Restoration Hardware 2012 Annual Report Download - page 131

events, including an initial public offering or certain sale or merger transactions. We estimated the fair value of
performance-based units awarded to employees at the grant date based on the fair value of the Company on such
date. We also considered the probability of achieving the established performance targets in determining our stock-
based compensation with respect to these awards. We recognize compensation cost over the performance period.
When the performance is related to a specific event occurring in the future, we recognize the full expense at the time
of the event. In connection with the initial public offering, shares of our common stock with substantially similar
restrictions, terms and conditions were issued in replacement of these performance-based units.
In connection with Gary Friedman’s resignation as Chairman and Co-Chief Executive Officer and new role
as Chairman Emeritus, Creator and Curator, shares of unvested stock he received in replacement of certain
performance-based units will be marked to market every period until the required vesting criteria are met in
accordance with Financial Accounting Standards Board Accounting Standards Codification Topic 718. As of
April 16, 2013, 480,959 of these shares remained unvested.
Income Taxes
We account for income taxes under an asset and liability approach that requires the recognition of deferred
tax assets and liabilities for the expected future tax consequences of events that have been recognized in our
consolidated financial statements or tax returns. In estimating future tax consequences, we generally take into
account all expected future events then known to us, other than changes in the tax law or rates which have not yet
been enacted and which are not permitted to be considered. Accordingly, we may record a valuation allowance to
reduce our net deferred tax assets to the amount that is more-likely-than-not to be realized. The determination as
to whether a deferred tax asset will be realized is made on a jurisdictional basis and is based upon management’s
best estimate of the recoverability of our net deferred tax assets. Future taxable income and ongoing prudent and
feasible tax planning are considered in determining the amount of the valuation allowance, and the amount of the
allowance is subject to adjustment in the future. Specifically, in the event we are to determine that we are not
more-likely-than-not able to realize our net deferred tax assets in the future, an adjustment to the valuation
allowance would decrease income in the period such determination is made. This allowance does not alter our
ability to utilize the underlying tax net operating loss and credit carryforwards in the future, the utilization of
which is limited to achieving future taxable income.
In assessing the need for a valuation allowance, we consider both positive and negative evidence related to
the likelihood of realization of the deferred tax assets. If, based on the weight of available evidence, it is more-
likely-than-not the deferred tax assets will not be realized, we record a valuation allowance. The weight given to
the positive and negative evidence is commensurate with the extent to which the evidence may be objectively
verified. As such, it is generally difficult for positive evidence regarding projected future taxable income
exclusive of reversing taxable temporary differences to outweigh objective negative evidence of recent financial
reporting losses. United States GAAP states that cumulative losses in recent years are a significant piece of
negative evidence that is difficult to overcome in determining that a valuation allowance is not needed against
deferred tax assets.
Due to the historical losses incurred, we had recorded a full valuation allowance against the U.S. net
deferred tax assets, excluding deferred tax liabilities related to indefinite lived intangibles, as well as against the
net deferred tax assets in Shanghai.
A sustained period of profitability in our operations was required before we would change our judgment
regarding the need for a full valuation allowance against our net deferred tax assets. Although we were profitable
for the full fiscal 2011, the seasonality of our business continued to result in losses during certain quarters. We
recorded a net loss of $3.7 million in the first quarter of fiscal 2012, compared to a net loss of $6.2 million in the
same quarter of fiscal 2011, and net income of $17.6 million in the second quarter of fiscal 2012, compared to
net income of $7.6 million in the same quarter of fiscal 2011. Due to the seasonality of our business, our full year
results historically have substantially depended on the results from operations in the fourth quarter.
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Form 10-K