Wayfair Inc. 10-K

Item 8. Financial Statements and Supplementary Data WAYFAIR INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm 51 Consolidated Balance Sheets 54 Consolidated Statements of Operations 55 Consolidated Statements of Comprehensive Income (Loss) 56 Consolidated Statement of Stockholders' Deficit 57 Consolidated Statements of Cash Flows 58 Notes to Consolidated Financial Statements 59 50 Table of Contents Report of Independent Registered Public Accounting Firm To the Stockholders and the Board of Directors of Wayfair Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Wayfair Inc. (the Company) as of December 31, 2020 and 2019, the related consolidated statements of operations, comprehensive income (loss), stockholders’ deficit and cash flows for each of the three years in the period ended December 31, 2020, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 25, 2021 expressed an unqualified opinion thereon. Adoption of New Accounting Standard As discussed in Note 1 to the consolidated financial statements, the Company changed its method for accounting for leases in 2019. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. 51 Table of Contents Completeness of Sales Return Reserves Description of the Matter As described in Note 2 to the consolidated financial statements, the Company had product revenue of $14.1 billion for the year ended December 31, 2020, which was net of sales return reserves of $72.8 million. Auditing the Company's measurement of sales return reserves on product revenue under its contracts with customers was especially challenging because the calculation involves subjective management assumptions about products delivered as of the balance sheet date that could be subject to return in future periods under the Company's returns policy. How We Addressed the Matter in Our Audit We obtained an understanding, evaluated the design and tested the operating effectiveness of internal controls over the Company's sales return reserve process. For example, we tested controls over management's assessment of the assumptions about expected returns by segment as of the balance sheet date. To test the Company’s reserves for returns on product revenue, our audit procedures included, among others, testing the accuracy and completeness of the underlying data used in the calculations and evaluating the significant assumptions used by management to estimate its reserves. To test management’s significant assumptions, we (1) agreed revenues by month for each segment in the analysis to the Company’s sales order system (2) examined sales return levels in the last month of the year and after year-end for unusual items or trends not consistent with the Company’s analysis of product returns and (3) tested the accuracy of the Company’s reserves for returns on product revenue recorded in prior periods by comparing the reserve to returns actually processed. We also compared the Company’s projections of future sales returns as of the balance sheet date with actual returns made subsequent to year end. Allocation of Convertible Notes Issuances and Settlements to Debt and Equity Description of the Matter As described in Note 6 to the consolidated financial statements, the Company issued $1.5 billion in aggregate principal of 0.625% convertible senior notes due 2025 (the “2025 Notes”) pursuant to an Indenture dated August 14, 2020. The 2025 Notes include a cash settlement feature, which requires the Company to separate the 2025 Notes into liability and equity components. Upon issuance, the Company allocated $1.2 billion to the liability component of the 2025 Notes and $0.3 billion to the equity component of the 2025 Notes. The Company used approximately $1.0 billion of the net proceeds from the offering to repurchase approximately $0.3 billion in aggregate principal amounts due under the convertible senior notes due 2022 (the “2022 Notes”). Additionally, in 2020, $0.1 billion aggregate principal of the 2022 Notes were settled upon conversion by the holders for 670,610 shares of Wayfair’s Class A common stock. The accounting for the repurchases and conversions of the 2022 Notes requires the Company to allocate consideration transferred to the holders to the liability and equity components of the 2022 Notes being settled. The Company allocated $0.4 billion and $0.8 billion to the liability and equity components of the 2022 Notes from the total settlement consideration transferred to the holders. Auditing the Company’s determination of the values allocated to the liability and equity components in both the issuance of the 2025 Notes and repurchases and conversions of the 2022 Notes was complex and highly judgmental as a result of the significant estimation required to determine the fair value of the liability component in each transaction. The fair value of the liability components was measured at the estimated fair value of a similar debt instrument without the conversion option. The fair value of similar debt instruments that do not have an associated conversion feature was determined using the Company’s estimated credit spread. Specifically, the credit spreads underlying the estimated effective interest rates for the 2022 and 2025 Notes were estimated using binomial lattice models and observing a range of credit spreads of comparable companies with similar credit ratings. In addition, management further estimated a credit rating for the Company using a synthetic credit rating model based on the Company’s financial performance as of each valuation date. 52 Table of Contents How We Addressed the Matter in Our Audit We obtained an understanding, evaluated the design and tested the operating effectiveness of internal controls that address the risks related to the Company’s process for determining the fair value of similar debt that does not have an associated conversion feature. To test the Company’s measurements of the liability and equity components of the 2025 Notes issuance and 2022 Notes repurchase, we (i) evaluated whether the valuation methodology was appropriate in the circumstances, giving consideration to the nature of the instruments being valued, the premise of the valuation, the business and environment in which the Company operates, and the lack of observable market data, (ii) assessed whether the assumptions on which the estimates were based, individually and taken as a whole, were consistent with the general economic environment, the economic environment of the Company’s business and industry in which it operates, and existing market information, (iii) performed comparative calculations and a sensitivity analysis to test the reasonableness of significant assumptions used in the Company’s valuation analysis, and (iv) prepared independent calculations to corroborate the estimate prepared by management. In performing our procedures, we also involved a valuation professional to assist in our evaluations. /s/ Ernst & Young LLP We have served as the Company’s auditor since 2012. Boston, Massachusetts February 25, 2021 53 Table of Contents WAYFAIR INC. CONSOLIDATED BALANCE SHEETS December 31, 2020 2019 (in thousands, except share and per share data) Assets: Current assets Cash and cash equivalents $ 2,129,440 $ 582,753 Short-term investments 461,698 404,252 Accounts receivable, net 110,299 99,720 Inventories 52,152 61,692 Prepaid expenses and other current assets 292,213 228,721 Total current assets 3,045,802 1,377,138 Operating lease right-of-use assets 808,375 763,400 Property and equipment, net 684,306 624,544 Long-term investments — 155,690 Other noncurrent assets 31,446 32,276 Total assets $ 4,569,929 $ 2,953,048 Liabilities and Stockholders' Deficit: Current liabilities Accounts payable $ 1,156,624 $ 908,097 Other current liabilities 1,008,970 703,422 Total current liabilities 2,165,594 1,611,519 Long-term debt 2,659,243 1,456,195 Operating lease liabilities 869,958 822,602 Other noncurrent liabilities 67,031 6,940 Total liabilities 5,761,826 3,897,256 Commitments and contingencies (Note 7) Stockholders’ deficit: Convertible preferred stock, $ 0.001 par value per share: 10,000,000 shares authorized and none issued at December 31, 2020 and 2019 — — Class A common stock, par value $ 0.001 per share, 500,000,000 shares authorized, 72,980,490 and 66,642,611 shares issued and outstanding at December 31, 2020 and 2019 73 67 Class B common stock, par value $ 0.001 per share, 164,000,000 shares authorized, 26,564,234 and 26,957,815 shares issued and outstanding at December 31, 2020 and 2019 27 27 Additional paid-in capital 698,482 1,122,548 Accumulated deficit ( 1,885,950 ) ( 2,065,423 ) Accumulated other comprehensive loss ( 4,529 ) ( 1,427 ) Total stockholders' deficit ( 1,191,897 ) ( 944,208 ) Total liabilities and stockholders' deficit $ 4,569,929 $ 2,953,048 See notes to consolidated financial statements. 54 Table of Contents WAYFAIR INC. CONSOLIDATED STATEMENTS OF OPERATIONS Year Ended December 31, 2020 2019 2018 (in thousands, except per share data) Net revenue $ 14,145,156 $ 9,127,057 $ 6,779,174 Cost of goods sold 10,032,985 6,979,725 5,192,451 Gross profit 4,112,171 2,147,332 1,586,723 Operating expenses: Customer service and merchant fees 509,559 356,727 260,046 Advertising 1,412,173 1,095,840 774,189 Selling, operations, technology, general and administrative 1,830,090 1,624,706 1,025,767 Total operating expenses 3,751,822 3,077,273 2,060,002 Income (loss) from operations 360,349 ( 929,941 ) ( 473,279 ) Interest (expense), net ( 146,397 ) ( 54,514 ) ( 28,560 ) Other (expense) income, net ( 8,633 ) 2,881 ( 204 ) Income (loss) before income taxes 205,319 ( 981,574 ) ( 502,043 ) Provision for income taxes, net 20,323 3,010 2,037 Net income (loss) $ 184,996 $ ( 984,584 ) $ ( 504,080 ) Earnings (loss) per share: Basic $ 1.93 $ ( 10.68 ) $ ( 5.63 ) Diluted $ 1.86 $ ( 10.68 ) $ ( 5.63 ) Weighted-average number of shares of common stock outstanding used in computing per share amounts: Basic 95,825 92,200 89,472 Diluted 99,337 92,200 89,472 See notes to consolidated financial statements. 55 Table of Contents WAYFAIR INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) Year Ended December 31, 2020 2019 2018 (in thousands) Net income (loss) $ 184,996 $ ( 984,584 ) $ ( 504,080 ) Other comprehensive income (loss): Foreign currency translation adjustments ( 3,085 ) 120 553 Net unrealized (loss) gain on available-for-sale investments ( 17 ) 233 30 Comprehensive income (loss) $ 181,894 $ ( 984,231 ) $ ( 503,497 ) See notes to consolidated financial statements. 56 Table of Contents WAYFAIR INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT Class A and Class B Common Stock Shares Amount Additional Paid-In Capital Accumulated Deficit Accumulated Other Comprehensive Loss Total Stockholders' Deficit (in thousands) Balance at December 31, 2017 88,209 $ 88 $ 537,212 $ ( 583,266 ) $ ( 2,363 ) $ ( 48,329 ) Net loss — — — ( 504,080 ) — ( 504,080 ) Other comprehensive income — — — — 583 583 Exercise of options to purchase common stock 46 — 138 — — 138 Issuance of common stock upon vesting of RSUs 2,504 3 — — — 3 Shares withheld related to net settlement of RSUs ( 11 ) — ( 1,284 ) — — ( 1,284 ) Equity-based compensation expense — — 133,638 — — 133,638 Cumulative effect of adopting new revenue recognition standard — — — 4,657 — 4,657 Equity component of issuance of convertible notes, net of premium paid on capped calls (Note 6) — — 83,953 — — 83,953 Balance at December 31, 2018 90,748 91 753,657 ( 1,082,689 ) ( 1,780 ) ( 330,721 ) Net loss — — — ( 984,584 ) — ( 984,584 ) Other comprehensive income — — — — 353 353 Exercise of options to purchase common stock 35 — 113 — — 113 Issuance of common stock upon vesting of RSUs 2,836 3 — — — 3 Shares withheld related to net settlement of RSUs ( 19 ) — ( 2,236 ) — — ( 2,236 ) Equity-based compensation expense — — 240,448 — — 240,448 Cumulative effect of adopting new leasing standard — — — 1,850 — 1,850 Equity component of issuance of convertible notes, net of premium paid on capped calls (Note 6) — — 130,566 — — 130,566 Balance at December 31, 2019 93,600 94 1,122,548 ( 2,065,423 ) ( 1,427 ) ( 944,208 ) Net income — — — 184,996 — 184,996 Other comprehensive loss — — — — ( 3,102 ) ( 3,102 ) Exercise of options to purchase common stock 25 — 439 — — 439 Issuance of common stock upon vesting of RSUs 3,015 3 — — — 3 Equity-based compensation expense — — 293,488 — — 293,488 Repurchase of common stock ( 1,256 ) ( 1 ) ( 380,236 ) — — ( 380,237 ) Shares issued upon conversion of convertible notes (Note 6) 4,161 4 426,162 — — 426,166 Reacquisition of equity component from repurchases and conversions of convertible notes, net of taxes (Note 6) — — ( 842,337 ) — — ( 842,337 ) Cumulative effect of adopting new credit allowance standard — — — ( 5,523 ) — ( 5,523 ) Equity component of issuance of convertible notes, net of premium paid on capped calls (Note 6) — — 78,418 — — 78,418 Balance at December 31, 2020 99,545 $ 100 $ 698,482 $ ( 1,885,950 ) $ ( 4,529 ) $ ( 1,191,897 ) See notes to consolidated financial statements. 57 Table of Contents WAYFAIR INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended December 31, 2020 2019 2018 (in thousands) Cash flows from operating activities: Net income (loss) $ 184,996 $ ( 984,584 ) $ ( 504,080 ) Adjustments to reconcile net income (loss) to net cash from (for) operating activities Depreciation and amortization 285,711 192,419 123,542 Equity-based compensation 276,208 227,451 127,564 Amortization of discount and issuance costs on convertible notes 134,288 62,111 22,585 Other non-cash adjustments 12,638 ( 1,691 ) ( 56 ) Changes in operating assets and liabilities: Accounts receivable, net ( 14,726 ) ( 49,187 ) ( 12,792 ) Inventories 9,947 ( 15,631 ) ( 18,319 ) Prepaid expenses and other current assets ( 61,259 ) ( 32,590 ) ( 65,195 ) Other assets ( 532 ) ( 1,329 ) ( 8,157 ) Accounts payable and other current liabilities 531,526 393,013 385,647 Other liabilities 57,934 13,200 34,122 Net cash from (for) operating activities 1,416,731 ( 196,818 ) 84,861 Cash flows from investing activities: Purchase of short- and long-term investments ( 481,670 ) ( 553,858 ) ( 99,002 ) Sale and maturities of short-and long-term investments 580,153 115,468 61,068 Purchase of property and equipment ( 186,040 ) ( 271,742 ) ( 159,205 ) Site and software development costs ( 148,394 ) ( 129,138 ) ( 62,750 ) Other investing activities, net ( 124 ) ( 15,567 ) ( 398 ) Net cash for investing activities ( 236,075 ) ( 854,837 ) ( 260,287 ) Cash flows from financing activities: Proceeds from borrowings 200,000 — — Repayment of borrowings ( 200,000 ) — — Proceeds from issuance of convertible notes, net of issuance costs 2,027,758 935,146 562,047 Premiums paid for capped call confirmations ( 255,024 ) ( 145,728 ) ( 93,438 ) Payments to extinguish convertible debt ( 1,040,349 ) — — Repurchase of common stock ( 380,237 ) — — Other financing activities, net 440 ( 2,914 ) ( 1,146 ) Net cash from financing activities 352,588 786,504 467,463 Effect of exchange rate changes on cash and cash equivalents 13,443 ( 1,557 ) ( 1,536 ) Net increase (decrease) in cash and cash equivalents 1,546,687 ( 266,708 ) 290,501 Cash and cash equivalents: Beginning of year 582,753 849,461 558,960 End of year $ 2,129,440 $ 582,753 $ 849,461 Supplemental Cash Flow Information: Cash paid for interest on long-term debt $ 17,407 $ 7,763 $ 1,554 Non-cash impact to equity upon conversion of convertible debt, net of taxes $ 306,889 $ — $ — Cash paid for interest on finance lease obligations $ — $ — $ 9,058 Construction costs capitalized under finance lease obligations and other leases $ — $ — $ 125,796 Purchase of property and equipment included in accounts payable and other liabilities $ 29,915 $ 41,181 $ 15,383 See notes to consolidated financial statements. 58 Table of Contents Notes to Consolidated Financial Statements 1. Summary of Significant Accounting Policies Description of Business and Basis of Presentation Wayfair Inc. is one of the world's largest online destinations for the home. Through its e-commerce business model, Wayfair offers visually inspired browsing, compelling merchandising, easy product discovery and attractive prices for over twenty-two million products from over 16,000 suppliers. These financial statements consolidate the operations and accounts of Wayfair Inc. and its wholly-owned subsidiaries. Unless the context indicates otherwise, references to “we,” “us” and “our” refer to Wayfair Inc. and its subsidiaries. All intercompany accounts and transactions have been eliminated. Below is a summary of Wayfair’s wholly-owned subsidiaries with operations: Subsidiary Location Wayfair LLC U.S. CastleGate Logistics Inc. U.S. CastleGate Trade Services LLC U.S. SK Retail, Inc. U.S. Wayfair Maine LLC U.S. Wayfair Transportation LLC U.S. Wayfair Securities Corporation U.S. Wayfair Stores Limited Republic of Ireland Wayfair (UK) Limited United Kingdom Wayfair Deutschland Ltd. & Co. KG Germany Wayfair Deutschland GP Ltd. Germany CastleGate Logistics Canada Inc. Canada CastleGate Logistics Hong Kong Limited Hong Kong Wayfair (BVI) Ltd. British Virgin Islands Use of Estimates We prepared the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America ("GAAP"). Any reference in these notes to applicable guidance is meant to refer to the authoritative GAAP as found in the Accounting Standards Codification ("ASC") and Accounting Standards Update ("ASU") of the Financial Accounting Standards Board ("FASB"). The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, as well as the disclosure of contingent assets and liabilities, at the date of and during the reported period of the consolidated financial statements. Actual results could differ from those estimates. Certain prior period amounts have been reclassified to conform to the current period presentation. Cash and Cash Equivalents Wayfair considers all highly liquid investments purchased with an original maturity (at the date of purchase) of three months or less to be the equivalent of cash. Cash equivalents, which consist primarily of money market accounts, are carried at cost, which approximates fair value. Investments Investments consist of certificates of deposits and marketable securities with original maturities of greater than three months. Short-term investments mature in less than twelve months from the balance sheet date. We determine the cost basis of an investment sold using the specific identification method. To the extent the amortized cost basis of the available-for-sale debt securities exceeds the fair value, management assesses the debt securities for credit loss, however management considers the risk of credit loss to be minimized by Wayfair's policy of investing in financial instruments issued by highly-rated financial institutions. When assessing the risk of credit loss, management considers factors such as the severity and the reason of the decline in value (i.e., any changes to the rating of the security by a rating agency or other adverse conditions specifically related to the security) and management's intended holding period and time 59 Table of Contents Notes to Consolidated Financial Statements (Continued) horizon for selling. During the years ended December 31, 2020, 2019 and 2018, Wayfair did no t recognize any credit losses related to its available-for-sale debt securities. Further, as of December 31, 2020 and 2019, Wayfair did no t record an allowance for credit losses related to its available-for-sale debt securities. Concentrations of Credit Risk Financial instruments that subject Wayfair to credit risk consist of cash and cash equivalents, short- and long-term investments and accounts receivable. The risk for cash and cash equivalents is minimized by Wayfair's policy to maintain these balances with major financial institutions of high-credit quality. At times, cash balances may exceed federally insured limits; however, to date, Wayfair has not incurred any losses on these investments. As of December 31, 2020 and 2019, Wayfair had $ 281.0 million and $ 48.2 million in banks located outside of the U.S. The risk for short- and long-term investments is minimized by Wayfair's policy of investing in financial instruments issued by highly-rated financial institutions. Accounts Receivables, Net Accounts receivable are stated net of the allowance for credit losses, which are recorded based on historical losses as well as management's expectation of future collections. Uncollectible amounts are written off against the allowance after all collection efforts have been exhausted. Wayfair's exposure to credit loss is minimized through fraud assessments performed prior to customer checkout and Wayfair's policy of monitoring the creditworthiness of its customers to which it grants credit terms in the normal course of business. Further, management believes credit risk is mitigated since approximately 99 % of the net revenue recognized for the twelve months ended December 31, 2020 was collected in advance of recognition. Inventories Inventories consisting of finished goods are stated at the lower of cost or net realizable value, determined by the first-in, first-out (FIFO) method, and consist of product for resale. Inventory costs consist of cost of product and inbound shipping and handling costs. Inventory costs also include direct and indirect labor costs, rent and depreciation expense associated with Wayfair's fulfillment centers. Inventory valuation requires Wayfair to make judgments, based on currently available information, about the likely method of disposition, such as through sales to individual customers, liquidations and expected recoverable values of each disposition category. Deferred Costs In-Transit Deferred costs in-transit to customers are recorded in prepaid expenses and other current assets. Property and Equipment Property and equipment are stated at cost, net of depreciation. Expenditures for maintenance and repairs are charged to expense as incurred, whereas betterments are capitalized as additions to property and equipment. Depreciation on property and equipment is calculated on the straight-line method over the estimated useful lives of the assets as follows: Class Range of Life (In Years) Furniture and computer equipment 3 to 7 Site and software development costs 2 Leasehold improvements The lesser of useful life or lease term Site and Software Development Costs Wayfair capitalizes certain costs associated with the development of its sites and internal-use software products after the preliminary project stage is complete and until the site enhancements or software is ready for its intended use. Wayfair also capitalizes implementation costs incurred in cloud computing hosting arrangements. Upgrades and enhancements are capitalized if they will result in added functionality. Capitalized costs are amortized over a two-year period. Costs incurred in the preliminary stages of development, after the software is ready for its intended use and for maintenance of internal-use software are expensed as incurred. 60 Table of Contents Notes to Consolidated Financial Statements (Continued) Long-Lived Assets Wayfair reviews long-lived assets for impairment whenever events or changes in circumstances, such as service discontinuance or technological obsolescence, indicate that the carrying amount of the long-lived asset may not be recoverable. When such events occur, Wayfair compares the carrying amount of the asset to the undiscounted expected future cash flows related to the asset. If the comparison indicates that an impairment exists, the amount of the impairment is calculated as the difference between the excess of the carrying amount over the fair value of the asset. If a readily determinable market price does not exist, fair value is estimated using discounted expected cash flows attributable to the asset. Leases Wayfair generally leases office and warehouse facilities under noncancelable agreements. Upon each agreement's commencement date, we determine if the agreement is part of an arrangement that is or that contains a lease, determine the lease classification and recognize right-of-use ("ROU") assets and lease liabilities for all leases with the exception of leases with terms of 12 months or less. We have arrangements with lease and non-lease components, and we account for lease and non-lease components separately for our warehouse and fulfillment center arrangements. For all other lease arrangements, we account for lease and non-lease components as a single lease component. Operating lease ROU assets are classified in operating lease right-of-use assets in the consolidated balance sheets. Operating lease liabilities are classified as other current liabilities and operating lease liabilities based on when lease payments are due. As of December 31, 2020 and 2019 we did no t have material finance lease arrangements. Lease liabilities and their corresponding ROU assets are recorded based on the present value of lease payments over the expected lease term at the lease commencement date. As most of our leases do not provide an implicit rate, we use an estimated incremental borrowing rate (“IBR”) based on the information available at the commencement date of the respective lease to determine the present value of future payments. The determination of the IBR requires judgment and is primarily based on publicly available information for companies within the same industry and with similar credit profiles. We adjust the rate for the impact of collateralization, the lease term and other specific terms included in each lease arrangement. The IBR is determined at the lease commencement and is subsequently reassessed upon a modification to the lease arrangement. The ROU asset also includes any lease payments made prior to the commencement date and excludes lease incentives and initial direct costs incurred. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. We review ROU assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the ROU asset may not be recoverable. When such events occur, we compare the carrying amount of the ROU asset to the undiscounted expected future cash flows related to the ROU asset. If the comparison indicates that an impairment exists, the amount of the impairment is calculated as the difference between the excess of the carrying amount over the fair value of the ROU asset. If a readily determinable market price does not exist, fair value is estimated using discounted expected cash flows attributable to the ROU asset. Contingent Liabilities Wayfair has certain contingent liabilities that arise in the ordinary course of business activities. Wayfair accrues for loss contingencies when losses become probable and are reasonably estimable. If the reasonable estimate of the loss is a range and no amount within the range is a better estimate, the minimum amount of the range is recorded as a liability. Wayfair does not accrue for contingent losses that, in our judgment, we consider to be reasonably possible, but not probable; however, we disclose the range of such reasonably possible losses. 61 Table of Contents Notes to Consolidated Financial Statements (Continued) Foreign Currency Translation The functional currency of Wayfair is the U.S. dollar, while the functional currencies of certain wholly-owned subsidiaries outside the U.S. are as follows: Subsidiary Functional Currency Wayfair Stores Limited Euro Wayfair Deutschland Ltd & Co KG Euro Wayfair Deutschland GP Ltd. Euro Wayfair (BVI) Ltd. Euro Wayfair (UK) Limited Pound sterling CastleGate Logistics Canada Inc. Canadian dollar CastleGate Logistics Hong Kong Limited Hong Kong dollar The financial statements of Wayfair are translated to U.S. dollars using year-end exchange rates for assets and liabilities and average exchange rates for revenue and expenses. Capital accounts are translated at their historical exchange rates when the capital transaction occurred. Translation adjustments arising from the use of differing exchange rates from period to period are included in other comprehensive income (loss) below net income (loss) and accumulated other comprehensive loss within total stockholders’ deficit. Transaction gains and losses are included in other (expense) income, net, which is reflected in net income (loss). Revenue Recognition Wayfair primarily generated net revenue through product sales on its family of sites. Wayfair recognizes net revenue on product sales through Wayfair's family of sites using the gross method when Wayfair has concluded it controls the product before it is transferred to the customer. Wayfair controls products when it is the entity responsible for fulfilling the promise to the customer and takes responsibility for the acceptability of the goods, assumes inventory risk from shipment through the delivery date, has discretion in establishing prices and selects the suppliers of products sold. Wayfair recognizes net revenue from sales of its products upon delivery to the customer. As Wayfair ships a large volume of packages through multiple carriers, actual delivery dates may not always be available and as such Wayfair estimates delivery dates based on historical data. Net revenue from product sales includes shipping costs charged to the customer and is recorded net of taxes collected from customers, which are recorded in other current liabilities and are remitted to governmental authorities. Cash discounts and rebates earned by customers at the time of purchase and estimates for sales return allowances are deducted from gross revenue in determining net revenue. Wayfair maintains a membership rewards program for customer purchases made with our private label Wayfair credit card and co-branded Mastercard ("Credit Card Program"). In exchange for providing intellectual property as part of the Credit Card Program, we record net revenues based on spending activity and the profitability of the card portfolio. Spending activity of the underlying accounts represents customer purchases used with their respective cards, and the profitability of the card portfolio is based on the financial performance of the underlying credit portfolio. Net revenue from contracts with customers is disaggregated by geographic region because this manner of disaggregation best depicts how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors. Refer to Note 13, Segment and Geographic Information , for additional detail. Wayfair has three types of contractual liabilities: (i) cash collections from its customers prior to delivery of products purchased, which are initially recorded in unearned revenue, and are recognized as net revenue when the products are delivered, (ii) unredeemed gift cards and site credits, which are initially recorded in unearned revenue, and are recognized in the period they are redeemed, and (iii) membership rewards redeemable for future purchases, which are earned by customers on purchases made through the Credit Card Program, and are initially recorded in other current liabilities, and recognized as net revenue when redeemed. The portion of gift cards and store credits not expected to be redeemed are recognized as net revenue based on a pattern of historical redemptions, which are substantially within twenty-four months from the date of issuance. 62 Table of Contents Notes to Consolidated Financial Statements (Continued) Cost of Goods Sold Costs of Goods sold consists of: Product Costs: Wayfair capitalizes into inventory costs for the purchase price we pay to suppliers of products sold, direct and indirect labor costs, rent, depreciation and inbound shipping and handling costs. Product costs are offset by rebates Wayfair earns through allowances and supplier incentive programs. Wayfair earns rebates when goods are shipped, and amounts earned and due from suppliers under these rebate programs are included in other current assets and are reflected as a reduction of cost of goods sold. Vendor allowances earned on Wayfair owned inventory reduce the carrying cost of inventory and are recognized in cost of goods sold when the inventory is sold. Product costs are also offset by media and merchandising offerings provided to our suppliers, which are not considered distinct from the purchase of goods from those suppliers. Shipping and Fulfillment Costs: Shipping costs include outbound shipping costs. Fulfillment costs include costs incurred to operate and staff our fulfillment centers and provide other inbound supply chain services such as ocean freight and drayage. Costs to operate and staff the CastleGate and WDN networks include rent and depreciation expenses associated with various facilities, costs to receive, inspect, pick, package and prepare customer orders for delivery, and direct and indirect labor costs including payroll, payroll-related benefits and equity-based compensation. Shipping and Fulfillment costs are offset by fees earned by providing logistic services to suppliers including order fulfillment, warehousing and inbound supply chain services such as ocean freight and drayage through Wayfair's CastleGate business. Fulfillment fees are earned upon completion of preparing customer orders for shipment, warehousing fees are earned upon completion of each storage date and inbound supply chain services are earned on a straight-line basis as the shipments move from origin to destination. Shipping and Fulfillment costs were $ 2.0 billion, $ 1.4 billion and $ 1.1 billion, for the years ended December 31, 2020, 2019 and 2018. Customer Service and Merchant Fees Customer service and merchant fees consist of labor-related costs, including payroll, payroll-related benefits and equity-based compensation of our employees involved in customer service activities, merchant processing fees associated with customer payments made by credit cards and debit cards and other variable fees. Merchant processing fees totaled $ 267.7 million, $ 179.7 million and $ 133.4 million in the years ended December 31, 2020, 2019 and 2018. Advertising Advertising consists of direct response performance marketing costs, such as display advertising, paid search advertising, social media advertising, search engine optimization, comparison shopping engine advertising, television advertising, direct mail, catalog and print advertising. Costs for advertising are expensed when the advertising begins. Prepayments for advertising that has not been incurred are included in prepaid expenses and other current assets, and advertising costs that have been incurred but not paid are included in other current liabilities. Selling, Operations, Technology, General and Administrative Selling, operations, technology, general and administrative expenses primarily include labor-related costs, including equity-based compensation, of our operations group, which includes our supply chain and logistics team, our technology team that builds and supports our sites, category managers, buyers, site merchandisers, merchants, marketers and the team who executes our advertising strategy, and our corporate general and administrative team, which includes human resources, finance and accounting personnel. Also included are administrative and professional service fees which include audit and legal fees, insurance, depreciation, rent and other corporate expenses. Equity-Based Compensation Wayfair recognizes its equity-based payments to employees and non-employees as gross expense over the service period based on their grant date fair values with actual forfeitures recognized as they occur. Wayfair has granted stock options, restricted common stock and restricted stock units. Restricted stock values are determined based on the quoted market price of our Class A common stock on the date of grant. Income Taxes Income taxes are accounted for under the asset and liability method. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. 63 Table of Contents Notes to Consolidated Financial Statements (Continued) Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Wayfair records valuation allowances to reduce deferred income tax assets to the amount that is more likely than not to be realized. As of December 31, 2020, we maintained a full valuation allowance against our net worldwide deferred tax asset. Wayfair determines whether it is more likely than not that a tax position will be sustained upon examination. If it is not more likely than not that a position will be sustained, no amount of benefit attributable to the position is recognized. The tax benefit to be recognized of any tax position that meets the more likely than not recognition threshold is calculated as the largest amount that is more than 50% likely of being realized upon resolution of the contingency. We evaluate at the end of each reporting period whether some or all of the undistributed earnings of our foreign subsidiaries are permanently reinvested. Our position is based upon several factors including management's evaluation of Wayfair and its subsidiaries' financial requirements, the short- and long-term operational and fiscal objectives of Wayfair and the tax consequences associated with the repatriation of earnings. Earnings (Loss) Per Share Wayfair follows the two-class method when computing earnings (loss) per share for its two issued classes of common stock - Class A and Class B. Basic earnings (loss) per share is computed using the weighted-average number of shares of common stock outstanding during the period. Diluted earnings (loss) per share is computed using the weighted-average number of shares of common stock outstanding during the period plus, if dilutive, common stock equivalents outstanding during the period and stock issuable upon conversion of our convertible debt instruments. Wayfair's common stock equivalents consist of shares issuable upon the release of restricted stock units, and to a lesser extent, the incremental shares of common stock issuable upon the exercise of stock options. The dilutive effect of these common stock equivalents is reflected in diluted earnings (loss) per share by application of the treasury stock method. The dilutive effect of shares issuable upon conversion of our convertible debt instruments are included in the calculation of diluted earnings (loss) per share under the if-converted method. For periods in which Wayfair has reported net losses, diluted earnings (loss) per share is the same as basic earnings (loss) per share, as the effects of common stock equivalents outstanding and shares issuable upon conversion of convertible debt instruments are antidilutive and therefore excluded from the calculation of diluted earnings (loss) per share. Wayfair allocates undistributed earnings between the classes on a one-to-one basis when computing earnings (loss) per share. As a result, basic and diluted earnings (loss) per Class A and Class B shares are equivalent. Adoption of New Accounting Principles Wayfair adopted ASU No. 2016-13, Financial Instruments–Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments , as subsequently amended (“ASU 2016-13”) on January 1, 2020, using the modified retrospective transition method. This ASU revised how entities account for credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. As of January 1, 2020, our adoption of ASU 2016-13 resulted in a $ 5.5 million cumulative adjustment to our accumulated deficit. Wayfair adopted ASU No. 2016-02, Leases ("ASU 2016-02") on January 1, 2019, using the modified retrospective approach. Wayfair also elected the package of practical expedients, which among other things, allowed Wayfair to carry forward historical lease classification. The adoption of the standard resulted in (1) the derecognition of building assets and finance lease obligations for certain leases that did not pass the sale-leaseback criteria, (2) the derecognition of construction in progress assets and other long-term liabilities for certain lease arrangements whereby Wayfair was no longer considered the deemed construction owner of the construction projects and (3) the recognition of operating lease ROU assets and lease liabilities for lease arrangements with an initial term greater than twelve months. 64 Table of Contents Notes to Consolidated Financial Statements (Continued) New Accounting Pronouncements In August 2020, the FASB issued ASU No. 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40) (“ASU 2020-06”). This ASU simplifies the accounting for convertible instruments by removing the separation models for convertible debt with cash conversion features and convertible instruments with a beneficial conversion feature. Under ASU 2020-06, a convertible debt instrument with those features will generally be reported as a single liability at its amortized cost with no separate accounting for the embedded conversion features. We expect the elimination of these models will reduce reported interest expense for Wayfair’s existing convertible instruments currently falling under the scope of those models. ASU 2020-06 requires the application of the if-converted method when calculating diluted earnings per share, eliminating our ability to use the treasury stock method when certain conditions are met. The ASU is effective for annual reporting periods beginning after December 15, 2021, with early adoption permitted no earlier than fiscal years beginning after December 15, 2020. We are currently evaluating the impact of the adoption of this ASU on our consolidated financial statements. 65 Table of Contents 2. Supplemental Financial Statement Disclosures Accounts Receivable, Net For the year ended December 31, 2020, we reported accounts receivable of $ 110.3 million, net of allowance for credit losses of $ 21.4 million. For the year ended December 31, 2019, we reported accounts receivable of $ 99.7 million, net of allowance for credit losses of $ 22.8 million. Other than the adjustment related to the adoption of ASU 2016-13, changes in the allowance for credit losses were not material for the year ended December 31, 2020. Prepaid Expenses and Other Current Assets The following table presents the components of prepaid expenses and other current assets as of December 31, 2020 and 2019: December 31, 2020 2019 (in thousands) Prepaid expenses and other current assets: Deferred costs in transit $ 156,240 $ 104,947 Prepaid expenses 50,205 46,177 Supplier receivables and credits receivable 62,165 48,328 Other current assets 23,603 29,269 Total prepaid expenses and other current assets $ 292,213 $ 228,721 Other Noncurrent Assets The following table presents the components of other noncurrent assets as of December 31, 2020 and 2019: December 31, 2020 2019 (in thousands) Other noncurrent assets: Goodwill and intangible assets, net $ 17,263 $ 18,809 Other noncurrent assets 14,183 13,467 Total other noncurrent assets $ 31,446 $ 32,276 Amortization expense related to intangible assets was $ 1.5 million, $ 0.8 million and $ 0.9 million for the years ended December 31, 2020, 2019 and 2018. Goodwill was $ 0.4 million for the years ended December 31, 2020 and 2019. For the years ended December 31, 2020, 2019 and 2018, no impairment of goodwill or intangible assets had been recorded. 66 Table of Contents Other Current Liabilities The following table presents the components of other current liabilities as of December 31, 2020 and 2019: December 31, 2020 2019 (in thousands) Other current liabilities: Unearned revenue $ 292,525 $ 167,641 Employee compensation and related benefits 155,574 141,922 Short-term lease liability (Note 5) 97,286 91,104 Advertising 90,251 71,597 Sales tax payable 104,502 62,173 Sales return allowance 72,835 38,042 Other accrued expenses and current liabilities 195,997 130,943 Total other current liabilities $ 1,008,970 $ 703,422 Contractual liabilities included in unearned revenue and other accrued expenses and current liabilities were $ 292.5 million and $ 5.6 million, respectively, at December 31, 2020, and $ 167.6 million and $ 4.6 million, respectively, at December 31, 2019. During the year ended December 31, 2020, Wayfair recognized $ 142.3 million and $ 3.4 million of net revenue included in unearned revenue and other accrued expenses and current liabilities, which was recorded as of December 31, 2019. 3. Cash and Cash Equivalents, Investments and Fair Value Measurements Investments As of December 31, 2020 and 2019, all of Wayfair’s marketable securities, which primarily consisted of corporate bonds and other government obligations that are priced at fair value, were classified as available-for-sale investments. During the year ended December 31, 2020, Wayfair collected $ 161.3 million of proceeds from the sale of long-term investments and recognized a realized gain of $ 0.8 million. During the years ended December 31, 2019 and 2018, Wayfair did no t have any realized gains or losses. 67 Table of Contents Notes to Consolidated Financial Statements (Continued) The following tables present details of Wayfair’s investment securities as of December 31, 2020 and 2019: December 31, 2020 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value (in thousands) Short-term: Investment securities $ 461,683 $ 20 $ ( 5 ) $ 461,698 Long-term: Investment securities — — — — Total $ 461,683 $ 20 $ ( 5 ) $ 461,698 December 31, 2019 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value (in thousands) Short-term: Investment securities $ 404,294 $ 20 $ ( 62 ) $ 404,252 Long-term: Investment securities 155,616 92 ( 18 ) 155,690 Total $ 559,910 $ 112 $ ( 80 ) $ 559,942 Fair Value Measurements Wayfair's financial assets and liabilities are measured at fair value, which is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The three levels of inputs used to measure fair value are as follows: ▪ Level 1—Unadjusted quoted prices in active markets for identical assets or liabilities ▪ Level 2—Unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are observable or can be corroborated by observable market data for substantially the full-term of the asset or liability ▪ Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the asset or liability This hierarchy requires Wayfair to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value. We classify our cash equivalents and certificate of deposits within Level 1 because we value these investments using quoted market prices. The fair value of our Level 1 financial assets is based on quoted market prices of the identical underlying security. We classify short- and long-term investments within Level 2 because unadjusted quoted prices for identical or similar assets in markets are not active. None of our assets are classified as Level 3. 68 Table of Contents Notes to Consolidated Financial Statements (Continued) The following tables set forth the fair value of Wayfair's financial assets measured at fair value on a recurring basis as of December 31, 2020 and 2019: December 31, 2020 Level 1 Level 2 Level 3 Total (in thousands) Cash and cash equivalents: Cash $ 638,621 $ — $ — $ 638,621 Cash equivalents 1,490,819 — — 1,490,819 Total cash and cash equivalents 2,129,440 — — 2,129,440 Short-term investments: Investment securities — 461,698 — 461,698 Other noncurrent assets: Certificate of deposit 5,200 — — 5,200 Long-term: Investment securities — — — — Total $ 2,134,640 $ 461,698 $ — $ 2,596,338 December 31, 2019 Level 1 Level 2 Level 3 Total (in thousands) Cash and cash equivalents: Cash $ 308,521 $ — $ — $ 308,521 Cash equivalents 274,232 — — 274,232 Total cash and cash equivalents 582,753 — — 582,753 Short-term investments: Investment securities — 404,252 — 404,252 Other noncurrent assets: Certificate of deposit 5,076 — — 5,076 Long-term: Investment securities — 155,690 — 155,690 Total $ 587,829 $ 559,942 $ — $ 1,147,771 69 Table of Contents Notes to Consolidated Financial Statements (Continued) 4. Property and Equipment, net The following table summarizes property and equipment, net as of December 31, 2020 and 2019: December 31, 2020 2019 (in thousands) Furniture and computer equipment $ 527,777 $ 509,120 Site and software development costs 431,546 297,252 Leasehold improvements 398,874 228,514 Construction in progress 28,806 45,503 1,387,003 1,080,389 Less: Accumulated depreciation and amortization ( 702,697 ) ( 455,845 ) Property and equipment, net $ 684,306 $ 624,544 Depreciation and amortization expense was $ 284.2 million, $ 191.6 million and $ 122.6 million, of which $ 131.6 million, $ 81.6 million and $ 51.3 million was attributable to the amortization expense of site and software development costs for the years ended December 31, 2020, 2019 and 2018. For the years ended December 31, 2020, 2019 and 2018, no impairment of long-lived assets had been recorded. Total costs capitalized of site and software development costs, net of accumulated amortization, totaled $ 157.6 million and $ 123.5 million as of December 31, 2020 and 2019. 5. Leases Wayfair has lease arrangements for warehouse, Wayfair Delivery Network facilities, which includes consolidation centers, cross docks and last mile delivery facilities and office spaces. These leases expire at various dates through 2034. Operating lease expense was $ 158.6 million, $ 122.0 million and $ 66.7 million in 2020, 2019 and 2018. Sublease income was $ 11.2 million in 2020 and immaterial in 2019 and 2018. The following table presents other information related to leases: Year Ended December 31, 2020 2019 (in thousands) Supplemental cash flows information: Cash payments included in operating cash flows from lease arrangements $ 157,267 $ 109,163 Right-of-use assets obtained in exchange for lease obligations $ 133,814 $ 301,053 December 31, 2020 December 31, 2019 Additional lease information: Weighted average remaining lease term 8 years 10 years Weighted average discount rate 6.5 % 6.7 % 70 Table of Contents Notes to Consolidated Financial Statements (Continued) Future minimum lease payments under non-cancellable leases as of December 31, 2020 were as follows: Amount (in thousands) 2021 $ 149,590 2022 165,624 2023 160,487 2024 157,219 2025 150,788 Thereafter 467,014 Total future minimum lease payments 1,250,722 Less: Imputed interest ( 283,478 ) Total $ 967,244 The following table presents total operating leases liabilities: December 31, 2020 (in thousands) Balance sheet line item: Other current liabilities $ 97,286 Operating lease liabilities 869,958 Total operating leases $ 967,244 As of December 31, 2020, Wayfair had additional operating lease commitments that had not yet commenced of approximately $ 127.9 million to be contractually delivered in 2021 with lease terms ranging between 2 to 15 years. 6. Debt and Other Financing The following table presents the outstanding principal amount and carrying value of debt and other financing as of the dates presented: December 31, 2020 December 31, 2019 Debt Instrument Principal Amount Unamortized Debt Discount Net Carrying Amount Principal Amount Unamortized Debt Discount Net Carrying Amount (in thousands) Revolving Credit Facility $ — $ — 2022 Notes $ 18,036 $ ( 1,596 ) 16,440 $ 431,250 $ ( 59,830 ) 371,420 2024 Notes 575,000 ( 132,892 ) 442,108 575,000 ( 161,275 ) 413,725 2026 Notes 948,750 ( 242,911 ) 705,839 948,750 ( 277,700 ) 671,050 2025 Notes 1,518,000 ( 289,954 ) 1,228,046 — — — 2025 Accreting Notes 288,464 ( 21,654 ) 266,810 — — — Total Debt $ 2,659,243 $ 1,456,195 Short-term debt $ — $ — Long-term debt $ 2,659,243 $ 1,456,195 71 Table of Contents Notes to Consolidated Financial Statements (Continued) Revolving Credit Facility Wayfair Inc., and certain of its subsidiaries (together, the “Guarantors”), and Wayfair Inc.’s wholly-owned subsidiary Wayfair LLC, as borrower (the "Borrower"), have a credit agreement with certain lenders, which provides for a $ 200 million senior secured revolving credit facility that matures on February 21, 2022 (the “Revolver”). Wayfair has issued letters of credit, primarily as security for certain lease agreements, for approximately $ 57.0 million as of December 31, 2020, which reduces the availability of credit under the Revolver. Any amounts outstanding under the Revolver are due at maturity. In addition, subject to the terms and conditions set forth in the credit agreement, Wayfair is required to make certain mandatory prepayments prior to maturity. In August 2020, in connection with the 2020 Repurchase Program, Wayfair amended the credit agreement to increase Wayfair’s stock repurchase basket in the negative covenant for restricted payments. In October 2020, Wayfair also increased the revolving loan commitment to $ 200 million through an incremental commitment joinder. In 2020, Wayfair borrowed under the Revolver, and Wayfair had repaid all borrowings as of December 31, 2020. As a result, there were no revolving loans outstanding under the Revolver as of December 31, 2020. Wayfair’s obligations under the Revolver are guaranteed by the Guarantors. The obligations of the Borrower and the Guarantors are secured by first-priority liens on substantially all of the assets of the Borrower and the Guarantors, including, with certain exceptions, all of the capital stock of Wayfair Inc.’s domestic subsidiaries and 65 % of the capital stock of Wayfair Inc.’s first-tier foreign subsidiaries. Revolver borrowings bear interest through maturity at a variable rate based upon, at the Borrower’s option, either the Eurodollar rate or the base rate (which is the highest of (x) Citibank’s prime rate, (y) one-half of 1.00% in excess of the federal funds effective rate and (z) 1.00 % in excess of the one-month Eurodollar rate), plus, in each case an applicable margin. As of December 31, 2020, the applicable margin for Eurodollar rate loans was 1.50 % per annum and the applicable margin for base rate loans was 0.50 % per annum. The applicable margin is subject to specified changes depending on Wayfair’s liquidity, as defined in the credit agreement. The Revolver contains affirmative and negative covenants customarily applicable to senior secured credit facilities, including covenants that, among other things, limit or restrict the ability of Wayfair LLC and the Guarantors, subject to negotiated exceptions, to incur additional indebtedness and additional liens on their assets, engage in mergers or acquisitions or dispose of assets, pay dividends or make other distributions, voluntarily prepay other indebtedness, enter into transactions with affiliated persons, make investments and change the nature of their businesses. The Revolver also contains customary events of default, subject to thresholds and grace periods, including, among others, payment default, covenant default, cross default to other material indebtedness and judgment default. In addition, the Revolver requires Wayfair to maintain certain levels of free cash flow, as defined in the credit agreement. As of December 31, 2020, Wayfair was in compliance with all covenants. Convertible Non-Accreting Notes The following table summarizes certain terms related to our outstanding convertible notes, excluding the 2025 Accreting Notes: Convertible Non-Accreting Notes Maturity Date Annual Coupon Rate Annual Effective Interest Rate Payment Dates for Semi-Annual Interest Payments in Arrears 2022 Notes September 1, 2022 0.375 % 6.0 % March 1 and September 1 2024 Notes November 1, 2024 1.125 % 8.1 % May 1 and November 1 2026 Notes August 15, 2026 1.00 % 6.4 % February 15 and August 15 2025 Notes October 1, 2025 0.625 % 5.2 % April 1 and October 1 72 Table of Contents Notes to Consolidated Financial Statements (Continued) In September 2017, Wayfair issued $ 431.25 million in aggregate principal amount of 0.375 % Convertible Senior Notes due 2022 (the "2022 Notes"), which includes the exercise in full of a $ 56.25 million option granted to the initial purchasers. In connection with the 2022 Notes, Wayfair entered into capped calls that covered, initially, the number of shares of Wayfair’s Class A common stock underlying the 2022 Notes, subject to anti-dilution adjustments substantially similar to those applicable to the 2022 Notes (the “2022 Capped Calls”). In November 2018, Wayfair issued $ 575.0 million in aggregate principal amount of 1.125 % Convertible Senior Notes due 2024 (the "2024 Notes"), which included the exercise in full of a $ 75.0 million option granted to the initial purchasers. In connection with the 2024 Notes, Wayfair entered into capped calls that covered, initially, the number of shares of Wayfair’s Class A common stock underlying the 2024 Notes, subject to anti-dilution adjustments substantially similar to those applicable to the 2024 Notes (the “2024 Capped Calls”). In August 2019, Wayfair issued $ 948.75 million in aggregate principal amount of 1.00 % Convertible Senior Notes due 2026 (the "2026 Notes"), which included the exercise in full of a $ 123.75 million option granted to the initial purchasers. In connection with the 2026 Notes, Wayfair entered into capped calls that covered, initially, the number of shares of Wayfair’s Class A common stock underlying the 2026 Notes, subject to anti-dilution adjustments substantially similar to those applicable to the 2026 Notes (the “2026 Capped Calls”). In August 2020, Wayfair issued $ 1.518 billion in aggregate principal amount of 0.625 % Convertible Senior Notes due 2025 (the “2025 Notes”, and together with the 2022 Notes, 2024 Notes, 2026 Notes, the “Non-Accreting Notes”), which included the exercise in full of a $ 198.0 million option granted to the initial purchasers. In connection with the issuance of the 2025 Notes, Wayfair entered into capped calls that covered, initially, the number of shares of Wayfair’s Class A common stock underlying the 2025 Notes, subject to anti-dilution adjustments substantially similar to those applicable to the 2025 Notes (the “2025 Capped Calls”). Convertible Accreting Notes In April 2020, Wayfair issued $ 535.0 million in aggregate original principal amount of 2.50 % Accreting Convertible Senior Notes due 2025 (the "2025 Accreting Notes", and collectively with the Non-Accreting Notes, the “Notes”) to GHEP VII Aggregator, L.P ("Great Hill"), CBEP Investments, LLC ("Charlesbank") and The Spruce House Partnership LLC. The 2025 Accreting Notes are fully and unconditionally guaranteed on a senior unsecured basis by Wayfair LLC, a wholly-owned subsidiary of Wayfair Inc., as guarantor. No cash interest is payable on the 2025 Accreting Notes. Instead, the 2025 Accreting Notes accrue interest at a rate of 2.50 % per annum, which accretes to the principal amount on April 1 and October 1 of each year. The 2025 Accreting Notes will mature on April 1, 2025, unless earlier purchased, redeemed or converted. The annual effective interest rate of the 2025 Accreting Notes is 4.4 %. Seniority of Notes The Notes are general senior unsecured obligations of Wayfair. The Notes rank senior in right of payment to any of Wayfair’s future indebtedness that is expressly subordinated in right of payment to the Notes, rank equal in right of payment to Wayfair’s existing and future unsecured indebtedness that is not so subordinated and are effectively subordinated in right of payment to any of Wayfair’s secured indebtedness to the extent of the value of the assets securing such indebtedness. The Non-Accreting Notes are structurally subordinated to all existing and future indebtedness and liabilities of Wayfair’s subsidiaries, including Wayfair LLC’s guaranty of the 2025 Accreting Notes, and the 2025 Accreting Notes are structurally subordinated to all existing and future indebtedness and liabilities of Wayfair’s subsidiaries (other than Wayfair LLC). Indentures The Notes are governed by separate indentures between Wayfair, as issuer, and U.S. Bank National Association, as trustee. The Non-Accreting Notes indenture also includes Wayfair LLC, as guarantor. Each indenture contains customary terms and covenants, including that upon certain events of default occurring and continuing, either the trustee or the holders of not less than 25 % in aggregate principal amount of the respective notes then outstanding may declare the entire principal amount of the respective notes plus accrued interest, if any, to be immediately due and payable. 73 Table of Contents Notes to Consolidated Financial Statements (Continued) Conversion and Redemption Terms of the Notes Wayfair's Notes will mature at their maturity date unless earlier purchased, redeemed or converted. The Notes’ initial conversion terms are summarized below: Convertible Notes Maturity Date Free Convertibility Date Initial Conversion Rate per $1,000 Principal Initial Conversion Price Redemption Date 2022 Notes September 1, 2022 June 1, 2022 9.6100 $ 104.06 September 8, 2020 2024 Notes November 1, 2024 August 1, 2024 8.5910 $ 116.40 May 8, 2022 2026 Notes August 15, 2026 May 15, 2026 6.7349 $ 148.48 August 20, 2023 2025 Notes October 1, 2025 July 1, 2025 2.3972 $ 417.15 October 4, 2022 2025 Accreting Notes April 1, 2025 - 13.7931 $ 72.50 May 9, 2023 The conversion rate is subject to adjustment upon the occurrence of certain specified events, including certain distributions and dividends to all or substantially all of the holders of Wayfair’s Class A common stock, but will not be adjusted for accrued and unpaid interest. Wayfair will settle any conversions of the Non-Accreting Notes in cash, shares of Wayfair’s Class A common stock or a combination thereof, with the form of consideration determined at Wayfair’s election. The holders of the Non-Accreting Notes may convert all or a portion of the notes prior to certain conversion dates (the “Free Convertibility Date”) under the following circumstances (in each case, as applicable to each series of Non-Accreting Notes): • during any calendar quarter (and only during such calendar quarter) after December 31, 2020, if the last reported sale price of Wayfair’s Class A common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130 % of the conversion price on each applicable trading day; • during the five business day period after any ten consecutive trading day period (the “measurement period") in which the trading price (as defined in the applicable indenture) per $ 1,000 principal amount of the notes for each trading day of the measurement period was less than 98 % of the product of the last reported sale price of Wayfair’s Class A common stock and the conversion rate on each such trading day; • if Wayfair calls the notes for redemption, at any time prior to the close of business on the second scheduled trading day immediately preceding the redemption date; and • upon the occurrence of specified corporate events (as set forth in the applicable indenture) On or after the applicable Free Convertibility Date until the close of business on the second scheduled trading day immediately preceding the applicable maturity date, holders of the Non-Accreting Notes may convert their Non-Accreting Notes at any time. The following Non-Accreting Notes are convertible during the calendar quarter ended March 31, 2021: the 2022 Notes, the 2024 Notes and the 2026 Notes. The 2025 Notes are not convertible during the first quarter of 2021. The holders of the 2025 Accreting Notes may convert all or a portion of their 2025 Accreting Notes at any time prior to the second business day immediately preceding the maturity date. Wayfair will settle any conversion of 2025 Accreting Notes with a number of shares of Wayfair’s Class A common stock per $ 1,000 original principal amount of 2025 Accreting Notes equal to the accreted principal amount of such original principal amount of 2025 Accreting Notes divided by the conversion price. Upon the occurrence of a fundamental change (as defined in the applicable indenture), holders of the Notes may require Wayfair to repurchase all or a portion of the Notes for cash at a price equal to 100 % of the principal amount (or accreted principal amount) of the Notes to be repurchased plus any accrued but unpaid interest to, but excluding, the fundamental change repurchase date (such interest to be included in the accreted principal amount for the 2025 Accreting Notes). Holders of the Non-Accreting Notes who convert their respective notes in connection with a make-whole fundamental change or a notice of redemption (each as defined in the indenture) may be entitled to a premium in the form of an increase in the conversion rate of the respective notes. Holders of the 2025 Accreting Notes who convert in connection with a make-whole fundamental change (as defined in the applicable indenture) may be entitled to a premium in the form of an increase in the conversion rate. 74 Table of Contents Notes to Consolidated Financial Statements (Continued) Wayfair may not redeem the Notes prior to certain dates (the “Redemption Date”). On or after the applicable Redemption Date, Wayfair may redeem for cash all or part of the applicable series of Notes if the last reported sale price of Wayfair’s Class A common stock equals or exceeds 130 % (Non-Accreting Notes) or 276 % (2025 Accreting Notes) of the conversion price then in effect for at least 20 trading days (whether or not consecutive), including at least one of the five trading days immediately preceding the date on which Wayfair provides notice of redemption, during any 30 consecutive trading days ending on, and including the trading day immediately preceding the date on which Wayfair provides notice of the redemption. The redemption price will be either 100 % of the principal amount (or accreted principal amount) of the notes to be redeemed, plus accrued and unpaid interest, if any, or the if-converted value holder elects to convert their Notes upon receiving notice of redemption. Accounting for Non-Accreting Notes In accounting for the issuance of the Non-Accreting Notes, Wayfair separated the Non-Accreting Notes into liability and equity components. The carrying amount of each Non-Accreting Note's liability component was calculated by measuring the fair value of a similar liability that did not have an associated convertible feature. The carrying amount of each Non-Accreting Note's equity component, representing the conversion option, which does not meet the criteria for separate accounting as a derivative as it is indexed to Wayfair's own stock, was determined by deducting the fair value of the Non-Accreting Note's liability component from the par value of the Non-Accreting Note. The difference between the carrying amount of the Non-Accreting Note and the liability component represents the debt discount for the Non-Accreting Note, which was recorded as a direct deduction from the related debt liabilities and is amortized to interest expense using the effective interest method over the term of the Non-Accreting Note. The equity components of the 2022 Notes, 2024 Notes, 2026 Notes and 2025 Notes of approximately $ 95.8 million, $ 181.5 million, $ 280.3 million and $ 297.4 million, respectively, are included in additional paid-in capital and are not remeasured as long as they continue to meet the conditions for equity classification. Wayfair allocated transaction costs related to the components of the Non-Accreting Notes using the same proportions as the proceeds from the corresponding Non-Accreting Notes. Transaction costs attributable to the liability components were recorded as direct deductions from the related debt liabilities and amortized to interest expense over the terms of the corresponding Non-Accreting Notes, and transaction costs attributable to the equity components were netted with the corresponding equity components in shareholders’ deficit. Accounting for Accreting Notes In accounting for the issuance of the 2025 Accreting Notes, Wayfair determined there was a beneficial conversion feature, which represents the excess of the fair value of the underlying common stock at the commitment date less the effective conversion price of the shares convertible at that time. The beneficial conversion feature of $ 39.4 million was recorded to additional paid-in capital and represents a debt discount to the 2025 Accreting Notes, which was recorded as a direct deduction from the related debt liability. It is amortized to interest expense using the effective interest method over the term of the 2025 Accreting Notes. All transaction costs incurred were recorded as a direct deduction from the related debt liability and are amortized to interest expense using the effective interest method over the term of the 2025 Accreting Notes. Interest for the 2025 Accreting Notes is amortized to interest expense using the effective interest method over the term of the 2025 Accreting Notes and recorded to other long-term liabilities. Upon accretion to the principal amount on April 1 and October 1 of each year, Wayfair will reclassify the interest accrued as of that date to long-term debt. The beneficial conversion feature for additional shares, which would be issued upon conversion of paid-in-kind interest, is recorded as additional interest expense and additional paid-in capital over the term of the 2025 Accreting Notes as such interest accrues. Proceeds from Notes Transactions The net proceeds from the sale of the 2022 Notes, 2024 Notes, 2026 Notes, 2025 Notes and 2025 Accreting Notes were approximately $ 420.4 million, $ 562.0 million, $ 935.1 million, $ 1.5 billion and $ 527.4 million, respectively, after deducting the initial purchasers’ discounts, if applicable, and the offering expenses payable by Wayfair. We used approximately $ 44.2 million, $ 93.4 million, $ 145.7 million and $ 255.0 million of the net proceeds from the 2022 Notes, 2024 Notes, 2026 Notes and 2025 Notes, respectively, to purchase the Capped Calls. We intend to use the remainder of the net proceeds from the Notes for working capital and general corporate purposes, including, but not limited to, operating and capital expenditures. We may also use a portion of the net proceeds to finance acquisitions, strategic transactions, investments, repurchases of our Class A common stock or the repayment, redemption, purchase or exchange of indebtedness (including the Notes). 75 Table of Contents Notes to Consolidated Financial Statements (Continued) Extinguishment and Conversions of Notes In August 2020, Wayfair used $ 1.0 billion of the net proceeds from the issuance of the 2025 Notes to repurchase for cash in privately negotiated repurchase transactions $ 343.4 million in aggregate principal amount of the 2022 Notes. Additionally, in 2020, $ 69.8 million aggregate principal of the 2022 Notes were settled upon conversion by the holders for 670,610 shares of Wayfair’s Class A common stock. In accounting for these transactions, Wayfair allocated $ 380.2 million of the total fair value of the consideration received from the 2025 Notes to the debt component of the repurchased 2022 Notes by estimating the fair value of a similar liability that did not have an associated convertible feature. The $ 12.8 million loss on extinguishment of the 2022 Notes recorded to other (expense) income, net, primarily represents the difference between the total fair value of consideration allocated to the debt component and the $ 368.8 million carrying value, net of the remaining unamortized debt discount and debt issuance costs. Wayfair applied the $ 832.0 million residual value of the total fair value of the consideration to the equity component in additional paid-in capital. In October 2020, Charlesbank converted $ 253.1 million of accreted principal of the 2025 Accreting Notes and received 3,490,175 shares of Wayfair’s Class A common stock. Upon Charlesbank's conversion of the 2025 Accreting Notes, the remaining debt discount for those notes of $ 19.8 million was immediately recognized as interest expense in the fourth quarter of 2020. In January 2021, Great Hill converted $ 253.1 million of accreted principal of the 2025 Accreting Notes and received 3,490,175 shares of Wayfair's Class A common stock. Interest Expense The following table presents total interest expense recognized for the Notes for the years ended December 31: Year Ended December 31, 2020 2019 Convertible Notes Contractual Interest Expense Debt Discount Amortization Total Interest Expense Contractual Interest Expense Debt Discount Amortization Total Interest Expense (in thousands) 2022 Notes $ 1,054 $ 13,775 $ 14,829 $ 1,617 $ 20,080 $ 21,697 2024 Notes 6,469 28,382 34,851 6,469 26,161 32,630 2026 Notes 9,488 34,759 44,247 3,342 12,205 15,547 2025 Notes 3,611 20,369 23,980 — — — 2025 Accreting Notes 8,324 25,438 33,762 — — — Total $ 28,946 $ 122,723 $ 151,669 $ 11,428 $ 58,446 $ 69,874 Fair Value of Notes The estimated fair value of the 2022 Notes, 2024 Notes, 2026 Notes, 2025 Notes and 2025 Accreting Notes was $ 38.4 million, $ 1.2 billion, $ 1.6 billion, $ 1.4 billion and $ 923.7 million, respectively, as of December 31, 2020. The estimated fair value of the Non-Accreting Notes was determined through consideration of quoted market prices. The estimated fair value of the 2025 Accreting Notes was determined through an option pricing model using Level 3 inputs including volatility and credit spread. The fair values of the Non-Accreting Notes and the 2025 Accreting Notes are classified as Level 2 and Level 3, respectively, as defined in Note 3, Cash and Cash Equivalents, Investments and Fair Value Measurements . The if-converted value of the 2022 Notes, 2024 Notes, 2026 Notes and 2025 Accreting Notes exceeded the principal value by $ 21.1 million, $ 540.5 million, $ 494.1 million and $ 610.0 million, respectively, as of December 31, 2020. The if-converted value of the 2025 Notes did not exceed the principal value as of December 31, 2020. Capped Calls The 2022 Capped Calls, 2024 Capped Calls, 2026 Capped Calls and 2025 Capped Calls (collectively, the "Capped Calls") are expected generally to reduce the potential dilution and/or offset the cash payments Wayfair is required to make in excess of the principal amount of the Notes upon conversion of the Notes if the market price per share of Wayfair’s Class A common stock is greater than the strike price of the applicable Capped Call (which corresponded to the initial conversion price of the applicable Non-Accreting Notes and is subject to certain adjustments under the terms of the applicable Capped Call), with such reduction 76 Table of Contents Notes to Consolidated Financial Statements (Continued) and/or offset subject to a cap based on the cap price of the applicable Capped Calls (the "Initial Cap Price"). The Capped Calls can, at Wayfair’s option, remain outstanding until their maturity date, even if all or a portion of the Non-Accreting Notes are converted, repurchased or redeemed prior to such date. Each of the Capped Calls has an initial cap price per share of Wayfair’s Class A common stock, which represented a premium over the last reported sale price (or, with respect to the 2025 Capped Calls, the volume-weighted average price) of Wayfair’s Class A common stock on the date the corresponding Non-Accreting Notes were priced (the "Cap Price Premium"), and is subject to certain adjustments under the terms of the corresponding agreements. Collectively, the Capped Calls cover, initially, the number of shares of Wayfair’s Class A common stock underlying the Non-Accreting Notes, subject to anti-dilution adjustments substantially similar to those applicable to the Non-Accreting Notes. The initial terms for the Capped Calls are presented below: Capped Calls Maturity Date Initial Cap Price Cap Price Premium 2022 Capped Calls September 1, 2022 $ 154.16 100 % 2024 Capped Calls November 1, 2024 $ 219.63 150 % 2026 Capped Calls August 15, 2026 $ 280.15 150 % 2025 Capped Calls October 1, 2025 $ 787.08 150 % The Capped Calls are separate transactions from the Non-Accreting Notes, are not subject to the terms of the Non-Accreting Notes and will not affect any holder’s rights under the Non-Accreting Notes. Similarly, holders of the Non-Accreting Notes do not have any rights with respect to the Capped Calls. The Capped Calls do not meet the criteria for separate accounting as a derivative as they are indexed to Wayfair's stock. The premiums paid for the Capped Calls were included as a net reduction to additional paid-in capital within shareholders’ deficit. 7. Commitments and Contingencies Purchase Obligations Wayfair has entered into purchase obligations that represent enforceable and legally binding software license commitments. Our payments due under these purchase obligations are $ 97.4 million in 2021, $ 121.2 million in 2022, $ 114.6 million in 2023 and no other commitments thereafter. These payments exclude payments for contracts that are able to be canceled, both in full or in part, since they do not represent legally binding arrangements. Collection of Sales or Other Similar Taxes Wayfair has historically collected and remitted sales tax based on the locations of its physical operations. On June 21, 2018, the U.S. Supreme Court rendered a 5-4 majority decision in South Dakota v. Wayfair Inc., 17-494. Among other things, the Court held that a state may require an out-of-state seller with no physical presence in the state to collect and remit sales taxes on goods the seller ships to consumers in the state, overturning existing court precedent. Several states and other taxing jurisdictions have presented, or indicated that they may present, Wayfair with sales tax assessments. The aggregate assessments received as of December 31, 2020 are not material to Wayfair's business and Wayfair does not expect the Court's decision to have a significant impact on its business. Legal Matters From time to time Wayfair is involved in claims that arise during the ordinary course of business. Although the results of litigation and claims cannot be predicted with certainty, Wayfair does not currently believe that the outcome of any of these other legal matters will have a material adverse effect on Wayfair's results of operation or financial condition. Regardless of the outcome, litigation can be costly and time consuming, as it can divert management's attention from important business matters and initiatives, negatively impacting Wayfair's overall operations. In addition, Wayfair may also find itself at greater risk to outside party claims as it increases its operations in jurisdictions where the laws with respect to the potential liability of online retailers are uncertain, unfavorable, or unclear. On November 18, 2020, certain of our present and former directors, along with Great Hill Partners, L.P., Great Hill, Charlesbank Capital Partners, LLC and Charlesbank, were named as defendants in a shareholder derivative lawsuit filed in the Court of Chancery of the State of Delaware by the Equity-League Pension Trust Fund. Wayfair is named as a nominal defendant. The derivative complaint primarily alleges that the director defendants breached their fiduciary duties with respect to Wayfair’s issuance of the 2025 Accreting Notes, and further alleges that the non-director defendants were unjustly enriched on the basis of 77 Table of Contents Notes to Consolidated Financial Statements (Continued) the issuance. The complaint asserts causes of action for breach of fiduciary duty and unjust enrichment and seeks disgorgement of proceeds received as a result of the issuance, other equitable relief and damages and attorneys’ fees and costs. At this time, based on available information regarding this litigation, we are unable to reasonably assess the ultimate outcome of this case or determine an estimate, or a range of estimates, of potential losses. 8. Employee Benefit Plans Wayfair has a defined-contribution, incentive savings plan pursuant to Section 401(k) of the Internal Revenue Code. The plan covers all full-time employees who have reached the age of 21 years. Employees may elect to defer compensation up to a dollar limit (as allowable by the Internal Revenue Code), of which up to 4 % of an employee's salary will be matched by Wayfair. The amounts deferred by the employee and the matching amounts contributed by Wayfair both vest immediately. The amount expensed under the plan totaled approximately $ 31.7 million, $ 27.9 million and $ 18.2 million in the years ended December 31, 2020, 2019 and 2018. 9. Stockholders’ Deficit Preferred Stock Wayfair authorized 10,000,000 shares of undesignated preferred stock, $ 0.001 par value per share, for future issuance. As of December 31, 2020, Wayfair had no shares of undesignated preferred stock issued or outstanding. Common Stock Wayfair authorized 500,000,000 shares of Class A common stock, $ 0.001 par value per share, and 164,000,000 shares of Class B common stock, $ 0.001 par value per share, of which 72,980,490 and 66,642,611 shares of Class A common stock and 26,564,234 and 26,957,815 shares of Class B common stock were outstanding as of December 31, 2020 and 2019. The rights of the holders of Class A common stock and Class B common stock are identical, except with respect to voting and conversion rights. Each share of Class A common stock is entitled to one vote per share and each share of Class B common stock is entitled to ten votes per share. Each share of Class B common stock may be converted into one share of Class A common stock at the option of its holder and will be automatically converted into one share of Class A common stock upon transfer thereof, subject to certain exceptions. In addition, upon the date on which the outstanding shares of Class B common stock represent less than 10 % of the aggregate number of shares of the then outstanding Class A common stock and Class B common stock, or in the event of the affirmative vote or written consent of holders of at least 66 2/3% of the outstanding shares of Class B common stock, all outstanding shares of Class B common stock shall convert automatically into Class A common stock. Subject to preferences that may apply to any shares of preferred stock outstanding at the time, the holders of common stock are entitled to receive dividends out of funds legally available if Wayfair's Board of Directors (the "Board"), in its discretion, determines to issue dividends and then only at the times and in the amounts that the Board may determine. Since Wayfair's initial public offering through December 31, 2020, 55,474,180 shares of Class B common stock were converted to Class A common stock. Stock Repurchase Program On August 21, 2020, the Board authorized the repurchase of up to $ 700 million of Wayfair’s Class A common stock (the “2020 Repurchase Program”). The 2020 Repurchase Program replaced Wayfair’s previous $ 200 million stock repurchase authorization approved by the Board in 2018, which was terminated simultaneously. During the year ended December 31, 2020, Wayfair repurchased $ 380.2 million of its Class A common stock through the stock repurchase programs at an average price of $ 302.71 per share. During the year ended December 31, 2019, Wayfair did not repurchase any shares of common stock. 10. Equity-Based Compensation The Board adopted the 2014 Incentive Award Plan ("2014 Plan") to grant cash and equity incentive awards to eligible participants in order to attract, motivate and retain talent. The 2014 Plan is administered by the Board for awards to non-employee directors and by the compensation committee of the Board for other participants and provides for the issuance of stock options, SARs, restricted common stock, restricted stock units ("RSUs"), performance shares, stock payments, cash payments, dividend awards and other incentives. Prior to the adoption of the 2014 Plan, Wayfair LLC issued certain equity awards pursuant to the Wayfair LLC Amended and Restated Common Unit Plan (the "2010 Plan"), which was administered by the Board of Wayfair LLC. Awards issued under the 2010 Plan that remain outstanding currently represent Class A or Class B common stock of Wayfair Inc. The 2014 Plan initially made 8,603,066 shares of Class A common stock available for future award grants. The 2014 Plan also contains an evergreen provision whereby the shares available for future grants are increased on the first day of each calendar 78 Table of Contents Notes to Consolidated Financial Statements (Continued) year from January 1, 2016 through and including January 1, 2024. As of January 1, 2021, 6,224,792 shares of Class A common stock were available for future grant under the 2014 Plan. Shares or RSUs forfeited, withheld for minimum statutory tax obligations, and unexercised stock option lapses from the 2010 and 2014 Plans are available for future grants under the 2014 Plan. The following table presents activity relating to stock options for the year ended December 31, 2020: Shares Weighted-Average Exercise Price Weighted-Average Remaining Contractual Term (Years) Outstanding at December 31, 2019 43,606 $ 3.00 1.5 Options exercised ( 24,560 ) $ 3.01 Outstanding and exercisable at December 31, 2020 19,046 $ 2.99 0.5 The intrinsic value of stock options exercised was $ 4.6 million and $ 4.8 million for the years ended December 31, 2020 and 2019. Aggregate intrinsic value of stock options outstanding and currently exercisable is $ 4.2 million as of December 31, 2020. All stock options were fully vested at December 31, 2020. The following table presents activity relating to RSUs for the year ended December 31, 2020: Shares Weighted-Average Grant Date Fair Value Unvested at December 31, 2019 8,112,736 $ 95.69 RSUs granted 2,441,898 $ 196.04 RSUs vested ( 3,015,462 ) $ 97.15 RSUs forfeited/canceled ( 1,563,873 ) $ 105.42 Outstanding as of December 31, 2020 5,975,299 $ 134.03 The intrinsic value of RSUs vested was $ 562.3 million and $ 358.6 million for the years ended December 31, 2020 and 2019. The aggregate intrinsic value of RSUs unvested was $ 1.3 billion as of December 31, 2020. Unrecognized equity-based compensation expense related to RSUs expected to vest over time is $ 728.3 million with a weighted-average remaining vesting term of 1.2 years as of December 31, 2020. Equity-based compensation was classified as follows in the consolidated statements of operations for the years ended December 31: Year Ended December 31, 2020 2019 2018 (in thousands) Cost of goods sold $ 9,494 $ 5,376 $ 2,549 Customer service and merchant fees 14,835 9,286 5,524 Selling, operations, technology, general and administrative 251,879 212,789 119,491 Total equity-based compensation $ 276,208 $ 227,451 $ 127,564 Equity-based compensation costs capitalized as site and software development costs was $ 17.3 million for the year ended December 31, 2020. The amount qualifying for capitalization during the years ended December 31, 2019 and 2018 was not material. 79 Table of Contents Notes to Consolidated Financial Statements (Continued) 11. Income Taxes The components of the provision for income taxes, net for the years ended December 31, 2020, 2019 and 2018 are presented below: Year ended 2020 2019 2018 (in thousands) Current: Federal $ — $ — $ — State 7,817 874 744 Foreign 2,164 2,136 78 Deferred: Federal 9,036 — ( 86 ) State 1,306 — ( 24 ) Foreign — — 1,325 Provision for income taxes, net $ 20,323 $ 3,010 $ 2,037 The actual provision for income taxes, net differs from the expected provision for income taxes computed at the U.S. Federal statutory tax rate of 21 % due to the following: Year Ended December 31, 2020 2019 2018 (in thousands) Provision for income taxes at the federal statutory rate $ 43,116 $ ( 206,131 ) $ ( 105,429 ) State income tax expense, net of federal benefit 18,518 ( 40,136 ) ( 22,584 ) Foreign tax rate differential 18,591 24,346 14,976 Non-deductible equity-based compensation expense 7,671 6,604 3,267 Windfall benefits from equity-based compensation ( 51,024 ) ( 28,915 ) ( 29,003 ) Change in valuation allowance ( 26,982 ) 236,863 119,370 Change in tax rate ( 847 ) ( 2,293 ) 197 Limitation on officer's compensation 8,103 6,509 5,283 Debt integration termination — — 9,236 Other 3,177 6,163 6,724 Provision for income taxes, net $ 20,323 $ 3,010 $ 2,037 We recorded a provision for income taxes, net of $ 20.3 million, representing an effective tax rate of 9.88 %. The effective tax rate differs from the U.S. Federal statutory rate of 21 % primarily as a result of excess tax benefits on equity awards for U.S. employees and the valuation allowance maintained against our worldwide net deferred tax asset. The components of income (loss) before income taxes determined by tax jurisdiction, are as follows: Year Ended December 31, 2020 2019 2018 (in thousands) U.S. $ 399,973 $ ( 699,347 ) $ ( 327,356 ) Foreign ( 194,654 ) ( 282,227 ) ( 174,687 ) Total $ 205,319 $ ( 981,574 ) $ ( 502,043 ) 80 Table of Contents Notes to Consolidated Financial Statements (Continued) The tax effects of temporary differences that give rise to significant portions of deferred tax assets and liabilities for the periods presented are as follows: December 31, 2020 2019 (in thousands) Deferred tax assets: Accounts receivable $ 5,507 $ 5,909 Inventories 1,048 871 Net operating loss carryforwards 433,543 470,199 Equity-based compensation expense 12,720 14,929 Intangibles 9,274 10,675 Accrued payroll 36,580 21,395 Accrued expenses and reserves 23,633 14,539 Charitable contributions — 872 Leases 255,381 239,259 Gross deferred tax assets 777,686 778,648 Less: Valuation allowance ( 328,116 ) ( 412,898 ) Net deferred tax assets 449,570 365,750 Deferred tax liabilities: Prepaid expenses $ ( 4,889 ) $ ( 5,930 ) Capitalized technology ( 35,261 ) ( 27,354 ) Property and equipment ( 41,543 ) ( 14,191 ) Operating lease right-of-use asset ( 211,727 ) ( 197,680 ) Convertible debt ( 167,043 ) ( 120,447 ) 481(a) adjustments ( 8,103 ) — Other ( 1,934 ) ( 148 ) Total deferred tax liabilities ( 470,500 ) ( 365,750 ) Non-current net deferred tax assets (liabilities) $ ( 20,930 ) $ — The valuation allowance decreased by $ 84.8 million during 2020. The decrease in the valuation allowance is the result of Wayfair utilizing its deferred tax assets related to historical net operating losses to offset current year taxable income, as well as a decrease in valuation allowance through equity as a result of the deferred tax liability recorded related to our convertible debt issuances. This is partially offset by establishing a valuation allowance against the current year operating losses of our foreign entities. In determining the need for a valuation allowance, Wayfair has given consideration to the cumulative book income and loss positions of each of its entities as well as its worldwide cumulative income position. We have assessed, on a jurisdictional basis, the available means of recovering deferred tax assets, including the ability to carry-back net operating losses, the existence of reversing temporary differences, the availability of tax planning strategies and available sources of future taxable income. At December 31, 2020, we maintain a full valuation allowance against our worldwide net deferred tax assets. As of December 31, 2020, Wayfair had federal net operating loss carryforwards available to offset future federal taxable income of $ 1.2 billion. In addition, Wayfair had state net operating loss carryforwards available in the amount of $ 1.0 billion which are available to offset future state taxable income. Of the federal net operating loss carryforwards, $ 150.7 million begin to expire in the year ending December 31, 2037. The remaining $ 1.0 billion of federal net operating loss carryforwards do not expire. The state net operating loss carryforwards begin to expire in the year ending December 31, 2023. Our ability to utilize these federal and state net operating loss carryforwards may be limited in the future if we experience an ownership change pursuant to Internal Revenue Code Section 382. An ownership change occurs when the ownership percentages of 5% or greater 81 Table of Contents Notes to Consolidated Financial Statements (Continued) stockholders change by more than 50% over a three-year period. Through December 31, 2020, we have determined that none of our tax attributes were subject to such a restrictive limitation. As of December 31, 2020, Wayfair also had foreign net operating loss carryforwards available to offset future foreign income of $ 949.8 million. The Canadian net operating loss of $ 18.2 million will expire in the year ending December 31, 2038. The remaining foreign net operating loss carryforwards do not expire. As of December 31, 2020, Wayfair has not provided for U.S. deferred income taxes on undistributed earnings of its foreign subsidiaries of approximately $ 6.0 million since these earnings are deemed to be indefinitely reinvested. Upon distribution of those earnings in the form of dividends or otherwise, we could be subject to income taxes as well as withholding taxes. The amount of taxes attributable to the undistributed earnings is immaterial. Wayfair establishes reserves for uncertain tax positions based on management's assessment of exposures associated with tax deductions, permanent tax differences and tax credits. The tax reserves are analyzed periodically and adjustments are made as events occur to warrant adjustment to the reserve. Reserves for uncertain tax positions as of December 31, 2020 and 2019 are not material and would not impact the effective tax rate if recognized as a result of the valuation allowance maintained against our net deferred tax assets. Wayfair's policy is to recognize interest and penalties related to unrecognized tax benefits and penalties as a component of the provision for income taxes, net. Related to the unrecognized tax benefits noted above, we did not accrue any penalties and interest during 2020, 2019 or 2018 because we believe that such additional interest and penalties would be insignificant. Wayfair's tax jurisdictions include the U.S., the UK, Germany, Ireland, Canada, Hong Kong and the British Virgin Islands. The statute of limitations with respect to our U.S. federal income taxes has expired for years prior to 2017. The relevant U.S. state statutes vary and years prior to 2016 are generally closed. The statute of limitations for our foreign income taxes vary, but have expired for years prior to 2016. However, preceding years remain open to examination by U.S. federal and state and foreign taxing authorities to the extent of future utilization of net operating losses generated in each preceding year. 12. Earnings (Loss) per Share The following table presents the calculation of basic and diluted earnings (loss) per share: Year Ended December 31, 2020 2019 2018 (in thousands, except per share data) Numerator: Numerator for basic EPS - Net income (loss) $ 184,996 $ ( 984,584 ) $ ( 504,080 ) Effect of dilutive securities: Interest expense associated with convertible debt instruments — — — Numerator for diluted EPS - net income (loss) available to common stockholders after the effect of dilutive securities $ 184,996 $ ( 984,584 ) $ ( 504,080 ) Denominator: Denominator for basic EPS - weighted-average number of shares of common stock outstanding 95,825 92,200 89,472 Effect of dilutive securities: Employee stock options 29 — — Restricted stock units 3,483 — — Convertible debt instruments — — — Dilutive potential common shares 3,512 — — Denominator for diluted EPS - adjusted weighted-average number of shares of common stock outstanding after the effect of dilutive securities 99,337 92,200 89,472 Earnings (Loss) per Share: Basic $ 1.93 $ ( 10.68 ) $ ( 5.63 ) Diluted $ 1.86 $ ( 10.68 ) $ ( 5.63 ) 82 Table of Contents Notes to Consolidated Financial Statements (Continued) The potential common shares from anti-dilutive securities excluded from the weighted-average shares of common stock used to calculate diluted earnings (loss) per share were as follows: Year Ended December 31, 2020 2019 2018 (in thousands) Outstanding employee stock options — 44 80 Unvested restricted common stock — — 20 Unvested restricted stock units 192 8,113 7,971 Shares related to convertible debt instruments 20,115 15,474 9,084 Total 20,307 23,631 17,155 Wayfair may settle conversions of the Non-Accreting Notes in cash, shares of Wayfair's Class A common stock or any combination thereof at its election. Wayfair will settle conversions of the 2025 Accreting Notes in shares. T he Capped Calls are generally expected to reduce the potential dilution of Wayfair's Class A common stock upon any conversion of the Notes and/or offset the cash payments Wayfair is required to make in excess of the principal amount of the Notes upon conversion of the Notes if the market price per share of Wayfair’s Class A common stock is greater than the strike price of the Capped Calls (which corresponded to the initial conversion price of the Non-Accreting Notes and is subject to certain adjustments under the terms of the Capped Calls), with such reduction and/or offset subject to the Initial Cap Price. The number of shares of Wayfair's Class A common stock potentially issuable and obtainable at the respective conversion prices of the Notes and the Capped Calls, respectively, as of December 31, 2020, are as follows: 2022 Notes / 2022 Capped Calls 2024 Notes / 2024 Capped Calls 2026 Notes / 2026 Capped Calls 2025 Accreting Notes 2025 Notes / 2025 Capped Calls (in thousands) Shares potentially issuable from convertible debt instruments 173 4,940 6,390 3,979 3,639 Shares obtainable from the exercise of capped calls ( 1,347 ) ( 2,322 ) ( 3,003 ) — ( 1,710 ) Total ( 1,174 ) 2,618 3,387 3,979 1,929 For more information on the structure of the Notes and the Capped Calls, including potential adjustments to the conversion prices used to determine the shares presented in the preceding table, see Note 6, Debt and Other Financing . 13. Segment and Geographic Information Operating segments are defined as components of an enterprise for which separate financial information is available that is evaluated on a regular basis by the Chief Operating Decision Maker ("CODM") in deciding how to allocate resources to an individual segment and in assessing performance. Wayfair’s CODM is its Chief Executive Officer. Wayfair's operating and reportable segments are the U.S. and International. These segments reflect the way the CODM allocates resources and evaluates financial performance, which is based upon each segment's Adjusted EBITDA. Adjusted EBITDA is defined as net income (loss) before depreciation and amortization, equity-based compensation and related taxes, interest (expense), net, other (expense) income, net, provision for income taxes, net, non-recurring items and other items not indicative of our ongoing operating performance. These charges are excluded from the evaluation of segment performance because it facilitates reportable segment performance comparisons on a period-to-period basis as these costs may vary independent of business performance. The accounting policies of the segments are the same as those described in Note 1, Summary of Significant Accounting Policies. Wayfair allocates certain operating expenses to the operating and reportable segments, including customer service and merchant fees and selling, operations, technology, general and administrative expenses based on the usage and relative contribution provided to the segments. It excludes from the allocations certain operating expense lines, including depreciation and amortization, equity-based compensation and related taxes, interest (expense), net, other (expense) income, net and provision for income taxes, net. There are no revenue transactions between Wayfair's reportable segments. 83 Table of Contents Notes to Consolidated Financial Statements (Continued) U.S. The U.S. segment primarily consists of amounts earned through product sales through Wayfair's family of sites in the U.S. International The International segment primarily consists of amounts earned through product sales through Wayfair's international sites. Net revenue from external customers for each group of similar products and services are not reported to the CODM. Separate identification of this information for purposes of segment disclosure is impractical, as it is not readily available and the cost to develop it would be excessive. No individual country outside the U.S. provided greater than 10% of consolidated net revenue. The following tables present net revenues and Adjusted EBITDA attributable to Wayfair’s reportable segments for the periods presented: Year Ended December 31, 2020 2019 2018 (in thousands) U.S. net revenue $ 11,900,658 $ 7,764,831 $ 5,813,070 International net revenue 2,244,498 1,362,226 966,104 Total net revenue $ 14,145,156 $ 9,127,057 $ 6,779,174 Year Ended December 31, 2020 2019 2018 (in thousands) Adjusted EBITDA: U.S. $ 1,041,892 $ ( 179,010 ) $ ( 19,049 ) International ( 95,004 ) ( 317,534 ) ( 195,937 ) Total reportable segments Adjusted EBITDA 946,888 ( 496,544 ) ( 214,986 ) Less: reconciling items (1) ( 761,892 ) ( 488,040 ) ( 289,094 ) Net income (loss) $ 184,996 $ ( 984,584 ) $ ( 504,080 ) (1) The following adjustments are made to reconcile total reportable segments Adjusted EBITDA to consolidated net income (loss): Year Ended December 31, 2020 2019 2018 (in thousands) Depreciation and amortization $ 285,711 $ 192,419 $ 123,542 Equity-based compensation and related taxes 296,872 240,978 136,415 Interest expense, net 146,397 54,514 28,560 Other expense (income), net 8,633 ( 2,881 ) 204 Provision for income taxes, net 20,323 3,010 2,037 Other (1) 3,956 — ( 1,664 ) Total reconciling items $ 761,892 $ 488,040 $ 289,094 (1) We recorded a $ 4.0 million loss related to severance costs associated with February 2020 workforce reductions. The values were recorded in selling, operations, technology, general and administrative expenses. In 2018, we terminated 84 Table of Contents Notes to Consolidated Financial Statements (Continued) the lease of a warehouse we had vacated in 2017 and recorded a one-time gain of $ 1.7 million related to the difference in the expected future net lease commitments and the actual costs incurred to terminate the lease. The following table presents long-lived assets attributable to Wayfair's reportable segments reconciled to the amounts: Year Ended December 31, 2020 2019 (in thousands) Geographic long-lived assets: U.S. $ 718,681 $ 731,963 International 163,753 144,803 Total reportable segment long-lived assets 882,434 876,766 Plus: reconciling corporate long-lived assets 610,247 511,178 Total long-lived assets $ 1,492,681 $ 1,387,944 U.S. and International long-lived assets consist of property and equipment, net and operating lease ROU assets. Corporate long-lived assets consist of property and equipment, net and operating lease ROU assets at our corporate facilities. The following table presents total assets attributable to Wayfair's reportable segments reconciled to consolidated amounts: Year Ended December 31, 2020 2019 (in thousands) Assets by segment: U.S. $ 1,122,391 $ 1,076,733 International 214,707 190,167 Total reportable segment assets 1,337,098 1,266,900 Plus: reconciling corporate assets 3,232,831 1,686,148 Total assets $ 4,569,929 $ 2,953,048 U.S. and International segment assets consist primarily of accounts receivable, net, inventories, prepaid expenses and other current assets, property and equipment, net and operating lease ROU assets. Corporate assets include cash and cash equivalents, short- and long-term investments, long-lived assets at our corporate facilities, capitalized internal-use software and website development costs and other noncurrent assets. 14. Related Party Transactions As discussed in Note 6, Debt and Other Financing , in April 2020, pursuant to the terms of the amended and restated purchase agreement, dated April 7, 2020 (the "Purchase Agreement"), Wayfair issued $ 535.0 million in aggregate original principal amount of 2025 Accreting Notes. The issuance of the 2025 Accreting Notes constitutes a related party transaction because of Michael W. Choe's positions as a director of Wayfair (as of May 12, 2020) and Managing Director and Chief Executive Officer of Charlesbank Capital Partners, LLC, the sole owner of the ultimate general partner of Charlesbank, a party to the Purchase Agreement; Michael Kumin's positions as a director of Wayfair and a Managing Partner at Great Hill Partners, LP, Manager of the ultimate general partner of Great Hill, a party to the Purchase Agreement; and the limited partnership interests held by Niraj Shah and Steve Conine, Wayfair's co-founders and co-chairmen, in affiliates of Great Hill and Charlesbank. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. 85 Table of Contents