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 (PCAOB ID: 42 ) 51 Consolidated Balance Sheets 53 Consolidated Statements of Operations 54 Consolidated Statements of Comprehensive (Loss) Income 55 Consolidated Statement of Stockholders' Deficit 56 Consolidated Statements of Cash Flows 57 Notes to Consolidated Financial Statements 58 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, 2022 and 2021, the related consolidated statements of operations, comprehensive (loss) income, stockholders’ deficit and cash flows for each of the three years in the period ended December 31, 2022, 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, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, 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, 2022, 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 23, 2023 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 convertible debt in 2021. 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 Matter The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter 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 matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. 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 $12.2 billion for the year ended December 31, 2022, which was net of sales return reserves of $52 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. Management bases the sales returns estimate on prior returns history, recent trends, and projections for returns on sales in the current period. 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 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 performed procedures which included (1) agreeing revenues by month in the analysis to the Company’s general ledger, (2) examining monthly sales return levels for the 12 months before year end and the period subsequent to year end for unusual items or trends not consistent with the Company’s historical analysis of product returns, and (3) testing the historical accuracy of the Company’s estimates of 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. /s/ Ernst & Young LLP We have served as the Company’s auditor since 2012. Boston, Massachusetts February 23, 2023 52 Table of Contents WAYFAIR INC. CONSOLIDATED BALANCE SHEETS December 31, 2022 2021 (in millions, except share and per share data) Assets: Current assets Cash and cash equivalents $ 1,050 $ 1,706 Short-term investments 228 693 Accounts receivable, net 272 226 Inventories 90 69 Prepaid expenses and other current assets 293 318 Total current assets 1,933 3,012 Operating lease right-of-use assets 839 849 Property and equipment, net 774 674 Other non-current assets 34 35 Total assets $ 3,580 $ 4,570 Liabilities and Stockholders' Deficit: Current liabilities Accounts payable $ 1,204 $ 1,166 Other current liabilities 868 1,051 Total current liabilities 2,072 2,217 Long-term debt 3,137 3,052 Operating lease liabilities, net of current 893 892 Other non-current liabilities 28 28 Total liabilities 6,130 6,189 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, 2022 and 2021 — — Class A common stock, par value $ 0.001 per share, 500,000,000 shares authorized, 82,903,862 and 79,150,937 shares issued and outstanding at December 31, 2022 and 2021 — — Class B common stock, par value $ 0.001 per share, 164,000,000 shares authorized, 25,691,397 and 25,691,761 shares issued and outstanding at December 31, 2022 and 2021 — — Additional paid-in capital 737 337 Accumulated deficit ( 3,280 ) ( 1,949 ) Accumulated other comprehensive loss ( 7 ) ( 7 ) Total stockholders' deficit ( 2,550 ) ( 1,619 ) Total liabilities and stockholders' deficit $ 3,580 $ 4,570 See notes to consolidated financial statements. 53 Table of Contents WAYFAIR INC. CONSOLIDATED STATEMENTS OF OPERATIONS Year Ended December 31, 2022 2021 2020 (in millions, except per share data) Net revenue $ 12,218 $ 13,708 $ 14,145 Cost of goods sold 8,802 9,813 10,033 Gross profit 3,416 3,895 4,112 Operating expenses: Customer service and merchant fees 632 584 510 Advertising 1,473 1,378 1,412 Selling, operations, technology, general and administrative 2,625 2,015 1,826 Impairment and other related net charges 39 12 — Restructuring charges 31 — 4 Total operating expenses 4,800 3,989 3,752 (Loss) income from operations ( 1,384 ) ( 94 ) 360 Interest expense, net ( 27 ) ( 32 ) ( 146 ) Other expense, net ( 4 ) ( 4 ) ( 9 ) Gain on debt extinguishment 96 — — (Loss) income before income taxes ( 1,319 ) ( 130 ) 205 Provision for income taxes, net 12 1 20 Net (loss) income $ ( 1,331 ) $ ( 131 ) $ 185 (Loss) earnings per share: Basic $ ( 12.54 ) $ ( 1.26 ) $ 1.93 Diluted $ ( 12.54 ) $ ( 1.26 ) $ 1.86 Weighted-average number of shares of common stock outstanding used in computing per share amounts: Basic 106 104 96 Diluted 106 104 99 See notes to consolidated financial statements. 54 Table of Contents WAYFAIR INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME Year Ended December 31, 2022 2021 2020 (in millions) Net (loss) income $ ( 1,331 ) $ ( 131 ) $ 185 Other comprehensive (loss) income: Foreign currency translation adjustments 1 ( 2 ) ( 3 ) Net unrealized loss on available-for-sale investments ( 1 ) — — Comprehensive (loss) income $ ( 1,331 ) $ ( 133 ) $ 182 See notes to consolidated financial statements. 55 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 millions) Balance at December 31, 2019 94 $ — $ 1,123 $ ( 2,065 ) $ ( 2 ) $ ( 944 ) Net income — — — 185 — 185 Other comprehensive loss — — — — ( 3 ) ( 3 ) Issuance of common stock upon vesting of RSUs 3 — — — — — Equity-based compensation — — 294 — — 294 Repurchase of common stock ( 1 ) — ( 380 ) — — ( 380 ) Shares issued upon conversion of convertible notes 4 — 426 — — 426 Reacquisition of equity component from repurchases and conversions of convertible notes, net of taxes — — ( 842 ) — — ( 842 ) Cumulative effect of adopting new credit allowance standard — — — ( 6 ) — ( 6 ) Equity component of issuance of convertible notes, net of premium paid on capped calls — — 78 — — 78 Balance at December 31, 2020 100 — 699 ( 1,886 ) ( 5 ) ( 1,192 ) Net loss — — — ( 131 ) — ( 131 ) Other comprehensive loss — — — — ( 2 ) ( 2 ) Issuance of common stock upon vesting of RSUs 2 — — — — Equity-based compensation — — 372 — — 372 Repurchase of common stock ( 1 ) — ( 300 ) — — ( 300 ) Shares issued upon conversion of convertible notes 4 — 265 — — 265 Cumulative effect of adopting new convertible debt standard — — ( 699 ) 68 — ( 631 ) Balance at December 31, 2021 105 — 337 ( 1,949 ) ( 7 ) ( 1,619 ) Net loss — — — ( 1,331 ) — ( 1,331 ) Issuance of common stock upon vesting of RSUs 5 — — — — — Equity-based compensation — — 555 — — 555 Repurchase of common stock ( 1 ) — ( 75 ) — — ( 75 ) Premiums paid for capped calls — — ( 80 ) — — ( 80 ) Balance at December 31, 2022 109 $ — $ 737 $ ( 3,280 ) $ ( 7 ) $ ( 2,550 ) See notes to consolidated financial statements. 56 Table of Contents WAYFAIR INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended December 31, 2022 2021 2020 (in millions) Cash flows (for) from operating activities: Net (loss) income $ ( 1,331 ) $ ( 131 ) $ 185 Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities Depreciation and amortization 371 322 286 Equity-based compensation expense 513 344 276 Amortization of discount and issuance costs on convertible notes 8 7 134 Impairment and other related net charges 39 12 — Gain on debt extinguishment ( 96 ) — — Other non-cash adjustments 41 6 13 Changes in operating assets and liabilities: Accounts receivable, net ( 48 ) ( 118 ) ( 15 ) Inventories ( 21 ) ( 17 ) 10 Prepaid expenses and other current assets 26 ( 28 ) ( 61 ) Other assets 1 — ( 1 ) Accounts payable and other current liabilities ( 177 ) 9 532 Other liabilities — 4 58 Net cash (used in) provided by operating activities ( 674 ) 410 1,417 Cash flows from (for) investing activities: Purchase of short- and long-term investments ( 430 ) ( 989 ) ( 481 ) Sale and maturities of short- and long-term investments 889 749 580 Purchase of property and equipment ( 186 ) ( 101 ) ( 186 ) Site and software development costs ( 272 ) ( 179 ) ( 149 ) Other investing activities, net — 5 — Net cash provided by (used in) investing activities 1 ( 515 ) ( 236 ) Cash flows from (for) financing activities: Repurchase of common stock ( 75 ) ( 300 ) ( 380 ) Proceeds from issuance of convertible notes, net of issuance costs 678 — 2,028 Premiums paid for capped call confirmations ( 80 ) — ( 255 ) Payment of principal upon maturity of convertible debt ( 3 ) — — Proceeds from borrowings — — 200 Repayment of borrowings — — ( 200 ) Payments to extinguish convertible debt ( 504 ) — ( 1,040 ) Other financing activities, net — ( 3 ) — Net cash provided by (used in) financing activities 16 ( 303 ) 353 Effect of exchange rate changes on cash and cash equivalents 1 ( 16 ) 13 Net (decrease) increase in cash and cash equivalents ( 656 ) ( 424 ) 1,547 Cash and cash equivalents: Beginning of year 1,706 2,130 583 End of year $ 1,050 $ 1,706 $ 2,130 Supplemental Cash Flow Information: Cash paid for interest on long-term debt $ 27 $ 27 $ 17 Non-cash impact to equity upon conversion of convertible notes, net of taxes $ — $ 265 $ 307 Purchase of property and equipment included in accounts payable and other liabilities $ ( 6 ) $ 41 $ 30 See notes to consolidated financial statements. 57 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 40 million products from over 20 thousand suppliers. These financial statements consolidate the operations and accounts of Wayfair Inc. and its wholly-owned subsidiaries. Unless the context indicates otherwise, “Wayfair,” “the company," or similar terms refer to Wayfair Inc. and its subsidiaries. All intercompany accounts and transactions have been eliminated. Use of Estimates The consolidated financial statements are prepared 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. 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 and certificates of deposits with original maturities of three months or less, are carried at cost, which approximates fair value. Investments Wayfair classifies investments in certificates of deposits and marketable securities with original maturities of greater than three months as short-term investments on the consolidated balance sheets. Short-term investments mature in less than twelve months from the balance sheet date. The cost basis of an investment sold is determined 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 horizon for selling. From time to time, Wayfair may enter into equity investments that align with organizational strategies and growth initiatives. Equity investments in companies for which the Company does not have the ability to exercise significant influence are accounted for as equity securities. These are measured at fair value and classified as other non-current assets within the consolidated balance sheets with observable changes recorded within other expense, net on the consolidated statements of operations. Equity Method Investments Wayfair accounts for investments using the equity method of accounting when the Company has the ability to exercise significant influence, but not controlling financial interest over an investee. The equity method investments are classified as other non-current assets within the consolidated balance sheets and the proportional share of income or loss is recorded within other expense, net on the consolidated statements of operations. Equity method investments are reviewed for indicators of impairment on a quarterly basis. An equity method investment is written down to the estimated fair value if there is evidence of a loss in value which is other-than-temporary. 58 Table of Contents Notes to Consolidated Financial Statements (Continued) Concentrations of Credit Risk Financial instruments that subject Wayfair to credit risk consist of cash and cash equivalents, short-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, 2022 and 2021, Wayfair had $ 122 million and $ 187 million in banks located outside of the U.S. The risk for short-term investments is minimized by Wayfair's policy of investing in financial instruments issued by highly-rated financial institutions. Accounts Receivable, 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 customer risk 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 98 % of the net revenue recognized for the twelve months ended December 31, 2022 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, Net 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. 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. 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. 59 Table of Contents Notes to Consolidated Financial Statements (Continued) Leases Wayfair generally leases office and warehouse facilities under noncancelable agreements. Upon each agreement's commencement date, Wayfair determines if the agreement is part of an arrangement that is or that contains a lease, the lease classification and recognizes the ROU assets and lease liabilities for all leases with the exception of leases with terms of 12 months or less. Wayfair has arrangements with lease and non-lease components, and accounts for lease and non-lease components as a single lease component for corporate headquarters offices and field offices. All other lease arrangements for lease and non-lease components are accounted for separately. Operating lease ROU assets are classified in operating lease right-of-use assets within 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, 2022 and 2021 Wayfair 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 the leases do not provide an implicit rate, Wayfair uses an estimated 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. Wayfair adjusts the rate for the impact of collateralization, the lease term and other specific terms included in each lease arrangement. The IBR is determined at lease commencement and is subsequently reassessed as necessary 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. Lease terms may include options to extend or terminate the lease when it is reasonably certain that Wayfair will exercise that option. Contingent Liabilities Certain contingent liabilities that arise in the ordinary course of business activities are accrued for as 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. After applying judgement, Wayfair does not accrue for contingent losses that are considered to be reasonably possible, but not probable; however, the range of such reasonably possible losses is disclosed. Foreign Currency Translation These financial statements are consolidated and presented in the U.S. dollar. Subsidiaries with non-U.S. dollar functional currencies are translated to the U.S. dollar 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 (loss) income below net (loss) income and accumulated other comprehensive loss within total stockholders’ deficit. Transaction gains and losses are included in other expense, net, which is reflected in net (loss) income. Revenue Recognition Wayfair generates net revenue primarily 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 as 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 the Credit Card Program. In exchange for providing intellectual property as part of the Credit Card Program, Wayfair records net revenue based on spending activity and 60 Table of Contents Notes to Consolidated Financial Statements (Continued) 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 primarily 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 within other current liabilities, 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 within other current liabilities, 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. Cost of Goods Sold Costs of goods sold consists of: Product Costs: Wayfair capitalizes into inventory the price paid to suppliers for products purchased by Wayfair, 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. Wayfair receives vendor allowances or discounts from certain vendors. These vendor allowances reduce the carrying cost of the inventory and related cost of goods sold when the inventory is sold. Product costs are also offset by media and merchandising offerings provided to 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 the 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 $ 2.2 billion, $ 2.1 billion and $ 2.0 billion, for the years ended December 31, 2022, 2021 and 2020. 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 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 $ 258 million, $ 275 million and $ 268 million in the years ended December 31, 2022, 2021 and 2020. 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. 61 Table of Contents Notes to Consolidated Financial Statements (Continued) Selling, Operations, Technology, General and Administrative Selling, operations, technology, general and administrative expenses primarily include labor-related costs, including equity-based compensation, of the operations group, which includes the supply chain and logistics team, the technology team that builds and supports sites, category managers, buyers, site merchandisers, merchants, marketers and the team who executes the advertising strategy and the 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 restricted common stock and restricted stock units. Restricted stock values are determined based on the quoted market price of Wayfair’s 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. 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. 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. Wayfair evaluates at the end of each reporting period whether some or all of the undistributed earnings of foreign subsidiaries are permanently reinvested. The 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. (Loss) Earnings per Share Wayfair follows the two-class method when computing (loss) earnings per share for its two issued classes of common stock - Class A and Class B. Basic (loss) earnings per share is computed using the weighted-average number of shares of common stock outstanding during the period. Diluted (loss) earnings 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 the 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 (loss) earnings per share by application of the treasury stock method. The dilutive effect of shares issuable upon conversion of the convertible debt instruments are included in the calculation of diluted (loss) earnings per share under the if-converted method. For periods in which Wayfair has reported net losses, diluted (loss) earnings per share is the same as basic (loss) earnings 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 (loss) earnings per share. Wayfair allocates undistributed earnings between the classes on a one-to-one basis when computing (loss) earnings per share. As a result, basic and diluted (loss) earnings per Class A and Class B shares are equivalent. 62 Table of Contents Notes to Consolidated Financial Statements (Continued) Previously Adopted Accounting Pronouncements Convertible Debt Wayfair adopted ASU 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") on January 1, 2021 using the modified retrospective approach for all financial instruments that are outstanding as of the adoption date. The new standard eliminates the cash conversion and beneficial conversion feature models that previously required separate accounting for conversion features. Entities that had those conversion features will report less interest expense as those conversion features were recorded as debt discounts which were amortized over the term of the debt. In addition, this ASU requires the application of the if-converted method when calculating diluted earnings per share. Under the new standard, the conversion of debt that is accounted for as a liability in its entirety will not result in any gain or loss if the conversion feature is exercised according to the original conversion terms. If those terms allowed the issuer to include cash as part of the settlement of the conversion feature, the issuer will first reduce the carrying amount of the convertible debt, including any unamortized premium, discount or issuance costs, by the value of the cash or other assets transferred and then recognize the remaining carrying value of the debt in the capital accounts. 2. Supplemental Financial Statement Disclosures Accounts Receivable, Net As of December 31, 2022, accounts receivable was $ 272 million, net of allowance for credit losses of $ 24 million. As of December 31, 2021, accounts receivable was $ 226 million, net of allowance for credit losses of $ 12 million. The changes in the allowance for credit losses were not material for the year ended December 31, 2022. Management believes credit risk is mitigated since approximately 98 % of the net revenue recognized for the year ended December 31, 2022 was collected in advance of recognition. Prepaid Expenses and Other Current Assets The following table presents the components of prepaid expenses and other current assets as of December 31, 2022 and 2021: December 31, 2022 2021 (in millions) Prepaid expenses and other current assets: Deferred costs in transit $ 96 $ 122 Prepaid expenses 95 93 Supplier receivables and credits receivable 69 70 Other current assets 33 33 Total prepaid expenses and other current assets $ 293 $ 318 Other Non-current Assets The following table presents the components of other non-current assets as of December 31, 2022 and 2021: December 31, 2022 2021 (in millions) Other non-current assets: Goodwill and intangible assets, net $ 15 $ 16 Long-term investments 11 8 Other non-current assets 8 11 Total other non-current assets $ 34 $ 35 63 Table of Contents Notes to Consolidated Financial Statements (Continued) Amortization expense related to intangible assets was $ 1 million, $ 1 million and $ 2 million for the years ended December 31, 2022, 2021 and 2020. Goodwill was $ 0.4 million for the years ended December 31, 2022 and 2021. For the years ended December 31, 2022, 2021 and 2020, no indicators of impairment of goodwill or intangible assets were identified and therefore no impairment has been recorded. Other Current Liabilities The following table presents the components of other current liabilities as of December 31, 2022 and 2021: December 31, 2022 2021 (in millions) Other current liabilities: Unearned revenue $ 214 $ 299 Employee compensation and related benefits 102 176 Current operating lease liabilities (Note 5) 125 110 Advertising 98 83 Sales tax payable 62 61 Sales return allowance 52 61 Other accrued expenses and current liabilities 215 261 Total other current liabilities $ 868 $ 1,051 Contractual liabilities included in unearned revenue and other accrued expenses and current liabilities were $ 214 million and $ 10 million, at December 31, 2022, and $ 299 million and $ 7 million, at December 31, 2021. During the year ended December 31, 2022, Wayfair recognized $ 216 million and $ 4 million of net revenue included in unearned revenue and other accrued expenses and current liabilities, which was recorded as of December 31, 2021. Restructuring Charges During the third quarter of 2022, Wayfair announced a workforce reduction involving approximately 870 employees in connection with its previously announced plans to manage operating expenses and realign investment priorities. During the year ended December 31, 2022, Wayfair incurred a total of $ 31 million of costs, consisting primarily of one-time employee severance and benefit costs, recorded to restructuring charges within the consolidated and condensed statements of operations. As of December 31, 2022, substantially all payments related to the employee severance and benefits costs were paid. On January 20, 2023, Wayfair announced an update to the Company’s cost efficiency plan, including a workforce reduction involving approximately 1,750 employees. As a result of this workforce reduction, Wayfair expects to incur between approximately $ 68 million and $ 78 million of costs, consisting primarily of employee severance and benefit costs, most of which are expected to be incurred in the first quarter of 2023. 3. Cash and Cash Equivalents, Investments and Fair Value Measurements Investments As of December 31, 2022 and 2021, 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. Wayfair did no t have any realized gains nor losses during the years ended December 31, 2022 and 2021. During the year ended December 31, 2020, Wayfair collected $ 161 million of proceeds from the sale of long-term investments and recognized a realized gain of $ 1 million. During the years ended December 31, 2022, 2021 and 2020, Wayfair recorded interest income, including interest earned from cash and cash equivalents and the marketable securities, of $ 13 million, $ 5 million and $ 6 million. During the years ended December 31, 2022, 2021 and 2020, Wayfair did not recognize any credit losses related to its available-for-sale debt securities. Further, as of December 31, 2022 and 2021, Wayfair did not record an allowance for credit losses related to its available-for-sale debt securities. 64 Table of Contents Notes to Consolidated Financial Statements (Continued) The following tables present details of Wayfair’s investment securities as of December 31, 2022 and 2021: December 31, 2022 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value (in millions) Short-term: Investment securities $ 229 $ — $ ( 1 ) $ 228 Total $ 229 $ — $ ( 1 ) $ 228 December 31, 2021 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value (in millions) Short-term: Investment securities $ 693 $ — $ — $ 693 Total $ 693 $ — $ — $ 693 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. Wayfair classifies cash equivalents and certificate of deposits within Level 1 because these are valued using quoted market prices. The fair value of Level 1 financial assets is based on quoted market prices of the identical underlying security. Wayfair classifies short-term investments within Level 2 because unadjusted quoted prices for identical or similar assets in markets are not active. Wayfair does not have assets that are classified as Level 3. 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, 2022 and 2021: December 31, 2022 Level 1 Level 2 Level 3 Total (in millions) Cash and cash equivalents: Cash $ 430 $ — $ — $ 430 Cash equivalents 620 — — 620 Total cash and cash equivalents 1,050 — — 1,050 Short-term investments: Investment securities — 228 — 228 Total $ 1,050 $ 228 $ — $ 1,278 65 Table of Contents Notes to Consolidated Financial Statements (Continued) December 31, 2021 Level 1 Level 2 Level 3 Total (in millions) Cash and cash equivalents: Cash $ 906 $ — $ — $ 906 Cash equivalents 800 — — 800 Total cash and cash equivalents 1,706 — — 1,706 Short-term investments: Investment securities — 693 — 693 Total $ 1,706 $ 693 $ — $ 2,399 4. Property and Equipment, net The following table summarizes property and equipment, net as of December 31, 2022 and 2021: December 31, 2022 2021 (in millions) Furniture and computer equipment $ 593 $ 557 Site and software development costs 829 592 Leasehold improvements 544 457 Construction in progress 36 35 2,002 1,641 Less: Accumulated depreciation and amortization ( 1,228 ) ( 967 ) Property and equipment, net $ 774 $ 674 Depreciation and amortization expense was $ 370 million, $ 322 million and $ 284 million, of which $ 224 million, $ 171 million and $ 132 million was attributable to the amortization expense of site and software development costs for the years ended December 31, 2022, 2021 and 2020. Total costs capitalized of site and software development costs, net of accumulated amortization, totaled $ 283 million and $ 193 million as of December 31, 2022 and 2021. Impairment and other related net charges For the year ended December 31, 2022, Wayfair recorded a charge of $ 15 million for the non-cash impairment of fixed assets. This is inclusive of $ 7 million, related to an impairment of a U.S. office location due to current sublease market conditions and $ 8 million for other non-cash impairment charges, related to construction in progress assets at an International warehouse. For the year ended December 31, 2021, in connection with the consolidation of certain customer service centers in identified U.S. locations, Wayfair recorded a charge of $ 5 million for the non-cash impairment of fixed assets. For further information, refer to Note 5 , Leases. For the year ended December 31, 2020, no impairment of long-lived assets had been recorded. 5. Leases Wayfair has lease arrangements for warehouses, 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 2043. Operating lease expense was $ 180 million, $ 160 million and $ 159 million for the years ended December 31, 2022, 2021 and 2020. Sublease income was $ 14 million, $ 17 million, and $ 11 million for the years ended December 31, 2022, 2021 and 2020. 66 Table of Contents Notes to Consolidated Financial Statements (Continued) The following table presents other information related to leases: Year Ended December 31, 2022 2021 (in millions) Supplemental cash flow information: Cash payments included in operating cash flows from lease arrangements $ 189 $ 169 Right-of-use assets obtained in exchange for lease obligations $ 170 $ 183 December 31, 2022 December 31, 2021 Additional lease information: Weighted average remaining lease term 8 years 8 years Weighted average discount rate 6.8 % 6.0 % Future minimum lease payments under non-cancellable leases as of December 31, 2022 were as follows: Amount (in millions) 2023 $ 188 2024 199 2025 193 2026 177 2027 151 Thereafter 437 Total future minimum lease payments 1,345 Less: Imputed interest ( 327 ) Total $ 1,018 The following table presents total operating leases liabilities: December 31, 2022 2021 (in millions) Balance sheet line item: Other current liabilities $ 125 $ 110 Operating lease liabilities, net of current 893 892 Total operating leases liabilities $ 1,018 $ 1,002 As of December 31, 2022, Wayfair has entered into $ 279 million of additional operating leases, primarily related to warehouse and retail leases that have not yet commenced. As there is no control of the underlying assets during the construction period, Wayfair is not considered the owner of the construction project for accounting purposes. These operating leases will commence between 2023 and 2027 with lease terms of 10 to 12 years. Impairment and other related net charges During the year ended December 31, 2022, Wayfair identified an indicator of impairment for one of the U.S. office locations, which was primarily due to current sublease market conditions. Wayfair performed an analysis and determined that the carrying amount of the asset group exceeded its fair value, which was calculated based on estimated future sublease income. As a result, Wayfair recorded a charge of $ 40 million during the year ended December 31, 2022, which included $ 32 million of non-cash impairment of the ROU asset, $ 7 million for the non-cash impairment of fixed assets and the remainder for other items. In the fourth quarter of 2022, Wayfair recorded a $ 9 million recovery related to the termination of the lease. 67 Table of Contents Notes to Consolidated Financial Statements (Continued) During the year ended December 31, 2021, Wayfair enacted a plan to consolidate certain customer service centers in identified U.S. locations. As a result, Wayfair recorded a charge of $ 12 million during the year ended December 31, 2021, which included $ 6 million for the non-cash impairment of ROU assets, $ 5 million for the non-cash impairment of fixed assets and the remainder for other items. For further information, refer to Note 4, Property and Equipment, net . 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, 2022 December 31, 2021 Debt Instrument Principal Amount Unamortized Debt Discount Net Carrying Amount Principal Amount Unamortized Debt Discount Net Carrying Amount (in millions) Revolving Credit Facility $ — $ — 2022 Notes $ — — — $ 3 — 3 2024 Notes 200 ( 1 ) 199 575 ( 6 ) 569 2025 Notes 1,289 ( 8 ) 1,281 1,518 ( 13 ) 1,505 2026 Notes 949 ( 7 ) 942 949 ( 9 ) 940 2027 Notes 690 ( 12 ) 678 — — — 2025 Accreting Notes 37 — 37 36 ( 1 ) 35 Total Debt $ 3,137 $ 3,052 Short-term debt — — Long-term debt $ 3,137 $ 3,052 Revolving Credit Facility On March 24, 2021, Wayfair and certain of its subsidiaries (together, the “Guarantors”), and Wayfair’s wholly-owned subsidiary Wayfair LLC, as borrower (the “Borrower”), entered into a new credit agreement (the “Credit Agreement”) with the lending institutions from time-to-time parties thereto and Citibank, N.A., in its capacity as administrative agent, collateral agent, swingline lender and a letter of credit issuer. The Credit Agreement provides for a $ 600 million senior secured revolving credit facility that matures on March 24, 2026 (the “Revolver”). The Revolver replaced the previous $ 200 million senior secured revolving credit facility (the “Previous Revolver”), which was set to mature on February 21, 2022. Wayfair paid all amounts owed under the Previous Revolver and terminated all lending commitments thereunder. Debt issuance costs for the Revolver are included in other non-current assets and are amortized to interest expense over the Revolver’s term. As of December 31, 2022, there were no revolving loans outstanding under the Revolver. Under the Credit Agreement, the Borrower may, from time to time, request letters of credit, which reduce the availability of credit under the Revolver. Wayfair had approximately $ 68 million outstanding letters of credit as of December 31, 2022, primarily as security for lease agreements, which reduced 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, the Borrower is required to make certain mandatory prepayments prior to maturity. The proceeds of the Revolver may be used to finance working capital, to refinance existing indebtedness and to provide funds for permitted acquisitions, repurchases of equity interests and other general corporate purposes. The Borrower’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’s domestic subsidiaries and 65 % of the capital stock of Wayfair’s first-tier foreign subsidiaries. 68 Table of Contents Notes to Consolidated Financial Statements (Continued) On October 11, 2021, the parties amended the Credit Agreement (“Amendment No. 1”) to reflect technical and administrative changes related to the phaseout of LIBOR and the implementation of SONIA with respect to loans denominated in Pounds Sterling. Following Amendment No. 1, the Revolver borrowings bear interest through maturity at a variable rate based upon, at the Borrower’s option, (i) the LIBOR rate, (ii) the base rate (which is the highest of (x) the 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 LIBOR rate) or (3) with respect to loans denominated in Pounds Sterling, the RFR rate (which is the greater of (x) the SONIA rate and (y) 0.00 %), plus, in each case an applicable margin. As of December 31, 2022, the applicable margin for LIBOR loans is 1.25 % per annum, the applicable margin for base rate loans is 0.25 % per annum and the applicable margin for RFR loans is 1.2826 % per annum. The applicable margin is subject to specified changes depending on Wayfair’s Consolidated Senior Secured Debt to Consolidated EBITDA Ratio, as defined in the Credit Agreement. The Credit Agreement contains affirmative and negative covenants customarily applicable to senior secured credit facilities, including covenants that, among other things, limit or restrict the ability of the Borrower 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, or 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 Credit Agreement requires Wayfair to maintain a Consolidated Senior Secured Debt to Consolidated EBITDA Ratio (as defined in the Credit Agreement) of 4.0 to 1.0, subject to a 0.5 step-up following certain permitted acquisitions. Wayfair does not expect any of these restrictions to affect or limit the ability to conduct business in the ordinary course. As of December 31, 2022, Wayfair was in compliance with all covenants. Convertible Non-Accreting Notes The following table summarizes certain terms related to the 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 2024 Notes November 1, 2024 1.125 % 1.5 % May 1 and November 1 2025 Notes October 1, 2025 0.625 % 0.9 % April 1 and October 1 2026 Notes August 15, 2026 1.000 % 1.2 % February 15 and August 15 2027 Notes September 15, 2027 3.250 % 3.6 % March 15 and September 15 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 September 2022, in connection with the issuance of the 2027 Notes, as defined below, Wayfair repurchased for cash approximately $ 375 million aggregate principal amount of the 2024 Notes. For more information, see “Extinguishment and Conversions of Notes” below. In August 2020, Wayfair issued $ 1.518 billion in aggregate principal amount of 0.625 % Convertible Senior Notes due 2025 (the “2025 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”). In September 2022, in connection with the issuance of the 2027 Notes, as defined below, Wayfair repurchased for cash approximately $ 229 million aggregate principal amount of the 2025 Notes. For more information, see “Extinguishment and Conversions of Notes” below. 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”). 69 Table of Contents Notes to Consolidated Financial Statements (Continued) In September 2022, Wayfair issued $ 690.0 million in aggregate principal amount of 3.25 % Convertible Senior Notes due 2027 (the “2027 Notes”), and together with the 2024 Notes, 2025 Notes, 2026 Notes, the “Non-Accreting Notes”), which included the exercise in full of a $ 90.0 million option granted to the initial purchasers. In connection with the issuance of the 2027 Notes, Wayfair entered into capped calls that covered, initially, the number of shares of Wayfair’s Class A common stock underlying the 2027 Notes, subject to anti-dilution adjustments substantially similar to those applicable to the 2027 Notes (the “2027 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 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 2.7 %. Seniority of the 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. 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 2025 Notes October 1, 2025 July 1, 2025 2.3972 $ 417.15 October 4, 2022 2026 Notes August 15, 2026 May 15, 2026 6.7349 $ 148.48 August 20, 2023 2027 Notes September 15, 2027 June 15, 2027 15.7597 $ 63.45 September 20, 2025 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. During the third quarter of 2022, upon maturity of the 2022 Notes, Wayfair paid in cash the remaining outstanding principal to the holders of the 2022 Notes. 70 Table of Contents Notes to Consolidated Financial Statements (Continued) 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 such Notes prior to certain specified dates (each, a “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), 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 5:00 p.m. (New York City time) (“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. Because the conditional conversion features of the 2024 Notes, 2025 Notes, 2026 Notes and 2027 Notes were not triggered during the calendar quarter ended December 31, 2022, the 2024 Notes, 2025 Notes, 2026 Notes, and 2027 Notes are not convertible during the calendar quarter ended March 31, 2023. The holders of the 2025 Accreting Notes may convert all or a portion of their 2025 Accreting Notes at any time prior to the close of business on 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. 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 if the holder elects to convert their Notes upon receiving notice of redemption. 71 Table of Contents Notes to Consolidated Financial Statements (Continued) Accounting for the Notes The Notes are recorded as a single unit within liabilities in the consolidated and condensed balance sheets as the conversion features within the Notes are not derivatives that require bifurcation and the Notes do not involve a substantial premium. Transaction costs to issue the Notes were recorded as direct deductions from the related debt liabilities and amortized to interest expense, net using the effective interest method over the terms of the corresponding Notes. Interest for the Accreting Notes is amortized to interest expense, net using the effective interest method over the term of the Accreting Notes and recorded to other long-term liabilities in the consolidated and condensed balance sheet. 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. Proceeds from Notes Transactions The net proceeds from the sale of the 2024 Notes, 2025 Notes, 2026 Notes, 2027 Notes and 2025 Accreting Notes were approximately $ 562 million, $ 1.5 billion, $ 935 million, $ 678 million and $ 527 million, after deducting the initial purchasers’ discounts, if applicable, and the offering expenses payable by Wayfair. Wayfair used approximately $ 93 million, $ 255 million, $ 146 million and $ 80 million of the net proceeds from the 2024 Notes, 2025 Notes, 2026 Notes and 2027 Notes, to purchase the Capped Calls. Wayfair intends 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. Wayfair may also use a portion of the net proceeds to finance acquisitions, strategic transactions, investments, repurchases of Class A common stock or the repayment, redemption, purchase or exchange of indebtedness (including the Notes). Partial Extinguishment of 2024 Notes and 2025 Notes During the year ended December 31, 2022, Wayfair used approximately $ 506 million of the net proceeds from the issuance of the 2027 Notes to repurchase for cash approximately $ 375 million aggregate principal amount of the 2024 Notes and approximately $ 229 million aggregate principal amount of the 2025 Notes, as well as aggregate accrued interest of $ 2 million for both the 2024 Notes and 2025 Notes, in privately negotiated repurchase transactions. In accounting for the repurchases of the 2024 Notes and 2025 Notes, Wayfair recorded a $ 96 million gain on debt extinguishment, representing the difference between the cash paid for principal of $ 504 million and the combined net carrying value of the 2024 Notes and 2025 Notes of $ 600 million. Conversions of Notes During the year ended December 31, 2022, there were no conversions of the Notes. Interest Expense The following table presents total interest expense recognized for the Notes for the years ended December 31: Year Ended December 31, 2022 2021 2020 Convertible Notes Contractual Interest Expense Debt Discount Amortization Total Interest Expense Contractual Interest Expense Debt Discount Amortization Total Interest Expense Contractual Interest Expense Debt Discount Amortization Total Interest Expense (in millions) 2022 Notes $ — $ — $ — $ — $ — $ — $ 1 $ 14 $ 15 2024 Notes 5 2 7 7 2 9 6 28 34 2025 Notes 9 3 12 10 3 13 4 20 24 2026 Notes 9 2 11 9 2 11 10 35 45 2027 Notes 7 1 8 — — — — — — 2025 Accreting Notes 1 — 1 ( 1 ) — ( 1 ) 8 26 34 Total $ 31 $ 8 $ 39 $ 25 $ 7 $ 32 $ 29 $ 123 $ 152 72 Table of Contents Notes to Consolidated Financial Statements (Continued) Fair Value of Notes The estimated fair value of the 2024 Notes, 2025 Notes, 2026 Notes, 2027 Notes and 2025 Accreting Notes was $ 169 million, $ 836 million, $ 553 million, $ 515 million and $ 17 million, as of December 31, 2022. 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, as defined in Note 3, Cash and Cash Equivalents, Investments and Fair Value Measurements . The if-converted value of the 2024 Notes, 2025 Notes, 2026 Notes, 2027 Notes and 2025 Accreting Notes did not exceed the principal value as of December 31, 2022. Capped Calls The 2024 Capped Calls, 2025 Capped Calls, 2026 Capped Calls and 2027 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 Non-Accreting Notes upon conversion of the Non-Accreting 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 correspond 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 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 2024 Capped Calls November 1, 2024 $ 219.63 150 % 2025 Capped Calls October 1, 2025 $ 787.08 150 % 2026 Capped Calls August 15, 2026 $ 280.15 150 % 2027 Capped Calls September 15, 2027 $ 97.62 100 % 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 and meet the requirements to be classified in equity. The premiums paid for the Capped Calls were included as a net reduction to additional paid-in capital within stockholders’ deficit when they were entered. 7. Commitments and Contingencies Purchase Obligations Wayfair has entered into purchase obligations that represent enforceable and legally binding software license and freight commitments. Payments due under these purchase obligations are $ 210 million in 2023, $ 184 million in 2024, $ 185 million in 2025, $ 2 million in 2026, $ 2 million in 2027 and none 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. The U.S. Supreme Court's decision in South Dakota v. Wayfair, Inc., removed a significant impediment to the enactment of laws imposing sales tax collection obligations on out-of-state e-commerce companies. 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, 2022 are not material to Wayfair's business and Wayfair does not expect the Court's decision to have a significant impact on its business. 73 Table of Contents Notes to Consolidated Financial Statements (Continued) 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. 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 $ 43 million, $ 35 million and $ 32 million in the years ended December 31, 2022, 2021 and 2020, respectively. 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, 2022, 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 82,903,862 and 79,150,937 shares of Class A common stock and 25,691,397 and 25,691,761 shares of Class B common stock were outstanding as of December 31, 2022 and 2021. 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, 2022, 56,347,017 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 in the open market, through privately negotiated transactions, or otherwise, including pursuant to a Rule 10b5-1 plan (the “2020 Repurchase Program”). On August 10, 2021, the Board authorized a new $ 1.0 billion share repurchase program on the same terms (the “2021 Repurchase Program,” together with the 2020 Repurchase Program, the “Repurchase Programs”). There is no stated expiration for the Repurchase Programs. Wayfair will begin repurchasing shares under the 2021 Repurchase Program upon the completion of the 2020 Repurchase Program. During the years ended December 31, 2022 and December 31, 2021, Wayfair repurchased 548,173 and 982,848 shares of Class A common stock for $ 75 million and $ 300 million, respectively, under authorized stock repurchase programs . 74 Table of Contents Notes to Consolidated Financial Statements (Continued) 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. In October 2022, the 2014 Plan was amended (the “Amended 2014 Plan”) by the stockholders of Wayfair to increase the aggregate number of shares of Class A common stock authorized for issuance under the 2014 Plan by 5,000,000 shares. The Amended 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. The Amended 2014 Plan initially made 8,603,066 shares of Class A common stock available for future award grants. The Amended 2014 Plan also contains an evergreen provision whereby the shares available for future grants are increased on the first day of each calendar year from January 1, 2016 through and including January 1, 2024. As of January 1, 2023, 4,379,140 shares of Class A common stock were available for future grant under the Amended 2014 Plan. Shares or RSUs forfeited, withheld for minimum statutory tax obligations, and unexercised stock option lapses from the Amended 2014 Plan are available for future grant under the Amended 2014 Plan. The following table presents activity relating to RSUs for the year ended December 31, 2022: Shares Weighted-Average Grant Date Fair Value Unvested at December 31, 2021 5,229,708 $ 208.62 RSUs granted 11,435,959 $ 68.61 RSUs vested ( 4,300,535 ) $ 121.58 RSUs forfeited/canceled ( 2,194,929 ) $ 151.84 Unvested at December 31, 2022 10,170,203 $ 100.13 The intrinsic value of RSUs vested was $ 291 million, $ 735 million, and $ 562 million and for the years ended December 31, 2022, 2021 and 2020. The aggregate intrinsic value of RSUs unvested was $ 334 million as of December 31, 2022. Unrecognized equity-based compensation expense related to RSUs expected to vest over time is $ 886 million with a weighted-average remaining vesting term of 1.0 year as of December 31, 2022. Equity-based compensation was classified as follows in the consolidated statements of operations for the years ended December 31: Year Ended December 31, 2022 2021 2020 (in millions) Cost of goods sold $ 11 $ 12 $ 9 Customer service and merchant fees 33 25 15 Selling, operations, technology, general and administrative 469 307 252 Total equity-based compensation expense $ 513 $ 344 $ 276 Equity-based compensation costs capitalized as site and software development costs were $ 43 million, $ 28 million and $ 17 million for the years ended December 31, 2022, 2021 and 2020. 75 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, 2022, 2021 and 2020 are presented below: Year Ended December 31, 2022 2021 2020 (in millions) Current: Federal $ — $ — $ — State 9 ( 1 ) 8 Foreign 3 1 2 Deferred: Federal — — 9 State — 1 1 Foreign — — — Provision for income taxes, net $ 12 $ 1 $ 20 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, 2022 2021 2020 (in millions) Provision (benefit) for income taxes at the federal statutory rate $ ( 277 ) $ ( 27 ) $ 43 State income tax expense (benefit), net of federal impact 9 ( 1 ) 19 Foreign tax rate differential 28 26 19 Non-deductible equity-based compensation expense 16 9 7 Windfall (shortfall) benefit (expense) from equity-based compensation 41 ( 70 ) ( 51 ) Change in valuation allowance 214 97 ( 27 ) Limitation on officer's compensation 4 6 8 Intangible property basis step-up — ( 43 ) — Other ( 23 ) 4 2 Provision for income taxes, net $ 12 $ 1 $ 20 The components of (loss) income before income taxes determined by tax jurisdiction, are as follows: Year Ended December 31, 2022 2021 2020 (in millions) U.S. $ ( 997 ) $ 171 $ 400 Foreign ( 322 ) ( 301 ) ( 195 ) Total $ ( 1,319 ) $ ( 130 ) $ 205 76 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, 2022 2021 (in millions) Deferred tax assets: Accounts receivable $ 5 $ 3 Inventories 3 2 Net operating loss carryforwards 702 499 Equity-based compensation expense 19 18 Intangible property 44 51 Accrued payroll 5 31 Accrued expenses and reserves 27 22 Capitalized technology 16 — Leases 279 269 Other 19 1 Gross deferred tax assets 1,119 896 Less: Valuation allowance ( 809 ) ( 568 ) Net deferred tax assets 310 328 Deferred tax liabilities: Prepaid expenses $ ( 19 ) $ ( 8 ) Capitalized technology — ( 42 ) Property and equipment ( 54 ) ( 35 ) Operating lease right-of-use asset ( 229 ) ( 228 ) Convertible debt — ( 8 ) 481(a) adjustments ( 5 ) ( 5 ) Other ( 3 ) ( 3 ) Total deferred tax liabilities ( 310 ) ( 329 ) Non-current net deferred tax liabilities $ — $ ( 1 ) The valuation allowance increased by $ 241 million during 2022. The increase in the valuation allowance is the result of Wayfair establishing a valuation allowance related to the current year operating losses, and adjustments to our operating loss carryforwards when we filed our returns. 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. Wayfair has 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, 2022, Wayfair maintained a full valuation allowance against substantially all of the worldwide net deferred tax assets. As of December 31, 2022, Wayfair had federal net operating loss carryforwards available to offset future federal taxable income of $ 2.0 billion. In addition, Wayfair had state net operating loss carryforwards available in the amount of $ 1.8 billion which are available to offset future state taxable income. Of the federal net operating loss carryforwards, $ 205 million begin to expire in the year ending December 31, 2037 if unused. Federal net operating loss carryforwards of $ 1.8 billion do not expire. The state net operating loss carryforwards begin to expire in the year ending December 31, 2023. The ability to utilize these federal and state net operating loss carryforwards may be limited in the future if Wayfair experiences an ownership change pursuant to Internal Revenue Code Section 382. An ownership change occurs when the ownership percentages of 5% or greater stockholders 77 Table of Contents Notes to Consolidated Financial Statements (Continued) change by more than 50% over a three-year period. Through December 31, 2022, Wayfair has determined that the ability to use tax attributes is not impacted by such a restrictive limitation. As of December 31, 2022, Wayfair also had foreign net operating loss carryforwards available to offset future foreign income of $ 1.5 billion. Foreign net operating loss of $ 39 million will expire in the year ending December 31, 2038. The remaining foreign net operating loss carryforwards do not expire. As of December 31, 2022, Wayfair has not provided for deferred income taxes on outside basis differences in its foreign subsidiaries of approximately $ 300 million since these basis differences are deemed to be indefinitely reinvested, or it is within the control of Wayfair to recognize these basis differences on a tax-free basis. Upon realization of the outside basis differences in the form of dividends or otherwise, Wayfair could be subject to income taxes as well as withholding taxes. The amount of taxes attributable to the outside basis differences, if realized, is expected to be 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, 2022 and 2021 are not material and would not impact the effective tax rate if recognized as a result of the valuation allowance maintained against the 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, Wayfair did not accrue any penalties and interest during 2022, 2021 or 2020 because it is believed 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 U.S. federal income taxes has expired for years prior to 2019. The relevant U.S. state statutes vary and years prior to 2016 are generally closed. The statute of limitations for 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. (Loss) Earnings per Share The following table presents the calculation of basic and diluted (loss) earnings per share: Year Ended December 31, 2022 2021 2020 (in millions, except per share data) Numerator: Numerator for basic and diluted (loss) earnings per share - net (loss) income $ ( 1,331 ) $ ( 131 ) $ 185 Denominator: Denominator for basic (loss) earnings per share - weighted-average number of shares of common stock outstanding 106 104 96 Effect of dilutive securities: Restricted stock units — — 3 Dilutive potential common shares — — 3 Denominator for diluted (loss) earnings per share - weighted-average number of shares of common stock outstanding after the effect of dilutive securities 106 104 99 (Loss) earnings per share: Basic $ ( 12.54 ) $ ( 1.26 ) $ 1.93 Diluted $ ( 12.54 ) $ ( 1.26 ) $ 1.86 78 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 (loss) earnings per share were as follows: Year Ended December 31, 2022 2021 2020 (in millions) Unvested restricted stock units 10 5 — Shares related to convertible debt instruments 25 15 20 Total 35 20 20 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 to the extent the market price per share of Wayfair’s Class A common stock is greater than the strike price of the Capped Calls (which corresponds to the initial conversion prices of the Non-Accreting Notes, subject to certain adjustments under the terms of the Capped Calls), with such reduction and/or offset capped at the Initial Cap Price. For more information on the structure of the Notes and the Capped Calls, 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 (loss) income before depreciation and amortization, equity-based compensation and related taxes, interest expense, net, other expense, net, provision for income taxes, net, non-recurring items, and other items not indicative of 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, impairment and other related net charges and restructuring charges, as well as interest expense, net, other expense, net, gain on debt extinguishment and provision for income taxes, net. There are no net revenue transactions between Wayfair's reportable segments. 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. 79 Table of Contents Notes to Consolidated Financial Statements (Continued) The following tables present net revenue and Adjusted EBITDA attributable to Wayfair’s reportable segments for the periods presented: Year Ended December 31, 2022 2021 2020 (in millions) U.S. net revenue $ 10,464 $ 11,249 $ 11,901 International net revenue 1,754 2,459 2,244 Total net revenue $ 12,218 $ 13,708 $ 14,145 Year Ended December 31, 2022 2021 2020 (in millions) Adjusted EBITDA: U.S. $ ( 98 ) $ 782 $ 1,042 International ( 318 ) ( 168 ) ( 95 ) Total reportable segments Adjusted EBITDA ( 416 ) 614 947 Less: reconciling items (1) ( 915 ) ( 745 ) ( 762 ) Net (loss) income $ ( 1,331 ) $ ( 131 ) $ 185 (1) The following adjustments are made to reconcile total reportable segments Adjusted EBITDA to consolidated net (loss) income: Year Ended December 31, 2022 2021 2020 (in millions) Depreciation and amortization $ 371 $ 322 $ 286 Equity-based compensation and related taxes 527 374 297 Interest expense, net 27 32 146 Other expense, net 4 4 9 Provision for income taxes, net 12 1 20 Other: Impairment and other related net charges (a) 39 12 — Restructuring charges (b) 31 — 4 Gain on debt extinguishment (c) ( 96 ) — — Total reconciling items $ 915 $ 745 $ 762 (a) In the year ended December 31, 2022, Wayfair recorded $ 40 million of lease impairment and other related charges related to changes in market conditions around future sublease income for one of the office locations in the U.S. In the fourth quarter of 2022, Wayfair recorded a $ 9 million recovery related to the termination of the lease. Additionally, Wayfair recorded an impairment charge of $ 8 million related to construction in progress assets at an International warehouse. In the year ended December 31, 2021, Wayfair recorded $ 12 million of customer service center impairment and other related charges related to a plan to consolidate customer service centers in identified U.S. locations. (b) In the year ended December 31, 2022, Wayfair recorded a $ 31 million charge to restructuring charges for severance costs associated with the August 2022 workforce reductions. In the year ended December 31, 2020, Wayfair recorded a $ 4 million charge to restructuring charges for severance costs associated with February 2020 workforce reductions. (c) In the year ended December 31, 2022, Wayfair recorded a $ 96 million gain on debt extinguishment upon repurchase of $ 375 million aggregate principal amount of the 2024 Notes and $ 229 million aggregate principal amount of the 2025 Notes. 80 Table of Contents Notes to Consolidated Financial Statements (Continued) The following table presents long-lived assets attributable to Wayfair's reportable segments reconciled to the amounts: Year Ended December 31, 2022 2021 (in millions) Geographic long-lived assets: U.S. $ 796 $ 690 International 225 247 Total reportable segment long-lived assets 1,021 937 Plus: reconciling corporate long-lived assets 592 586 Total long-lived assets $ 1,613 $ 1,523 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 corporate facilities. The following table presents total assets attributable to Wayfair's reportable segments reconciled to consolidated amounts: Year Ended December 31, 2022 2021 (in millions) Assets by segment: U.S. $ 1,381 $ 1,234 International 295 315 Total reportable segment assets 1,676 1,549 Plus: reconciling corporate assets 1,904 3,021 Total assets $ 3,580 $ 4,570 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-term investments, long-lived assets at corporate facilities, capitalized internal-use software and website development costs and other non-current assets. 14. Subsequent Events On January 20, 2023, Wayfair announced an update to the Company’s cost efficiency plan, including a workforce reduction involving approximately 1,750 employees. As a result of this workforce reduction, Wayfair expects to incur between approximately $ 68 million and $ 78 million of costs, consisting primarily of employee severance and benefit costs, most of which are expected to be incurred in the first quarter of 2023. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.