Notes to Consolidated and Condensed Financial Statements
(Unaudited)
1. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited consolidated and condensed financial statements contained in this Quarterly Report on Form 10-Q are those of Wayfair Inc. and its wholly-owned subsidiaries. Unless the context indicates otherwise, references to “we,” “us” and “our” refer to Wayfair Inc. and its subsidiaries. In our opinion, the accompanying unaudited consolidated and condensed financial statements have been prepared in accordance with generally accepted accounting principles in the United States ("GAAP") and applicable rules and regulations of the U.S. Securities and Exchange Commission ("SEC") regarding interim financial reporting and reflect all adjustments, consisting of normal recurring adjustments, necessary to present fairly the results of the interim periods presented. Certain information and note disclosures normally included in the audited financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with the audited consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2020. Furthermore, interim results are not necessarily indicative of the results for the full year ended December 31, 2020 or future periods.
Wayfair believes that other than the adoption of new accounting pronouncements that follow, there have been no significant changes during the three months ended March 31, 2021 to the items disclosed in Note 1, Summary of Significant Accounting Policies, included in Part II, Item 8, Financial Statements and Supplementary Data, of our Annual Report on Form 10-K for the year ended December 31, 2020.
Adoption of New 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.
The adoption of ASU 2020-06 resulted in the following adjustments to the consolidated and condensed balance sheet:
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January 1, 2021
|
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Adoption of ASU 2020-06
|
|
December 31, 2020
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|
(in thousands)
|
Balance sheet line item:
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
3,310,065
|
|
|
$
|
650,822
|
|
|
$
|
2,659,243
|
|
Other non-current liabilities
|
|
$
|
46,413
|
|
|
$
|
(20,618)
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|
|
$
|
67,031
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|
Additional paid-in capital
|
|
$
|
—
|
|
|
$
|
(698,482)
|
|
|
$
|
698,482
|
|
Accumulated deficit
|
|
$
|
(1,817,671)
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|
|
$
|
68,279
|
|
|
$
|
(1,885,950)
|
|
The adoption of ASU 2020-06 resulted in the following adjustments to our calculations of basic and diluted earnings per share for the three months ended March 31, 2021:
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Under ASU 2020-06
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Difference
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Under Legacy Accounting
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Earnings (loss) per share:
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Basic
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$
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0.18
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$
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0.49
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|
$
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(0.31)
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Diluted
|
|
$
|
0.16
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|
$
|
0.47
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|
$
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(0.31)
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The adoption of ASU 2020-06 did not materially impact our cash flows or compliance with debt covenants.
Income Taxes
Wayfair adopted ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”) on January 1, 2021, using the modified retrospective approach. This ASU simplifies the accounting for income taxes, removes certain exceptions to the general principles in Topic 740, and clarifies and amends existing guidance to improve consistent application. The effect of adoption of the new guidance was not material to our consolidated financial statements.
2. Supplemental Financial Statement Disclosures
Accounts Receivables, Net
As of March 31, 2021, we reported accounts receivable of $107.0 million, net of allowance for credit losses of $16.7 million. As of December 31, 2020, we reported accounts receivable of $110.3 million, net of allowance for credit losses of $21.4 million. The changes in the allowance for credit losses were not material for the three months ended March 31, 2021. Management believes credit risk is mitigated since approximately 99% of the net revenue recognized for the three months ended March 31, 2021 was collected in advance of recognition.
Contractual Liabilities
Contractual liabilities included in other current liabilities was $354.1 million at March 31, 2021 and $298.1 million at December 31, 2020. During the three months ended March 31, 2021, Wayfair recognized $223.8 million of net revenue that was included in other current liabilities as of December 31, 2020.
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 net revenue and cash flows are affected by economic factors. Refer to Note 10, Segment and Geographic Information, for additional detail.
Customer Service Center Impairment and Other Charges
During the first quarter of 2021, Wayfair enacted a plan to consolidate certain customer service centers in identified U.S. locations to transition toward virtual service models. Factors that influenced our decision were our ability to utilize a greater use of remote and home office applications and our ability to provide superior customer care, which we continued to evaluate through the beginning of the first quarter of 2021. As a result, we recorded a charge of $12.2 million during the first quarter of 2021, which included $6.3 million for the non-cash impairment of right-of-use (“ROU”) assets, $5.0 million for the non-cash accelerated depreciation of fixed assets and the remainder for other items. The impairment of ROU assets represents the excess of estimated future remaining call center lease commitments over expected future sublease income in certain affected facilities.
3. Cash and Cash Equivalents, Investments and Fair Value Measurements
Investments
As of March 31, 2021 and December 31, 2020, all of Wayfair’s marketable securities, which primarily consisted of corporate bonds and other government obligations that are priced at fair value, were classified as available-for-sale investments. During the three months ended March 31, 2021, Wayfair did not have any realized gains or losses. During the three months ended March 31, 2020, Wayfair collected $161.3 million of proceeds from the sale of long-term investments and recognized a realized gain of $0.8 million. During the three months ended March 31, 2021 and March 31, 2020, Wayfair did not recognize any credit losses related to its available-for-sale debt securities. Further, as of March 31, 2021 and December 31, 2020, Wayfair did not record an allowance for credit losses related to its available-for-sale debt securities.
The following tables present details of Wayfair’s investment securities as of March 31, 2021 and December 31, 2020:
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March 31, 2021
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Amortized
Cost
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Gross
Unrealized
Gains
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Gross
Unrealized
Losses
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Estimated
Fair Value
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(in thousands)
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Short-term:
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Investment securities
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$
|
608,512
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|
|
$
|
39
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|
|
$
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(27)
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|
|
$
|
608,524
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December 31, 2020
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Amortized
Cost
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Gross Unrealized Gains
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Gross
Unrealized
Losses
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Estimated
Fair Value
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(in thousands)
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Short-term:
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Investment securities
|
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$
|
461,683
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|
|
$
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20
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|
|
$
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(5)
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|
|
$
|
461,698
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Fair Value Measurements
Wayfair's financial assets and liabilities are measured at fair value, which is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The three levels of inputs used to measure fair value are as follows:
▪Level 1—Unadjusted quoted prices in active markets for identical assets or liabilities
▪Level 2—Unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are observable or can be corroborated by observable market data for substantially the full-term of the asset or liability
▪Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the asset or liability
This hierarchy requires Wayfair to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value. We classify our cash equivalents and certificate of deposits within Level 1 because we value these investments using quoted market prices. The fair value of our Level 1 financial assets is based on quoted market prices of the identical underlying security. We classify short-term investments within Level 2 because unadjusted quoted prices for identical or similar assets in markets are not active. None of our cash and cash equivalents or investments 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 March 31, 2021 and December 31, 2020:
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March 31, 2021
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Level 1
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Level 2
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Level 3
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Total
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(in thousands)
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Cash and cash equivalents:
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Cash
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$
|
546,349
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$
|
—
|
|
|
$
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—
|
|
|
$
|
546,349
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Cash equivalents
|
|
1,540,135
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|
|
—
|
|
|
—
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|
|
1,540,135
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|
Total cash and cash equivalents
|
|
2,086,484
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|
|
—
|
|
|
—
|
|
|
2,086,484
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Short-term investments:
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|
|
|
|
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|
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Investment securities
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—
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|
|
608,524
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—
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|
|
608,524
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Other non-current assets:
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|
|
|
|
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|
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Certificate of deposit
|
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5,200
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|
|
—
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|
|
—
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|
|
5,200
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|
|
|
|
|
|
|
|
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|
|
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Total
|
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$
|
2,091,684
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|
|
$
|
608,524
|
|
|
$
|
—
|
|
|
$
|
2,700,208
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December 31, 2020
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Level 1
|
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Level 2
|
|
Level 3
|
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Total
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|
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(in thousands)
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Cash and cash equivalents:
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|
|
|
|
|
|
|
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Cash
|
|
$
|
638,621
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|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
638,621
|
|
Cash equivalents
|
|
1,490,819
|
|
|
—
|
|
|
—
|
|
|
1,490,819
|
|
Total cash and cash equivalents
|
|
2,129,440
|
|
|
—
|
|
|
—
|
|
|
2,129,440
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
Investment securities
|
|
—
|
|
|
461,698
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|
|
—
|
|
|
461,698
|
|
Other non-current assets:
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|
|
|
|
|
|
|
|
Certificate of deposit
|
|
5,200
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|
|
—
|
|
|
—
|
|
|
5,200
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Total
|
|
$
|
2,134,640
|
|
|
$
|
461,698
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|
|
$
|
—
|
|
|
$
|
2,596,338
|
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4. 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:
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|
March 31, 2021
|
|
December 31, 2020
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Debt Instrument
|
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Principal Amount
|
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Unamortized Debt Discount
|
|
Net Carrying Amount
|
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Principal Amount
|
|
Unamortized Debt Discount
|
|
Net Carrying Amount
|
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(in thousands)
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2022 Notes
|
|
$
|
17,597
|
|
|
$
|
(115)
|
|
|
$
|
17,482
|
|
|
$
|
18,036
|
|
|
$
|
(1,596)
|
|
|
$
|
16,440
|
|
|
|
|
|
2024 Notes
|
|
575,000
|
|
|
(8,122)
|
|
|
566,878
|
|
|
575,000
|
|
|
(132,892)
|
|
|
442,108
|
|
|
|
|
|
2026 Notes
|
|
948,746
|
|
|
(10,500)
|
|
|
938,246
|
|
|
948,750
|
|
|
(242,911)
|
|
|
705,839
|
|
|
|
|
|
2025 Notes
|
|
1,518,000
|
|
|
(15,532)
|
|
|
1,502,468
|
|
|
1,518,000
|
|
|
(289,954)
|
|
|
1,228,046
|
|
|
|
|
|
2025 Accreting Notes
|
|
35,425
|
|
|
(408)
|
|
|
35,017
|
|
|
288,464
|
|
|
(21,654)
|
|
|
266,810
|
|
|
|
|
|
Total Debt
|
|
|
|
|
|
$
|
3,060,091
|
|
|
|
|
|
|
$
|
2,659,243
|
|
|
|
|
|
Short-term debt
|
|
|
|
|
|
$
|
—
|
|
|
|
|
|
|
$
|
—
|
|
|
|
|
|
Long-term debt
|
|
|
|
|
|
$
|
3,060,091
|
|
|
|
|
|
|
$
|
2,659,243
|
|
|
|
|
|
|
|
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Revolving Credit Facility
On March 24, 2021, Wayfair and certain of its subsidiaries (together, the “Guarantors”) and Wayfair LLC, a wholly-owned subsidiary of Wayfair, 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 our 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.
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 $56.2 million outstanding letters of credit as of March 31, 2021, 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.
Revolver borrowings bear interest through maturity at a variable rate based upon, at the Borrower’s option, either the LIBOR rate or 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), plus, in each case an applicable margin. As of March 31, 2021, the applicable margin for LIBOR loans is 1.25% per annum and the applicable margin for base rate loans is 0.25% 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. We do not expect any of these restrictions to affect or limit our ability to conduct business in the ordinary course. As of March 31, 2021, we were in compliance with all covenants.
Convertible Non-Accreting Notes
The following table summarizes certain terms related to our outstanding convertible notes, excluding the 2025 Accreting Notes:
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Convertible Non-Accreting Notes
|
|
Maturity Date
|
|
Annual Coupon Rate
|
|
Annual Effective Interest Rate
|
|
Payment Dates for Semi-Annual Interest Payments in Arrears
|
2022 Notes
|
|
September 1, 2022
|
|
0.375%
|
|
0.9%
|
|
March 1 and September 1
|
2024 Notes
|
|
November 1, 2024
|
|
1.125%
|
|
1.5%
|
|
May 1 and November 1
|
2026 Notes
|
|
August 15, 2026
|
|
1.00%
|
|
1.2%
|
|
February 15 and August 15
|
2025 Notes
|
|
October 1, 2025
|
|
0.625%
|
|
0.9%
|
|
April 1 and October 1
|
Convertible Accreting Notes
No cash interest is payable on the 2025 Accreting Notes. Instead, the 2025 Accreting Notes accrued 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%.
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:
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Convertible Notes
|
|
Maturity Date
|
|
Free Convertibility Date
|
|
Initial Conversion Rate per $1,000 Principal
|
|
Initial Conversion Price
|
|
Redemption Date
|
2022 Notes
|
|
September 1, 2022
|
|
June 1, 2022
|
|
9.6100
|
|
$104.06
|
|
September 8, 2020
|
2024 Notes
|
|
November 1, 2024
|
|
August 1, 2024
|
|
8.5910
|
|
$116.40
|
|
May 8, 2022
|
2026 Notes
|
|
August 15, 2026
|
|
May 15, 2026
|
|
6.7349
|
|
$148.48
|
|
August 20, 2023
|
2025 Notes
|
|
October 1, 2025
|
|
July 1, 2025
|
|
2.3972
|
|
$417.15
|
|
October 4, 2022
|
2025 Accreting Notes
|
|
April 1, 2025
|
|
-
|
|
13.7931
|
|
$72.50
|
|
May 9, 2023
|
The conversion rate is subject to adjustment upon the occurrence of certain specified events, including certain distributions and dividends to all or substantially all of the holders of Wayfair’s Class A common stock, but will not be adjusted for accrued and unpaid interest.
Wayfair will settle any conversions of the Non-Accreting Notes in cash, shares of Wayfair’s Class A common stock or a combination thereof, with the form of consideration determined at Wayfair’s election. The holders of the Non-Accreting Notes may convert all or a portion of the notes prior to certain conversion dates (the “Free Convertibility Date”) under the following circumstances (in each case, as applicable to each series of Non-Accreting Notes):
•during any calendar quarter (and only during such calendar quarter) after March 31, 2021, if the last reported sale price of Wayfair’s Class A common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day;
•during the five business day period after any ten consecutive trading day period (the “measurement period") in which the trading price (as defined in the applicable indenture) per $1,000 principal amount of the notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of Wayfair’s Class A common stock and the conversion rate on each such trading day;
•if Wayfair calls the notes for redemption, at any time prior to the close of business on the second scheduled trading day immediately preceding the redemption date; and
•upon the occurrence of specified corporate events (as set forth in the applicable indenture)
On or after the applicable Free Convertibility Date until the close of business on the second scheduled trading day immediately preceding the applicable maturity date, holders of the Non-Accreting Notes may convert their Non-Accreting Notes at any time.
The following Non-Accreting Notes are convertible during the calendar quarter ended June 30, 2021: the 2022 Notes, the 2024 Notes and the 2026 Notes. The 2025 Notes are not convertible during the second quarter of 2021.
The holders of the 2025 Accreting Notes may convert all or a portion of their 2025 Accreting Notes at any time prior to the second business day immediately preceding the maturity date. Wayfair will settle any conversion of 2025 Accreting Notes with a number of shares of Wayfair’s Class A common stock per $1,000 original principal amount of 2025 Accreting Notes equal to the accreted principal amount of such original principal amount of 2025 Accreting Notes divided by the conversion price.
Upon the occurrence of a fundamental change (as defined in the applicable indenture), holders of the Notes may require Wayfair to repurchase all or a portion of the Notes for cash at a price equal to 100% of the principal amount (or accreted principal amount) of the Notes to be repurchased plus any accrued but unpaid interest to, but excluding, the fundamental change repurchase date (such interest to be included in the accreted principal amount for the 2025 Accreting Notes). Holders of the Non-Accreting Notes who convert their respective notes in connection with a make-whole fundamental change or a notice of redemption (each as defined in the indenture) may be entitled to a premium in the form of an increase in the conversion rate of the respective notes. Holders of the 2025 Accreting Notes who convert in connection with a make-whole fundamental change (as defined in the applicable indenture) may be entitled to a premium in the form of an increase in the conversion rate.
Wayfair may not redeem the Notes prior to certain dates (the “Redemption Date”). On or after the applicable Redemption Date, Wayfair may redeem for cash all or part of the applicable series of Notes if the last reported sale price of Wayfair’s Class A common stock equals or exceeds 130% (Non-Accreting Notes) or 276% (2025 Accreting Notes) of the conversion price then in effect for at least 20 trading days (whether or not consecutive), including at least one of the five trading days immediately preceding the date on which Wayfair provides notice of redemption, during any 30 consecutive trading days ending on, and including the trading day immediately preceding the date on which Wayfair provides notice of the redemption. The redemption price will be either 100% of the principal amount (or accreted principal amount) of the notes to be redeemed, plus accrued and unpaid interest, if any, or the if-converted value holder elects to convert their Notes upon receiving notice of redemption.
Conversions of Notes
In the three months ended March 31, 2021, holders of the 2022 Notes and 2026 Notes converted $0.4 million of aggregate principal and received 4,244 shares of Wayfair’s Class A common stock. During the same period, Great Hill converted $253.1 million of accreted principal of the 2025 Accreting Notes and received 3,490,175 shares of Wayfair's Class A common stock in the first quarter of 2021. In aggregate these conversions increased additional paid-in capital by $250.4 million. In April 2021, holders of the 2022 Notes converted $12.5 million of principal and received 120,278 shares of Wayfair’s Class A common stock.
Interest Expense
The following table presents total interest expense recognized for the Notes for the three months ended March 31, 2021 and 2020, which included the reversal of interest expense we recorded in 2020 for a portion of interest accretion for the 2025 Accreting Notes that was not realized in 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2021
|
|
2020
|
Convertible Notes
|
|
Contractual Interest Expense
|
|
Debt Discount Amortization
|
|
Total Interest Expense
|
|
Contractual Interest Expense
|
|
Debt Discount Amortization
|
|
Total Interest Expense
|
|
|
(in thousands)
|
2022 Notes
|
|
$
|
19
|
|
|
$
|
22
|
|
|
$
|
41
|
|
|
$
|
404
|
|
|
$
|
5,212
|
|
|
$
|
5,616
|
|
2024 Notes
|
|
1,617
|
|
|
539
|
|
|
2,156
|
|
|
1,617
|
|
|
6,887
|
|
|
8,504
|
|
2026 Notes
|
|
2,240
|
|
|
607
|
|
|
2,847
|
|
|
2,319
|
|
|
8,775
|
|
|
11,094
|
|
2025 Notes
|
|
2,372
|
|
|
851
|
|
|
3,223
|
|
|
—
|
|
|
—
|
|
|
—
|
|
2025 Accreting Notes
|
|
(1,380)
|
|
|
53
|
|
|
(1,327)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
|
$
|
4,868
|
|
|
$
|
2,072
|
|
|
$
|
6,940
|
|
|
$
|
4,340
|
|
|
$
|
20,874
|
|
|
$
|
25,214
|
|
Fair Value of Notes
The estimated fair value of the 2022 Notes, 2024 Notes, 2026 Notes, 2025 Notes and 2025 Accreting Notes was $52.4 million, $1.6 billion, $2.1 billion, $1.6 billion and $153.8 million, respectively, as of March 31, 2021. 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. The fair values of the Non-Accreting Notes and the 2025 Accreting Notes are classified as Level 2 and Level 3, respectively, as defined in Note 3, Cash and Cash Equivalents, Investments and Fair Value Measurements. The if-converted value of the 2022 Notes, 2024 Notes, 2026 Notes and 2025 Accreting Notes exceeded the principal value by $35.6 million, $979.8 million, $1.1 billion and $118.4 million, respectively, as of March 31, 2021. The if-converted value of the 2025 Notes did not exceed the principal value as of March 31, 2021.
Capped Calls
The 2022 Capped Calls, 2024 Capped Calls, 2026 Capped Calls and 2025 Capped Calls (collectively, the "Capped Calls") are expected generally to reduce the potential dilution and/or offset the cash payments Wayfair is required to make in excess of the principal amount of the 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
|
|
|
2022 Capped Calls
|
|
September 1, 2022
|
|
$154.16
|
|
100%
|
|
|
2024 Capped Calls
|
|
November 1, 2024
|
|
$219.63
|
|
150%
|
|
|
2026 Capped Calls
|
|
August 15, 2026
|
|
$280.15
|
|
150%
|
|
|
2025 Capped Calls
|
|
October 1, 2025
|
|
$787.08
|
|
150%
|
|
|
The Capped Calls are separate transactions from the Non-Accreting Notes, are not subject to the terms of the Non-Accreting Notes and will not affect any holder’s rights under the Non-Accreting Notes. Similarly, holders of the Non-Accreting Notes do not have any rights with respect to the Capped Calls. The Capped Calls do not meet the criteria for separate accounting as a derivative as they are indexed to Wayfair's stock. The premiums paid for the Capped Calls were included as a net reduction to additional paid-in capital within shareholders’ deficit when they were entered.
5. Commitments and Contingencies
Legal Matters
From time to time Wayfair is involved in claims that arise during the ordinary course of business. Although the results of litigation and claims cannot be predicted with certainty, Wayfair does not currently believe that the outcome of any of these other legal matters will have a material adverse effect on Wayfair's results of operation or financial condition. Regardless of the outcome, litigation can be costly and time consuming, as it can divert management's attention from important business matters and initiatives, negatively impacting Wayfair's overall operations. In addition, Wayfair may also find itself at greater risk to outside party claims as it increases its operations in jurisdictions where the laws with respect to the potential liability of online retailers are uncertain, unfavorable, or unclear.
On November 18, 2020, certain of our present and former directors, along with Great Hill Partners, L.P., GHEP VII Aggregator, L.P. (“Great Hill”), Charlesbank Capital Partners, LLC and CBEP Investments, LLC (“Charlesbank”), were named as defendants in a shareholder derivative lawsuit filed in the Court of Chancery of the State of Delaware by the Equity-League Pension Trust Fund. Wayfair is named as a nominal defendant. The derivative complaint primarily alleges that the director defendants breached their fiduciary duties with respect to Wayfair’s issuance of the 2025 Accreting Notes, and further alleges that the non-director defendants were unjustly enriched on the basis of the issuance. The complaint asserts causes of action for breach of fiduciary duty and unjust enrichment and seeks disgorgement of proceeds received as a result of the issuance, other equitable relief and damages and attorneys’ fees and costs. On February 16, 2021, the named director defendants and Wayfair filed motions to dismiss the complaint with prejudice and Great Hill and Charlesbank each filed separate motions to dismiss the complaint. The motions are expected to be fully briefed by May 11, 2021. At this time, based on available information regarding this litigation, we are unable to reasonably assess the ultimate outcome of this case or determine an estimate, or a range of estimates, of potential losses.
6. 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 March 31, 2021, 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 77,196,363 and 72,980,490 shares of Class A common stock and 26,563,909 and 26,564,234 shares of Class B common stock were outstanding as of March 31, 2021 and December 31, 2020. The rights of the holders of Class A common stock and Class B common stock are identical, except for 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 the 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 March 31, 2021, 55,474,505 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”). During the three months ended March 31, 2021, Wayfair repurchased $0.2 million through the 2020 Repurchase Program at an average price of $223.63 per share of Class A common stock. During the three months ended March 31, 2020, Wayfair did not repurchase any shares of common stock.
7. Equity-Based Compensation
The Board adopted the 2014 Incentive Award Plan ("2014 Plan") to grant cash and equity incentive awards to eligible participants in order to attract, motivate and retain talent. The 2014 Plan is administered by the Board for awards to non-employee directors and by the compensation committee of the Board for other participants and provides for the issuance of
stock options, SARs, restricted common stock, restricted stock units ("RSUs"), performance shares, stock payments, cash payments, dividend awards and other incentives. Prior to the adoption of the 2014 Plan, Wayfair LLC issued certain equity awards pursuant to the Wayfair LLC Amended and Restated Common Unit Plan (the "2010 Plan"), which was administered by the Board of Wayfair LLC. Awards issued under the 2010 Plan that remain outstanding currently represent Class A or Class B common stock of Wayfair Inc.
The 2014 Plan initially made 8,603,066 shares of Class A common stock available for future award grants. The 2014 Plan also contains an evergreen provision whereby the shares available for future grants are increased on the first day of each calendar year from January 1, 2016 through and including January 1, 2024. As of January 1, 2021, 6,224,792 shares of Class A common stock were available for future grant under the 2014 Plan. Shares or RSUs forfeited, withheld for minimum statutory tax obligations, and unexercised stock option lapses from the 2010 and 2014 Plans are available for future grant under the 2014 Plan.
The following table presents activity relating to stock options for the three months ended March 31, 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted-Average Exercise Price
|
|
Weighted-Average Remaining Contractual Term (Years)
|
Outstanding at December 31, 2020
|
|
19,046
|
|
|
$
|
2.99
|
|
|
0.5
|
Options exercised
|
|
(11,595)
|
|
|
$
|
2.91
|
|
|
|
Outstanding and exercisable at March 31, 2021
|
|
7,451
|
|
|
$
|
3.10
|
|
|
0.2
|
The intrinsic value of stock options exercised was $3.6 million and $0.4 million for the three months ended March 31, 2021 and 2020. Aggregate intrinsic value of stock options outstanding and currently exercisable is $2.3 million as of March 31, 2021. All stock options were fully vested at March 31, 2021.
The following table presents activity relating to RSUs for the three months ended March 31, 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted-
Average Grant
Date Fair Value
|
Unvested at December 31, 2020
|
|
5,975,299
|
|
|
$
|
134.03
|
|
RSUs granted
|
|
331,165
|
|
|
$
|
291.61
|
|
RSUs vested
|
|
(710,224)
|
|
|
$
|
109.87
|
|
RSUs forfeited/canceled
|
|
(185,233)
|
|
|
$
|
143.32
|
|
Outstanding as of March 31, 2021
|
|
5,411,007
|
|
|
$
|
146.53
|
|
The intrinsic value of RSUs vested was $194.7 million and $61.5 million for the three months ended March 31, 2021 and 2020. The aggregate intrinsic value of RSUs unvested is $1.7 billion as of March 31, 2021. Unrecognized equity-based compensation expense related to RSUs expected to vest over time is $717.2 million with a weighted-average remaining vesting term of 1.2 years as of March 31, 2021.
8. Income Taxes
The (benefit) provision for income taxes, net recorded in the three months ended March 31, 2021 is primarily related to income earned in the U.S. and certain foreign jurisdictions and U.S. state income taxes, as well as related changes in our valuation allowance on deferred tax assets, offset by a discrete tax benefit related to excess tax benefits on equity awards for U.S. employees. Wayfair had no material unrecognized tax benefits as of March 31, 2021 and December 31, 2020.
9. Earnings (Loss) per Share
The following table presents the calculation of basic and diluted earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
|
|
|
2021
|
|
2020
|
|
|
|
|
|
(in thousands, except per share data)
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
Numerator for basic EPS - Net income (loss)
|
|
$
|
18,234
|
|
|
$
|
(285,865)
|
|
|
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
Interest expense associated with convertible debt instruments
|
|
(1,567)
|
|
|
—
|
|
|
|
|
Numerator for diluted EPS - net income (loss) available to common stockholders after the effect of dilutive securities
|
|
$
|
16,667
|
|
|
$
|
(285,865)
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
Denominator for basic EPS - weighted-average number of shares of common stock outstanding
|
|
102,840
|
|
|
94,089
|
|
|
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
Employee stock options
|
|
15
|
|
|
—
|
|
|
|
|
Restricted stock units
|
|
3,128
|
|
|
—
|
|
|
|
|
Convertible debt instruments
|
|
699
|
|
|
—
|
|
|
|
|
Dilutive potential common shares
|
|
3,842
|
|
|
—
|
|
|
|
|
Denominator for diluted EPS - adjusted weighted-average number of shares of common stock outstanding after the effect of dilutive securities
|
|
106,682
|
|
|
94,089
|
|
|
|
|
Earnings (Loss) per Share:
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.18
|
|
|
$
|
(3.04)
|
|
|
|
|
Diluted
|
|
$
|
0.16
|
|
|
$
|
(3.04)
|
|
|
|
|
The potential common shares from anti-dilutive securities excluded from the weighted-average shares of common stock used to calculate diluted earnings (loss) per share were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
|
|
|
2021
|
|
2020
|
|
|
|
|
|
(in thousands)
|
Outstanding employee stock options
|
|
—
|
|
|
37
|
|
|
|
|
Unvested restricted stock units
|
|
61
|
|
|
7,154
|
|
|
|
|
Shares related to convertible debt instruments
|
|
15,630
|
|
|
15,474
|
|
|
|
|
Total
|
|
15,691
|
|
|
22,665
|
|
|
|
|
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. The Capped Calls are generally expected to reduce the potential dilution of Wayfair's Class A common stock upon any conversion of the Notes and/or offset the cash payments Wayfair is required to make in excess of the principal amount of the Notes upon conversion of the Notes if the market price per share of Wayfair’s Class A common stock is greater than the strike price of the Capped Calls (which corresponded to the initial conversion price of the Non-Accreting Notes and is subject to certain adjustments under the terms of the Capped Calls), with such reduction and/or offset subject to the Initial Cap Price. The number of shares of Wayfair's Class A common stock potentially issuable and obtainable at the respective conversion prices of the Notes and the Capped Call, respectively, as of March 31, 2021, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2022 Notes / 2022 Capped Calls
|
|
2024 Notes / 2024 Capped Calls
|
|
2026 Notes / 2026 Capped Calls
|
|
2025 Accreting Notes
|
|
2025 Notes / 2025 Capped Calls
|
|
|
(in thousands)
|
Shares potentially issuable from convertible debt instruments
|
|
169
|
|
|
4,940
|
|
|
6,390
|
|
|
489
|
|
|
3,639
|
|
Shares obtainable from the exercise of capped calls
|
|
(1,347)
|
|
|
(2,322)
|
|
|
(3,003)
|
|
|
—
|
|
|
(1,710)
|
|
Total
|
|
(1,178)
|
|
|
2,618
|
|
|
3,387
|
|
|
489
|
|
|
1,929
|
|
For more information on the structure of the Notes and the Capped Calls, including potential adjustments to the conversion prices used to determine the shares presented in the preceding table, see Note 4, Debt and Other Financing.
10. Segment and Geographic Information
Operating segments are defined as components of an enterprise for which separate financial information is available that is evaluated on a regular basis by the Chief Operating Decision Maker ("CODM") in deciding how to allocate resources to an individual segment and in assessing performance. Wayfair’s CODM is its Chief Executive Officer.
Wayfair's operating and reportable segments are the U.S. and International. These segments reflect the way the CODM allocates resources and evaluates financial performance, which is based upon each segment's Adjusted EBITDA. Adjusted EBITDA is defined as net income (loss) before depreciation and amortization, equity-based compensation and related taxes, interest (expense), net, other (expense), net, (benefit) provision for income taxes, net, non-recurring items, and other items not indicative of our ongoing operating performance. These charges are excluded from 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.
Wayfair allocates certain operating expenses to the operating and reportable segments, including customer service and merchant fees and selling, operations, technology, general and administrative 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, as well as interest (expense), net, other (expense), net, and (benefit) 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 of the U.S. provided greater than 10% of consolidated net revenue.
The following tables present net revenues and Adjusted EBITDA attributable to Wayfair's reportable segments for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
|
|
|
2021
|
|
2020
|
|
|
|
|
|
(in thousands)
|
|
U.S. net revenue
|
|
$
|
2,820,686
|
|
|
$
|
1,974,983
|
|
|
|
|
International net revenue
|
|
656,832
|
|
|
355,080
|
|
|
|
|
Total net revenue
|
|
$
|
3,477,518
|
|
|
$
|
2,330,063
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
|
|
|
2021
|
|
2020
|
|
|
|
|
|
(in thousands)
|
|
Adjusted EBITDA:
|
|
|
|
|
|
|
|
U.S.
|
|
$
|
227,235
|
|
|
$
|
(45,095)
|
|
|
|
|
International
|
|
(21,468)
|
|
|
(82,182)
|
|
|
|
|
Total reportable segments Adjusted EBITDA
|
|
205,767
|
|
|
(127,277)
|
|
|
|
|
Less: reconciling items (1)
|
|
(187,533)
|
|
|
(158,588)
|
|
|
|
|
Net income (loss)
|
|
$
|
18,234
|
|
|
$
|
(285,865)
|
|
|
|
|
(1) The following adjustments are made to reconcile total reportable segments Adjusted EBITDA to consolidated net income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
|
|
|
2021
|
|
2020
|
|
|
|
|
|
(in thousands)
|
|
Depreciation and amortization
|
|
$
|
80,312
|
|
|
$
|
66,843
|
|
|
|
|
Equity-based compensation and related taxes
|
|
86,901
|
|
|
63,992
|
|
|
|
|
Interest expense, net
|
|
6,812
|
|
|
22,218
|
|
|
|
|
Other expense, net
|
|
3,298
|
|
|
246
|
|
|
|
|
(Benefit) provision for income taxes, net
|
|
(2,002)
|
|
|
1,333
|
|
|
|
|
Other (1)
|
|
12,212
|
|
|
3,956
|
|
|
|
|
Total reconciling items
|
|
$
|
187,533
|
|
|
$
|
158,588
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) In the three months ended March 31, 2021, we recorded $12.2 million of customer service center impairment and other charges related to our plan to consolidate customer service centers. During the three months ended March 31, 2020, we recorded $4.0 million in selling, operations, technology, general and administrative expenses for severance costs associated with February 2020 workforce reductions.
11. Related Party Transactions
As discussed in Note 6, Debt and Other Financing, included in Part II, Item 8, Financial Statements and Supplementary Data, of Wayfair’s Annual Report on Form 10-K for the year ended December 31, 2020, in April 2020, pursuant to the terms of the amended and restated purchase agreement, dated April 7, 2020 (the "Purchase Agreement"), Wayfair issued $535.0 million in aggregate original principal amount of 2025 Accreting Notes. The issuance of the 2025 Accreting Notes constitutes a related
party transaction because of Michael W. Choe's positions as a director of Wayfair (as of May 12, 2020) and Managing Director and Chief Executive Officer of Charlesbank Capital Partners, LLC, the sole owner of the ultimate general partner of Charlesbank, a party to the Purchase Agreement; Michael Kumin's positions as a director of Wayfair and a Managing Partner at Great Hill Partners, LP, Manager of the ultimate general partner of Great Hill, a party to the Purchase Agreement; and the limited partnership interests held by Niraj Shah and Steve Conine, Wayfair's co-founders and co-chairmen, in affiliates of Great Hill and Charlesbank.