset by ~~$30.2~~increased variable expense related to the higher revenue, including $72.8 million of higher product costs, ~~and $8.5~~$25.4 million of increased transportation costs ~~due~~and $8.4 million of increased variable rent expense, in addition to $4.0 million of higher credit card fees related to higher demand during these time periods.

As a percentage of net revenue, gross margin increased 10 basis points to 41.8% of net revenue in the six months ended June 30, 2022 compared to 41.7% of net revenue in the six months ended June 30, 2021.

The gross margin increase as a percentage of net revenue was primarily the result of leverage on fixed Showroom occupancy costs over higher net revenue and ~~$1.5~~leverage on credit card fees related to demand, contributing 290 basis points to the gross margin improvement. This was partially offset by higher transportation costs and variable rent, which together increased 270 basis points as a percentage of net revenue.

Selling, General and Administrative Expenses

SG&A expenses increased $29.4 million, or 23.0%, to $157.6 million in the six months ended June 30, 2022 compared to $128.2 million in the six months ended June 30, 2021.

The increase in SG&A expenses was primarily driven by a $25.6 million increase in warehouse expenses and a $17.0 million increase in corporate expenses to support the growth of the business and a $6.3 million increase in new public company costs. This was partially offset by the non-recurrence of the derivative expense in the prior year related to the change in the fair value of the Term Loan exit fee of $29.8 million.

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As a percentage of net revenue, SG&A expenses decreased 760 basis points to 28.5% of net revenue in the six months ended June 30, 2022 compared to 36.1% of net revenue in the six months ended June 30, 2021.

Interest expense

Interest expense decreased $0.1 million to $2.6 million in the six months ended June 30, 2022 compared to $2.7 million in the six months ended June 30, 2021. For the six months ended June 30, 2022 and 2021 interest expense was primarily related to our finance lease liabilities.

Income Taxes

Income tax expense was $18.3 million in the six months ended June 30, 2022 compared to $1.2 million in the six months ended June 30, 2021. Prior to the Reorganization, the Company was a limited liability company under the Internal Revenue Code that had elected to be taxed as a partnership and did not pay federal or most state corporate income taxes on its taxable income, but rather its members were liable for their respective portions of the taxable income (loss) of LLC. Income tax expense included state and local taxes in certain jurisdictions prior to the Reorganization. Subsequent to the Reorganization, LLC’s taxable income flows through to FS Arhaus and Homeworks who are subject to U.S. federal and state corporate income taxes.

Net and Comprehensive Income

Net and comprehensive income increased $36.7 million to $52.7 million in the six months ended June 30, 2022 compared to $16.0 million in the six months ended June 30, 2021. The increase was driven by the factors described above.

Comparison of the three months ended June 30, 2022 and 2021

Net Revenue

Net revenue increased $122.2 million, or 66.4%, to $306.3 million in the three months ended June 30, 2022 compared to $184.0 million in the three months ended June 30, 2021. Net revenue was driven by increased demand for our products in both eCommerce and Showrooms, as well as elements of our supply chain continuing to catch up with client demand.

Comparable growth was 65.2% in the three months ended June 30, 2022 compared to 71.4% in the three months ended June 30, 2021. Demand comparable growth was 22.5% in the three months ended June 30, 2022 compared to 72.9% in the three months ended June 30, 2021. Demand comparable growth for the three months ended June 30, 2021was positively impacted by Showroom closures in 2020 as a result of the COVID-19 pandemic.

Gross Margin

Gross margin increased $55.2 million, or 70.9%, to $133.0 million in the three months ended June 30, 2022 compared to $77.8 million in the three months ended June 30, 2021. Gross margin improvement was driven by the increase in net revenue, partially offset by increased variable expense related to the higher revenue, including $43.0 million of higher product costs, $14.6 million of increased transportation costs and $4.5 million of increased variable rent expense, in addition to $2.4 million of higher credit card fees related to higher demand during the three months ended ~~September~~June 30, ~~2021 versus~~2022 compared to the three months ended ~~September~~June 30, ~~2020. Net revenue in the three months ended September 30, 2020 was compressed due to supply chain constraints and disruption arising from COVID-19.~~2021.

As a percentage of net revenue, gross margin increased ~~420~~110 basis points to ~~41.7%~~43.4% of net revenue in the three months ended ~~September~~June 30, ~~2021~~2022 compared to ~~37.5%~~42.3% of net revenue in the three months ended ~~September~~June 30, ~~2020.~~2021. The gross margin ~~improvement was primarily the result of the benefits of leverage as a result of the significant~~ increase in revenue, as certain components of our cost of goods sold are fixed or otherwise do not move in line with revenues. In particular, non-variable Showroom occupancy costs, which are not dependent on revenue levels, were lower as a percentage of net revenue was primarily the result of leverage on fixed Showroom occupancy costs over higher net revenue and leverage on credit card fees related to demand, contributing ~~430~~290 basis points to the gross margin improvement. This was partially offset by higher transportation costs and variable rent, which together increased 240 basis points as a percentage of net revenue.

Selling, General and Administrative Expenses

SG&A expenses increased ~~$27.1~~$13.6 million, or ~~66.2%~~19.7%, to ~~$68.1~~$82.8 million in the three months ended ~~September~~June 30, ~~2021~~2022 compared to ~~$41.0~~$69.1 million in the three months ended ~~September~~June 30, ~~2020.~~ 2021.

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The increase in SG&A expenses was primarily driven by ~~higher corporate and~~a $14.1 million increase in warehouse expenses ~~of $7.6~~and an $8.7 million increase in corporate expenses to support the growth of the business, anand a $3.2 million increase in ~~selling expenses~~new public company costs. This was partially offset by the non-recurrence of ~~$6.8 million primarily related to compensation, one-time costs~~the derivative expense in the prior year related to the ~~IPO~~change in the fair value of ~~$3.5 million, increased marketing investment~~the Term Loan exit fee of ~~$3.4 million and an out-of-period adjustment for depreciation of $3.0 million related to our capital lease.~~$18.3 million.

As a percentage of net revenue, SG&A expenses decreased 501060 basis points to ~~33.5%~~27.0% of net revenue in the three months ended ~~September~~June 30, ~~2021~~2022 compared to ~~34.0%~~37.6% of net revenue in the three months ended ~~September~~June 30, ~~2020.~~2021.

Interest expense

Interest expense decreased ~~$1.4~~$0.1 million to ~~$1.3~~$1.3 million in the three months ended ~~September~~June 30, ~~2021~~2022 compared to ~~$2.7~~$1.4 million in the three months ended ~~September~~June 30, ~~2020.~~2021. For the three months ended ~~September~~June 30, 2022 and 2021, interest expense was primarily related to our ~~capital~~finance lease ~~obligations. For~~liabilities.

Income taxes

Income taxes were $12.4 million in the three months ended ~~September~~June 30, ~~2020, interest expense~~ ~~was primarily related~~2022 compared to ~~our Term Loan, which was paid off in December 2020, our capital lease~~ ~~obligations, and borrowings on our revolving credit facility.~~

~~State and Local Taxes~~

~~State and local taxes were~~ $0.5 million in the three months ended ~~September~~June 30, ~~2021 compared~~2021. Prior to ~~$0.7 million in~~ the ~~three months ended September 30, 2020. This includes state and local tax in~~Reorganization, the ~~locations where we operate. As~~Company was a limited liability company under the Internal Revenue Code that had elected to be taxed as a partnership and did not pay federal or most state corporate income taxes on its taxable income, but rather its members were liable for their respective portions of the taxable income (loss) of LLC. Income tax expense included state and local taxes in certain jurisdictions prior to the Reorganization. Subsequent to the Reorganization, LLC’s taxable income flows through to FS Arhaus ~~LLC was a pass-through entity for the three months ended September 30, 2021~~ and ~~September 30, 2020.~~

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Net and Comprehensive Income

Net and comprehensive income increased ~~$13.6~~$29.8 million to ~~$14.4~~$36.6 million in the three months ended ~~September~~June 30, ~~2021~~2022 compared to ~~$0.8~~$6.8 million in the three months ended ~~September~~June 30, ~~2020.~~2021. The increase was driven by the factors described above.

Liquidity and Capital Resources

Liquidity Outlook

Our primary cash needs have historically been for merchandise inventories, payroll, marketing catalogs, Showroom rent, capital expenditures associated with opening new Showrooms and updating existing Showrooms, as well as the development of our infrastructure and information technology. We seek out and evaluate opportunities for effectively managing and deploying capital in ways that improve working capital and support and enhance our business initiatives and strategies. As of ~~September~~June 30, ~~2021~~,2022, we had cash and cash equivalents of ~~$149.2~~$144.6 million. ~~At September 30, 2021, we had no availability on the Revolver based on the borrowing base formula.~~

In November 2021, we entered into the 2021 Credit Facility with Bank of ~~America.~~America, N.A. and the lenders party thereto. The 2021 Credit Facility provides for, among other things, (1) a revolving credit facility in an aggregate amount not to exceed at any time outstanding the amount of such lender’s commitment, (2) a letter of credit commitment in an amount equal to the lesser of (a) ~~$10~~$10.0 million, and (b) the amount of the revolving credit facility as of such date, and (3) a swingline loan in an amount equal to the lesser of (a) $5$5.0 million, and (b) the amount of the revolving credit facility as of such date. The aggregate amount of all commitments of all lenders under the 2021 Credit Facility is ~~$50~~$50.0 million, which may be increased pursuant to the terms of the 2021 Credit Facility. The 2021 Credit Facility contains restrictive covenants and has certain financial covenants, including a minimum rent-adjusted total leverage ratio and a minimum fixed charge ratio. The 2021 Credit Facility bears variable interest rates at the prevailing Bloomberg Short-Term Bank Yield index rate plus the applicable margin ~~(1.75%~~(1.50% at ~~origination)~~June 30, 2022), whereas the applicable margin is adjusted quarterly based on the Company’s consolidated rent-adjusted total leverage ratio. At June 30, 2022, we had no borrowings on the 2021 Credit Facility.

For the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022, our principal sources of liquidity were cash flows from operations, including client deposits. We believe our operating cash flows will be sufficient to meet working capital requirements and fulfill other capital needs for at least the next 12 months, although we may enter into borrowing arrangements in the ~~future or if conditions change.~~future.

While we do not require debt to fund our operations, our goal continues to be ~~in a~~to position the Company to take advantage of the many opportunities that we may identify in connection with our business and operations. We have pursued in the past, and may pursue in the future, additional strategies to generate capital to pursue opportunities and investments, including new debt financing arrangements. In addition to funding the normal operations of our business, we have used our liquidity

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to fund investments and strategies such as supply chain expansion and growth initiatives. In addition, our capital needs and uses of capital may change in the future due to changes in our business or new opportunities that we choose to pursue.

Capital expenditures

WeHistorically, we have invested significant capital expenditures in opening new ~~Showrooms, and these~~Showrooms. In 2022, our recent distribution center footprint expansion has also been a focus of our capital expenditures. While our capital expenditures vary year to year, they have increased in the past and may continue to increase in future periods as our distribution centers become fully operational and we open additional Showrooms. Our capital expenditures include expenditures related to investing activities and ~~cash~~ outflows of capital related to construction activities to design and build landlord-owned leased assets, net of tenant allowances received. Given the pace at which business conditions are evolving in response to the COVID-19 health crisis, we may adjust our investments in various business initiatives including our capital expenditures over the remainder of fiscal year 2021.

Certain lease arrangements require the landlord to fund a portion of the construction related costs through payments directly to us. New Showrooms may require different levels of capital investment on our part in the future.

In addition, we continue to address the effects of the COVID-19 pandemic on our business with respect to real estate development and the introduction of new Showrooms. A range of factors ~~involved~~included in the development of new

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Showrooms may continue to be affected by the COVID-19 ~~health crisis~~pandemic including delays in construction, ~~as well as~~ permitting and other necessary governmental actions. In addition, the scope and cadence of investments by third parties, including landlords and other real estate counterparties, may be adversely affected by the health crisis. Actions taken by federal, state and local government authorities, and in some instances mall and shopping center owners, in response to the pandemic may require changes to our real estate strategy and related capital expenditures. In addition, we may ~~continue to~~ be required to make lease payments in whole or in part for our Showrooms in the event that ~~may be~~they are required to close in the future ~~in the event of~~due to resurgences in COVID-19 outbreaks or for other reasons. Any efforts to mitigate the costs of construction delays and deferrals, retail closures and other operational difficulties, including any such difficulties resulting from COVID-19, such as by negotiating with landlords and other third parties regarding the timing and amount of payments under existing contractual arrangements, may not be successful, and as a result, our real estate strategy may have ongoing significant liquidity needs even as we make changes to our planned operations and expansion cadence.

Credit Facilities

Refer to Note 4 — Long-Term Debt ~~and Note 12 — Subsequent Events in~~ to our condensed consolidated financial statements for further information on our Revolver and 2021 Credit Facility, respectively.

Cash Flow Analysis

The following table provides a summary of our cash provided by operating, investing and financing activities:


		Nine Months Ended September 30,					Six months ended June 30,
(In thousands)	(In thousands)	2021		2020		(In thousands)	2022		2021
Net cash provided by operating activities	Net cash provided by operating activities	$	142,589	$	115,120	Net cash provided by operating activities	$	41,110	$	109,503
Net cash used in investing activities	Net cash used in investing activities	$	(29,531)	$	(11,129)	Net cash used in investing activities	(20,355)		(13,691)
Net cash used in financing activities	Net cash used in financing activities	$	(15,580)	$	(9,165)	Net cash used in financing activities	(50)		(20,342)
Net increase in cash, cash equivalents and restricted cash equivalents	Net increase in cash, cash equivalents and restricted cash equivalents	$	97,478	$	94,826	Net increase in cash, cash equivalents and restricted cash equivalents	$	20,705	$	75,470

Net cash provided by operating activities

Comparison of the ~~Nine Months Ended September~~six months ended June 30, ~~2021~~2022 and ~~September 30, 2020~~2021

Net cash provided by operating activities was ~~$142.6~~$41.1 million in the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 compared to ~~$115.1~~$109.5 million net cash provided by operating activities in the ~~nine~~six months ended ~~September~~June 30, ~~2020.~~2021. The ~~increase~~decrease in our net cash provided by operating activities in the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 was ~~primarily the result of increased~~impacted by several factors: higher inventory levels; lower change in client deposits ~~resulting~~ from ~~strong client~~improved delivery of backlog orders and lower demand comparable growth of 14.7% versus demand comparable growth of 82.0% in the ~~impact of higher~~six months ended June 30, 2021; and lower non-cash items in the current period, particularly the nonrecurring derivative expense in the prior year related to the change in the fair value of the ~~term loan~~Term Loan exit fee, which reduced our net income without any corresponding adverse impact to our cash ~~generation and an increase to accrued expenses. This was~~generation. These items were partially offset by ~~decreases in cash related to~~increases in: accounts payable; accrued expenses; and the ~~changes in working capital, which were primarily driven by increases in merchandise inventory~~non-cash amortization for our operating leases caused by ~~forecasted client demand.~~the adoption of ASC 842, Leases.

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Net cash used in investing activities

Investing activities consist primarily of ~~investments in~~ capital expenditures related to investments in retail Showrooms, information technology and systems infrastructure, as well as supply chain investments. Investing activities also include strategic investments made by the Company.

Comparison of the ~~Nine Months Ended September~~six months ended June 30, ~~2021~~2022 and ~~September 30, 2020~~2021

For the ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, net cash used in investing activities was ~~$29.5~~$20.4 million primarily due to investments in Showrooms, ~~the purchase of an airplane,~~ information technology and systems infrastructure, and supply ~~chain.~~chain expansion.

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For the ~~nine~~six months ended ~~September~~June 30, ~~2020,~~2021, net cash used in investing activities was ~~$11.1~~$13.7 million primarily due to investments in Showrooms, information technology and systems infrastructure, and supply ~~chain.~~chain expansion.

Historical capital expenditures are summarized as follows:

Nine Months Ended September 30,
(In thousands) 2021 2020
Net cash used in investing activities $ 29,531 $ 11,129
Proceeds from sale of property, furniture and equipment — —
Total capital expenditures $ 29,531 $ 11,129
Landlord contributions 11,140 9,940
Total company funded capital expenditures $ 18,391 $ 1,189


	Six months ended June 30,
(In thousands)	2022		2021
Net cash used in investing activities	$	20,355	$	13,691
Less: Landlord contributions	7,064		8,278
Total capital expenditures, net of landlord contributions	$	13,291	$	5,413

~~Comparison of the Nine Months Ended September 30, 2021 and September 30, 2020~~

Total ~~company funded~~ capital expenditures, net of landlord contributions increased by ~~$17.2~~$7.9 million in the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 compared to the ~~nine~~six months ended ~~September~~June 30, ~~2020.~~ 2021. This increase was related to our new facility in North Carolina, the opening of new Showrooms ~~the purchase of an airplane,~~ and information technology and systems ~~infrastructure.~~ infrastructure upgrades.

We anticipate our total company funded capital expenditures to be ~~$32~~between $55 million ~~to $34~~and $65 million in fiscal year ~~2021,~~2022, primarily related to the expansion of our ~~new facility in~~Boston Heights distribution center and the opening of our North Carolina ~~the purchase of an airplane,~~and Dallas distribution centers, the opening of new Showrooms, and information technology and systems ~~infrastructure.~~infrastructure upgrades.

Net cash used in financing activities

Financing activities consist primarily of borrowings related to ~~credit facilities, dividends, repayments of preferred units and~~ tax distributions to ~~members.~~noncontrolling interest holders of Arhaus, LLC.

Comparison of the ~~Nine Months Ended September~~six months ended June 30, ~~2021~~2022 and ~~September 30, 2020~~2021

For the ~~nine~~six months ended ~~September~~June 30, 2022, net cash used in financing activities was $50.0 thousand due to principal payments on finance leases.

For the six months ended June 30, 2021, net cash used in financing activities was ~~$15.6~~$20.3 million, ~~due~~which related to $12.4 million of shareholder distribution and $7.9 million of tax distributions to ~~members.~~

~~For~~ the ~~nine months ended September 30, 2020, net cash used in financing activities was $9.2 million. Payments on the term loan used $11.2 million~~noncontrolling interest holders of ~~cash. Revolver borrowings net of payments were $11.0 million. Tax distributions to members were $8.8 million.~~LLC.

Off-Balance Sheet Transactions

As of ~~September~~June 30, ~~2021, other than operating leases and letters of credits, which are typical in a retail environment,~~2022, we ~~did not~~ have ~~any other~~no material off-balance sheet arrangements.

Critical Accounting Policies and Estimates

~~Our~~Accounting policies and estimates are considered critical when they require management to make subjective and complex judgments, estimates and assumptions about matters that have a material impact on the presentation of our financial statements and accompanying notes. For a description of our critical accounting policies ~~related to revenue recognition~~ and ~~leases have not materially changed from those disclosed~~estimates, see Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies and Estimates” in our final prospectus, dated November 3, 2021 (File No. 333-260015) filed with the SEC pursuant to Rule 424(b)(4) under the Securities Act of 1933, as amended. Our critical accounting policies related to revenue recognition, goodwill and fair value are as follows:

~~Revenue Recognition~~

Net revenue consists of sales to clients, net of returns, discounts, and rebates. Net revenue and cost of goods sold is recognized when performance obligations under the terms of the contract are satisfied, and the control of merchandise has been transferred to a client, which occurs when merchandise is received by our clients. Net revenue from “direct-to-client” and “home-delivered” sales are recognized when the merchandise is delivered to the client. Net revenue from “cash-and-carry” Showroom sales are recognized at the point of sale in the Showroom. Discounts provided to clients are accounted for as a reduction of sales at the point of sale. Sales commissions are incremental costs and are expensed as incurred.

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~~A reserve is recorded for projected merchandise returns based~~Annual Report on actual historical return rates. We provide an allowance for sales returns based on historical return rates, which is presented on a gross basis. The allowance for sales returns is presented within other current liabilities and the estimated value of the right of return asset for merchandise is presented within prepaid expense and other assets on the consolidated balance sheet. Actual merchandise returns are monitored regularly and have not been materially different from the estimates recorded. Merchandise returns are granted for various reasons, including delays in merchandise delivery, merchandise quality issues, client preference and other similar matters. We have various return policies for merchandise, depending on the type of merchandise sold. Merchandise returned often represents merchandise that can be resold. Amounts refunded to clients are generally made by issuing the same payment tender as used in the original purchase. Merchandise exchanges of the same merchandise at the same price are not considered merchandise returns and, therefore, are excluded when calculating the sales returns reserve. The allowance for sales returns is included within accrued other expenses line item on the consolidated balance sheet.

All taxes assessed by a government authority that are both imposed on and concurrent with a specific revenue-producing transaction and collected by us from clients are excluded from the measurement of the transaction price. As a result, sales are stated net of tax.

Shipping and handling is recognized as activities to fulfill the performance obligation of transferring merchandise to clients, therefore the fees are recorded as revenue. The costs we incur for shipping and handling are included in cost of goods sold, and the costs of shipping and handling activities are accrued for in the same period as the delivery to clients.

We collect various taxes as an agent in connection with the sale of merchandise and remit these amounts to the respective taxing authorities. These taxes are included within the accrued taxes line item of the consolidated balance sheet until remitted to the respective taxing authority.

Client deposits represent payments made by clients on orders. At the time of purchase, we collect deposits for all orders equivalent to at least 50 percent of the clients purchase price. Orders are recognized as revenue when the merchandise is delivered to the client and at the time of delivery the client deposit is no longer recorded as a liability.

~~Goodwill~~

The recoverability of goodwill is evaluated annually or whenever events or changes in circumstances indicate that the fair value of the reporting unit is less than its carrying amount. Circumstances that may indicate impairment include, but are not limited to, deterioration in general economic conditions, limitations on accessing capital, or other developments in equity and credit markets; industry and market considerations such as deterioration in the environment in which we operate, an increased competitive environment, a decline in market dependent multiples or metrics, a change in the market for our products or services, or a regulatory or political development; cost factors that have a negative effect on earnings and cash flows; overall financial performance; changes in management, key personnel, strategy, or clients; a sustained decrease in share price in either absolute terms or relative to peers.

We perform our annual goodwill impairment testing in the fourth quarter by comparing the fair value of a reporting unit with its carrying amount, limited to the total amount of goodwill of the reporting unit. We establish the fair valueForm 10-K for the reporting unit based on the discounted cash flows to determine if the fair value of our goodwill exceeds its carrying value. We will recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value.

~~Fair Value~~

~~Our primary financial instruments are~~ ~~accounts receivable, payables, lease obligations, incentive unit compensation and a derivative instrument. Due to the short-term maturities of accounts receivable and payables,~~ ~~we believe the fair values of these instruments approximate their respective carrying values at~~ ~~September 30, 2021 and~~year ended December 31, ~~2020~~.

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We have established a hierarchy to measure our financial instruments at fair value, which requires us to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Observable inputs represent market data obtained from independent sources, whereas unobservable inputs reflect our own market assumptions, which are used if observable inputs are not reasonably available without undue cost and effort. The hierarchy defines three levels of inputs that may be used to measure fair value:

~~Level 1Unadjusted quoted prices in active markets for identical, unrestricted assets and liabilities that the reporting entity has the ability to access at the measurement date.~~

~~Level 2~~Inputs other than quoted prices included within Level 1 that are observable for the asset and liability or can be corroborated with observable market data for substantially the entire contractual term of the asset or liability.

~~Level 3~~Unobservable inputs that reflect the entity’s own assumptions about the assumptions market participants would use in the pricing of the asset or liability and are consequently not based on market activity but rather through particular valuation techniques.2021.

Recent Accounting Pronouncements

See Note 2— Recently Issued Accounting Standards to our condensed consolidated financial ~~statements~~.statements.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

We are exposed to market risks, which include significant deterioration of the U.S. and foreign markets, changes in U.S. interest rates, foreign currency exchange rate fluctuations and the effects of economic uncertainty, which may affect the prices we pay our vendors in the foreign countries in which we do business. We do not engage in financial transactions for trading or speculative purposes.

Foreign Currency Exchange Risk

We believe foreign currency exchange rate fluctuations do not contain significant market risk to us due to the nature of our relationships with our vendors outside of the United States. We purchase the majority of our inventory from vendors outside of the United States in transactions that are primarily denominated in U.S. dollars and, as such, any foreign currency impact related to these international purchase transactions was not significant to us for the ~~nine~~six and three months ended ~~September~~June 30, ~~2021~~2022 and ~~2020,~~2021, respectively. However, since we pay for the majority of our international purchases in U.S. dollars, a decline in the U.S. dollar relative to other foreign currencies would subject us to risks associated with increased purchasing costs from our vendors. We cannot predict with certainty the effect these increased costs may have on our financial statements or results of operations. We currently do not use derivative instruments to manage this risk.

Interest Rate Risk

We are primarily exposed to interest rate risk with respect to borrowing under our ~~Revolver~~2021 Credit Facility and as of ~~September~~June 30, ~~2021,~~2022, we have not drawn upon ~~the Revolver. On November 4, 2021, we terminated our Revolver and entered into~~ the 2021 Credit Facility. Based on the interest rate onin the 2021 Credit Facility and to the extent borrowings were outstanding, we do not believe a 100 basis point change in interest rates would have a material impact on our financial condition or results of operations for the periods presented. We currently do not use derivative instruments to manage this risk.

Impact of Inflation

~~Our results~~Inflation generally affects us by increasing our cost of ~~operations~~labor, material, transportation, and ~~financial condition are presented based on historical cost. While it is difficult~~our general costs. We have historically been able to ~~accurately measure the~~recover these cost increases through price increases. However, we cannot reasonably estimate our ability to successfully recover any impact of inflation due to the imprecise nature of the estimates required, we believe the effects of inflation, if any, on our historical results of operations and financial condition have been immaterial. We cannot assure you, however, that our results of operations and financial condition will not be materially impacted by inflationthrough price increases in the future. We currently do not use derivative instruments to manage this risk.

Emerging Growth Company Status

We are an “emerging growth company,” as defined in the JOBS Act. Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have elected to use this extended transition period to enable us to comply with new or

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revised accounting standards that have different effective dates for public and private companies until the earlier of the date we are no longer an emerging growth company or affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. Accordingly, our condensed consolidated financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our ~~Chief Executive Officer~~CEO and Chief Financial Officer (“CFO”), management has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934) as of ~~September~~June 30, ~~2021.~~

2022. Based on their evaluation as of June 30, 2022, the CEO and CFO have concluded that our disclosure controls and procedures were not effective at the reasonable assurance level because of the material weaknesses in our internal control over financial reporting described below.

Based upon that evaluation, our ~~Chief Executive Officer~~CEO and ~~Chief Financial Officer~~CFO identified three material weaknesses in our internal control over financial reporting.

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Material Weaknesses in Internal Control Over Financial Reporting

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of a company’s annual or interim financial statements will not be prevented or detected on a timely basis.

•We did not design and maintain an effective control environment commensurate with our financial reporting requirements. Specifically, we lacked a sufficient complement of professionals with an appropriate level of accounting knowledge, training and experience to appropriately analyze, record and disclose accounting matters timely and accurately. Additionally, the lack of a sufficient number of professionals resulted in an inability to consistently establish appropriate authorities and responsibilities in pursuit of our financial reporting objectives, as demonstrated by, amongst other things, insufficient segregation of duties in our finance and accounting functions. This material weakness contributed to the following additional material weaknesses.

•We did not design and maintain accounting policies, procedures and controls, or maintain documentary evidence of existing control activities to achieve complete, accurate and timely financial accounting, reporting and disclosures, including adequate controls over the period-end financial reporting process, the preparation and review of account reconciliations and journal entries, including segregation of duties and assessing the reliability of reports and spreadsheets used in controls.

•We did not design and maintain effective controls to address the identification of and accounting for certain ~~non-routine~~non-routine or complex transactions, including the proper application of U.S. GAAP of such transactions. Specifically, we did not design and maintain controls to timely or appropriately account for our incentive unit plan.

These material weaknesses resulted in a restatement of our previously issued annual consolidated financial statements as of and for the years ended December 31, 2020 and 2019 principally related to selling, general and administrative expenses and other long-term liabilities, and misclassifications in the balance sheets and statements of comprehensive income. These material weaknesses also resulted in an immaterial ~~out-of-period~~ adjustments recorded as of and for the ~~period~~year ended ~~September 30,~~December 31, 2021 principally related to property, furniture and equipment, ~~net and~~net; selling, general and administrative ~~expenses.~~expenses; and misclassifications in the balance sheet and statement of cash flows. Additionally, each of the material weaknesses could result in misstatements to substantially all of our accounts or disclosures, ~~which then~~that would result in a material misstatement to the annual or interim consolidated financial ~~statements.~~

statements that would not be prevented or detected.

•Lastly, we did not design and maintain effective controls over information technology, or IT, general controls for information systems that are relevant to the preparation of our financial statements. Specifically, we did not design and maintain: (i) program change management controls for financial systems to ensure that information technology program and data changes affecting financial applications and underlying accounting records are identified, tested, authorized and implemented appropriately; (ii) user access controls to ensure appropriate segregation of duties and that adequately restrict user and privileged access to financial applications, programs, and data to appropriate Company personnel; (iii) computer operations controls to ensure that critical batch jobs are monitored and data backups are authorized and monitored; and (iv) testing and approval controls for program development to ensure that new software development is aligned with business and IT requirements.

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These IT deficiencies did not result in material adjustments to our consolidated financial ~~statements,~~statements; however, the deficiencies, when aggregated, could impact maintaining effective segregation of duties, as well as the effectiveness of IT-dependent controls (such as automated controls that address the risk of material misstatement to one or more assertions, along with the IT controls and underlying data that support the effectiveness of system-generated data and reports) that could result in misstatements potentially impacting all financial statement accounts and disclosures that would not be prevented or detected. Accordingly, management has determined these IT deficiencies in the aggregate constitute a material weakness.

Remediation Activities

With the oversight of senior management and our Audit Committee, we have designed and begun to implement a remediation plan which includes:

•Updating our policies and procedures to establish and maintain effective segregation of duties for our finance and accounting staff in relation to journal entries, reconciliations and other applicable processes.

•Designing and implementing internal financial reporting procedures and controls to improve the completeness, accuracy and timely preparation of financial reporting and disclosures inclusive of establishing an ongoing program to provide sufficient training to our finance and accounting staff.

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•Enhancing the design and operation of user access control activities and procedures to ensure that access to IT applications and data is adequately restricted to appropriate personnel.

•Hiring additional competent and qualified technical accounting and financial reporting personnel with appropriate knowledge and experience of U.S. GAAP and SEC financial reporting requirements, including non-routine and complex transactions, to design, execute and/or provide appropriate oversight of activities related to internal control over financial reporting, or ICFR.

•Implementing additional program change management policies and procedures, control activities, and tools to ensure changes affecting key financial systems related to IT applications and underlying accounting records are identified, authorized, tested, and implemented appropriately.

•Designing and implementing a formal systems development lifecycle methodology and related program development controls to ensure significant IT change events are appropriately tested and approved.

•Enhancing the design and operation of control activities and procedures within the computer operations domain to ensure key batch jobs are monitored, processing failures are adequately resolved, and recovery capability is tested.

•Identifying and evaluating key IT dependencies including key reports, automated application controls, interfaces, and end user computer facilities.

Although we have developed and begun to implement a plan to remediate the material weaknesses and believe, based on our evaluation to date, that the material weaknesses will be remediated in a timely fashion, we cannot project a specific timeline on when the plan will be fully implemented. The material weaknesses will not be remediated until the necessary internal controls have been designed, implemented, tested and determined to be operating effectively. While the Company cannot provide an estimate of costs expected to be incurred in connection with implementing this remediation plan, these remediation measures will be time consuming, incur significant costs to both implement and maintain, and place significant demands on the Company’s financial and operational resources. In addition, we may need to take additional measures to address the material weaknesses or modify the planned remediation steps, and we cannot be certain that the measures we have taken, and expect to take, to improve our internal controls will be sufficient to address the issues identified, to ensure that our internal controls are effective or to ensure that the identified material weaknesses will not result in a material misstatement of our consolidated financial statements. Moreover, we cannot provide assurance that we will not identify additional material weaknesses in our ICFR in the future. Until we remediate the material weaknesses, our ability to record, process and report financial information accurately, and to prepare our consolidated financial statements within the time periods specified by the rules and forms of the SEC, could be adversely affected.

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Changes in Internal Control over Financial Reporting

Other than as described above with respect to ongoing remediation efforts, there were no changes in our internal control over financial reporting as such term is defined in Exchange Act Rule 13a-15(f) during the quarter ended ~~September~~June 30, ~~2021~~2022 that have materially affected, or isare reasonably likely to materially affect, our internal control over financial reporting.

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Part II - Other ~~Informati~~onInformation

Item 1. Legal Proceedings

From time to time, we have and we may become involved in legal proceedings arising in the ordinary course of business, including claims related to our employment practices, claims of intellectual property infringement and claims related to personal injuries and product liability for the products that we sell and in the Showrooms we operate. Any claims could result in litigation against us and could result in regulatory proceedings being brought against us by various federal and state agencies that regulate our business. Defending such litigation is costly and can impose significant ~~burden~~burdens on management and employees. Further, we could receive unfavorable preliminary or interim rulings in the course of litigation, and there can be no assurance that favorable final outcomes will be obtained.

We are currently not a party to any legal proceedings, the outcome of which, if determined adversely to us, would individually or in the aggregate have a material adverse effect on our business, financial condition or results of operations.

Item 1A. ~~RISK FACTORS~~Risk Factors

~~In addition to~~There have been no material changes from the ~~other information discussed~~risk factors disclosed in ~~this report, please consider the factors described in~~Part I, Item 1A “Risk Factors” in our ~~registration statement~~Annual Report on Form S-1, as amended (File No. 333-260015) (the “Registration Statement”) which could materially affect our business, financial condition or future results. There have not been any significant changes with respect to10-K for the risks described in our Registration Statement, but these are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may adversely affect our business, financial condition or operating results.year ended December 31, 2021.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

On November 3, 2021, our registration statement on Form S-1 (File No. 333-260015), which was filed in connection with our IPO, was declared effective. At the closing of the offering on November 8, 2021, we sold 12,903,226 shares of our Class A common stock, which did not include the exercise by the underwriters of their option to purchase up to 1,935,484 additional shares. Our sale of 12,903,226 Class A common stock at our initial public offering price of $13.00 per share, resulted in net proceeds to us of approximately $151.4 million, after deducting underwriting discounts and commissions of $10.4 million and estimated offering expenses of approximately $5.9 million. As disclosed in the registration statement, we used a portion of the net proceeds received from the IPO to pay the term loan exit fee of $64.1 million in connection with the term loan that was repaid on December 28, 2020 and the remainder will be used for general corporate purposes. None of the expenses associated with the IPO were paid to directors, officers, persons owning ten percent or more of any class of equity securities, or to their associates, or to our affiliates.None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

None.

Item 5. Other Information

None.

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I~~tem~~Item 6. Exhibits ~~and Financial Statement Schedules~~


Exhibit No.	Description	Filings Referenced for Incorporation by Reference

3.1	Amended and Restated Certificate of Incorporation of Arhaus, Inc.	November 10, 2021 Form 8-K, Exhibit 3.1

3.2	Amended and Restated Bylaws of Arhaus, Inc.	November 10, 2021 Form 8-K, Exhibit 3.2

~~10.~~1 †10.1	~~Credit Agreement, dated November 8, 2021, among Arhaus, Inc., certain subsidiaries~~Form of ~~Arhaus, Inc., as the Guarantors, Bank~~Notice of ~~America, N.A., as the Administrative Agent, the L/C Issuer,~~Award (Restricted Stock Unit and ~~the Swingline Lender, and the lenders party thereto.~~Performance Share Unit)	~~November 10, 2021 Form 8-K, Exhibit 10.1~~Filed herewith

31.1	Certificate of Chief Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	Filed herewith

31.2	Certificate of Chief Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	Filed herewith

32.1*	Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	~~Filed~~Furnished herewith

32.2*	Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	~~Filed~~Furnished herewith

101.INS	XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document)	Filed herewith

101.SCH	Inline XBRL Taxonomy Extension Schema Document	Filed herewith

101.CAL	Inline XBRL Taxonomy Extension Calculation Linkbase Document	Filed herewith

101.DEF	Inline XBRL Taxonomy Extension Definition Linkbase Document	Filed herewith

101.LAB	Inline XBRL Taxonomy Extension Label Linkbase Document	Filed herewith

101.PRE	Inline XBRL Taxonomy Extension Presentation Linkbase Document	Filed herewith

104	Cover Page with Interactive Data File (formatted as Inline XBRL with applicable taxonomy extension information contained in Exhibits 101)	Filed herewith

* The certifications furnished in Exhibit 32.1 and 32.2 hereto are deemed to accompany this Quarterly Report on Form 10-Q and will not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, except to the extent that the registrant specifically incorporates it by reference.

† Certain schedules and exhibits to this agreement have been omitted in accordance with Item 601(a)(5) of Regulation S-K. A copy of any omitted schedule and/or exhibit will be furnished to the SEC on request.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly ~~authorized.~~authorized on this 11th day of August, 2022


						ARHAUS, ~~INC~~INC.

						By:			/s/ Dawn Phillipson
						Name:			Dawn Phillipson
						Title:			Chief Financial Officer
									(Principal Financial and Accounting Officer)

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	September 30, 2021		December 31, 2020
Assets
Current assets
Cash and cash equivalents	$	149,246	$	50,739
Restricted cash equivalents	5,880		6,909
Accounts receivable, net	360		600
Merchandise inventory, net	170,555		108,022
Prepaid and other current assets	20,380		19,733
Total current assets	346,421		186,003
Property, furniture and equipment, net	137,013		117,696
Goodwill	10,961		10,961
Other noncurrent assets	885		1,284
Total assets	$	495,280	$	315,944

Liabilities and Members’ Deficit
Current liabilities
Accounts payable	30,383		29,113
Accrued taxes	10,102		7,910
Accrued wages	18,634		9,660
Accrued other expenses	17,412		11,317
Client deposits	260,204		154,128
Total current liabilities	336,735		212,128
Capital lease obligation	50,550		47,600
Deferred rent and lease incentives	76,534		71,213
Other long-term liabilities	51,310		21,094
Total liabilities	515,129		352,035

Commitments and contingencies (Note 10)	0		0

Members’ deficit
Accumulated Deficit	(22,654)		(37,761)
Additional Paid-in Capital	2,805		1,670
Total members’ deficit	(19,849)		(36,091)
Total liabilities and members’ deficit	$	495,280	$	315,944


	Nine Months Ended
	Mezzanine Equity						Members' Deficit
	Class A Preferred			Class B Preferred			Class A			Class B
	Units	Amount		Units	Amount		Units	Amount		Units	Amount		Accumulated Deficit		Additional Paid-in Capital		Total Members' Deficit
Balances as of December 31, 2020	—	$	—	—	$	—	20,939	$	—	7,488	$	—	$	(37,761)	$	1,670	$	(36,091)








Net income	—	—		—	—		—	—		—	—		30,580		—		30,580
Tax distribution	—	—		—	—		—	—		—	—		(15,473)		—		(15,473)
Incentive unit compensation	—	—		—	—		—	—		—	—		—		1,135		1,135
Balances as of September 30, 2021	—	$	—	—	$	—	20,939	$	—	7,488	$	—	$	(22,654)	$	2,805	$	(19,849)




Balances as of December 31, 2019	1,250	$	18,206	1,250	$	18,206	20,939	$	—	7,488	$	—	$	(34,747)	$	1,367	$	(33,380)









Net income	—	—		—	—		—	—		—	—		14,432		—		14,432
Tax distribution	—	—		—	—		—	—		—	—		(8,845)		—		(8,845)
Preferred units dividend unpaid	—	2,187		—	2,187		—	—		—	—		(4,374)		—		(4,374)
Incentive unit compensation	—	—		—	—		—	—		—	—		—		226		226
Balances as of September 30, 2020	1,250	$	20,393	1,250	$	20,393	20,939	$	—	7,488	$	—	$	(33,534)	$	1,593	$	(31,941)


Year Ending December 31,	Third Party		Related Party		Total

Remainder of 2021	$	10,234	$	1,143	$	11,377
2022	40,802		4,596		45,398
2023	36,813		4,686		41,499
2024	32,614		3,873		36,487
2025	28,135		3,455		31,590
2026	24,569		3,374		27,943
Thereafter	104,163		25,564		129,727
	$	277,330	$	46,691	$	324,021


Year Ending December 31,
Remainder of 2021	$	1,168
2022	4,673
2023	4,673
2024	4,673
2025	4,673
2026	5,132
Thereafter	120,392
	145,384
Less: Amount representing interest	(95,287)
	$	50,097


	Class C			Class D			Class F/F-1			Class G
	Units	Weighted Average Grant Date Fair Value		Units	Weighted Average Grant Date Fair Value		Units	Weighted Average Grant Date Fair Value (1)		Units	Weighted Average Grant Date Fair Value
December 31, 2020	1,868,913	$	0.57	96,318	$	0.83	4,381,030	$	0.63	—	$	—
Granted	—	—		—	—		—	—		701,965	18.10
Forfeited	—	—		—	—		(109,916)	0.77		—	—
September 30, 2021	1,868,913	$	0.57	96,318	$	0.83	4,271,114	$	0.63	701,965	$	18.10