Equity Based Compensation

9 Months Ended

Sep. 30, 2022

Share-Based Payment Arrangement [Abstract]

The following tables summarize the activity of the Company’s management incentive unit awards granted pre-IPO for the nine months ended September 30, 2022 and their equity based compensation expense for the nine and three months ended September 30, 2022 and 2021, respectively (amounts in thousands):


	Class A			Class B
	Amount	Weighted Average Grant Date Fair Value		Amount	Weighted Average Grant Date Fair Value
Unvested at December 31, 2021	2,520,229	$	16.28	596,598	$	0.13
Granted	—	—		—	—
Forfeited	—	—		—	—
Vested	(1,009,960)	17.38		(596,598)	0.10
Unvested at September 30, 2022	1,510,269	$	18.10	—	$	—


	Nine months ended September 30,				Three months ended September 30,
	2022		2021		2022		2021
Equity based compensation expense - management incentive units pre-IPO(1)	$	2,073	$	1,135	$	684	$	708

(1) Total unrecognized equity based compensation for the management incentive unit awards granted pre-IPO to be recognized in future periods is $9.5 million at September 30, 2022, and will be recognized over a weighted average period of 3.60 years. Equity based compensation expense is recorded within selling, general and administrative expenses on our condensed consolidated statements of comprehensive income.

On August 2, 2022, the Compensation Committee (the "Committee") of the Board of Directors of the Company approved grants of performance stock units (“PSUs”) and restricted stock units (“RSUs”) under the Arhaus, Inc. 2021 Equity Incentive Plan (the “2021 Plan”) to certain of the Company’s named executive officers and other key employees (“Award Recipient”). The Committee also approved RSU awards to certain members of the Board of Directors.

Each RSU represents a contingent right to receive one share of the Company’s Class A common stock upon vesting. The RSUs granted to Award Recipients vest in one-third increments on each of the first, second and third anniversary of the date of grant, provided that the Award Recipient continues to serve the Company through the applicable vesting date (“Continuous Service”). If the Award Recipient’s Continuous Service terminates for any reason other than death, disability or in connection with a change in control (as such terms are defined in the 2021 Plan), unless the Committee determines otherwise, all RSUs that are unvested at the time of such termination shall be forfeited and canceled immediately without consideration. The RSUs issued to certain members of the Board of Directors will vest on the one-year anniversary of the grant date. The Company accounts for forfeitures as they occur.

Each PSU represents a contingent right to receive one share of the Company’s Class A common stock upon vesting. The number of PSUs earned will be based on the Company’s financial performance as measured against pre-established target goals for cumulative demand revenue and cumulative adjusted EBITDA (the “Performance Goals”) over the period beginning on January 1, 2022 and ending on December 31, 2024 (the “Performance Period”). PSUs will vest as of the end of the Performance Period (December 31, 2024) subject to the Award Recipient’s Continuous Service, but will not settle and payout until the number of PSUs earned is determined by the Committee. The Award Recipient may earn between 0% and 200% of the PSU target award based on the Company’s achievement of the Performance Goals. The Company accounts for forfeitures as they occur.

The fair value of each PSU and RSU is based on the grant date market price of $5.75. The aggregate grant date fair value of the PSUs and RSUs granted during the nine months ended September 30, 2022 was $2.9 million and $4.1 million, respectively.

The following table summarizes the activity of the Company’s PSU and RSU awards for the nine months ended September 30, 2022, and their equity based compensation expense for the nine and three months ended September 30, 2022 and 2021, respectively (amounts in thousands):


	PSU Awards			RSU Awards
	Amount	Weighted Average Grant Date Fair Value		Amount	Weighted Average Grant Date Fair Value
Unvested at December 31, 2021	—	$	—	—	$	—
Granted	496,375	5.75		720,411	5.75
Forfeited	(750)	5.75		(3,250)	5.75
Vested	—	—		—	—
Unvested at September 30, 2022	495,625	$	5.75	717,161	$	5.75


	Nine months ended September 30,				Three months ended September 30,
	2022		2021		2022		2021
Equity based compensation expense - PSUs(1)	$	238	$	—	$	238	$	—
Equity based compensation expense - RSUs(2)	$	302	$	—	$	302	$	—

(1) Total unrecognized equity based compensation for the PSUs to be recognized in future periods is $3.2 million at September 30, 2022, and will be recognized over a weighted average period of 2.25 years. Equity based compensation expense is recorded within selling, general and administrative expenses on our condensed consolidated statements of comprehensive income.

(2) Total unrecognized equity based compensation for the RSUs to be recognized in future periods is $3.8 million at September 30, 2022, and will be recognized over a weighted average period of 2.55 years. Equity based compensation expense is recorded within selling, general and administrative expenses on our condensed consolidated statements of comprehensive income.