arhs-20220331

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 March 31, 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: 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)

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 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 May 4, 2022 the registrant had 52,947,617 shares of Class A common stock and 87,115,600 shares of Class B common stock outstanding.

Table of Contents


		Page
Part I - Financial Information		2
Item 1 .	Financial Statements of Arhaus, Inc. and Subsidiaries	2
	Condensed Consolidated Balance Sheets (unaudited)	2
	Condensed Consolidated Statements of Comprehensive Income (unaudited)	3
	Condensed Consolidated Statements of Changes in Stockholders’ Equity (Deficit) (unaudited)	4
	Condensed Consolidated Statements of Cash Flows (unaudited)	5
	Notes to Condensed Consolidated Financial Statements (unaudited)	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	25
Item 4.	Controls and Procedures	26
Part II. Other Information		29
Item 1.	Legal Proceedings	29
Item 1A.	Risk Factors	29
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	29
Item 3.	Defaults Upon Senior Securities	29
Item 4.	Mine Safety Disclosures	29
Item 5.	Other Information	29
Item 6.	Exhibits	30
Signatures		31

Part I - Financial Information

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


Arhaus, Inc. and Subsidiaries Condensed Consolidated Balance Sheets (Unaudited, amounts in thousands, except share and per share data)


	March 31, 2022		December 31, 2021
Assets
Current assets
Cash and cash equivalents	$	148,841	$	123,777
Restricted cash equivalents	7,134		7,131
Accounts receivable, net	1,586		228
Merchandise inventory, net	246,542		208,343
Prepaid and other current assets	31,013		28,517
Total current assets	435,116		367,996
Operating right-of-use assets	196,896		—
Financing right-of-use assets	38,103		—
Property, furniture and equipment, net	107,581		179,631
Deferred tax asset	25,268		27,684
Goodwill	10,961		10,961
Other noncurrent assets	264		278
Total assets	$	814,189	$	586,550

Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable	$	54,249	$	51,429
Accrued taxes	12,486		7,302
Accrued wages	12,822		16,524
Accrued other expenses	20,946		61,047
Client deposits	306,243		264,929
Current portion of operating lease liabilities	37,957		—
Current portion of financing lease liabilities	182		—
Total current liabilities	444,885		401,231
Operating lease liabilities, long-term	227,191		—
Financing lease liabilities, long-term	50,342		—
Capital lease obligation	—		50,525
Deferred rent and lease incentives	2,513		63,037
Other long-term liabilities	2,714		1,992
Total liabilities	$	727,645	$	516,785
Commitments and contingencies (Note 9)
Stockholders' equity
Class A shares, par value $0.001 per share (600,000,000 shares authorized, 51,231,602 and 50,427,390 shares issued and outstanding as of March 31, 2022 and December 31, 2021, respectively)	51		50
Class B shares, par value $0.001 per share (100,000,000 shares authorized, 86,519,002 shares issued and outstanding as of March 31, 2022 and December 31, 2021, respectively)	87		87
Accumulated Deficit	(100,523)		(116,581)
Additional Paid-in Capital	186,929		186,209
Total Arhaus, Inc. stockholders' equity	86,544		69,765
Total liabilities and stockholders' equity	$	814,189	$	586,550

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

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


	Three months ended March 31,
		2022		2021
Net revenue		$	246,300	$	171,314
Cost of goods sold		148,583		100,979
Gross margin		97,717		70,335
Selling, general and administrative expenses		74,848		59,038
Loss on disposal of assets		—		14
Income from operations		22,869		11,283
Interest expense		1,300		1,367
Other income		(358)		—
Income before taxes		21,927		9,916
Income tax expense		5,869		704
Net and comprehensive income		16,058		9,212
Less: Net income attributable to noncontrolling interest		—		5,317
Net and comprehensive income attributable to Arhaus, Inc.		$	16,058	$	3,895

Net and comprehensive income per share, basic
Weighted-average number of common shares outstanding, basic		137,482,533		112,058,742
Net and comprehensive income per share, basic		$	0.12	$	0.03
Net and comprehensive income per share, diluted
Weighted-average number of common shares outstanding, diluted		138,708,468		112,058,742
Net and comprehensive income per share, diluted		$	0.12	$	0.03

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


Arhaus, Inc. and Subsidiaries Condensed Consolidated Statements of Changes in Stockholders’ Equity (Deficit) (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 December 31, 2021	—	$	—	—	$	—	50,428	$	50	86,519	$	87	$	(116,581)	$	186,209	$	—	$	69,765
Net income													16,058						16,058
Shareholder capital contribution															24				24
Equity based compensation							804	1							696				697
Balances as of March 31, 2022	—	$	—	—	$	—	51,232	$	51	86,519	$	87	$	(100,523)	$	186,929	$	—	$	86,544










	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 December 31, 2020	645	$	—	4,158	$	—	—	$	—	—	$	—	$	(28,422)	$	1,670	$	(7,689)	$	(34,441)
Net income													3,895				5,317		9,212
Tax distribution																	(4,643)		(4,643)
Equity based compensation															76				76
Balances as of March 31, 2021	645	$	—	4,158	$	—	—	$	—	—	$	—	$	(24,527)	$	1,746	$	(7,015)	$	(29,796)

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

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


	Three Months Ended March 31,
	2022		2021
Cash flows from operating activities
Net income	$	16,058	$	9,212
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization	5,876		4,463
Non-cash amortization of operating lease right-of-use asset	7,009		—
Amortization of deferred financing fees and interest on finance lease in excess of principal paid	2,557		692
Equity based compensation	697		76
Deferred tax assets	2,417		—
Derivative expense associated with Term Loan exit fee	—		11,547
Loss on disposal of assets	—		14
Amortization and write-off of lease incentives	(63)		(1,066)
Changes in operating assets and liabilities
Accounts receivable	(1,358)		(98)
Merchandise inventory	(38,199)		(13,937)
Prepaid and other current assets	(3,016)		2,127
Other noncurrent liabilities	99		(995)
Accounts payable	8,680		779
Accrued expenses	4,633		2,625
Operating right-of-use assets and liabilities	(11,485)		—
Deferred rent and lease incentives	—		986
Client deposits	41,314		56,674
Net cash provided by operating activities	35,219		73,099

Cash flows from investing activities
Purchases of property, furniture and equipment	(10,151)		(7,006)
Net cash used in investing activities	(10,151)		(7,006)

Cash flows from financing activities
Issuance of related party notes	—		(1,000)
Principal payments under capital leases	—		(71)
Principal payments under finance leases	(1)		—
Distributions to noncontrolling interest holders	—		(4,643)
Net cash used in financing activities	(1)		(5,714)
Net increase in cash, cash equivalents and restricted cash equivalents	25,067		60,379
Cash, cash equivalents and restricted cash equivalents
Beginning of period	130,908		64,002
End of period	$	155,975	$	124,381

Supplemental disclosure of cash flow information
Interest paid in cash	$	1,281	$	1,591
Income taxes paid in cash	$	259	$	110

Noncash operating activities:
Lease incentives	$	—	$	4,547
Noncash investing activities:
Purchase of property, furniture and equipment in accounts payable	$	108	$	(1,010)
Noncash financing activities:
Derecognition of build-to-suit assets as a result of ASC 842 adoption	$	(31,017)	$	—
Capital contributions	$	24	$	—

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

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

1. Nature of Business and Basis of Presentation

Nature of Business

Arhaus, Inc. (the “Company,” “we” or “Arhaus”) is a Delaware 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 position our retail locations as Showrooms for our brand, while our website acts as a virtual extension of our Showrooms. The Company operated 78 Showrooms at March 31, 2022.

Arhaus was formed on July 14, 2021 for the purpose of completing an initial public offering (“IPO”) of its common stock and 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 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,” or “Class A Units”) and the unit holders (“Management Unitholders”) of LLC, a series of transactions were completed on November 8, 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 same party before and after the Reorganization and therefore resulted in a change in reporting entity. In accordance with ASC 805-50-45-5, for transactions between entities under common control, the condensed consolidated financial statements for periods prior to the Reorganization have been adjusted to retrospectively combine the previously separate entities for 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.

The accompanying condensed consolidated balance sheets at March 31, 2022 and December 31, 2021, the condensed consolidated statements of comprehensive income, cash flows and changes in stockholders’equity (deficit) for the three months ended March 31, 2022 and 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 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 March 31, 2022; the results of operations, cash flows and changes in stockholders’equity (deficit) for the three months ended March 31, 2022 and 2021. The condensed consolidated balance sheet as of December 31, 2021 included herein was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP.

The results for the three months ended March 31, 2022 and 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 year ended December 31, 2021.

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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 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, equity based compensation and a derivative instrument.

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 substantially all client deposits as of March 31, 2022 will be recognized as net revenue within the next 12 months as the performance obligations are satisfied.

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 $0.9 million and $0.9 million at March 31, 2022 and December 31, 2021, respectively, is recorded in the accrued other expenses line item of the condensed consolidated balance 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 are accounts receivable, payables, lease obligations, derivatives and equity based compensation instruments. Due to the short-term maturities of accounts receivable and payables, the Company believes the fair values of these instruments approximate their respective carrying values at March 31, 2022 and December 31, 2021. See Note 4 for discussion of our derivative, Note 5 for discussion of our lease obligations and Note 6 for discussion of our 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.

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

2. Recently Issued Accounting Standards

New Accounting Standards 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, in its balance sheets. While it will still be necessary for lessees to distinguish between “operating” and “financing” (formerly known as “capital”) leases, these distinctions will primarily affect how a lessee must recognize expense in its income statement. The new guidance is effective for financial statements issued for annual periods beginning after December 15, 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 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 resulted in $242.0 million recognized as total right-of-use assets and $326.5 million recognized as total lease liabilities on our consolidated balance sheets as of January 1, 2022. For certain previous operating and capital leases, we qualified as the deemed owner of the 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 derecognized the 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 our consolidated 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 adopted the standard in the current period. The adoption of this standard did not have a material impact on our condensed consolidated financial statements.

3. Merchandise Warranties

The 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 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):


	Three months ended March 31,
	2022		2021
Balance as of beginning of period	$	4,724	$	3,326
Accruals during the period	2,196		1,592
Settlements during the period	(1,957)		(1,341)
Balance as of end of the period (1)	$	4,963	$	3,577

(1) $2.9 million and $2.7 million were recorded in accrued other expenses at March 31, 2022 and December 31, 2021, respectively. The remainder is recorded in other long-term 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 included a revolving credit facility of $30.0 million with availability limited pursuant to a borrowing base formula based on specified percentages of eligible inventory, net of reserves. The Company’s borrowings under the Revolver bore variable interest rates at the LIBOR index rate (“LIBOR”) plus the applicable margin (5.5% at March 31, 2021). In the event LIBOR ceased to be available during the term of the Revolver, the Revolver provided procedures to determine an Alternate Base Rate. The Revolver 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 $0.1 million for three months ended March 31, 2021, 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 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 March 31, 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 March 31, 2022, we had no borrowings on the 2021 Credit Facility. Deferred financing costs related to the 2021 Credit Facility of $0.3 million are recorded in other noncurrent assets on the consolidated balance sheets and will be amortized over the term of the debt on a straight-line basis, which approximates the effective interest method.

Prior to the Company entering into the Revolver and 2021 Credit Facility, the debt structure (“Prior Credit Facilities”) included a revolving credit facility (the “Prior Revolver”) and a term loan (the “Term Loan”). The Prior Revolver was terminated on June 25, 2020 and Term Loan was paid in full on December 28, 2020.

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 was payable upon a change of control, qualified IPO or sale of all or

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

substantially all assets of the Company. In connection with the repayment of the Term Loan on December 28, 2020, the 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 was treated as a derivative and adjusted to fair value each reporting period. The Company recorded derivative expense of $11.5 million for the three months ended March 31, 2021, which was included in selling, general and administrative expense within the condensed consolidated 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.

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 exit fee. The key assumptions used within the Black-Scholes OPM as of March 31, 2021 were as follows:


			March 31, 2021
Term			10 years
Risk-free rate of return			1.70%
Volatility			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 March 31, 2022 and December 31, 2021.

5. Leases

The Company leases real estate and equipment under operating and finance leases, some of which are from related parties as discussed in Note 10 — Related Party Transactions. The most significant obligations under these lease agreements require the payments of periodic rentals, real estate taxes, insurance and maintenance costs. Depending on particular Showroom leases, the Company can also owe a percentage rent payment if particular Showrooms meet certain sales figures.

The following table summarizes the amounts recognized in our condensed consolidated balance sheets related to leases as of March 31, 2022 (amounts in thousands):

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


	Condensed Consolidated Balance Sheet Classification	March 31, 2022

Assets
Operating lease assets	Operating right-of-use assets	$	196,896
Finance lease assets	Financing right-of-use assets	38,103
Total leased assets		$	234,999

Liabilities
Current operating leases	Current portion of operating lease liabilities	$	37,957
Non-current operating leases	Operating lease liabilities, long-term	227,191
Total operating lease liabilities		265,148

Current finance leases	Current portion of financing lease liabilities	182
Non-current finance leases	Financing lease liabilities, long-term	50,342
Total finance lease liabilities		50,524
Total lease liabilities		$	315,672

The components of lease cost recognized within our condensed consolidated statements of comprehensive income for the three months ended March 31, 2022 are as follows (amounts in thousands):

Condensed Consolidated Income Statement Classification

Three months ended March 31, 2022

Lease costs:

Operating lease costs

Cost of goods sold

8,405

Operating lease costs

Selling, general and administrative expenses

1,087

Finance lease costs

—

Amortization of right-of-use assets

Selling, general and administrative expenses

458

Interest expense on lease liabilities

Interest expense

1,231

Other lease costs (1)

Cost of goods sold

7,918

Other lease costs (1)

Selling, general and administrative expenses

Total lease costs

19,187

(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 was $15.7 million, $2.8 million and $0.5 million for the three months ended March 31, 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 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 March 31, 2022.


Weighted Average Remaining Lease Term (In Years)						March 31, 2022
Operating leases						8.35
Finance leases						23.79

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

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SEC Form 10-Q filed by Arhaus Inc.