Washington, D.C. 20549
Wayfair Inc.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
WAYFAIR INC.
WAYFAIR INC.
WAYFAIR INC.
WAYFAIR INC.
WAYFAIR INC.
WAYFAIR INC.
Wayfair Inc.
1. Description of Business
4. Credit LossesDebt and Other Financing
5. Intangible Assets and GoodwillConvertible Non-Accreting Notes
As of September 30, 2020 and December 31, 2019, the Company had $17.2 million and $18.4 million of intangible assets, respectively. Amortization expense related to intangible assets was $0.4 million and $0.1 million for the three months ended September 30, 2020 and 2019, respectively, and $1.2 million and $0.4 million for the nine months ended September 30, 2020 and 2019, respectively.
Goodwill was $0.4 million as of September 30, 2020 and December 31, 2019.
6. Property and Equipment, net
The following table summarizes propertycertain terms related to our outstanding convertible notes, excluding the 2025 Accreting Notes: | | | | | | | | | | | | | | | | | | | | | | | | | | |
Convertible Non-Accreting Notes | | Maturity Date | | Annual Coupon Rate | | Annual Effective Interest Rate | | Payment Dates for Semi-Annual Interest Payments in Arrears |
2022 Notes | | September 1, 2022 | | 0.375% | | 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 | | 1.000% | | 1.2% | | February 15 and August 15 |
2025 Notes | | October 1, 2025 | | 0.625% | | 0.9% | | April 1 and October 1 |
Convertible Accreting Notes
Nocash 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 equipment, net asOctober 1 of September 30, 2020each 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 December 31, 2019:Redemption Terms of the Notes
| | | | | | | | | | | | | | |
| | September 30, 2020 | | December 31, 2019 |
| | (in thousands) |
Furniture and computer equipment | | $ | 554,489 | | | $ | 509,120 | |
Site and software development costs | | 397,027 | | | 297,252 | |
Leasehold improvements | | 341,345 | | | 228,514 | |
Construction in progress | | 23,667 | | | 45,503 | |
| | 1,316,528 | | | 1,080,389 | |
Less accumulated depreciation and amortization | | (634,471) | | | (455,845) | |
Property and equipment, net | | $ | 682,057 | | | $ | 624,544 | |
Property and equipment depreciation and amortization expense was $72.2 million and $50.1 million for the three months ended September 30, 2020 and 2019, respectively, and $207.3 million and $133.8 million for the nine months ended September 30, 2020 and 2019, respectively.
7. LeasesWayfair's Notes will mature at their maturity date unless earlier purchased, redeemed or converted. The Notes’ initial conversion terms are summarized below: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Convertible Notes | | Maturity Date | | Free Convertibility Date | | Initial Conversion Rate per $1,000 Principal | | Initial Conversion Price | | Redemption Date |
2022 Notes | | September 1, 2022 | | June 1, 2022 | | 9.6100 | | $104.06 | | September 8, 2020 |
2024 Notes | | November 1, 2024 | | August 1, 2024 | | 8.5910 | | $116.40 | | May 8, 2022 |
2026 Notes | | August 15, 2026 | | May 15, 2026 | | 6.7349 | | $148.48 | | August 20, 2023 |
2025 Notes | | October 1, 2025 | | July 1, 2025 | | 2.3972 | | $417.15 | | October 4, 2022 |
2025 Accreting Notes | | April 1, 2025 | | - | | 13.7931 | | $72.50 | | May 9, 2023 |
The Company has lease arrangementsconversion 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 warehouse, fulfillment center, office,accrued and data center spaces. These leases expireunpaid 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 variousWayfair’s election. The holders of the Non-Accreting Notes may convert all or a portion of the notes prior to certain conversion dates through 2034. Operating lease expense was $38.6 million(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 June 30, 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 $31.8 millionincluding, 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 three months ended September 30, 2020applicable 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 2019, respectively, and $118.8 million and $86.8 million for the nine months ended September 30, 2020 and 2019, respectively.
The following table presents supplemental cash flow information related to leases:
| | | | | | | | | | | | | | |
| | Nine months ended September 30, 2020 | | Nine months ended September 30, 2019 |
| | (in thousands) |
Cash payments included in operating cash flows from lease arrangements | | $ | 105,416 | | | $ | 77,687 | |
Right-of-use assets obtained in exchange for lease obligations | | $ | 110,210 | | | $ | 281,006 | |
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 table presents supplemental balance sheet information related to leases:
| | | | | | | | | | | | | | |
| | September 30, 2020 | | December 31, 2019 |
Additional lease information | | | | |
Weighted average remaining lease term | | 8 years | | 10 years |
Weighted average discount rate | | 6.5 | % | | 6.7 | % |
Non-Accreting Notes are convertible during the calendar quarter ended September 30, 2021: the 2022 Notes, the 2024 Notes and the 2026 Notes. The 2025 Notes are not convertible during the third 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 June 30, 2021, holders of the 2022 Notes and 2026 Notes converted $14.5 million of aggregate principal and received 139,196 shares of Wayfair’s Class A common stock. During the six months ended June 30, 2021, holders of the 2022 Notes and 2026 Notes converted $14.9 million of aggregate principal and received 143,440 shares of Wayfair’s Class A common stock. During the six months ended June 30, 2021, Great Hill converted $253.1 million of accreted principal of the 2025 Accreting Notes and received 3,490,175 shares of Wayfair's Class A common stock. In aggregate, these conversions increased additional paid-in capital by $14.4 million and $264.8 million for the three and six months ended June 30, 2021.
Interest Expense
The following table presents future minimum lease payments under non-cancellable leasestables present total interest expense recognized for the Notes for the three and six months ended June 30, 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 June 30, |
| | 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 | | $ | 4 | | | $ | 15 | | | $ | 19 | | | $ | 404 | | | $ | 5,289 | | | $ | 5,693 | |
2024 Notes | | 1,617 | | | 539 | | | 2,156 | | | 1,617 | | | 7,017 | | | 8,634 | |
2026 Notes | | 2,372 | | | 476 | | | 2,848 | | | 2,372 | | | 8,619 | | | 10,991 | |
2025 Notes | | 2,372 | | | 845 | | | 3,217 | | | 0 | | | 0 | | | 0 | |
2025 Accreting Notes | | 223 | | | 23 | | | 246 | | | 3,192 | | | 1,685 | | | 4,877 | |
Total | | $ | 6,588 | | | $ | 1,898 | | | $ | 8,486 | | | $ | 7,585 | | | $ | 22,610 | | | $ | 30,195 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, |
| | 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 | | $ | 23 | | | $ | 37 | | | $ | 60 | | | $ | 809 | | | $ | 10,501 | | | $ | 11,310 | |
2024 Notes | | 3,234 | | | 1,078 | | | 4,312 | | | 3,234 | | | 13,903 | | | 17,137 | |
2026 Notes | | 4,612 | | | 1,083 | | | 5,695 | | | 4,691 | | | 17,154 | | | 21,845 | |
2025 Notes | | 4,744 | | | 1,696 | | | 6,440 | | | 0 | | | 0 | | | 0 | |
2025 Accreting Notes | | (1,157) | | | 76 | | | (1,081) | | | 3,192 | | | 1,685 | | | 4,877 | |
Total | | $ | 11,456 | | | $ | 3,970 | | | $ | 15,426 | | | $ | 11,926 | | | $ | 43,243 | | | $ | 55,169 | |
Fair Value of Notes
The estimated fair value of the 2022 Notes, 2024 Notes, 2026 Notes, 2025 Notes and 2025 Accreting Notes was $9.4 million, $1.6 billion, $2.1 billion, $1.6 billion and $156.2 million, respectively, as of SeptemberJune 30, 2020:2021. 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 $6.3 million, $984.6 million, $1.1 billion and $120.3 million, respectively, as of June 30, 2021. The if-converted value of the 2025 Notes did not exceed the principal value as of June 30, 2021.
| | | | | | | | |
| | Amount |
| | (in thousands) |
2020 (excluding the nine months ended September 30, 2020) | | $ | 33,793 | |
2021 | | 161,998 | |
2022 | | 162,800 | |
2023 | | 157,581 | |
2024 | | 155,062 | |
Thereafter | | 602,837 | |
Total future minimum lease payments | | 1,274,071 | |
Less: Imputed interest | | (303,994) | |
Total | | $ | 970,077 | |
Capped CallsThe following table presents total operating leases as of September 30, 20202022 Capped Calls, 2024 Capped Calls, 2026 Capped Calls and December 31, 2019:
| | | | | | | | | | | | | | |
| | September 30, 2020 | | December 31, 2019 |
| | (in thousands) |
Balance sheet line item | | | | |
Other current liabilities | | $ | 102,366 | | | $ | 91,104 | |
Operating lease liabilities | | 867,711 | | | 822,602 | |
Total operating leases | | $ | 970,077 | | | $ | 913,706 | |
As of September 30, 2020,2025 Capped Calls (collectively, the Company has entered into $149.4 million of additional operating leases, primarily related"Capped Calls") are expected generally to build-to-suit warehouse leases that have not yet commenced. Asreduce the Company does not controlpotential dilution and/or offset the underlying assets during the construction period, the Companycash payments Wayfair is not considered the ownerrequired to make in excess of the construction projects for accounting purposes. These operating leases will commence between 2020principal 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 2021 with leaseis subject to certain adjustments under the terms of 2the applicable Capped Call), with such reduction and/or offset subject to 15 years.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 stockholders’ deficit when they were entered.
8.5. Commitments and Contingencies
Letters of Credit
The Company has issued letters of credit, primarily as security for certain lease agreements, for approximately $54.9 million and $46.7 million, as of September 30, 2020 and December 31, 2019, respectively.
Legal Matters
From time to time the CompanyWayfair is involved in claims that arise during the ordinary course of business. Although the results of litigation and claims cannot be predicted with certainty, the CompanyWayfair does not currently believe that the outcome of any of these other legal matters will have a material adverse effect on the Company'sWayfair'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 the Company'sWayfair's overall operations. In addition, the CompanyWayfair 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 January 10, 2019November 18, 2020, certain of our present and January 16, 2019, putative securities class action complaintsformer 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 against the Company and 3 of its officers in the U.S. District Court for the District of Massachusetts. The 2 complaints alleged violations of Sections 10(b) and 20(a)Chancery of the Securities Exchange ActState of 1934,Delaware by the Equity-League Pension Trust Fund. Wayfair is named as amended, relatinga nominal defendant. The derivative complaint primarily alleges that the director defendants breached their fiduciary duties with respect to certain prior disclosuresWayfair’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 were fully briefed as of May 11, 2021. Oral argument on the motions is scheduled for August 23, 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.
Company. Each plaintiff was seeking to represent a class of shareholders who purchased or acquired stock of the Company between August 2, 2018 and October 31, 2018, and was seeking damages and other relief based on allegations that the defendants' conduct affected the value of such stock. On July 8, 2020, the consolidated complaint was dismissed with prejudice.
9. Equity-Based Compensation
The board of directors of the Company (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 with respect to awards to non-employee directors and by the compensation committee of the Board with respect to other participants and provides for the issuance of stock options, stock appreciation rights ("SARs"), restricted 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 directors of Wayfair LLC. Awards issued under the 2010 Plan that remain outstanding currently represent Class A or Class B common stock of the Company.
For awards granted pursuant to the 2014 Plan, 8,603,066 shares of Class A common stock were initially available for issuance. The 2014 Plan also contains an evergreen provision whereby the shares available for future grant are increased on the first day of each calendar year beginning January 1, 2016 and ending on and including January 1, 2024. As of January 1, 2020, 5,111,305 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 nine months ended September 30, 2020:
| | | | | | | | | | | | | | | | | | | | |
| | Shares | | Weighted-Average Exercise Price | | Weighted-Average Remaining Contractual Term (Years) |
Outstanding at December 31, 2019 | | 43,606 | | | $ | 3.00 | | | 1.5 |
Options exercised | | (23,660) | | | $ | 3.02 | | | |
Outstanding and exercisable at September 30, 2020 | | 19,946 | | | $ | 2.98 | | | 0.7 |
The intrinsic value of stock options exercised was $4.4 million and $4.2 million for the nine months ended September 30, 2020 and 2019, respectively. The aggregate intrinsic value of stock options outstanding and currently exercisable is $5.7 million as of September 30, 2020. All stock options were fully vested at September 30, 2020.
The following table presents activity relating to RSUs for the nine months ended September 30, 2020:
| | | | | | | | | | | | | | |
| | Shares | | Weighted- Average Grant Date Fair Value |
Outstanding at December 31, 2019 | | 8,112,736 | | | $ | 95.69 | |
RSUs granted | | 1,688,442 | | | $ | 171.72 | |
RSUs vested | | (2,233,708) | | | $ | 95.30 | |
RSUs forfeited/canceled | | (1,343,119) | | | $ | 103.73 | |
Outstanding as of September 30, 2020 | | 6,224,351 | | | $ | 115.27 | |
The intrinsic value of RSUs vested was $342.9 million and $290.5 million for the nine months ended September 30, 2020 and 2019, respectively. The aggregate intrinsic value of RSUs unvested is $1.8 billion as of September 30, 2020. Unrecognized equity-based compensation expense related to outstanding RSUs is $649.7 million with a weighted average remaining vesting term of 1.2 years at September 30, 2020.
10. Unearned Revenue
The Company has three types of contractual liabilities: (i) cash collections from its customers prior to delivery of products purchased, which are initially recorded in unearned revenue, and are recognized as net revenue when the products are delivered, (ii) unredeemed gift cards and site and store credits, which are initially recorded in unearned revenue, and are recognized in the period they are redeemed, and (iii) membership rewards redeemable for future purchases, which are earned by customers on purchases made with the Company's Wayfair branded, private label credit card, and are initially recorded in other current liabilities, and are recognized as net revenue when redeemed. The portion of gift cards and site and store credits not expected to be redeemed ("breakage") are recognized as net revenue based on historical redemption patterns, which is substantially within
twenty-four months from the date of issuance, to the extent there is no requirement for remitting balances to governmental agencies.
Contractual liabilities included in unearned revenue and other current liabilities in the Consolidated and Condensed Balance Sheet were $318.2 million and $5.3 million at September 30, 2020 and $167.6 million and $4.6 million at December 31, 2019, respectively. During the nine months ended September 30, 2020, the Company recognized $139.7 million and $2.8 million of net revenue that was included in unearned revenue and other current liabilities, respectively, at December 31, 2019.
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 11, Segment and Geographic Information, for additional detail.
11. 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. The Company’s CODM is its chief executive officer.
The Company's operating and reportable segments are the U.S. and International. These segments reflect the way the CODM allocates resources and evaluates financial performance, which is based upon each segment's Adjusted EBITDA. Adjusted EBITDA is defined as net income (loss) before depreciation and amortization, equity-based compensation and related taxes, interest (expense), net, other (expense) income, net, (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.
The Company 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) income, net, and (benefit) provision for income taxes, net. There are no net revenue transactions between the Company's reportable segments.
U.S.
The U.S. segment primarily consists of amounts earned through product sales through the Company's family of sites in the U.S. The U.S. net revenue for the three and nine months ended September 30, 2019 includes $5.8 million and $30.9 million, respectively of net revenue previously classified as other net revenue
International
The International segment primarily consists of amounts earned through product sales through the Company'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 the Company's reportable segments for the periods presented:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
| | (in thousands) |
U.S. net revenue | | $ | 3,274,872 | | | $ | 1,966,654 | | | $ | 8,901,559 | | | $ | 5,624,870 | |
International net revenue | | 564,698 | | | 338,833 | | | 1,572,746 | | | 968,697 | |
Total net revenue | | $ | 3,839,570 | | | $ | 2,305,487 | | | $ | 10,474,305 | | | $ | 6,593,567 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
| | (in thousands) |
Adjusted EBITDA: | | | | | | | | |
U.S. | | $ | 377,007 | | | $ | (62,878) | | | $ | 766,486 | | | $ | (91,002) | |
International | | (5,895) | | | (81,306) | | | (82,838) | | | (225,383) | |
Total reportable segments Adjusted EBITDA | | 371,112 | | | (144,184) | | | 683,648 | | | (316,385) | |
Less: reconciling items (1) | | (197,946) | | | (127,851) | | | (522,470) | | | (337,977) | |
Net income (loss) | | $ | 173,166 | | | $ | (272,035) | | | $ | 161,178 | | | $ | (654,362) | |
(1) The following adjustments are made to reconcile total reportable segments Adjusted EBITDA to consolidated net income (loss):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
| | (in thousands) |
Depreciation and amortization | | $ | 72,575 | | | $ | 50,250 | | | $ | 208,532 | | | $ | 134,172 | |
Equity-based compensation and related taxes | | 76,683 | | | 65,275 | | | 211,376 | | | 173,963 | |
Interest expense, net | | 36,315 | | | 14,432 | | | 87,472 | | | 33,922 | |
Other expense (income), net | | 13,584 | | | (2,182) | | | 10,720 | | | (5,582) | |
(Benefit) provision for income taxes, net | | (1,211) | | | 76 | | | 414 | | | 1,502 | |
Other (1) | | 0 | | | 0 | | | 3,956 | | | 0 | |
Total reconciling items | | $ | 197,946 | | | $ | 127,851 | | | $ | 522,470 | | | $ | 337,977 | |
| | | | | | | | |
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(1) The Company recorded $4.0 million in the nine months ended September 30, 2020 in selling, operations, technology, general and administrative expenses in the Consolidated and Condensed Statements of Operations related to severance costs associated with February 2020 workforce reductions.
12. Income Taxes
The (benefit) provision for income taxes, net was $(1.2) million and $0.1 million for the three months ended September 30, 2020 and 2019, respectively, and $0.4 million and $1.5 million for the nine months ended September 30, 2020 and 2019, respectively. The (benefit) provision for income taxes, net recorded in the three and nine months ended September 30, 2020 is primarily related to income earned in the U.S. and certain foreign jurisdictions and U.S. state income taxes, offset by a discrete tax benefit related to excess tax benefits on equity awards for U.S. employees. The (benefit) provision for income taxes, net recorded in the three and nine months ended September 30, 2019 is primarily related to income earned in certain foreign jurisdictions and U.S. state income taxes.
Deferred income taxes reflect the impact of temporary differences between the amounts of assets and liabilities for financial reporting purposes and such amounts as measured by tax laws. The Company has deferred tax assets related to its net operating loss carryforwards accumulated since the fourth quarter of 2014 and related to net operating loss carryforwards of certain of its foreign subsidiaries. A valuation allowance against net deferred tax assets is required if, based upon the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. The Company reassesses the
valuation allowance on a quarterly basis and has provided a valuation allowance on substantially all of its worldwide net deferred tax assets.
The Company had 0 material unrecognized tax benefits as of September 30, 2020 and December 31, 2019. The Company’s policy is to recognize interest and penalties related to unrecognized tax benefits as a component of the (benefit) provision for income taxes, net.
13.6. Stockholders’ Deficit
Preferred Stock
The CompanyWayfair authorized 10,000,000 shares of undesignated preferred stock, $0.001 par value per share, for future issuance. As of SeptemberJune 30, 2020, the Company2021, Wayfair had 0 shares of undesignated preferred stock issued or outstanding.
Common Stock
The CompanyWayfair 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 68,959,95777,013,108 and 66,642,61172,980,490 shares of Class A common stock and 26,636,72126,563,837 and 26,957,81526,564,234 shares of Class B common stock were outstanding as of SeptemberJune 30, 20202021 and December 31, 2019, respectively.2020. The rights of the holders of Class A common stock and Class B common stock are identical, except with respect tofor voting and conversion rights. Each share of Class A common stock is entitled to 1 vote per share and each share of Class B common stock is entitled to 10 votes per share. Each share of Class B common stock may be converted into 1 share of Class A common stock at the option of its holder and will be automatically converted into 1 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,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 the Company'sWayfair's initial public offering through SeptemberJune 30, 2020, 55,401,6932021, 55,474,577 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$700.0 million of the Company’sWayfair’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”). The 2020 Repurchase Program replaced the Company’s previous $200 million stock repurchase authorization approved by the Board in 2018 (the “2018 Repurchase Program”), which was terminated simultaneously.
During the three and ninesix months ended SeptemberJune 30, 2020, the Company2021, Wayfair repurchased $280.2$300.0 million and $300.2 million through the stock repurchase programs2020 Repurchase Program at an average price of $331.65$305.50 and $305.43 per share of Class A common stock.
During the three and ninesix months ended SeptemberJune 30, 2019, the Company2020, Wayfair did not repurchase any shares of common stock.
14. Credit Agreement7. Equity-Based Compensation
The Company has a credit agreement with certain lenders, which currentlyBoard 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 a $200 million senior secured revolving credit facility maturing on February 21, 2022the 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 “Revolver”). The Revolver contains affirmative and negative covenants customarily applicable to senior secured credit facilities, and also requires the Company to maintain certain levels of Free Cash Flow (as defined in the credit agreement).
On August 21, 2020, in connection with the 2020 Repurchase Program, the Company amended the credit agreement for the Revolver to increase the Company’s stock repurchase basket in the negative covenant for restricted payments. The Company also increased the revolving loan commitment amount to $200 million on October 30, 2020 through an incremental commitment joinder. In the nine months ended September 30, 2020, the Company borrowed under the Revolver. All borrowings were repaid as of September 30, 2020. As a result, there were 0 amounts outstanding on the Revolver as of September 30, 2020.
15. Convertible Debt
2017 Notes and Capped Call Transactions
On September 15, 2017, the Company issued $431.25 million in aggregate principal amount of 0.375% Convertible Senior Notes due 2022 (the "2017 Notes""2010 Plan"), which includes the exercise in full of a $56.25 million over-allotment option, to certain financial institutions as the initial purchasers of the 2017 Notes (the "2017 Initial Purchasers"). On September 11, 2017, in connection with the pricing of the 2017 Notes, the Company entered into privately negotiated capped call transactions (the "2017 Base Capped Call Transactions") with 2 of the 2017 Initial Purchasers and certain other financial institutions (the "2017 Option Counterparties") and, in connection with the exercise in full of the over-allotment optionwas administered by the 2017 Initial Purchasers, on September 14, 2017, entered into additional capped call transactions (such additional capped call transactions,Board of Wayfair LLC. Awards issued under the "2017 Additional Capped Call Transactions” and, together with the 2017 Base Capped Call Transactions, the "2017 Capped Call Transactions") with the 2017 Option Counterparties. Collectively, the 2017 Capped Call Transactions covered,2010 Plan that remain outstanding currently represent Class A or Class B common stock of Wayfair Inc.
The 2014 Plan initially the number ofmade 8,603,066 shares of the Company’s Class A common stock underlyingavailable for future award grants. The 2014 Plan also contains an evergreen provision whereby the 2017 Notes, subject to anti-dilution adjustments substantially similar to those applicable to the 2017 Notes.
The 2017 Notes were issued pursuant to an indenture, dated September 15, 2017 (the "2017 Indenture"), between the Company and U.S. Bank National Association, as trustee. The Company pays interestshares available for future grants are increased on the 2017 Notes semiannually in arrears at a rate of 0.375% per annum on March 1 and September 1first day of each year. The 2017 Notes are convertible based upon an initial conversion ratecalendar year from January 1, 2016 through and including January 1, 2024. As of 9.6100January 1, 2021, 6,224,792 shares of the Company’s Class A common stock per $1,000 principal amount of 2017 Notes (equivalent to a conversion price of approximately $104.06 per share of the Company’s Class A common stock). The conversion rate will be subject to adjustment upon the occurrence of certain specified events, including certain distributions and dividends to all or substantially all of the holders of the Company’s Class A common stock, but will not be adjustedwere available for accrued and unpaid interest. The Company will settle any conversions of the 2017 Notes in cash, shares of the Company’s Class A common stock or a combination thereof, with the form of consideration determined at the Company’s election.
The 2017 Notes will mature on September 1, 2022, unless earlier purchased, redeemed or converted. Prior to June 1, 2022, holders may convert all or a portion of their 2017 Notes onlyfuture grant under the following circumstances: (1) during any calendar quarter (and only during such calendar quarter), if2014 Plan. Shares or RSUs forfeited, withheld for minimum statutory tax obligations, and unexercised stock option lapses from the last reported sale price of2010 and 2014 Plans are available for future grant under the Company’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; (2) during the 5 business day period after any 10 consecutive trading day period (the "2017 Notes measurement period") in which the trading price per $1,000 principal amount of 2017 Notes for each trading day of the 2017 Notes measurement period was less than 98% of the product of the last reported sale price of the Company’s Class A common stock and the conversion rate on each such trading day; (3) with respect to any 2017 Notes called for redemption by the Company, at any time prior to the close of business on the second scheduled trading day immediately preceding the redemption date; or (4) upon the occurrence of specified corporate events. On and after June 1, 2022 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert their 2017 Notes at any time, regardless of the foregoing circumstances. Holders of 2017 Notes who convert their 2017 Notes in connection with a notice of a redemption or a make-whole fundamental change (each as defined in the 2017 Indenture) may be entitled to a premium in the form of an increase in the conversion rate of the 2017 Notes.
On November 15, 2018, the Company amended and restated the 2017 Capped Call Transactions (the "Restated 2017 Capped Call Transactions") with each of the 2017 Option Counterparties in order to, among other things, provide that the options underlying the Restated 2017 Capped Call Transactions can, at the Company’s option, remain outstanding until September 1, 2022, which is the maturity date for the 2017 Notes, even if all or a portion of the 2017 Notes are converted, repurchased or redeemed prior to such date.
The Company could not redeem the 2017 Notes prior to September 8, 2020. On or after September 8, 2020, the Company may redeem for cash all or part of the 2017 Notes if the last reported sale price of the Company’s Class A common stock equals or exceeds 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive), including at least 1 of the 5 trading days immediately preceding the date on which the Company provides notice of redemption, during any 30 consecutive trading days ending on, and including the trading day immediately preceding the date on which the Company provides notice of the redemption. The redemption price will be 100% of the principal amount of the 2017 Notes to be redeemed, plus accrued and unpaid interest, if any.
Upon the occurrence of a fundamental change (as defined in the 2017 Indenture), holders may require the Company to repurchase all or a portion of their 2017 Notes for cash at a price equal to 100% of the principal amount of the 2017 Notes to be repurchased plus any accrued but unpaid interest to, but excluding, the fundamental change repurchase date.2014 Plan.
The 2017 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 2017 Notes then outstanding may declare the entire principal amount of all the 2017 Notes plus accrued interest, if any, to be immediately due and payable.
2018 Notes and Capped Call Transactions
In November 2018, the Company issued $575.0 million in aggregate principal amount of 1.125% Convertible Senior Notes due 2024 (the "2018 Notes"), which includes the exercise in full of a $75.0 million option granted to the initial purchasers, to certain financial institutions as the initial purchasers of the 2018 Notes (the "2018 Initial Purchasers"). The issuance of $500.0 million of 2018 Notes closed on November 19, 2018 and the additional $75.0 million of additional 2018 Notes, which were issued pursuant to the exercise of the 2018 Initial Purchasers' option to purchase such additional 2018 Notes, closed on November 29, 2018. On November 14, 2018, in connection with the pricing of the 2018 Notes, the Company entered into privately negotiated capped call transactions (the "2018 Base Capped Call Transactions") with one of the 2018 Initial Purchasers and certain other financial institutions (the "2018 Option Counterparties") and, in connection with the exercise in full of the 2018 Initial Purchasers' option to purchase such additional 2018 Notes, on November 27, 2018, entered into additional capped call transactions (such additional capped call transactions, the "2018 Additional Capped Call Transactions" and, together with the 2018 Base Capped Call Transactions, the "2018 Capped Call Transactions") with the 2018 Option Counterparties. Collectively, the 2018 Capped Call Transactions cover, initially, the number of shares of the Company’s Class A common stock underlying the 2018 Notes, subject to anti-dilution adjustments substantially similar to those applicable to the 2018 Notes.
The 2018 Notes were issued pursuant to an indenture, dated November 19, 2018 (the "2018 Indenture"), between the Company and U.S. Bank National Association, as trustee. The Company will pay interest on the 2018 Notes semiannually in arrears at a rate of 1.125% per annum on May 1 and November 1 of each year commencing on May 1, 2019. The 2018 Notes are convertible based upon an initial conversion rate of 8.5910 shares of the Company’s Class A common stock per $1,000 principal amount of 2018 Notes (equivalent to a conversion price of approximately $116.40 per share of the Company’s Class A common stock). The conversion rate will be subject to adjustment upon the occurrence of certain specified events, including certain distributions and dividends to all or substantially all of the holders of the Company’s Class A common stock, but will not be adjusted for accrued and unpaid interest. The Company will settle any conversions of the 2018 Notes in cash, shares of the Company’s Class A common stock or a combination thereof, with the form of consideration determined at the Company’s election.
The 2018 Notes will mature on November 1, 2024, unless earlier purchased, redeemed or converted. Prior to August 1, 2024, holders may convert all or a portion of their 2018 Notes only under the following circumstances: (1) during any calendar quarter (and only during such calendar quarter), if the last reported sale price of the Company’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; (2) during the five business day period after any ten consecutive trading day period (the "2018 Notes measurement period") in which the trading price per $1,000 principal amount of 2018 Notes for each trading day of the 2018 Notes measurement period was less than 98% of the product of the last reported sale price of the Company’s Class A common stock and the conversion rate on each such trading day; (3) with respect to any 2018 Notes called for redemption by the Company, at any time prior to the close of business on the second scheduled trading day immediately preceding the redemption date; or (4) upon the occurrence of specified corporate events. On and after August 1, 2024 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert their 2018 Notes at any time, regardless of the foregoing circumstances. Holders of 2018 Notes who convert their 2018 Notes in connection with a make-whole fundamental change or a notice of redemption (each as defined in the 2018 Indenture) may be entitled to a premium in the form of an increase in the conversion rate of the 2018 Notes.
The Company may not redeem the 2018 Notes prior to May 8, 2022. On or after May 8, 2022, the Company may redeem for cash all or part of the 2018 Notes if the last reported sale price of the Company’s Class A common stock equals or exceeds 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive), including at least 1 of the 5 trading days immediately preceding the date on which the Company provides notice of redemption, during any 30 consecutive trading days ending on, and including the trading day immediately preceding the date on which the Company provides notice of the redemption. The redemption price will be 100% of the principal amount of the 2018 Notes to be redeemed, plus accrued and unpaid interest, if any.
Upon the occurrence of a fundamental change (as defined in the 2018 Indenture), holders may require the Company to repurchase all or a portion of their 2018 Notes for cash at a price equal to 100% of the principal amount of the 2018 Notes to be repurchased plus any accrued but unpaid interest to, but excluding, the fundamental change repurchase date.
The 2018 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 2018 Notes then outstanding may declare the entire principal amount of all the 2018 Notes plus accrued interest, if any, to be immediately due and payable.
2019 Notes and Capped Call Transactions
On August 19, 2019, the Company issued $948.75 million in aggregate principal amount of 1.00% Convertible Senior Notes due 2026 (the "2019 Notes"), which includes the exercise in full of a $123.75 million option granted to the initial purchasers, to certain financial institutions as the initial purchasers of the 2019 Notes (the "2019 Initial Purchasers"). On August 14, 2019, in connection with the pricing of the 2019 Notes, the Company entered into privately negotiated capped call transactions (the "2019 Base Capped Call Transactions") with certain of the 2019 Initial Purchasers or their affiliates and another financial institution (the "2019 Option Counterparties") and, in connection with the exercise in full of the 2019 Initial Purchasers' option to purchase such additional 2019 Notes, on August 16, 2019, entered into additional capped call transactions (such additional capped call transactions, the "2019 Additional Capped Call Transactions" and, together with the 2019 Base Capped Call Transactions, the "2019 Capped Call Transactions") with the 2019 Option Counterparties. Collectively, the 2019 Capped Call Transactions cover, initially, the number of shares of the Company’s Class A common stock underlying the 2019 Notes, subject to anti-dilution adjustments substantially similar to those applicable to the 2019 Notes.
The 2019 Notes were issued pursuant to an indenture, dated August 19, 2019 (the "2019 Indenture"), between the Company and U.S. Bank National Association, as trustee. The Company will pay interest on the 2019 Notes semiannually in arrears at a rate of 1.00% per annum on February 15 and August 15 of each year commencing on February 15, 2020. The 2019 Notes are convertible based upon an initial conversion rate of 6.7349 shares of the Company’s Class A common stock per $1,000 principal amount of 2019 Notes (equivalent to a conversion price of approximately $148.48 per share of the Company’s Class A common stock). The conversion rate will be subject to adjustment upon the occurrence of certain specified events, including certain distributions and dividends to all or substantially all of the holders of the Company’s Class A common stock, but will not be adjusted for accrued and unpaid interest. The Company will settle any conversions of the 2019 Notes in cash, shares of the Company’s Class A common stock or a combination thereof, with the form of consideration determined at the Company’s election.
The 2019 Notes will mature on August 15, 2026, unless earlier purchased, redeemed or converted. Prior to May 15, 2026, holders may convert all or a portion of their 2019 Notes only under the following circumstances: (1) during any calendar quarter commencing after the calendar quarter ending on December 31, 2019 (and only during such calendar quarter), if the last reported sale price of the Company’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; (2) during the five business day period after any ten consecutive trading day period (the “2019 Notes measurement period”) in which the trading price per $1,000 principal amount of 2019 Notes for each trading day of the 2019 Notes measurement period was less than 98% of the product of the last reported sale price of the Company’s Class A common stock and the conversion rate on each such trading day; (3) with respect to any 2019 Notes called for redemption by the Company, at any time prior to the close of business on the second scheduled trading day immediately preceding the redemption date; or (4) upon the occurrence of specified corporate events. On and after May 15, 2026 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert their 2019 Notes at any time, regardless of the foregoing circumstances. Holders of 2019 Notes who convert their 2019 Notes in connection with a make-whole fundamental change or a notice of redemption (each as defined in the 2019 Indenture) may be entitled to a premium in the form of an increase in the conversion rate of the 2019 Notes.
The Company may not redeem the 2019 Notes prior to August 20, 2023. On or after August 20, 2023, the Company may redeem for cash all or part of the 2019 Notes if the last reported sale price of the Company’s Class A common stock equals or exceeds 130% 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 the Company provides notice of redemption, during any 30 consecutive trading days ending on, and including the trading day immediately preceding the date on which the Company provides notice of the redemption. The redemption price will be 100% of the principal amount of the 2019 Notes to be redeemed, plus accrued and unpaid interest, if any.
Upon the occurrence of a fundamental change (as defined in the 2019 Indenture), holders may require the Company to repurchase all or a portion of their 2019 Notes for cash at a price equal to 100% of the principal amount of the 2019 Notes to be repurchased plus any accrued but unpaid interest to, but excluding, the fundamental change repurchase date.
The 2019 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 2019 Notes then
outstanding may declare the entire principal amount of all the 2019 Notes plus accrued interest, if any, to be immediately due and payable.
2020 Notes and Capped Call Transactions
On August 14, 2020, the Company issued $1.518 billion in aggregate principal amount of 0.625% Convertible Senior Notes due 2025 (the “2020 Notes”, and together with the 2017 Notes, the 2018 Notes and the 2019 Notes, the “Non-Accreting Notes”), which includes the exercise in full of a $198.0 million option granted to the initial purchasers, to certain financial institutions as the initial purchasers of the 2020 Notes (the “2020 Initial Purchasers”). On August 11, 2020, in connection with the pricing of the 2020 Notes, the Company entered into privately negotiated capped call transactions (the “2020 Base Capped Call Transactions”) with certain of the 2020 Initial Purchasers or their respective affiliates and certain other financial institutions (the “2020 Option Counterparties”) and, in connection with the exercise in full of the 2020 Initial Purchasers’ option to purchase such additional 2020 Notes, on August 12, 2020, entered into additional capped call transactions (such additional capped call transactions, the “2020 Additional Capped Call Transactions” and together with the 2020 Base Capped Call Transactions, the “2020 Capped Call Transactions”) with the 2020 Option Counterparties. Collectively, the 2020 Capped Call Transactions cover, initially, the number of shares of the Company’s Class A common stock underlying the 2020 Notes, subject to anti-dilution adjustments substantially similar to those applicable to the 2020 Notes.
The 2020 Notes were issued pursuant to an indenture, dated August 14, 2020 (the "2020 Indenture"), between the Company and U.S. Bank National Association, as trustee. The Company will pay interest on the 2020 Notes semiannually in arrears at a rate of 0.625% per annum on April 1 and October 1 of each year commencing on April 1, 2021. The 2020 Notes are convertible based upon an initial conversion rate of 2.3972 shares of the Company’s Class A common stock per $1,000 principal amount of 2020 Notes (equivalent to a conversion price of approximately $417.15 per share of the Company’s Class A common stock). The conversion rate will be subject to adjustment upon the occurrence of certain specified events, including certain distributions and dividends to all or substantially all of the holders of the Company’s Class A common stock, but will not be adjusted for accrued and unpaid interest. The Company will settle any conversions of the 2020 Notes in cash, shares of the Company’s Class A common stock or a combination thereof, with the form of consideration determined at the Company’s election.
The 2020 Notes will mature on October 1, 2025, unless earlier purchased, redeemed or converted. Prior to July 1, 2025, holders may convert all or a portion of their 2020 Notes only under the following circumstances: (1) during any calendar quarter commencing after the calendar quarter ending on December 31, 2020 (and only during such calendar quarter), if the last reported sale price of the Company’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; (2) during the five business day period after any ten consecutive trading day period (the “2020 Notes measurement period”) in which the trading price per $1,000 principal amount of 2020 Notes for each trading day of the 2020 Notes measurement period was less than 98% of the product of the last reported sale price of the Company’s Class A common stock and the conversion rate on each such trading day; (3) with respect to any 2020 Notes called for redemption by the Company, at any time prior to the close of business on the second scheduled trading day immediately preceding the redemption date; or (4) upon the occurrence of specified corporate events. On and after July 1, 2025 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert their 2020 Notes at any time, regardless of the foregoing circumstances. Holders of 2020 Notes who convert their 2020 Notes in connection with a make-whole fundamental change or a notice of redemption (each as defined in the 2020 Indenture) may be entitled to a premium in the form of an increase in the conversion rate of the 2020 Notes.
The Company may not redeem the 2020 Notes prior to October 4, 2022. On or after October 4, 2022, the Company may redeem for cash all or part of the 2020 Notes if the last reported sale price of the Company’s Class A common stock equals or exceeds 130% 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 the Company provides notice of redemption, during any 30 consecutive trading days ending on, and including the trading day immediately preceding the date on which the Company provides notice of the redemption. The redemption price will be 100% of the principal amount of the 2020 Notes to be redeemed, plus accrued and unpaid interest, if any.
Upon the occurrence of a fundamental change (as defined in the 2020 Indenture), holders may require the Company to repurchase all or a portion of their 2020 Notes for cash at a price equal to 100% of the principal amount of the 2020 Notes to be repurchased plus any accrued but unpaid interest to, but excluding, the fundamental change repurchase date.
The 2020 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 2020 Notes then
outstanding may declare the entire principal amount of all the 2020 Notes plus accrued interest, if any, to be immediately due and payable.
Proceeds from Non-Accreting Notes Transactions
The net proceeds from the sale of the 2017 Notes, 2018 Notes, 2019 Notes, and the 2020 Notes were approximately $420.4 million, $562.0 million, $935.1 million, and $1.5 billion. respectively, after deducting the initial purchasers’ discounts and the offering expenses payable by the Company. The Company used approximately $44.2 million, $93.4 million, $145.7 million, and $255.0 million, respectively, of the net proceeds from the 2017 Notes, 2018 Notes, 2019 Notes, and 2020 Notes to pay the cost of the 2017 Capped Call Transactions, the 2018 Capped Call Transactions, the 2019 Capped Call Transactions, and the 2020 Capped Call Transactions, respectively.
Accounting for Non-Accreting Notes
In accounting for the issuance of the Non-Accreting Notes, the Company separated the Non-Accreting Notes into liability and equity components. The carrying amount of the liability components were calculated by measuring the fair value of a similar liability that does not have an associated convertible feature. The carrying amount of the equity components, representing the conversion option, which does not meet the criteria for separate accounting as a derivative as it is indexed to the Company's own stock, were determined by deducting the fair value of the liability components from the par value of the Non-Accreting Notes. The differences between the carrying amounts of the Non-Accreting Notes and the liability components represent the debt discounts for the corresponding Non-Accreting Notes, which is recorded as a direct deduction from the related debt liabilities in the Consolidated and Condensed Balance Sheet and amortized to interest expense using the effective interest method over the terms of the corresponding Non-Accreting Notes.
The effective interest rate of the 2017 Notes, the 2018 Notes, the 2019 Notes and the 2020 Notes is 6.0%, 8.1%, 6.4%, and 5.2%, respectively. The equity components of the 2017 Notes, the 2018 Notes, the 2019 Notes and the 2020 Notes of approximately $95.8 million, $181.5 million, $280.3 million, and $297.4 million, respectively, are included in additional paid-in capital in the Consolidated and Condensed Balance Sheet and are not remeasured as long as they continue to meet the conditions for equity classification. The Company allocated transaction costs related to the components of the Non-Accreting Notes using the same proportions as the proceeds from the corresponding Non-Accreting Notes. Transaction costs attributable to the liability components were recorded as direct deductions from the related debt liabilities in the Consolidated and Condensed Balance Sheet and amortized to interest expense over the terms of the corresponding Non-Accreting Notes, and transaction costs attributable to the equity components were netted with the corresponding equity components in shareholders’ deficit.
2020 Accreting Notes
On April 8, 2020, the Company issued $535.0 million in aggregate original principal amount of 2.50% Accreting Convertible Senior Notes due 2025 (the "2020 Accreting Notes", and collectively with the Non-Accreting Notes, the “Notes”) to GHEP VII Aggregator, L.P. ("Great Hill"), CBEP Investments, LLC ("Charlesbank") and The Spruce House Partnership LLC. The 2020 Accreting Notes are fully and unconditionally guaranteed on a senior unsecured basis by Wayfair LLC, a wholly-owned subsidiary of the Company, as guarantor.
The 2020 Accreting Notes were issued pursuant to an indenture, dated April 8, 2020 (the "2020 Accreting Indenture"), among the Company, Wayfair LLC, as guarantor, and U.S. Bank National Association, as trustee. The 2020 Accreting Notes are fully and unconditionally guaranteed on a senior unsecured basis by Wayfair LLC. No cash interest will be payable on the 2020 Accreting Notes. Instead, the 2020 Accreting Notes will accrue interest at a rate of 2.50% per annum which will accrete to the principal amount on April 1 and October 1 of each year, beginning on October 1, 2020. The 2020 Accreting Notes are convertible based upon an initial conversion price of $72.50 per share of the Company’s Class A common stock. The conversion price 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 the Company's Class A common stock, but will not be adjusted for accrued and unpaid interest. The Company will settle any conversion of 2020 Accreting Notes with a number of shares of the Company's Class A common stock per $1,000 original principal amount of 2020 Accreting Notes equal to the accreted principal amount of such original principal amount of 2020 Accreting Notes divided by the conversion price.
The 2020 Accreting Notes will mature on April 1, 2025, unless earlier purchased, redeemed or converted. Holders may convert all or a portion of their 2020 Accreting Notes at any time prior to the second business day immediately preceding the maturity date. Holders of the 2020 Accreting Notes who convert in connection with a make-whole fundamental change (as defined in the 2020 Accreting Indenture) may be entitled to a premium in the form of additional shares of the Company's Class A common stock.
The Company may not redeem the 2020 Accreting Notes prior to May 9, 2023. On or after May 9, 2023, the Company may redeem for cash all or part of the 2020 Accreting Notes if the last reported sale price of the Company's Class A common stock equals or exceeds 276% 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 the Company provides notice of redemption, during any 30 consecutive trading days ending on, and including the trading day immediately preceding the date on which the Company provides notice of the redemption. The redemption price will be 100% of the accreted principal amount of the 2020 Accreting Notes to be redeemed, including accrued interest, if any, but excluding, the redemption date.
Upon the occurrence of a fundamental change (as defined in the 2020 Accreting Indenture), holders may require the Company to repurchase all or a portion of their 2020 Accreting Notes for cash at a price equal to 100% of the accreted principal amount of the 2020 Accreting Notes to be repurchased (which accreted principal amount upon repurchase will include interest, if any, accrued to, but excluding, the fundamental change repurchase date).
The 2020 Accreting 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 2020 Accreting Notes then outstanding may declare the entire principal amount of all the 2020 Accreting Notes plus accrued interest, if any, to be immediately due and payable.
The net proceeds from the sale of the 2020 Accreting Notes was approximately $527.4 million, after deducting the offering expenses payable by the Company.
In accounting for the issuance of the 2020 Accreting Notes, the Company determined there was a beneficial conversion feature, which represents the excess of the fair value of the underlying common stock at the commitment date less the effective conversion price of the shares convertible at that time. The beneficial conversion feature of $39.4 million was recorded to additional paid-in capital in the Consolidated and Condensed Balance Sheet and represents a debt discount to the 2020 Accreting Notes, which was recorded as a direct deduction from the related debt liability in the Consolidated and Condensed Balance Sheet. It is amortized to interest expense using the effective interest method over the term of the 2020 Accreting Notes. All transaction costs incurred were recorded as a direct deduction from the related debt liability in the Consolidated and Condensed Balance Sheet and are amortized to interest expense using the effective interest method over the term of the 2020 Accreting Notes.
The 2020 Accreting Notes accrue interest at a rate of 2.50% per annum, which will accrete to the principal amount on April 1 and October 1 of each year, beginning on October 1, 2020. The interest is amortized to interest expense using the effective interest method over the term of the 2020 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, the Company will reclassify the interest accrued as of that date to long-term debt. The beneficial conversion feature for additional shares, which would be issued upon conversion of paid in kind interest, is recorded as additional interest expense and additional paid-in capital over the term of the 2020 Accreting Notes as such interest accrues. The effective interest rate of the 2020 Accreting Notes is 4.4%.
Capped Call Transactions
The Restated 2017 Capped Call Transactions, 2018 Capped Call Transactions, 2019 Capped Call Transactions, and 2020 Capped Call Transactions (collectively, the "Capped Call Transactions") are expected generally to reduce the potential dilution and/or offset the cash payments the Company is required to make in excess of the principal amount of the Non-Accreting Notes upon conversion of the Non-Accreting Notes in the event that the market price per share of the Company’s Class A common stock is greater than the strike price of the Capped Call Transactions (which initially corresponds to the initial conversion price of the Non-Accreting Notes and is subject to certain adjustments under the terms of the Capped Call Transactions), with such reduction and/or offset subject to a cap based on the cap price of the Capped Call Transactions. The Restated 2017 Capped Call Transactions have an initial cap price of $154.16 per share of the Company’s Class A common stock, which represents a premium of 100% over the last reported sale price of the Company’s Class A common stock on September 11, 2017, which is the date the 2017 Notes priced, and is subject to certain adjustments under the terms of the Restated 2017 Capped Call Transactions. The 2018 Capped Call Transactions have an initial cap price of $219.63 per share of the Company’s Class A common stock, which represents a premium of 150% over the last reported sale price of the Company’s Class A common stock on November 14, 2018, which is the day the 2018 Notes priced, and is subject to certain adjustments under the terms of the 2018 Capped Call Transactions. The 2019 Capped Call Transactions have an initial cap price of $280.15 per share of the Company's Class A common stock, which represents a premium of 150% over the last reported sale price of the Company's Class A common stock on August 14, 2019, which is the day the 2019 Notes priced, and is subject to certain adjustments under the terms of the 2019 Capped Call Transactions. The 2020 Capped Call Transactions have an initial cap price of $787.08 per share of the Company’s Class A common stock, which represents a premium of 150% over the U.S. composite volume weighted average price of the Company’s Class A common stock on August 11, 2020, which is the day the 2020 Notes priced,
and is subject to certain adjustments under the terms of the 2020 Capped Call Transactions. Collectively, the Capped Call Transactions cover, initially, the number of shares of the Company’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 Capped Call Transactions are separate transactions, in each case, entered into by the Company with the 2017 Option Counterparties, the 2018 Option Counterparties, the 2019 Option Counterparties, and the 2020 Option Counterparties, and are not part of the terms of the Non-Accreting Notes and will not affect any holder’s rights under the Non-Accreting Notes. Holders of the Non-Accreting Notes will not have any rights with respect to the Capped Call Transactions. The Capped Call Transactions do not meet the criteria for separate accounting as a derivative as they are indexed to the Company's stock. The premiums paid for the Capped Call Transactions have been included as a net reduction to additional paid-in capital within shareholders’ deficit.
Extinguishment, Conversions and Convertibility of the Notes
In August 2020, the Company used $1.0 billion of the net proceeds from the issuance of the 2020 Notes to repurchase for cash in privately negotiated repurchase transactions $343.4 million in aggregate principal amount of the 2017 Notes. Additionally, in the third quarter of 2020, $60.6 million aggregate principal of the 2017 Notes were settled upon conversion by the holders for 582,825 shares of the Company’s Class A common stock. Approximately $27.2 million aggregate principal amount of the 2017 Notes remained outstanding as of September 30, 2020.
In accounting for these transactions, the Company allocated $371.8 million of the total fair value of the consideration received from the 2020 Notes to the debt component of the repurchased 2017 Notes by estimating the fair value of a similar liability that did not have an associated convertible feature. The $12.6 million loss on extinguishment of the 2017 Notes recorded to Other (expense) income, net in the Consolidated and Condensed Statements of Operations, primarily represents the difference between the total fair value of consideration allocated to the debt component and the $360.5 million carrying value, net of the remaining unamortized debt discount and debt issuance costs. The Company applied the $818.7 million residual value of the total fair value of the consideration to the equity component in additional paid-in capital in the Consolidated and Condensed Balance Sheet.
The following Non-Accreting Notes are convertible during the calendar quarter ended December 31, 2020: the 2017 Notes, the 2018 Notes and the 2019 Notes. The 2020 Notes are not convertible during the fourth quarter of 2020. None of the 2018 Notes, the 2019 Notes or the 2020 Notes have been converted to date.
The 2020 Accreting Notes are convertible at any time prior to the second business day immediately preceding the maturity date (April 1, 2025). As of September 30, 2020, none of the 2020 Accreting Notes had been converted. In October 2020, Charlesbank converted $253.1 million of accreted principal of the 2020 Accreting Notes and received 3,490,175 shares of the Company’s Class A common stock.
Use of Proceeds of the Notes
The Company 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. The Company may also use a portion of the net proceeds to finance acquisitions, strategic transactions, investments. repurchases of its Class A common stock or the repayment, redemption, purchase or exchange of indebtedness (including the Notes).
Seniority of Notes
The Notes are general senior unsecured obligations of the Company. The Notes rank senior in right of payment to any of the Company’s future indebtedness that is expressly subordinated in right of payment to the Notes, rank equal in right of payment to the Company’s existing and future unsecured indebtedness that is not so subordinated, and are effectively subordinated in right of payment to any of the Company’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 the Company’s subsidiaries, including Wayfair LLC’s guaranty of the 2020 Accreting Notes, and the 2020 Accreting Notes are structurally subordinated to all existing and future indebtedness and liabilities of the Company’s subsidiaries (other than Wayfair LLC).
The following table presents
activity relating to stock options for the
outstanding principal amount and carryingsix months ended June 30, 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 | | (19,026) | | | $ | 2.98 | | | |
Options forfeited/canceled | | (20) | | | $ | 3.42 | | | |
Outstanding and exercisable at June 30, 2021 | | 0 | | | $ | 0 | | | 0 |
The intrinsic value of stock options exercised was $5.9 million and $2.2 million for the Notes as of the date presented:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | September 30, 2020 | | December 31, 2019 |
| | | | | | 2017 Notes | | 2018 Notes | | 2019 Notes | | 2020 Accreting Notes | | 2020 Notes | | 2017 Notes | | 2018 Notes | | 2019 Notes |
| | | | | | (in thousands) |
Principal amounts: | | | | | | | | | | | | | | | | | | | | |
Principal | | | | | | $ | 27,171 | | | $ | 575,000 | | | $ | 948,750 | | | $ | 535,000 | | | $ | 1,518,000 | | | $ | 431,250 | | | $ | 575,000 | | | $ | 948,750 | |
Unamortized debt discount | | | | | | (2,764) | | | (140,200) | | | (251,548) | | | (42,650) | | | (304,624) | | | (59,830) | | | (161,275) | | | (277,700) | |
Net carrying amount | | | | | | $ | 24,407 | | | $ | 434,800 | | | $ | 697,202 | | | $ | 492,350 | | | $ | 1,213,376 | | | $ | 371,420 | | | $ | 413,725 | | | $ | 671,050 | |
The following tables present total interest expense recognized related to the Notes:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, |
| | 2020 | | 2019 |
| | 2017 Notes | | 2018 Notes | | 2019 Notes | | 2020 Accreting Notes | | 2020 Notes | | 2017 Notes | | 2018 Notes | | 2019 Notes |
| | (in thousands) |
Contractual interest expense | | $ | 224 | | | $ | 1,617 | | | $ | 2,372 | | | $ | 3,310 | | | $ | 1,239 | | | $ | 404 | | | $ | 1,617 | | | $ | 1,031 | |
Interest cost related to amortization of the debt discount | | 2,970 | | | 7,172 | | | 8,759 | | | 2,632 | | | 6,937 | | | 5,058 | | | 6,613 | | | 3,799 | |
Total interest expense | | $ | 3,194 | | | $ | 8,789 | | | $ | 11,131 | | | $ | 5,942 | | | $ | 8,176 | | | $ | 5,462 | | | $ | 8,230 | | | $ | 4,830 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, |
| | 2020 | | 2019 |
| | 2017 Notes | | 2018 Notes | | 2019 Notes | | 2020 Accreting Notes | | 2020 Notes | | 2017 Notes | | 2018 Notes | | 2019 Notes |
| | (in thousands) | | |
Contractual interest expense | | $ | 1,033 | | | $ | 4,852 | | | $ | 7,063 | | | $ | 6,502 | | | $ | 1,239 | | | $ | 1,213 | | | $ | 4,852 | | | $ | 1,031 | |
Interest cost related to amortization of the debt discount | | 13,471 | | | 21,075 | | | 25,912 | | | 4,317 | | | 6,937 | | | 14,948 | | | 19,423 | | | 3,799 | |
Total interest expense | | $ | 14,504 | | | $ | 25,927 | | | $ | 32,975 | | | $ | 10,819 | | | $ | 8,176 | | | $ | 16,161 | | | $ | 24,275 | | | $ | 4,830 | |
six months ended June 30, 2021 and 2020. All stock options were fully vested at June 30, 2021.The estimated fairfollowing table presents activity relating to RSUs for the six months ended June 30, 2021: | | | | | | | | | | | | | | |
| | Shares | | Weighted- Average Grant Date Fair Value |
Unvested at December 31, 2020 | | 5,975,299 | | | $ | 134.03 | |
RSUs granted | | 912,628 | | | $ | 312.80 | |
RSUs vested | | (1,362,291) | | | $ | 114.63 | |
RSUs forfeited/canceled | | (467,841) | | | $ | 145.88 | |
Outstanding as of June 30, 2021 | | 5,057,795 | | | $ | 170.42 | |
The intrinsic value of RSUs vested was $400.5 million and $137.1 million for the 2017 Notes, 2018 Notes, 2019 Notes, 2020 Notes,six months ended June 30, 2021 and 2020 Accreting Notes was $75.6 million, $1.5 billion, $1.8 billion, $1.5 billion and $2.2 billion, respectively, as of September 30, 2020. The estimated fair value of the Non-Accreting Notes was determined through consideration of quoted market prices. The estimated fair value of the 2020 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 2020 Accreting Notes are classified as Level 2 and Level 3, respectively, as defined in Note 3, Investments and Fair Value Measurements2020. The if-convertedaggregate intrinsic value of the 2017 Notes, 2018 Notes, 2019 Notes, and 2020 Accreting Notes exceeded the principal value by $48.8 million, $862.5 million, $910.7 million, andRSUs unvested is $1.6 billion respectively, as of SeptemberJune 30, 2020. The if-converted value2021. Unrecognized equity-based compensation expense related to RSUs expected to vest over time is $778.6 million with a weighted-average remaining vesting term of the 2020 Notes did not exceed the principal value1.2 years as of SeptemberJune 30, 2021.
8. Income Taxes
The provision for income taxes, net recorded in the three and six months ended June 30, 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 0 material unrecognized tax benefits as of June 30, 2021 and December 31, 2020.
16.9. Earnings (Loss) per Share
Basic and diluted earnings (loss) per share is presented using the two-class method required for participating securities: Class A and Class B common stock. The rights of the holders of Class A and Class B common stock are identical, except with respect to voting and conversion. For more information on the rights of Class A and Class B common stockholders, see Note 13, Stockholders’ Deficit.
Basic earnings (loss) per share is computed using the weighted-average number of shares of common stock outstanding during the period. Diluted earnings (loss) per share is computed using the weighted-average number of shares of common stock plus, if dilutive, common stock equivalents outstanding during the period and stock issuable upon conversion of our convertible debt instruments. The Company's common stock equivalents consist of shares issuable upon the release of RSUs, and to a lesser extent, the incremental shares of common stock issuable upon the exercise of stock options and unvested restricted stock. The dilutive effect of these common stock equivalents is reflected in diluted earnings (loss) per share by application of the treasury stock method. The dilutive effect of shares issuable upon conversion of the Company's convertible debt instruments are included in the calculation of diluted net earnings (loss) per share under the if-converted method.
For periods in which the Company has generated a net loss, the Company's basic and diluted earnings (loss) per share are the same as basic earnings (loss) per share, as the effects of common stock equivalents outstanding and shares issuable upon conversion of convertible debt instruments are antidilutive and therefore excluded from the calculation of diluted earnings (loss) per share.
The Company allocates undistributed earnings between the classes on a 1-to-1 basis when computing earnings (loss) per share. As a result, basic and diluted earnings (loss) per Class A and Class B shares of common stock are equivalent.
The following table presents the calculation of basic and diluted earnings (loss) per share:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
| | (in thousands, except per share data) |
Numerator: | | | | | | | | |
Numerator for basic EPS - Net income (loss) | | $ | 173,166 | | | $ | (272,035) | | | $ | 161,178 | | | $ | (654,362) | |
Effect of dilutive securities: | | | | | | | | |
Interest expense associated with convertible debt instruments | | 9,136 | | | 0 | | | 0 | | | 0 | |
Numerator for diluted EPS - net income (loss) available to common stockholders after the effect of dilutive securities | | $ | 182,302 | | | $ | (272,035) | | | $ | 161,178 | | | $ | (654,362) | |
Denominator: | | | | | | | | |
Denominator for basic EPS - weighted-average number of shares of common stock outstanding | | 95,373 | | | 92,540 | | | 94,767 | | | 91,820 | |
Effect of dilutive securities: | | | | | | | | |
Employee stock options | | 24 | | | 0 | | | 32 | | | 0 | |
Restricted stock units | | 4,123 | | | 0 | | | 3,222 | | | 0 | |
Convertible debt instruments | | 9,680 | | | 0 | | | 0 | | | 0 | |
Dilutive potential common shares | | 13,827 | | | 0 | | | 3,254 | | | 0 | |
Denominator for diluted EPS - adjusted weighted-average number of shares of common stock outstanding after the effect of dilutive securities | | 109,200 | | | 92,540 | | | 98,021 | | | 91,820 | |
| | | | | | | | |
Basic earnings (loss) per share | | $ | 1.82 | | | $ | (2.94) | | | $ | 1.70 | | | $ | (7.13) | |
Diluted earnings (loss) per share | | $ | 1.67 | | | $ | (2.94) | | | $ | 1.64 | | | $ | (7.13) | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended June 30, | | Six months ended June 30, |
| | 2021 | | 2020 | | 2021 | | 2020 |
| | (in thousands, except per share data) |
Numerator: | | | | | | | | |
Numerator for basic EPS - Net income (loss) | | $ | 130,428 | | | $ | 273,877 | | | $ | 148,662 | | | $ | (11,988) | |
Effect of dilutive securities: | | | | | | | | |
Interest expense associated with convertible debt instruments | | 8,485 | | | 30,195 | | | 8,986 | | | 0 | |
Numerator for diluted EPS - net income (loss) available to common stockholders after the effect of dilutive securities | | $ | 138,913 | | | $ | 304,072 | | | $ | 157,648 | | | $ | (11,988) | |
Denominator: | | | | | | | | |
Denominator for basic EPS - weighted-average number of shares of common stock outstanding | | 103,829 | | | 94,834 | | | 103,337 | | 94,461 | |
Effect of dilutive securities: | | | | | | | | |
Employee stock options | | 4 | | | 31 | | | 9 | | | 0 | |
Restricted stock units | | 2,722 | | | 2,788 | | | 3,001 | | | 0 | |
Convertible debt instruments | | 15,537 | | | 22,279 | | | 12,293 | | | 0 | |
Dilutive potential common shares | | 18,263 | | | 25,098 | | | 15,303 | | | 0 | |
Denominator for diluted EPS - adjusted weighted-average number of shares of common stock outstanding after the effect of dilutive securities | | 122,092 | | | 119,932 | | | 118,640 | | | 94,461 | |
Earnings (Loss) per Share: | | | | | | | | |
Basic | | $ | 1.26 | | | $ | 2.89 | | | $ | 1.44 | | | $ | (0.13) | |
Diluted | | $ | 1.14 | | | $ | 2.54 | | | $ | 1.33 | | | $ | (0.13) | |
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 September 30, | | Nine months ended September 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
| | (in thousands) |
Outstanding employee stock options | | 0 | | | 51 | | | 0 | | | 51 | |
Unvested restricted common stock | | 0 | | | 20 | | | 0 | | | 20 | |
Unvested restricted stock units | | 116 | | | 7,823 | | | 510 | | | 7,823 | |
Shares related to convertible debt instruments | | 13,228 | | | 15,474 | | | 20,232 | | | 15,474 | |
Total | | 13,344 | | | 23,368 | | | 20,742 | | | 23,368 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended June 30, | | Six months ended June 30, |
| | 2021 | | 2020 | | 2021 | | 2020 |
| | (in thousands) |
Outstanding employee stock options | | 0 | | | 0 | | | 0 | | | 26 | |
Unvested restricted stock units | | 204 | | | 933 | | | 129 | | | 7,180 | |
Shares related to convertible debt instruments | | 0 | | | 0 | | | 3,639 | | | 22,279 | |
Total | | 204 | | | 933 | | | 3,768 | | | 29,485 | |
The CompanyWayfair may settle conversions of the Non-Accreting Notes in cash, shares of the Company'sWayfair’s Class A common stock or any combination thereof at its election. The CompanyWayfair will settle conversions of the 20202025 Accreting Notes in shares. The Capped Call TransactionsCalls are generally expected to reduce the potential dilution of the Company'sWayfair's Class A common stock upon any conversion of the Notes and/or offset the cash payments the CompanyWayfair is required to make in excess of the principal amount of the Notes. TheNotes 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. As of June 30, 2021, the number of shares of the Company'sWayfair's Class A common stock potentially issuable and obtainable at the respective conversion prices of the 2022 Notes, 2024 Notes, 2026 Notes, 2025 Notes and 2025 Accreting Notes is 29,916 shares, 4,939,825 shares, 6,389,703 shares, 3,638,950 shares and 494,733 shares. Under the Capped Call Transactions, respectively, by year, areCalls outstanding as follows:of June 30, 2021, the maximum cash value obtainable of the 2022 Capped Calls, 2024 Capped Calls, 2026 Capped Calls and 2025 Capped Calls, if exercised at maturity, is $207.6 million, $509.9 million, $841.3 million and $1.3 billion.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2017 Notes / Restated 2017 Capped Call Transactions | | 2018 Notes / 2018 Capped Call Transactions | | 2019 Notes / 2019 Capped Call Transactions | | 2020 Accreting Notes | | 2020 Notes / 2020 Capped Call Transactions |
| | (in thousands) | | |
Shares potentially issuable from convertible debt instruments | | 261 | | | 4,940 | | | 6,390 | | | 7,379 | | | 3,639 | |
Shares obtainable from the exercise of capped call transactions | | (1,347) | | | (2,322) | | | (3,003) | | | — | | | (1,710) | |
Total | | (1,086) | | | 2,618 | | | 3,387 | | | 7,379 | | | 1,929 | |
For more information on the structure of the Notes and the Capped Call Transactions, including potential adjustmentsCalls, 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) income, net, provision for income taxes, net, non-recurring items, and other items not indicative of our ongoing operating performance. These charges are excluded from 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 conversion prices usedoperating 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 determine the shares presentedsegments. 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) income, net, 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 preceding table, see Note 15, 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.
Convertible DebtThe following tables present net revenues and Adjusted EBITDA attributable to Wayfair's reportable segments for the periods presented: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended June 30, | | Six months ended June 30, |
| | 2021 | | 2020 | | 2021 | | 2020 |
| | (in thousands) |
U.S. net revenue | | $ | 3,098,157 | | | $ | 3,651,704 | | | $ | 5,918,843 | | | $ | 5,626,687 | |
International net revenue | | 759,469 | | | 652,968 | | | 1,416,301 | | | 1,008,048 | |
Total net revenue | | $ | 3,857,626 | | | $ | 4,304,672 | | | $ | 7,335,144 | | | $ | 6,634,735 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended June 30, | | Six months ended June 30, |
| | 2021 | | 2020 | | 2021 | | 2020 |
| | (in thousands) |
Adjusted EBITDA: | | | | | | | | |
U.S. | | $ | 322,561 | | | $ | 434,574 | | | $ | 549,796 | | | 389,479 | |
International | | (11,721) | | | 5,239 | | | (33,189) | | | (76,943) | |
Total reportable segments Adjusted EBITDA | | 310,840 | | | 439,813 | | | 516,607 | | | 312,536 | |
Less: reconciling items (1) | | (180,412) | | | (165,936) | | | (367,945) | | | (324,524) | |
Net income | | $ | 130,428 | | | $ | 273,877 | | | $ | 148,662 | | | $ | (11,988) | |
.
(1) The following adjustments are made to reconcile total reportable segments Adjusted EBITDA to consolidated net income (loss): | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended June 30, | | Six months ended June 30, |
| | 2021 | | 2020 | | 2021 | | 2020 |
| | (in thousands) |
Depreciation and amortization | | $ | 77,925 | | | $ | 69,114 | | | $ | 158,237 | | | $ | 135,957 | |
Equity-based compensation and related taxes | | 87,708 | | | 70,701 | | | 174,609 | | | 134,693 | |
Interest expense, net | | 8,402 | | | 28,939 | | | 15,214 | | | 51,157 | |
Other expense (income), net | | 2,248 | | | (3,110) | | | 5,546 | | | (2,864) | |
Provision for income taxes, net | | 4,129 | | | 292 | | | 2,127 | | | 1,625 | |
Other (a) | | 0 | | | 0 | | 12,212 | | | 3,956 | |
Total reconciling items | | $ | 180,412 | | | $ | 165,936 | | | $ | 367,945 | | | $ | 324,524 | |
| | | | | | | | |
| | | | | | | | |
(a) In the six months ended June 30, 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 six months ended June 30, 2020, we recorded $4.0 million in selling, operations, technology, general and administrative expenses for severance costs associated with February 2020 workforce reductions.
17.11. Related Party Transactions
As discussed in Note 6, Note 15, Convertible 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 8, 2020, pursuant to the terms of the amended and restated purchase agreement, dated April 7, 2020 (the "Purchase Agreement"), the CompanyWayfair issued $535.0 million in aggregate original principal amount of 20202025 Accreting Notes. The issuance of the 20202025 Accreting Notes constitutes a related party transaction because of Michael W. Choe's positions as a director of the CompanyWayfair (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 the CompanyWayfair 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, the Company'sWayfair's co-founders and co-chairmen, in affiliates of Great Hill and Charlesbank.
18. Recent Accounting Pronouncements
In August 2020, the FASB issued ASU No. 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40) (“ASU 2020-06”). This ASU simplifies the accounting for convertible instruments by removing the separation models for convertible debt with cash conversion features and convertible instruments with a beneficial conversion feature. Under ASU 2020-06, a convertible debt instrument with those features will generally be reported as a single liability at its amortized cost with no separate accounting for the embedded conversion features. We expect the elimination of these models will reduce reported interest expense and increase reported net income for the Company’s existing convertible instruments falling under the scope of those models before the adoption of ASU 2020-06. ASU 2020-06 requires the application of the if-converted method when calculating diluted earnings per share, eliminating the Company’s ability to use the treasury stock method when certain conditions are met. The ASU is effective for annual reporting periods beginning after December 15, 2021, with early adoption permitted no earlier than fiscal years
beginning after December 15, 2020. Management is currently evaluating the impact of the adoption of this ASU on the Company’s consolidated financial statements.
ITEMItem 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSManagement’s Discussion and Analysis Of Financial Condition and Results Of Operations
The following discussionForward Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of our financial conditionSection 27A of the Securities Act of 1933, as amended (the "Securities Act"), and resultsSection 21E of operations should be read in conjunction with the unaudited Consolidated and Condensed Financial Statements and the notes thereto included elsewhereSecurities Exchange Act of 1934, as amended (the "Exchange Act"). All statements other than statements of historical fact contained in this Quarterly Report on Form 10-Q, including statements regarding our investment plans and anticipated returns on those investments, our future customer growth, our future results of operations and financial position, available liquidity and access to financing sources, our business strategy, plans and objectives of management for future operations, consumer activity and behaviors, developments in our technology and systems and anticipated results of those developments and the impact of the evolving coronavirus (COVID-19) pandemic and our audited Consolidated Financial Statements and related notes thereto includedresponse to it, are forward-looking statements. In some cases, you can identify forward-looking statements by terms such as "may," "will," "should," "expects," "plans," "anticipates," "could," "intends," "target," "projects," "contemplates," "believes," "estimates," "predicts," "potential" or "continue" or the negative of these terms or other similar expressions.
Forward-looking statements are based on current expectations of future events. We cannot guarantee that any forward-looking statement will be accurate, although we believe that we have been reasonable in our Annual Reportexpectations and assumptions. Investors should realize that if underlying assumptions prove inaccurate or that known or unknown risks or uncertainties materialize, actual results could vary materially from Wayfair’s expectations and projections. Investors are therefore cautioned not to place undue reliance on Form 10-K for the year ended December 31, 2019. This discussion containsany forward-looking statements. These forward-looking statements that involve risks and uncertainties. As a resultspeak only as of many factors, such as those included in Part I, Item 1, Special Note Regarding Forward Looking Statements, and inPart II, Item 1A, Risk Factors,the date of this Quarterly Report on Form 10-Q and, except as required by applicable law, we undertake no obligation to publicly update or revise any forward-looking statements contained herein, whether as a result of any new information, future events or otherwise.
Factors that could cause or contribute to differences in our future results include, without limitation, the following:
•our ability to acquire new customers and sustain and/or manage our growth;
•our ability to increase our net revenue per active customer;
•our ability to build and maintain strong brands;
•our ability to manage our global growth and expansion;
•our ability to compete successfully;
•the rate of growth of the Internet and e-commerce;
•economic factors, such as interest rates, significant inflation, the housing market, currency exchange fluctuations and changes in customer spending;
•disruptions or inefficiencies in our supply chain or logistics network, including any impact of the evolving COVID-19 outbreak on our suppliers and third party carriers and delivery agents;
•potential impacts of the COVID-19 outbreak on our business, financial condition, and results of operations;
•world events, natural disasters, public health emergencies (such as the COVID-19 outbreak), civil disturbances, and terrorist attacks; and
•developments in, and the outcome of, legal and regulatory proceedings and investigations to which we are a party or are subject, and the liabilities, obligations and expenses, if any, that we may incur in connection therewith.
A further list and description of risks, uncertainties and other factors that could cause or contribute to differences in our future results include the cautionary statements herein and in our other filings with the Securities and Exchange Commission, including those set forth under Part I, Item 1A, Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2019, our actual results may differ materially from those anticipated in these forward-looking statements.
The following discussion includes financial information prepared in accordance with generally accepted accounting principles in the United States of America ("GAAP"), as well as certain non-GAAP financial measures such as Adjusted EBITDA, Free Cash Flow, and Net Revenue Constant Currency Growth. Generally, a non-GAAP financial measure is a numerical measure of financial performance, financial position or cash flows that excludes (or includes) amounts that are included in (or excluded from) the most directly comparable measure calculated and presented in accordance with GAAP. Management believes the use of these non-GAAP measures on a consolidated and reportable segment basis assists investors in understanding the ongoing operating performance2020. We qualify all of our businessforward-looking statements by presenting comparable financial results between periods. For more information on these non-GAAP financial measures, including reconciliations to the most directly comparable GAAP financial measures, see "Non-GAAP Financial Measures" below.
Unless the context requires otherwise, references in this Quarterly Report on Form 10-Q to "Wayfair," "the company," "we," "us," "our," and similar terms include Wayfair Inc. and its subsidiaries, unless the context indicates otherwise.cautionary statements.
Overview
We areWayfair is one of the world's largest online destinations for the home. Through our e-commerce business model, we offer visually inspired browsing, compelling merchandising, easy product discovery and attractive prices for over eighteentwenty-two million products from over 12,00016,000 suppliers. Because
We believe an increasing portion of the largedollars spent on home goods will be spent online and that there is an opportunity for acquiring more market opportunity we see in front of us, we are currently investing acrossshare. Our business model is designed to grow our business, including investments to expand our international business, to build our proprietary logistics network and to continue developing various product categories.
Our operating and reportable segments are the U.S. and International. The following table presents net revenue attributableby acquiring new customers as well as stimulating repeat purchases from our existing customers. Through increasing brand awareness as well as paid and unpaid advertising, we attract new and repeat customers to our reportable segments for the periods presented:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
| | (in thousands) |
U.S. net revenue | | $ | 3,274,872 | | | $ | 1,966,654 | | | $ | 8,901,559 | | | $ | 5,624,870 | |
International net revenue | | 564,698 | | | 338,833 | | | 1,572,746 | | | 968,697 | |
Total net revenue | | $ | 3,839,570 | | | $ | 2,305,487 | | | $ | 10,474,305 | | | $ | 6,593,567 | |
For more information on our segments, see Note 11, Segmentsites. We turn these customers into recurring shoppers by creating a seamless shopping experience across their entire journey — offering best-in-class product discovery, purchasing, fulfillment and Geographic Information, included in Part I, Item 1, Unaudited Consolidated and Condensed Financial Statements, of this Quarterly Report on Form 10-Q.customer service.
COVID-19 Outbreak
We are continuing to closely monitor the impact of the COVID-19 outbreak on our business, results of operations and financial results. The situation surrounding the evolving COVID-19 outbreak remainscontinues to remain fluid and the full extent of the positive or negative impact of the COVID-19 outbreak on our business will depend on certain developments including the length of time that the outbreak and global health crisis continues, the impact on consumer activity and behaviors and the effect on our customers, employees, suppliers, partners, and stockholders, all of which are uncertain and cannot be predicted. See Part II,I, Item 1A, Risk Factors, in our Annual Report on Form 10-K for the year ended December 31, 2020 for additional details. Our focus remains on promoting the health, safety and financial security of our employees and serving our customers. As a result, we have taken a numbercontinued to develop and implement health, safety, employment and operational protocols in order to mitigate the impact of precautionary measures,the COVID-19 outbreak on our employees and our business, including implementing social distancing and enhanced cleaning measures and COVID-19 testing in our facilities, suspending all non-essential travel, transitioning a large portion of our employees to working-from-home, reimbursing certain employee technology purchases, providing employee welfare programs, providing emergency paid time off and targeted hourly pay increases and developing no contact delivery methods.
In an effort to contain or slow the COVID-19 outbreak, authoritiesAuthorities across the world have implemented various measures in response to the COVID-19 outbreak, some of which have been subsequently rescinded or modified, including travel bans, stay-at-home orders and shutdowns of certain businesses. We anticipate that these actions and the global health crisis caused by the COVID-19 outbreak, including any resurgences, will continue to negatively impact global economic activity. While the COVID-19 outbreak has not had a material adverse impact on our operations to date and we believe the long-term opportunity that we see for shopping for the home online remains unchanged, it is difficult to predict all of the positive or negative impacts the COVID-19 outbreak will have on our business.business in the short- and long-term.
In the short term,While we have continuedcontinue to see increased sales and order activity incompared to pre-pandemic levels, the market sinceprior year periods contained herein include the increased demand that existed at the onset of the COVID-19 outbreak. In order to keep up with the increased orders, we have hired and are continuing to hire additional frontline and sales and service workers. However, much is unknown and accordingly the situation remains dynamic and subject to rapid and possibly material change. We will continue to actively monitor the situation and may take further actions that alter our business operations as may be required by federal, state, local or foreign authorities, or that we determine are in the best interests of our customers, employees, suppliers, partners, stockholders and communities.
Factors Affecting our Performance
We believe that our performance and future success depend on a number of factors that present significant opportunities for us but also pose risks and challenges, including those discussed in Part I, Item 1A, Risk Factors, in our Annual Report on Form 10-K for the year ended December 31, 2020.
Key Financial and Operating Metrics
We measure our business using key financial and operating metrics, as well as non-GAAP financial measures.Adjusted EBITDA, Free Cash Flow and Adjusted Diluted Earnings per Share (see “Non-GAAP Financial Measures”). Our Free Cash Flow non-GAAP financial measure isand Adjusted Diluted Earnings per Share are measured on a consolidated basis, while our Adjusted EBITDA non-GAAP financial measure is measured on a consolidated and reportable segment basis. SeeAll other key financial and operating metrics are derived and reported from our consolidated net revenue.
We use the following metrics to assess the near and longer-term performance of our overall business: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended June 30, | | Six months ended June 30, |
| | 2021 | | 2020 | | 2021 | | 2020 |
| | (in thousands, except LTM Net Revenue per Active Customer, Average Order Value and per share data) |
Key Financial Statement Metrics: | | | | | | | | |
Net revenue | | $ | 3,857,626 | | $ | 4,304,672 | | $ | 7,335,144 | | $ | 6,634,735 |
Gross profit | | $ | 1,128,060 | | $ | 1,321,030 | | $ | 2,131,087 | | $ | 1,900,153 |
Income from operations | | $ | 145,207 | | $ | 299,998 | | $ | 171,549 | | $ | 37,930 |
Net income (loss) | | $ | 130,428 | | $ | 273,877 | | $ | 148,662 | | $ | (11,988) |
Earnings (loss) per share: | | | | | | | | |
Basic | | $ | 1.26 | | $ | 2.89 | | $ | 1.44 | | $ | (0.13) |
Diluted | | $ | 1.14 | | $ | 2.54 | | $ | 1.33 | | $ | (0.13) |
| | | | | | | | |
Net cash from operating activities | | $ | 275,439 | | $ | 1,135,251 | | $ | 452,035 | | $ | 878,961 |
Key Operating Metrics: | | | | | | | | |
Active customers (1) | | 31,067 | | 25,979 | | 31,067 | | 25,979 |
LTM net revenue per active customer (2) | | $ | 478 | | $ | 440 | | $ | 478 | | $ | 440 |
Orders delivered (3) | | 13,885 | | 18,892 | | 28,581 | | 28,768 |
Average order value (4) | | $ | 278 | | $ | 227 | | $ | 257 | | $ | 230 |
Non-GAAP Financial Measures: | | | | | | | | |
Adjusted EBITDA | | $ | 310,840 | | $ | 439,813 | | $ | 516,607 | | $ | 312,536 |
Free Cash Flow | | $ | 206,937 | | $ | 1,053,602 | | $ | 318,127 | | $ | 698,979 |
Adjusted Diluted Earnings per Share (5) | | $ | 1.89 | | $ | 3.13 | | $ | 2.89 | | $ | 1.33 |
| | | | | | | | |
(1) The number of active customers represents the total number of individual customers who have purchased at least once directly from our sites during the preceding twelve-month period. The change in active customers in a reported period captures both the inflow of new customers as well as the outflow of existing customers who have not made a purchase in the last twelve months. We view the number of active customers as a key indicator of our growth.
(2) LTM net revenue per active customer represents our total net revenue in the last twelve months divided by our total number of active customers for the same preceding twelve-month period. We view LTM net revenue per active customer as a key indicator of our customers' purchasing patterns, including their initial and repeat purchase behavior.
(3) Orders delivered represents the total orders delivered in any period, inclusive of orders that may eventually be returned. As we ship a large volume of packages through multiple carriers, actual delivery dates may not always be available, and as such we estimate delivery dates based on historical data. We recognize net revenue when an order is delivered, and therefore orders delivered, together with average order value, is an indicator of the net revenue we expect to recognize in a given period. We view orders delivered as a key indicator of our growth.
(4) We define average order value as total net revenue in a given period divided by the orders delivered in that period. We view average order value as a key indicator of the mix of products on our sites, the mix of offers and promotions and the purchasing behavior of our customers.
(5) Adjusted Diluted Earnings per Share reflects our January 1, 2021 adoption of ASU 2020-06, further discussed in Note 11,1, Summary of Significant Accounting Policies, included in Part I, Item 1, Unaudited Consolidated and Condensed Financial Statements, of this Quarterly Report on Form 10-Q. Prior periods have not been restated. Under legacy accounting, Adjusted Diluted Earnings per Share for the three and six months ended June 30, 2021 would have been $1.81 and $2.43.
Results of Consolidated Operations
Comparison of the three months ended June 30, 2021 and 2020
Net revenue
In the three months ended June 30, 2021, net revenue decreased by $447.0 million, or 10.4%, compared to the same period in 2020, which reflects some normalization in consumer behavior as we anniversary the early months of the COVID-19 outbreak in 2020. The decrease in net revenue was driven by lower orders, partially offset by higher average order values. Our U.S. net revenue decreased 15.2%, while our International net revenue increased 16.3% in the second quarter of 2021, as compared to the same period in 2020. International Net Revenue Constant Currency Growth (see “Non-GAAP Measures”) for the three months ended June 30, 2021 was 3.2%. | | | | | | | | | | | | | | | | | | | | |
| | Three months ended June 30, | | |
| | 2021 | | 2020 | | % Change |
| | (in thousands) | | |
U.S. net revenue | | $ | 3,098,157 | | | $ | 3,651,704 | | | (15.2) | % |
International net revenue | | 759,469 | | | 652,968 | | | 16.3 | % |
Net revenue | | $ | 3,857,626 | | | $ | 4,304,672 | | | (10.4) | % |
For more information on our segments, see Note 10 to the unaudited consolidated and condensed financial statements, Segment and Geographic Information, included in Part I, Item 1, Unaudited Consolidated and Condensed Financial Statements, of this Quarterly Report on Form 10-Q10-Q.
Cost of goods sold
Cost of goods sold is sensitive to many factors, including quarter-to-quarter variability in product mix, pricing strategies, changes in wholesale, shipping and fulfillment costs and fees earned for supplier services rendered. In the three months ended June 30, 2021, cost of goods sold decreased by $254.1 million, or 8.5%, as compared to the same period in 2020.
The decrease in cost of goods sold is primarily driven by a decrease in the number of orders delivered. The increase in cost of goods sold as a percentage of net revenue reflects lower operational efficiencies relative to the same period in 2020 and changes in our product mix. | | | | | | | | | | | | | | | | | | | | |
| | Three months ended June 30, | | |
| | 2021 | | 2020 | | % Change |
| | (in thousands) | | |
Cost of goods sold | | $ | 2,729,566 | | $ | 2,983,642 | | (8.5) | % |
As a percentage of net revenue | | 70.8 | % | | 69.3 | % | | |
| | | | | | |
| | | | | | |
Operating expenses
Operating expenses are comprised of customer service and merchant fees, advertising and selling, operations, technology, general and administrative expenses. We disclose separately the equity-based compensation and related taxes that are included in customer service and merchant fees and selling, operations, technology and general and administrative expenses. | | | | | | | | | | | | | | | | | | | | |
| | Three months ended June 30, | | |
| | 2021 | | 2020 | | % Change |
| | (in thousands) | | |
Customer service and merchant fees (1) | | $ | 144,630 | | $ | 143,773 | | 0.6 | % |
Advertising | | 351,775 | | 417,777 | | (15.8) | % |
Selling, operations, technology, general and administrative (1) | | 486,448 | | 459,482 | | 5.9 | % |
| | | | | | |
Total operating expenses | | $ | 982,853 | | $ | 1,021,032 | | (3.7) | % |
As a percentage of net revenue: | | | | | | |
Customer service and merchant fees (1) | | 3.7 | % | | 3.3 | % | | |
Advertising | | 9.1 | % | | 9.7 | % | | |
Selling, operations, technology, general and administrative (1) | | 12.6 | % | | 10.7 | % | | |
| | | | | | |
| | 25.4 | % | | 23.7 | % | | |
(1) Includes equity-based compensation and related taxes as follows: | | | | | | | | | | | | | | | | | | | | |
| | Three months ended June 30, | | |
| | 2021 | | 2020 | | |
| | (in thousands) | | |
Customer service and merchant fees | | $ | 6,201 | | | $ | 4,313 | | | |
Selling, operations, technology, general and administrative | | $ | 78,421 | | | $ | 64,035 | | | |
Our equity-based compensation and related taxes included in customer service and merchant fees and selling, operations, technology, general and administrative expenses increased by $16.3 million in the three months ended June 30, 2021, compared to the same period in 2020, as a result of RSUs awarded in 2020 and the six months ended June 30, 2021.
The following table summarizes operating expenses as a percentage of net revenue, excluding equity-based compensation and related taxes: | | | | | | | | | | | | | | | | | | | | |
| | Three months ended June 30, | | |
| | 2021 | | 2020 | | |
Customer service and merchant fees | | 3.6 | % | | 3.2 | % | | |
Selling, operations, technology, general and administrative | | 10.6 | % | | 9.2 | % | | |
| | | | | | |
| | | | | | |
Customer Service and Merchant Fees
Excluding the impact of equity-based compensation and related taxes, our expenses for customer service and merchant fees decreased by $1.0 million in three months ended June 30, 2021, as compared to the same period in 2020, primarily due to the decrease in net revenue during the three months ended June 30, 2021. Expenses for customer service and merchant fees as a percentage of net revenues increased in the second quarter of 2021 as compared to the same period last year. The increase was primarily due to increased compensation costs associated with increased customer service hiring since the same period in the prior year.
Advertising
Our advertising expenses and as a percentage of net revenue decreased by $66.0 million and 0.6% in the three months ended June 30, 2021, as compared to the same period 2020, primarily attributable to efficiencies in our advertising spend and partially offset by increased investment to generate future customer growth.
Selling, operations, technology, general and administrative
Excluding the impact of equity-based compensation and related taxes, our expenses for selling, operations, technology, general and administrative activities increased by $12.6 million in three months ended June 30, 2021, as compared to the same period in 2020, primarily attributable to depreciation and amortization, information technology and personnel costs. As a percentage of net revenue, selling, operations, technology, general and administrative expenses increased to 12.6% in three months ended June 30, 2021, as compared to 10.7% in the same period in 2020, primarily due to the decrease in net revenue.
Interest expense, net
Our interest expense, net decreased by $20.5 million in the three months ended June 30, 2021, as compared to the same period in 2020, primarily attributable to the adoption of ASU 2020-06 on January 1, 2021. | | | | | | | | | | | | | | | | | | | | |
| | Three months ended June 30, | | |
| | 2021 | | 2020 | | % Change |
| | (in thousands) | | |
Interest expense, net | | $ | (8,402) | | | $ | (28,939) | | | (71.0) | % |
Other (expense) income, net
Our other (expense), income, net decreased by $5.4 million in the three months ended June 30, 2021, as compared to the same period in 2020, primarily attributable to the net change in unrealized and realized gains (losses) from foreign currency transactions. | | | | | | | | | | | | | | | | | | | | |
| | Three months ended June 30, | | |
| | 2021 | | 2020 | | % Change |
| | (in thousands) | | |
Other (expense) income, net | | $ | (2,248) | | | $ | 3,110 | | | (172.3) | % |
Provision for income taxes, net
Our provision for income taxes, net increased by $3.8 million in the three months ended June 30, 2021, as compared to the same period in 2020, primarily related to income earned in the U.S. and certain foreign jurisdictions and U.S. state income taxes, partially offset by the recognition of a discrete tax benefit due to excess tax benefits on equity awards for U.S. employees. | | | | | | | | | | | | | | | | | | | | |
| | Three months ended June 30, | | |
| | 2021 | | 2020 | | % Change |
| | (in thousands) | | |
Provision for income taxes, net | | $ | 4,129 | | | $ | 292 | | | 1,314.0 | % |
Comparison of the six months ended June 30, 2021 and 2020
Net revenue
In the six months ended June 30, 2021, net revenue increased by $700.4 million, or 10.6%, as compared to the same period in 2020, primarily due to growth in our customer base, with the number of active customers increasing by 19.6% from the six months ended June 30, 2021, as compared to the same period in 2020. Our U.S. net revenue increased 5.2%, while our International net revenue increased 40.5% in the six months ended June 30, 2021, as compared to same period in 2020. International Net Revenue Constant Currency Growth (see “Non-GAAP Measures” below) for the six months ended June 30, 2021 was 27.6%. | | | | | | | | | | | | | | | | | | | | |
| | Six months ended June 30, | | |
| | 2021 | | 2020 | | % Change |
| | (in thousands) | | |
U.S. net revenue | | $ | 5,918,843 | | | $ | 5,626,687 | | | 5.2 | % |
International net revenue | | 1,416,301 | | | 1,008,048 | | | 40.5 | % |
Net revenue | | $ | 7,335,144 | | | $ | 6,634,735 | | | 10.6 | % |
For more information on our segments, see Note 10 to the unaudited consolidated and condensed financial statements, Segment and Geographic Information, included in Part I, Item 1, Unaudited Consolidated and Condensed Financial Statements, of this Quarterly Report on Form 10-Q.
Cost of goods sold
Cost of goods sold is sensitive to many factors, including quarter-to-quarter variability in product mix, pricing strategies, changes in wholesale, shipping and fulfillment costs and fees earned for supplier services rendered. In the six months ended June 30, 2021, cost of goods sold increased by $469.5 million, or 9.9%, as compared to the same period in 2020.
The increase in cost of goods sold is driven in part by changes in our product mix and higher product costs. The decrease in cost of goods sold as a percentage of net revenue is primarily a result of unlocking incremental margin from merchandising investments and operational efficiencies. | | | | | | | | | | | | | | | | | | | | |
| | Six months ended June 30, | | |
| | 2021 | | 2020 | | % Change |
| | (in thousands) | | |
Cost of goods sold | | $ | 5,204,057 | | $ | 4,734,582 | | 9.9 | % |
As a percentage of net revenue | | 70.9 | % | | 71.4 | % | | |
| | | | | | |
| | | | | | |
Operating expenses
Operating expenses are comprised of customer service and merchant fees, advertising, selling, operations, technology, general and administrative expenses and customer service center impairment and other charges. We disclose separately the equity-based compensation and related taxes that are included in customer service and merchant fees and selling, operations, technology and general and administrative expenses. | | | | | | | | | | | | | | | | | | | | |
| | Six months ended June 30, | | |
| | 2021 | | 2020 | | % Change |
| | (in thousands) | | |
Customer service and merchant fees (1) | | $ | 291,871 | | $ | 233,236 | | 25.1 | % |
Advertising | | 717,638 | | 693,537 | | 3.5 | % |
Selling, operations, technology, general and administrative (1) | | 937,817 | | 935,450 | | 0.3 | % |
Customer service center impairment and other charges | | 12,212 | | — | | — | |
Total operating expenses | | $ | 1,959,538 | | $ | 1,862,223 | | 5.2 | % |
As a percentage of net revenue: | | | | | | |
Customer service and merchant fees (1) | | 4.0 | % | | 3.5 | % | | |
Advertising | | 9.8 | % | | 10.5 | % | | |
Selling, operations, technology, general and administrative (1) | | 12.8 | % | | 14.1 | % | | |
Customer service center impairment and other charges | | 0.2 | % | | — | % | | |
| | 26.8 | % | | 28.1 | % | | |
(1) Includes equity-based compensation and related taxes as follows: | | | | | | | | | | | | | | | | | | | | |
| | Six months ended June 30, | | |
| | 2021 | | 2020 | | |
| | (in thousands) | | |
Customer service and merchant fees | | $ | 12,095 | | | $ | 6,432 | | | |
Selling, operations, technology, general and administrative | | $ | 156,423 | | | $ | 124,180 | | | |
Our equity-based compensation and related taxes included in customer service and merchant fees and selling, operations, technology, general and administrative expenses increased by $37.9 million in the six months ended June 30, 2021, as compared to the same period in 2020, as a result of RSUs awarded in 2020 and the six months ended June 30, 2021.
The following table summarizes operating expenses as a percentage of net revenue, excluding equity-based compensation and related taxes: | | | | | | | | | | | | | | | | | | | | |
| | Six months ended June 30, | | |
| | 2021 | | 2020 | | |
Customer service and merchant fees | | 3.8 | % | | 3.4 | % | | |
Selling, operations, technology, general and administrative | | 10.7 | % | | 12.2 | % | | |
| | | | | | |
| | | | | | |
Customer Service and Merchant Fees
Excluding the impact of equity-based compensation and related taxes, our expenses for customer service and merchant fees increased by $53.0 million in the six months ended June 30, 2021, as compared to the same period in 2020, primarily due to the increase in net revenue during the six months ended June 30, 2021. Expenses for customer service and merchant fees as a percentage of net revenues increased in the six months ended June 30, 2021, as compared to the same period last year. The increase was primarily due to increased compensation costs associated with increased customer service hiring since the same period in the prior year.
Advertising
Our advertising expenses increased by $24.1 million in the six months ended June 30, 2021, as compared to the same period 2020, primarily as a result of an increase in online advertising. Advertising decreased as a percentage of net revenue in June 30, 2021, as compared to the same period in 2020, primarily attributable to efficiencies in our advertising spend and partially offset by increased investment to generate future customer growth.
Selling, operations, technology, general and administrative
Excluding the impact of equity-based compensation and related taxes, our expenses for selling, operations, technology, general and administrative activities decreased by $29.9 million in the six months ended June 30, 2021, compared to the same period in 2020, primarily attributable to personnel costs, depreciation and amortization and information technology. As a percentage of net revenue, selling, operations, technology, general and administrative expenses decreased to 12.8% in the six months ended June 30, 2021, as compared to 14.1% in the same period in 2020, primarily due to the relatively slower pace of corporate headcount net hiring relative to the increase in net revenue.
Customer service center impairment and other charges
During the six months ended June 30, 2021, we enacted a plan to consolidate certain customer service centers in identified U.S. locations. As a result, we recorded a charge of $12.2 million during the six months ended June 30, 2021, which included $6.3 million for the non-cash impairment of ROU assets, $5.0 million for the non-cash accelerated depreciation of fixed assets and the remainder for other items.
Interest expense, net
Our interest expense, net decreased by $35.9 million in the six months ended June 30, 2021, as compared to the same period in 2020, primarily attributable to the adoption of ASU 2020-06 on January 1, 2021, as well as a reversal of interest expense we recorded in 2020 for a portion of paid in kind interest accretion for the 2025 Accreting Notes that was not realized in 2021. | | | | | | | | | | | | | | | | | | | | |
| | Six months ended June 30, | | |
| | 2021 | | 2020 | | % Change |
| | (in thousands) | | |
Interest expense, net | | $ | (15,214) | | | $ | (51,157) | | | (70.3) | % |
Other (expense) income, net
Our other (expense), income, net decreased by $8.4 million in the six months ended June 30, 2021, as compared to the same period in 2020, primarily attributable to the net change in unrealized and realized gains (losses) from foreign currency transactions. | | | | | | | | | | | | | | | | | | | | |
| | Six months ended June 30, | | |
| | 2021 | | 2020 | | % Change |
| | (in thousands) | | |
Other (expense) income, net | | $ | (5,546) | | | $ | 2,864 | | | (293.6) | % |
Provision for income taxes, net
Our provision for income taxes, net increased by $0.5 million in the six months ended June 30, 2021, as compared to the same period in 2020, primarily related to income earned in the U.S. and certain foreign jurisdictions and U.S. state income taxes, partially offset by the recognition of a discrete tax benefit related to excess tax benefits on equity awards for U.S. employees. | | | | | | | | | | | | | | | | | | | | |
| | Six months ended June 30, | | |
| | 2021 | | 2020 | | % Change |
| | (in thousands) | | |
Provision for income taxes, net | | $ | 2,127 | | | $ | 1,625 | | | 30.9 | % |
Liquidity and Capital Resources
Sources of Liquidity
At June 30, 2021, our principal source of liquidity was cash and cash equivalents and short-term investments totaling $2.6 billion. In addition, on March 24, 2021, Wayfair and certain of its subsidiaries entered a new credit agreement and $600.0 million senior secured revolving credit facility that matures on March 24, 2026 (the “Revolver”). The Revolver replaced our previous $200.0 million senior secured revolving credit facility, which was set to mature on February 21, 2022. Wayfair had outstanding letters of credit, primarily as security for certain lease agreements, for approximately $60.2 million as of June 30, 2021, which reduced the availability of credit under the Revolver. Excluding liquidity available through our Revolver, the following table shows sources of liquidity as of June 30, 2021 and December 31, 2020: | | | | | | | | | | | | | | |
| | June 30, 2021 | | December 31, 2020 |
| | (in thousands) |
Cash and cash equivalents | | $ | 2,078,451 | | | $ | 2,129,440 | |
Short-term investments | | $ | 523,390 | | | $ | 461,698 | |
Working capital | | $ | 908,230 | | | $ | 880,208 | |
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We believe that our existing cash and cash equivalents and investments, cash generated from operations and the borrowing availability under our Revolver will be sufficient to meet our anticipated cash needs for at least the foreseeable future. However, our liquidity assumptions may prove to be incorrect, and we could exhaust our available financial resources sooner than we currently expect. In addition, we may elect to raise additional funds at any time through equity, equity-linked or debt financing arrangements. Further, we may from time to time seek to retire, restructure, repurchase or redeem, or otherwise mitigate the equity dilution associated with, our outstanding convertible debt, through cash purchases, stock buybacks of some or all of the shares underlying convertible notes and/or exchanges for equity or debt, in open-market purchases, privately negotiated transactions or otherwise. Such repurchases, exchanges or liability management exercises, if any, will be upon such terms and at such prices and sizes as we may determine, and will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material.
Our future capital requirements and the adequacy of available funds will depend on many factors, including those described herein and in our other filings with the Securities and Exchange Commission, or SEC, including those set forth Part I, Item 1A, Risk Factors, in our Annual Report on Form 10-K for the year ended December 31, 2020. In addition, the COVID-19 outbreak and related measures to contain its impact have caused disruption in the capital markets, which could make obtaining financing more difficult and/or expensive. As a consequence, we may not be able to secure additional financing to meet our operating requirements on acceptable terms, or at all. If we raise additional funds through the issuance of equity, equity-linked or debt financing arrangements, those securities and instruments may have rights, preferences or privileges senior to the rights of our common stock, and the holders of our equity securities may experience dilution. We will continue to monitor our liquidity during this time of historic disruption and volatility in the global capital markets due to the COVID-19 outbreak.
Credit Agreement and Convertible Notes
Under the terms of our Revolver, we may use proceeds to finance working capital, to refinance existing indebtedness and to provide funds for permitted acquisitions, repurchases of equity interests and other general corporate purposes. Any amounts outstanding under the Revolver are due at maturity.
As of June 30, 2021, we had $3.1 billion of indebtedness outstanding. The conditional conversion features of the 2022 Notes, 2024 Notes and 2026 Notes were triggered during the second quarter of 2021, and the 2022 Notes, 2024 Notes and 2026 Notes therefore became convertible in the third quarter of 2021 pursuant to the applicable last reported sales price conditions. The conditional conversion feature of the 2025 Notes was not triggered during the second quarter of 2021, and the 2025 Notes are therefore not convertible in the third quarter of 2021 pursuant to the applicable last reported sales price condition. The 2025 Accreting Notes are convertible at any time prior to the second business day immediately preceding the maturity date. In the three months ended June 30, 2021, holders of the 2022 Notes and 2026 Notes converted $14.5 million of aggregate principal and received 139,196 shares of Wayfair’s Class A common stock. During the six months ended June 30, 2021, holders of the 2022 Notes and 2026 Notes converted $14.9 million of aggregate principal and received 143,440 shares of Wayfair’s Class A common stock. During the six months ended June 30, 2021, Great Hill converted $253.1 million of accreted principal of the 2025 Accreting Notes and received 3,490,175 shares of Wayfair's Class A common stock.
Whether any of the Non-Accreting Notes will be convertible in future quarters will depend on the satisfaction of the applicable last reported sales price condition or another conversion condition in the future. If one or more holders elect to convert their Non-Accreting Notes at a time when any such Non-Accreting Notes are convertible, unless we elect to satisfy our
conversion obligation by delivering solely shares of our Class A common stock (other than paying cash in lieu of delivering any fractional share), we would be required to settle a portion or all of our conversion obligation through the payment of cash, which could adversely affect our liquidity.
The credit agreement and indentures governing our convertible notes contain restrictions and covenants that may limit our operating flexibility. For information regarding our reportable segments. All other key financialcredit agreement and operating metrics are derivedconvertible notes, see Note 4, Debt and reported from our consolidated Direct Retail net revenue, which includes sales generated primarily through our familyOther Financing, included in Part I, Item 1, Unaudited Consolidated and Condensed Financial Statements, of sites. These metrics do not include net revenue derived from the websites operated by our retail partners and our media solutions business.this Quarterly Report on Form 10-Q. We do not have accessexpect any of these restrictions to certain customer level information on net revenue derived throughaffect our retail partnersability to conduct our business in the ordinary course. During the second quarter of 2021, we were in compliance with all the terms and therefore cannot measure or disclose it.
We use the following metrics to assess the near and longer-term performanceconditions of our overall business:debt agreements.
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| | Three months ended September 30, | | Nine months ended September 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
| | (in thousands, except LTM Net Revenue per Active Customer and Average Order Value) |
Direct Retail Financial and Operating Metrics: | | | | | | | | |
Direct Retail Net Revenue (1) | | $ | 3,827,265 | | | $ | 2,299,680 | | | $ | 10,444,083 | | | $ | 6,562,620 | |
Active Customers | | 28,783 | | | 19,071 | | | 28,783 | | | 19,071 | |
LTM Net Revenue per Active Customer | | $ | 451 | | | $ | 449 | | | $ | 451 | | | $ | 449 | |
Orders Delivered | | 15,758 | | | 9,121 | | | 44,526 | | | 26,446 | |
Average Order Value | | $ | 243 | | | $ | 252 | | | $ | 235 | | | $ | 248 | |
Non-GAAP Financial Measures: | | | | | | | | |
Adjusted EBITDA | | $ | 371,112 | | | $ | (144,184) | | | $ | 683,648 | | | $ | (316,385) | |
Free Cash Flow | | $ | 255,028 | | | $ | (180,900) | | | $ | 954,007 | | | $ | (439,188) | |
Stock Repurchase Program(1) Direct RetailOn August 21, 2020, the Board authorized the repurchase of up to $700.0 million of our 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”). The 2020 Repurchase Program does not obligate Wayfair to purchase any shares of Class A common stock and has no expiration but may be suspended or terminated by the Board at any time. The actual timing, number and value of shares repurchased in the future will be determined by Wayfair in its discretion and will depend on a number of factors, including market conditions, applicable legal requirements, our capital needs and whether there is a better alternative use of capital. As of June 30, 2021, Wayfair has repurchased 1,806,318 shares of Class A common stock for approximately $537.4 million under the 2020 Repurchase Program.
Trends and Historical Cash Flows | | | | | | | | | | | | | | |
| | Six months ended June 30, |
| | 2021 | | 2020 |
| | (in thousands) |
Net income (loss) | | $ | 148,662 | | | $ | (11,988) | |
Cash flows from operating activities | | $ | 452,035 | | | $ | 878,961 | |
Net cash (for) from investing activities | | $ | (196,404) | | | $ | 188,204 | |
Net cash (for) from financing activities | | $ | (300,152) | | | $ | 527,643 | |
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Operating Activities
Cash flows in connection with operating activities consisted of net revenue is calculated by taking consolidated net revenueincome (loss) adjusted for certain non-cash items including depreciation and excluding U.S. net revenue derived fromamortization, equity-based compensation, loss on impairment and certain other non-cash expenses, as well as the websites operated by our retail partnerseffect of changes in working capital and other activities. Operating cash flows can be volatile and are sensitive to many factors, including changes in working capital and our media solutions business, which accounted for $12.3net income (loss).
Cash from operating activities in the six months ended June 30, 2021 decreased by $426.9 million compared to the same period in 2020 primarily due to the decrease in cash from operating assets and liabilities of $607.4 million, decrease in amortization of discount and issuance costs related to our convertible notes of $42.5 million, partially offset by the increase in net income (loss) of $160.7 million, increase in equity-based compensation of $26.8 million, increase in depreciation and amortization expense of $22.3 million, loss on impairment of $12.2 million and $30.2increase in other non-cash items of $1.0 million.
Investing Activities
Cash for investing activities in the six months ended June 30, 2021 decreased by $384.6 million compared to the same period in 2020 due to the increase in purchases of short-term investments of $612.6 million and increase in site and software development costs of $9.7 million, partially offset by the increase in sales and maturities of short-term investments of $181.8 million, decrease in purchases of property and equipment of $55.7 million and decrease in other investing activities of $0.2 million. Purchases of property and equipment and site and software development costs (collectively “Capital Expenditures” were 1.8% of net revenue for the threequarter ended June 30, 2021 and nineprimarily related to equipment purchases and improvements for leased warehouses within our expanding logistics network and ongoing investments in our proprietary technology and operational platform. On an absolute dollar basis, we expect Capital Expenditures for the third quarter of 2021 to be within a range of $70.0 million and $80.0 million as we continue to expand our technology and logistics network.
Financing Activities
Cash for financing activities in the six months ended SeptemberJune 30, 2021 was $300.2 million due to the repurchase of Class A common stock through the 2020 Repurchase Program in the period. This compared to $527.6 million of cash from financing activities in the six months ended June 30, 2020, respectively, and $5.8 million and $30.9primarily due to $527.4 million of proceeds from the issuance of convertible notes, net revenueof issuance costs during the period.
Off-Balance Sheet Arrangements
We do not engage in any off-balance sheet activities. We do not have any off-balance sheet interest in variable interest entities, which include special purpose entities and other structured finance entities.
Contractual Obligations
There have been no material changes to our contractual obligations and estimates as compared to the contractual obligations described in Contractual Obligations included in Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of Wayfair’s Annual Reporton Form 10-K for the three and nine monthsyear ended September 30, 2019, respectively.December 31, 2020.
Non-GAAP Financial Measures
Adjusted EBITDA
To provide investors with additional information regarding our financial results, we have disclosed here and elsewhere in this Quarterly Report on Form 10-Q Adjusted EBITDA, a non-GAAP financial measure that we calculate as net income (loss) before depreciation and amortization, equity-based compensation and related taxes, interest (expense),expense, net, other (expense) income, net, (benefit) provision for income taxes, net, non-recurring items, and other items not indicative of our ongoing operating performance. We have provided a reconciliation below of Adjusted EBITDA to net income (loss), the most directly comparable GAAP financial measure.
We have included Adjusted EBITDA in this Quarterly Report on Form 10-Q because it is a key measure used by our management and the Board to evaluate our operating performance, generate future operating plans and make strategic decisions regarding the allocation of capital. In particular, the exclusion of certain expenses in calculating Adjusted EBITDA facilitates operating performance comparisons on a period-to-period basis as these costs may vary independent of business performance. Accordingly, we believe that Adjusted EBITDA provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and the Board.
Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:
▪Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and Adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements;
▪Adjusted EBITDA does not reflect equity-based compensation and related taxes;
▪Adjusted EBITDA does not reflect changes in our working capital;
▪Adjusted EBITDA does not reflect income tax payments that may represent a reduction in cash available to us;
▪Adjusted EBITDA does not reflect interest expenses associated with our borrowings;
▪Adjusted EBITDA does not include other items not indicative of our ongoing operating performance, and
▪Other companies, including companies in our industry, may calculate Adjusted EBITDA differently, which reduces its usefulness as a comparative measure.
Because of these limitations, you should consider Adjusted EBITDA alongside other financial performance measures, including various cash flow metrics, net income (loss) and our other GAAP results.
The following table reflects the reconciliation of net income (loss) to Adjusted EBITDA for each of the periods indicated:
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| | Three months ended September 30, | | Nine months ended September 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
| | (in thousands) |
Reconciliation of Adjusted EBITDA | | | | | | | | |
Net income (loss) | | $ | 173,166 | | $ | (272,035) | | $ | 161,178 | | $ | (654,362) |
Depreciation and amortization | | 72,575 | | 50,250 | | 208,532 | | 134,172 |
Equity-based compensation and related taxes | | 76,683 | | 65,275 | | 211,376 | | 173,963 |
Interest expense, net | | 36,315 | | 14,432 | | 87,472 | | 33,922 |
Other expense (income), net | | 13,584 | | (2,182) | | 10,720 | | (5,582) |
(Benefit) provision for income taxes, net | | (1,211) | | 76 | | 414 | | 1,502 |
Other (1) | | — | | — | | 3,956 | | — |
Adjusted EBITDA | | $ | 371,112 | | $ | (144,184) | | $ | 683,648 | | $ | (316,385) |
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| | Three months ended June 30, | | Six months ended June 30, |
| | 2021 | | 2020 | | 2021 | | 2020 |
| | (in thousands) |
Reconciliation of Adjusted EBITDA | | | | | | | | |
Net income (loss) | | $ | 130,428 | | $ | 273,877 | | $ | 148,662 | | | $ | (11,988) | |
Depreciation and amortization | | 77,925 | | 69,114 | | 158,237 | | | 135,957 | |
Equity-based compensation and related taxes | | 87,708 | | 70,701 | | 174,609 | | | 134,693 | |
Interest expense, net | | 8,402 | | 28,939 | | 15,214 | | | 51,157 | |
Other expense (income), net | | 2,248 | | (3,110) | | 5,546 | | | (2,864) | |
Provision for income taxes, net | | 4,129 | | 292 | | 2,127 | | | 1,625 | |
Other (1) | | — | | — | | 12,212 | | | 3,956 | |
Adjusted EBITDA | | $ | 310,840 | | $ | 439,813 | | $ | 516,607 | | $ | 312,536 |
(1) The CompanyIn the six months ended June 30, 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 six months ended June 30, 2020, we recorded $4.0 million in the nine months ended September 30, 2020 in selling, operations, technology, general and administrative expenses in the Consolidated and Condensed Statements of Operations related tofor severance costs associated with February 2020 workforce reductions.
Free Cash Flow
To provide investors with additional information regarding our financial results, we have also disclosed here and elsewhere in this Quarterly Report on Form 10-Q Free Cash Flow, a non-GAAP financial measure that we calculate as net cash provided byfrom or used infor operating activities less net cash used to purchase property and equipment and site and software development costs (collectively "Capital Expenditures").Capital Expenditures. We have provided a reconciliation below of Free Cash Flow to net cash provided byfrom or used infor operating activities, the most directly comparable GAAP financial measure.
We have included Free Cash Flow in this Quarterly Report on Form 10-Q because it is an important indicator of our business performance as it measures the amount of cash we generate. Accordingly, we believe that Free Cash Flow provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management.
Free Cash Flow has limitations as an analytical tool because it omits certain components of the cash flow statement and does not represent the residual cash flow available for discretionary expenditures. Further, other companies, including companies in our industry, may calculate Free Cash Flow differently. Accordingly, you should not consider Free Cash Flow in isolation or as a substitute for analysis of our results as reported under GAAP. Because of these limitations, you should consider Free Cash Flow alongside other financial performance measures, including net cash provided byfrom or used infor operating activities, Capital Expenditures and our other GAAP results.
The following table presents a reconciliation of net cash provided by (used in)from or for operating activities to Free Cash Flow for each of the periods indicated:
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| | Three months ended September 30, | | Nine months ended September 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
| | (in thousands) |
Net cash provided by (used in) operating activities | | $ | 331,027 | | | $ | (76,441) | | | $ | 1,209,988 | | | $ | (160,523) | |
Purchase of property and equipment | | (41,493) | | | (68,628) | | | (146,303) | | | (183,968) | |
Site and software development costs | | (34,506) | | | (35,831) | | | (109,678) | | | (94,697) | |
Free Cash Flow | | $ | 255,028 | | | $ | (180,900) | | | $ | 954,007 | | | $ | (439,188) | |
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| | Three months ended June 30, | | Six months ended June 30, |
| | 2021 | | 2020 | | 2021 | | 2020 |
| | (in thousands) |
Net cash from operating activities | | $ | 275,439 | | | $ | 1,135,251 | | | $ | 452,035 | | | $ | 878,961 | |
Purchase of property and equipment | | (24,624) | | | (44,846) | | | (49,072) | | | (104,810) | |
Site and software development costs | | (43,878) | | | (36,803) | | | (84,836) | | | (75,172) | |
Free Cash Flow | | $ | 206,937 | | | $ | 1,053,602 | | | $ | 318,127 | | | $ | 698,979 | |
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Net Revenue Constant Currency Growth
To provide investors with additional information regarding our financial results, we have disclosed in this Quarterly Report on Form 10-Q Net Revenue Constant Currency Growth, a non-GAAP financial measure that we calculate by translating the current period local currency net revenue by the currency exchange rates used to translate our financial statements in the comparable prior-year period.
Net Revenue Constant Currency Growth is included in this Quarterly Report on Form 10-Q because it is an important indicator of our operating results. Accordingly, we believe that Net Revenue Constant Currency Growth provides useful information to investors and others in understanding and evaluating trends in our operating results in the same manner as our management.
Net Revenue Constant Currency Growth has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. For example, Net Revenue Constant Currency Growth rates, by their nature, exclude the impact of foreign exchange, which may have a material impact on net revenue.
Key Operating Metrics (Direct Retail)Adjusted Diluted Earnings per Share
Active Customers
As of the last date of each reported period,To provide investors with additional information regarding our financial results, we determine our number of active customers by counting the total number of individual customers who have purchased at least once directly from our sites during the preceding twelve-month period. The changedisclosed in active customers in a reported period captures both the inflow of new customers as well as the outflow of existing customers who have not made a purchase in the last twelve months. We view the number of active customers as a key indicator of our growth.
LTM Net Revenue Per Active Customer
We define LTM net revenue per active customer as our total net revenue derived from Direct Retail sales in the last twelve months divided by our total number of active customers for the same preceding twelve-month period. We view LTM net revenue per active customer as a key indicator of our customers' purchasing patterns, including their initial and repeat purchase behavior.
Orders Delivered
We define orders delivered as the total Direct Retail orders delivered in any period, inclusive of orders that may eventually be returned. As we ship a large volume of packages through multiple carriers, actual delivery dates may not always be available, and as such we estimate delivery dates based on historical data. We recognize net revenue when an order is delivered and therefore orders delivered, together with average order value, is an indicator of the net revenue we expect to recognize in a given period. We view orders delivered as a key indicator of our growth.
Average Order Value
We define average order value as total Direct Retail net revenue in a given period divided by the orders delivered in that period. We view average order value as a key indicator of the mix of products on our sites, the mix of offers and promotions and the purchasing behavior of our customers.
Factors Affecting our Performance
We believe that our performance and future success depend on a number of factors that present significant opportunities for us but also pose risks and challenges, including those discussed in Part II, Item 1A, Risk Factors, of this Quarterly Report on Form 10-Q and Part I, Item 1A, Risk Factors, in our Annual Report on Form 10-K for the year ended December 31, 2019.
Components of Our Results of Operations
Net Revenue
Net revenue consists primarily of sales of product from our sites and through the websites of our online retail partners and includes related shipping fees. We deduct cash discounts, allowances and estimated returns from gross revenue to determineAdjusted Diluted Earnings per Share, a non-GAAP financial measure that we calculate as net revenue. We recognize product revenue upon delivery to our customers. Net revenue is primarily driven by growth of new and active customers and the frequency with which customers purchase. The products offered on our sites are fulfilled with product we ship to our customers directly from our suppliers and, increasingly, from our CastleGate warehouses.
We also generate net revenue through third-party advertisers that pay us based on the number of advertisement related clicks, actions, or impressions for advertisements placed on our sites. Net revenue earned under these arrangements is included in net revenue and net revenue through our third-party advertisers is recognized in the period in which the click, action or impression occurs. This net revenue has not been material to date.
Cost of Goods Sold
Cost of goods sold consists of:
Product costs: Product costs include the purchase price of products sold, expenses capitalized into Wayfair inventory, which include direct and indirect labor costs, rent, and depreciation expenses, and inbound shipping and handling costs for Wayfair inventory. These costs are partially offset by product rebates earned from suppliers upon shipment of goods and certain fees incurred for other media and merchandising services Wayfair provides to its suppliers to promote products for sale on our sites.
Shipping and Fulfillment costs: Shipping costs include outbound shipping costs. Fulfillment costs include costs incurred to operate and staff our fulfillment centers and provide other inbound supply chain services, such as ocean freight and drayage. Costs to operate and staff our 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. These costs are partially offset by fees incurred for warehousing, fulfillment and other inbound supply chain services Wayfair provides to its suppliers.
Cost of goods sold is sensitive to many factors, including quarter-to-quarter variability in product mix, pricing strategies, changes in wholesale, shipping and fulfillment costs, and fees earned for supplier services rendered.
Customer Service and Merchant Fees
Customer service and merchant fees consist of labor-related costs, including payroll, payroll-related benefits, andincome (loss) plus equity-based compensation of our employees involved in customer service activities and merchant processing fees associated with customer payments made by credit cards and debit cards and other variable fees. Increases in our customer service and merchant fees are driven by the growth in our net revenue and are expected to remain relatively consistent as a percentage of net revenue. We expect customer service and merchant fees expenses to remain relatively stable as a percentage of net revenue.
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. We should benefit from deriving a larger base of our net revenue from repeat customers, as we believe the cost of marketing to a repeat customer is less than the cost to acquire a new customer. We expect our absolute marketing dollar spend to continue to grow as our business scales, though advertising costs as a percentage of net revenue will continue to be impacted by factors such as the mix of new and repeat customers, as well as brand, channel, and geographic mix.
Selling, operations, technology, general and administrative
Selling, operations, technology, general and administrative expenses primarily include labor-related costs, including equity-based compensation, of our operations group, which includes our supply chain and logistics team, our technology team, which builds and supports our sites, category managers, buyers, site merchandisers, merchants, marketers and the team who executes our advertising strategy, and our corporate general and administrative team, which includes human resources, finance and accounting personnel. Also included are administrative and professional service fees including audit and legal fees, insurance and other corporate expenses, including depreciation and rent. We expect selling, operations, technology, general and administrative expenses will continue to increase as we grow our net revenue and operations.
Interest (expense), net
Interest (expense), net consists primarily of interest expense in connection with our convertible notes and other borrowings. Interest expense is offset by interest earned on cash, cash equivalents and short- and long-term investments held by us.
Other (expense) income, net
Other (expense) income, net consists primarily of the loss on extinguishment of debt for the 2017 Notes, foreign currency exchange gains or losses, and realized gains on our available-for-sale investments.
(Benefit)related taxes, provision for income taxes, net, non-recurring items, other items not indicative of our ongoing operating performance, and, if dilutive, interest expense associated with convertible debt instruments under the if-converted method divided by the weighted-average number of shares of common stock used in the computation of diluted earnings (loss) per share. Accordingly, we believe that these adjustments to our adjusted diluted net income before calculating per share amounts for all periods presented provides a more meaningful comparison between our operating results from period to period.
(Benefit)
Adjusted Diluted Earnings per Share has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. For example, Adjusted Diluted Earnings per Share, by its nature, excludes equity-based compensation and related taxes, provision for income taxes, net, consistsnon-recurring items, other items not indicative of U.S. federalour ongoing operating performance, and, state income taxes and taxes on income earned in certain foreign jurisdictions.
Resultsif dilutive, interest expense associated with convertible debt instruments under the if-converted method. Because of Consolidated Operations
Comparison of the three months ended September 30, 2020 and 2019
Net revenue
| | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | |
| | 2020 | | 2019 | | % Change |
| | (in thousands) | | |
U.S. net revenue | | $ | 3,274,872 | | | $ | 1,966,654 | | | 66.5 | % |
International net revenue | | 564,698 | | | 338,833 | | | 66.7 | % |
Net revenue | | $ | 3,839,570 | | | $ | 2,305,487 | | | 66.5 | % |
In the three months ended September 30, 2020, net revenue increased by $1.5 billion, or 66.5%, compared to the same period in 2019, primarily due to growth in our customer base, with the number of active customers increasing by 50.9% as of September 30, 2020 compared to September 30, 2019. There was an increase in order frequency, with LTM ordersthese limitations, you should consider Adjusted Diluted Earnings per active customer increasing by 4.9% as of September 30, 2020 compared to September 30, 2019. Additionally, active customers on average spent more in the three months ended September 30, 2020, with LTM net revenue per active customer increasing 0.4% as of September 30, 2020 compared to September 30, 2019. Our U.S. net revenue increased 66.5%, while our International net revenue increased 66.7%. International Net Revenue Constant Currency Growth was 63.9%.
Cost of goods sold
| | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | |
| | 2020 | | 2019 | | % Change |
| | (in thousands) | | |
Cost of goods sold | | $ | 2,692,142 | | $ | 1,765,566 | | 52.5 | % |
| | | | | | |
| | | | | | |
In the three months ended September 30, 2020, cost of goods sold increased by $0.9 billion, or 52.5%, compared to the same period in 2019. The increase in cost of goods sold was primarily driven by an increase in the number of orders delivered, partially offset by efficiencies gained in shipping costs from our logistics network.Share alongside other financial performance measures.
Operating expenses
| | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | |
| | 2020 | | 2019 | | % Change |
| | (in thousands) | | |
Customer service and merchant fees (1) | | $ | 139,589 | | $ | 91,255 | | 53.0 | % |
Advertising | | 344,025 | | 281,846 | | 22.1 | % |
Selling, operations, technology, general and administrative (1) | | 441,960 | | 426,529 | | 3.6 | % |
Total operating expenses | | $ | 925,574 | | $ | 799,630 | | 15.8 | % |
As a percentage of net revenue: | | | | | | |
Customer service and merchant fees (1) | | 3.6 | % | | 4.0 | % | | |
Advertising | | 9.0 | % | | 12.2 | % | | |
Selling, operations, technology, general and administrative (1) | | 11.5 | % | | 18.5 | % | | |
| | 24.1 | % | | 34.7 | % | | |
(1) Includes equity-based compensation and related taxes as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | |
| | 2020 | | 2019 | | |
| | (in thousands) | | |
Customer service and merchant fees | | $ | 4,477 | | | $ | 2,374 | | | |
Selling, operations, technology, general and administrative | | $ | 69,361 | | | $ | 61,451 | | | |
Our equity-based compensation and related taxes included in customer service and merchant fees and selling, operations, technology, general and administrative expenses increased by $10.0 million in the three months ended September 30, 2020 compared to the same period in 2019, as a result of RSUs awarded in 2019 and the nine months ended September 30, 2020.
The following table summarizes operating expenses as a percentage of net revenue, excluding equity-based compensation and related taxes:
| | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | |
| | 2020 | | 2019 | | |
Customer service and merchant fees | | 3.5 | % | | 3.9 | % | | |
Selling, operations, technology, general and administrative | | 9.7 | % | | 15.8 | % | | |
| | | | | | |
| | | | | | |
Excluding the impact of equity-based compensation and related taxes, customer service and merchant fees increased by $46.2 million in the three months ended September 30, 2020 compared to the same period in 2019, primarily due to the increase in customer service personnel costs and net revenue during the three months ended September 30, 2020.
Our advertising expenses increased by $62.2 million in the three months ended September 30, 2020 compared to the same period in 2019, primarily as a result of an increase in online advertising. Advertising decreased as a percentage of net revenue in the three months ended September 30, 2020 compared to the same period in 2019. The decrease was primarily attributable to efficiencies in our advertising spend, partially offset by increased investment to generate future customer growth.
Excluding the impact of equity-based compensation and related taxes, selling, operations, technology, general and administrative expenses increased by $7.5 million in the three months ended September 30, 2020 compared to the same period in 2019, primarily due to the increase in net revenue and the associated growth in our operations. The increase in selling, operations, technology, general and administrative was primarily attributable to an increase in depreciation and amortization, partially offset by reduced personnel and personnel-related costs.
Interest (expense), net
| | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | |
| | 2020 | | 2019 | | % Change |
| | (in thousands) | | |
Interest (expense), net | | $ | (36,315) | | | $ | (14,432) | | | 151.6 | % |
Our interest (expense), net increased by $21.9 million in the three months ended September 30, 2020 compared to the same period in 2019, primarily attributable to our convertible notes and other borrowings.
Other (expense) income, net
| | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | |
| | 2020 | | 2019 | | % Change |
| | (in thousands) | | |
Other (expense) income, net | | $ | (13,584) | | | $ | 2,182 | | | (722.5) | % |
Our other (expense) income, net increased by $15.8 million in the three months ended September 30, 2020 compared to the same period in 2019, primarily attributable to the $12.6 million loss for the extinguishment of debt for the 2017 Notes.
(Benefit) provision for income taxes, net
| | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | |
| | 2020 | | 2019 | | % Change |
| | (in thousands) | | |
(Benefit) provision for income taxes, net | | $ | (1,211) | | | $ | 76 | | | (1,693.4) | % |
Our (benefit) provision for income taxes, net increased by $1.3 million in the three months ended September 30, 2020 compared to the same period in 2019, primarily related to the recognition of a discrete tax benefit due to excess tax benefits on equity awards for U.S. employees, offset by taxes on income earned in the U.S. and certain foreign jurisdictions and U.S. state income taxes.
Comparison of the nine months ended September 30, 2020 and 2019
Net revenue
| | | | | | | | | | | | | | | | | | | | |
| | Nine months ended September 30, | | |
| | 2020 | | 2019 | | % Change |
| | (in thousands) | | |
U.S. net revenue | | $ | 8,901,559 | | | $ | 5,624,870 | | | 58.3 | % |
International net revenue | | 1,572,746 | | | 968,697 | | | 62.4 | % |
Net revenue | | $ | 10,474,305 | | | $ | 6,593,567 | | | 58.9 | % |
In the nine months ended September 30, 2020, net revenue increased by $3.9 billion, or 58.9%, compared to the same period in 2019, primarily due to growth in our customer base, with the number of active customers increasing by 50.9% as of September 30, 2020 compared to September 30, 2019. There was an increase in order frequency, with LTM orders per active customer increasing 4.9% as of September 30, 2020 compared to September 30, 2019. Additionally, active customers on average spent more in the nine months ended September 30, 2020, with LTM net revenue per active customer increasing 0.4% as of September 30, 2020 compared to September 30, 2019. Our U.S. net revenue increased 58.3%, while our International net revenue increased 62.4%. International Net Revenue Constant Currency Growth was 64.2%.
Cost of goods sold
| | | | | | | | | | | | | | | | | | | | |
| | Nine months ended September 30, | | |
| | 2020 | | 2019 | | % Change |
| | (in thousands) | | |
Cost of goods sold | | $ | 7,426,724 | | $ | 5,023,590 | | 47.8 | % |
| | | | | | |
| | | | | | |
In the nine months ended September 30, 2020, cost of goods sold increased by $2.4 billion, or 47.8%, compared to the same period in 2019. The increase in cost of goods sold was primarily driven by an increase in the number of orders delivered, partially offset by efficiencies gained in shipping costs from our logistics network.
Operating expenses
| | | | | | | | | | | | | | | | | | | | |
| | Nine months ended September 30, | | |
| | 2020 | | 2019 | | % Change |
| | (in thousands) | | |
Customer service and merchant fees (1) | | $ | 372,825 | | $ | 256,230 | | 45.5 | % |
Advertising | | 1,037,562 | | 784,981 | | 32.2 | % |
Selling, operations, technology, general and administrative (1) | | 1,377,410 | | 1,153,286 | | 19.4 | % |
Total operating expenses | | $ | 2,787,797 | | $ | 2,194,497 | | 27.0 | % |
As a percentage of net revenue: | | | | | | |
Customer service and merchant fees (1) | | 3.6 | % | | 3.9 | % | | |
Advertising | | 9.9 | % | | 11.9 | % | | |
Selling, operations, technology, general and administrative (1) | | 13.2 | % | | 17.5 | % | | |
| | 26.7 | % | | 33.3 | % | | |
(1) Includes equity-based compensation and related taxes as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Nine months ended September 30, | | |
| | 2020 | | 2019 | | |
| | (in thousands) | | |
Customer service and merchant fees | | $ | 10,909 | | | $ | 6,619 | | | |
Selling, operations, technology, general and administrative | | $ | 193,541 | | | $ | 163,585 | | | |
Our equity-based compensation and related taxes included in customer service and merchant fees and selling, operations, technology, general and administrative expenses increased by $34.2 million in the nine months ended September 30, 2020 compared to the same period in 2019, as a result of RSUs awarded in 2019 and the nine months ended September 30, 2020.
The following table summarizes operating expenses as a percentage of net revenue, excluding equity-based compensation and related taxes:
| | | | | | | | | | | | | | | | | | | | |
| | Nine months ended September 30, | | |
| | 2020 | | 2019 | | |
Customer service and merchant fees | | 3.5 | % | | 3.8 | % | | |
Selling, operations, technology, general and administrative | | 11.3 | % | | 15.0 | % | | |
| | | | | | |
| | | | | | |
Excluding the impact of equity-based compensation and related taxes, customer service and merchant fees increased by $112.3 million in the nine months ended September 30, 2020 compared to the same period in 2019, primarily due to the increase in net revenue during the nine months ended September 30, 2020.
Our advertising expenses increased by $252.6 million in the nine months ended September 30, 2020 compared to the same period in 2019, primarily as a result of an increase in online advertising. Advertising decreased as a percentage of net revenue in the nine months ended September 30, 2020 compared to the same period in 2019. The decrease was primarily attributable to efficiencies in our advertising spend, partially offset by increased investment to generate future customer growth.
Excluding the impact of equity-based compensation and related taxes, selling, operations, technology, general and administrative expenses increased by $194.2 million in the nine months ended September 30, 2020 compared to the same
period in 2019, primarily due toA reconciliation of the increase in net revenuenumerator and denominator for diluted earnings (loss) per share, the most directly comparable GAAP financial measure, and the associated growth in our operations. numerator and denominator for Adjusted Diluted Earnings per Share, is as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended June 30, | | Six months ended June 30, |
| | 2021 | | 2020 | | 2021 | | 2020 |
| | (in thousands, except per share data) |
Numerator: | | | | | | | | |
Net income (loss) | | $ | 130,428 | | | $ | 273,877 | | | $ | 148,662 | | | $ | (11,988) | |
Effect of dilutive securities: | | | | | | | | |
Interest expense associated with convertible debt instruments | | 8,485 | | | 30,195 | | | 8,986 | | | — | |
Numerator for diluted EPS - net income (loss) available to common stockholders after the effect of dilutive securities | | 138,913 | | | 304,072 | | | 157,648 | | | (11,988) | |
Adjustments to net income (loss): | | | | | | | | |
Interest expense associated with convertible debt instruments | | — | | | — | | | 6,438 | | | — | |
Equity-based compensation and related taxes | | 87,708 | | | 70,701 | | | 174,609 | | | 134,693 | |
Provision for income taxes, net | | 4,129 | | | 292 | | | 2,127 | | | 1,625 | |
Other | | — | | | — | | | 12,212 | | 3,956 |
Numerator for Adjusted Diluted EPS - Adjusted net income | | $ | 230,750 | | | $ | 375,065 | | | $ | 353,034 | | | $ | 128,286 | |
Denominator: | | | | | | | | |
Denominator for basic EPS - weighted-average number of shares of common stock outstanding | | 103,829 | | | 94,834 | | | 103,337 | | 94,461 | |
Effect of dilutive securities: | | | | | | | | |
Employee stock options | | 4 | | | 31 | | | 9 | | | — | |
Restricted stock units | | 2,722 | | | 2,788 | | | 3,001 | | | — | |
Convertible debt instruments | | 15,537 | | | 22,279 | | | 12,293 | | | — | |
Dilutive potential common shares | | 18,263 | | | 25,098 | | | 15,303 | | | — | |
Denominator for diluted EPS - adjusted weighted-average number of shares of common stock outstanding after the effect of dilutive securities | | 122,092 | | | 119,932 | | | 118,640 | | | 94,461 | |
Adjustments to effect of dilutive securities: | | | | | | | | |
Employee stock options | | — | | | — | | | — | | | 36 | |
Restricted stock units | | — | | | — | | | — | | | 2,078 | |
Convertible debt instruments | | — | | | — | | | 3,639 | | | — | |
Denominator for Adjusted Diluted EPS - adjusted weighted-average number of shares of common stock outstanding after the effect of dilutive securities | | 122,092 | | | 119,932 | | | 122,279 | | | 96,575 | |
Diluted Earnings (Loss) per Share | | $ | 1.14 | | | $ | 2.54 | | | $ | 1.33 | | | $ | (0.13) | |
Adjusted Diluted Earnings per Share | | $ | 1.89 | | | $ | 3.13 | | | $ | 2.89 | | | $ | 1.33 | |
| | | | | | | | |
| | | | | | | | |
New Accounting Pronouncements
The increase in selling, operations, technology, general and administrative was primarily attributableinformation called for by this section is incorporated herein by reference to personnel costs, rent, information technology, and depreciation and amortization.
Interest (expense), net
| | | | | | | | | | | | | | | | | | | | |
| | Nine months ended September 30, | | |
| | 2020 | | 2019 | | % Change |
| | (in thousands) | | |
Interest (expense), net | | $ | (87,472) | | | $ | (33,922) | | | 157.9 | % |
Our interest (expense), net increased by $53.6 million in the nine months ended September 30, 2020 compared to the same period in 2019, primarily attributable to our convertible notes and other borrowings.
Other (expense) income, net
| | | | | | | | | | | | | | | | | | | | |
| | Nine months ended September 30, | | |
| | 2020 | | 2019 | | % Change |
| | (in thousands) | | |
Other (expense) income, net | | $ | (10,720) | | | $ | 5,582 | | | (292.0) | % |
Our other (expense) income, net increased by $16.3 million in the nine months ended September 30, 2020 compared to the same period in 2019, primarily attributable to the $12.6 million loss for the extinguishment of debt for the 2017 Notes.
Provision for income taxes, net
| | | | | | | | | | | | | | | | | | | | |
| | Nine months ended September 30, | | |
| | 2020 | | 2019 | | % Change |
| | (in thousands) | | |
Provision for income taxes, net | | $ | 414 | | | $ | 1,502 | | | (72.4) | % |
Our provision for income taxes, net decreased by $1.1 million in the nine months ended September 30, 2020 compared to the same period in 2019, primarily related to income earned in the U.S. and certain foreign jurisdictions and U.S. state income taxes, offset by the recognition of a discrete tax benefit related to excess tax benefits on equity awards for U.S. employees.
Liquidity and Capital Resources
Sources of Liquidity
| | | | | | | | | | | | | | |
| | September 30, 2020 | | December 31, 2019 |
| | (in thousands) |
Cash and cash equivalents | | $ | 2,442,939 | | | $ | 582,753 | |
Short-term investments | | $ | 113,985 | | | $ | 404,252 | |
Accounts receivable, net | | $ | 109,652 | | | $ | 99,720 | |
Long-term investments | | $ | — | | | $ | 155,690 | |
Working capital | | $ | 826,113 | | | $ | (234,381) | |
| | | | |
| | | | |
| | | | |
Historical Cash Flows
| | | | | | | | | | | | | | |
| | Nine months ended September 30, |
| | 2020 | | 2019 |
| | (in thousands) |
Net income (loss) | | $ | 161,178 | | | $ | (654,362) | |
Net cash provided by (used in) operating activities | | $ | 1,209,988 | | | $ | (160,523) | |
Net cash provided by (used in) investing activities | | $ | 190,211 | | | $ | (179,174) | |
Net cash provided by financing activities | | $ | 452,529 | | | $ | 787,207 | |
| | | | |
| | | | |
| | | | |
| | | | |
At September 30, 2020, our principal source of liquidity was cash and cash equivalents and short-term investments totaling $2.6 billion, which includes $527.4 million of net proceeds from the issuance of our 2020 Accreting Notes in April 2020 and $1.5 billion of net proceeds from the issuance of our 2020 Notes in August 2020, partially offset by $255.0 million in premiums paid in August 2020 for separate capped call transactions, $1.0 billion paid to repurchase a portionNote 1 of the 2017 Notes in privately negotiated repurchase transactions,unaudited consolidated and $280.2 million of Class A common stock repurchased through stock repurchase programs. We believe that our existing cash and cash equivalents and investments, together with these incremental transactions, cash generated from operations, and the borrowing availability under our revolving credit facility, will be sufficient to meet our anticipated cash needs for at least the foreseeable future. However, our liquidity assumptions may prove to be incorrect, and we could exhaust our availablecondensed financial resources sooner than we currently expect. In addition, we may elect to raise additional funds at any time through equity, equity-linked or debt financing arrangements. Further, we may from time to time seek to retire, restructure, repurchase or redeem, or otherwise mitigate the equity dilution associated with, our outstanding debt, through cash purchases, stock buybacks of some or all of the shares underlying convertible notes, and/or exchanges for equity or debt, in open-market purchases, privately negotiated transactions or otherwise. Such repurchases, exchanges or liability management exercises, if any, will be upon such terms and at such prices and sizes as we may determine, and will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material.
Capital Expenditures were 4.4% of net revenue for the year ended December 31, 2019 and related primarily to our ongoing investments in our technology infrastructure and equipment purchases and improvements for leased warehouses within our expanding logistics network. Capital Expenditures were 2.0% of net revenue for the quarter ended September 30, 2020. On an absolute dollar basis, we expect Capital Expenditures for the three months ending December 31, 2020 to be within the range of $75.0 million to $85.0 million as we continue to build out our technology and logistics network.
Our future capital requirements and the adequacy of available funds will depend on many factors, including those described herein and in our other filings with the SEC, including those set forth in Part II, Item 1A, Risk Factors, of this Quarterly Report on Form 10-Q and Part I, Item 1A, Risk Factors, in our Annual Report on Form 10-K for the year ended December 31, 2019. In addition, the COVID-19 outbreak has caused disruption in the capital markets. It could make financing more difficult and/or expensive and we may not be able to secure additional financing to meet our operating requirements on acceptable terms, or at all. If we raise additional funds through the issuance of equity, equity-linked or debt financing arrangements, those securities and instruments may have rights, preferences or privileges senior to the rights of our common stock, and our stockholders may experience dilution. We will continue to monitor our liquidity during this time of historic disruption and volatility in the global capital markets due to the COVID-19 outbreak.
Operating Activities
Cash flows in connection with operating activities consisted of our net income (loss) adjusted for certain non-cash items including depreciation and amortization, equity-based compensation, and certain other non-cash expenses, as well as the effect of changes in working capital and other activities. Operating cash flows can be volatile and are sensitive to many factors, including changes in working capital and our net income (loss).
Cash provided by operating activities in the nine months ended September 30, 2020 was $1.2 billion and was driven primarily by cash provided by operating assets and liabilities of $552.8 million, the net impact of certain non-cash items including equity-based compensation of $197.1 million, depreciation and amortization expense of $208.5 million, net income of $161.2 million, amortization of discount and issuance costs related to our convertible notes of $78.2 million and other non-cash items of $12.0 million.
Cash used in operating activities in the nine months ended September 30, 2019 was $160.5 million and was driven primarily by a net loss of $654.4 million and other non-cash items of $1.6 million, partially offset by cash provided by operating assets and liabilities of $158.6 million, the net impact of certain non-cash items including equity-based compensation of $162.0 million, depreciation and amortization expense of $134.2 million, and amortization of discount and issuance costs related to our convertible notes of $40.7 million.
Investing Activities
Our primary investing activities consisted of purchases of property and equipment, particularly purchases of servers and networking equipment, investment in our sites and software development, disposal of short- and long-term investments, and leasehold improvements for our facilities.
Cash provided by investing activities in the nine months ended September 30, 2020 was $190.2 million and was primarily driven by sale and maturities of short-and long-term investments of $466.3 million, partially offset by purchases of property and equipment of $146.3 million and site and software development costs of $109.7 million, purchase of short-and long-term investments of $20.0 million and other investing activities of $0.1 million.
Cash used in investing activities in the nine months ended September 30, 2019 was $179.2 million and was primarily driven by purchases of property and equipment of $184.0 million and site, software development costs of $94.7 million and other investing activities of $16.0 million, partially offset by a net increase in the maturity of short-term investments of $115.5 million.
Financing Activities
Cash provided by financing activities in the nine months ended September 30, 2020 was $452.5 million and was primarily due to the $2.0 billion of net proceeds from the issuance of our 2020 Accreting Notes and 2020 Notes, $200.0 million of proceeds from the borrowing under our revolving credit facility and $0.4 million of other financing activities, net, partially offset by an aggregate payment of $1.0 billion to partially extinguish the 2017 Notes, a repurchase of common stock of $280.2 million, $255.0 million of premiums paid for the 2020 Capped Call Transactions, and the repayment of $200.0 million of the outstanding balance under our revolving credit facility.
Cash provided by financing activities in the nine months ended September 30, 2019 was $787.2 million and was primarily due to $935.1 million of net proceeds from the issuance of our 2019 Notes and $0.1 million net proceeds from exercise of stock options, partially offset by $145.7 million in premiums paid for separate capped call transactions, $0.8 million of deferred finance costs, and $1.5 million statutory minimum taxes paid related to net share settlements of equity awards.
Stock Repurchase Program
On August 21, 2020, the Board authorized the repurchase of up to $700 million of our Class A common stock (the “2020 Repurchase Program”). The 2020 Repurchase Program replaced our previous $200 million stock repurchase authorization approved by the Board in 2018 (the “2018 Repurchase Program”), which was terminated simultaneously. The Company repurchased 432,548 shares of Class A common stock for approximately $143.0 million under the 2018 Repurchase Program before it was terminated and replaced by the 2020 Repurchase Program. The 2020 Repurchase Program does not obligate the Company to purchase any shares of Class A common stock and has no expiration but may be suspended or terminated by the Board at any time. Under the 2020 Repurchase Program, we are authorized to repurchase, from time to time, outstanding shares of Class A common stock in the open market, through privately negotiated transactions, or otherwise, including pursuant to a Rule 10b5-1 plan. The actual timing, number and value of shares repurchased in the future will be determined by the Company in its discretion and will depend on a number of factors, including market conditions, applicable legal requirements, our capital needs and whether there is a better alternative use of capital.
To date, the Company has repurchased 411,393 shares of Class A common stock for approximately $137.2 million under the 2020 Repurchase Program.
Credit Agreement and Convertible Notes
As disclosed in Note 14, Credit Agreement included in Part I, Item 1, Unaudited Consolidated and Condensed Financial Statements, of this Quarterly Report on Form 10-Q, in the nine months ended September 30, 2020, the Company borrowed under the Revolver. All borrowings were repaid as of September 30, 2020.
As disclosed in Note 15, Convertible Debt, included in Part I, Item 1, Unaudited Consolidated and Condensed Financial Statements, of this Quarterly Report on Form 10-Q, during the third quarter of 2020, the Company partially repurchased the 2017 Notes, which consisted of a repurchase of $343.4 million aggregate principal amount of the 2017 Notes for an aggregate purchase price of approximately $1.0 billion. Additionally, during the third quarter of 2020, $60.6 million aggregate principal of the 2017 Notes were settled upon conversion by the holders for 582,825 shares of the Company’s Class A common stock.
The conditional conversion features of the 2017 Notes, 2018 Notes and 2019 Notes were triggered during the third quarter of 2020, and the 2017 Notes, 2018 Notes and 2019 Notes are therefore convertible in the fourth quarter of 2020 pursuant to the applicable last reported sales price conditions. The conditional conversion feature of the 2020 Notes was not triggered during the third quarter of 2020, and the 2020 Notes are therefore not convertible in the fourth quarter of 2020 pursuant to the applicable last reported sales price conditions. The 2020 Accreting Notes are convertible at any time prior to the second business day immediately preceding the maturity date. The 2019 Notes and 2020 Notes were not convertible during the third quarter of 2020. None of the 2018 Notes, the 2019 Notes or the 2020 Notes have been converted to date. As of September 30, 2020, none of the 2020 Accreting Notes had been converted. In October 2020,Charlesbank, converted $253.1 million of accreted principal of the 2020 Accreting Notes and received 3,490,175 shares of Class A common stock.
Whether any of the Non-Accreting Notes will be convertible in future quarters will depend on the satisfaction of the applicable last reported sales price condition or another conversion condition in the future. If one or more holders elect to convert their Non-Accreting Notes at a time when any such notes are convertible, unless we elect to satisfy our conversion obligation by delivering solely shares of our Class A common stock (other than paying cash in lieu of delivering any fractional share), we would be required to settle a portion or all of our conversion obligation through the payment of cash, which could adversely affect our liquidity.
For information regarding our credit agreement and convertible notes, see Note 14, Credit Agreement, and Note 15, Convertible Debt, included in Part I, Item 1, Unaudited Consolidated and Condensed Financial Statements, of this Quarterly Report on Form 10-Q.
Off-Balance Sheet Arrangements
We do not engage in any off-balance sheet activities. We do not have any off-balance sheet interest in variable interest entities, which include special purpose entities and other structured finance entities.
Contractual Obligations
During the third quarter of 2020 the Company entered into an additional purchase obligation that extended the duration and increased the commitment to $300 million of certain enforceable and legally binding software license agreements. Other than this additional purchase obligation and those described in Note 15, Convertible Debt, included in Part I, Item 1, Unaudited Consolidated and Condensed Financial Statements, of this Quarterly Report on Form 10-Q, there have been no material changes to our contractual obligations and estimates as compared to the contractual obligations described in Contractual Obligations included in Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of the Company’s Annual Reporton Form 10-K for the year ended December 31, 2019.
Critical Accounting Policies
Our financial statements are prepared in accordance with accounting principles generally accepted in the U.S. The preparation of our financial statements and related disclosures requires us to make estimates, assumptions and judgments that affect the reported amount of assets, liabilities, net revenue, costs and expenses and related disclosures. We believe that the estimates, assumptions and judgments involved in the accounting policies described below have the greatest potential impact on our financial statements and, therefore, we consider these to be our critical accounting policies. Accordingly, we evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates under different assumptions and conditions.
There have been no material changes to our critical accounting policies and estimates as compared to the critical accounting policies and estimates described in Note 2, Summary of Significant Accounting Policies, included in Part II, Item
8, Financial Statements and Supplementary Data, of the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, except as disclosed in Note 2, Summary of Significant Accounting Policies - Credit Impairment, included in Part I, Item 1, Unaudited Consolidated and Condensed Financial Statements, of this Quarterly Report on Form 10-Q.
ITEMItem 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKQuantitative and Qualitative Disclosures About Market Risk
WeThere have operations both within the U.S. and internationally, and we are exposedbeen no significant changes in our exposures to market risksrisk since December 31, 2020. See Part II, Item 7A, Quantitative and Qualitative Disclosures about Market Risk included in our Annual Report on Form 10-K for the ordinary course of our business, including the effects of interest rate changes, foreign currency fluctuations and inflation. Information relating to quantitative and qualitative disclosures about these market risks is set forth below.
Interest Rate Sensitivity
Cash and cash equivalents and short- and long-term investments were held primarily in cash deposits, certificates of deposit, money market funds, and corporate debt. The fair value of our cash, cash equivalents and short- and long-term investments will fluctuate with movements of interest rates, increasing in periods of declining rates of interest and declining in periods of increasing rates of interest.
Our 2017 Notes, which were issued in September 2017, carryyear ended December 31, 2020 for a fixed interest rate of 0.375% per year, our 2018 Notes, which were issued in November 2018, carry a fixed interest rate of 1.125% per year, our 2019 Notes, which were issued in August 2019, carry a fixed interest rate of 1.00% per year, our 2020 Accreting Notes, which were issued in April 2020, carry a fixed interest at a rate of 2.50% per year, and our 2020 Notes, which were issued in August 2020, carry a fixed interest rate of 0.625% per year. Since the Notes bear interest at a fixed rate, we have no direct financial statement risk associated with changes in interest rates.
Interest on the revolving line of credit incurred pursuant to the credit agreement described herein accrues at a floating rate based on a formula tied to certain market rates at the time of incurrence; however, we do not expect that any changes in prevailing interest rates will have a material impactdiscussion on our results of operations.
Foreign Currency Risk
Most of our sales are denominated in U.S. dollars, and therefore, our total net revenue is not currently subjectexposures to significant foreign currencymarket risk. However, as our international business has grown, fluctuations in foreign currency exchange rates have started to have a greater impact. Our operating expenses are denominated in the currencies of the countries in which our operations are located or in which net revenue is generated, and as a result we face exposure to adverse movements in foreign currency exchange rates, particularly changes in the British Pound, Euro, and Canadian Dollar, as the financial results of our international operations are translated from local currency, or functional currency, into U.S. dollars upon consolidation. Fluctuations in foreign currency exchange rates may cause us to recognize transaction gains and losses in our Consolidated and Condensed Statements of Operations. To date, foreign currency transaction gains and losses have not been material to our financial statements, and we have not engaged in any foreign currency hedging transactions, but we may do so in the future. The effect of foreign currency exchange on our business historically has varied from quarter to quarter and may continue to do so, potentially materially. In addition, volatile market conditions arising from the COVID-19 pandemic may result in changes in exchange rates, and in particular a weakening of foreign currencies relative to the U.S. dollar may negatively affect our net revenue as expressed in U.S. dollars.
Inflation
We do not believe that inflation has had a material effect on our business, financial condition or results of operations. We continue to monitor the impact of inflation in order to minimize its effects through pricing strategies, productivity improvements and cost reductions. If our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could harm our business, financial condition and results of operations.
ITEM 4. CONTROLS AND PROCEDURESControls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. The term "disclosure controls and procedures," as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the rules and forms of the Securities and Exchange Commission, or SEC. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q, our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) or 15d-15(d) of the Exchange Act during the period covered by this Quarterly Report on Form 10-Q, that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. We have not experienced any material impact to our internal controls over financial reporting despite the fact that most of our employees continue to work remotely due to the COVID-19 outbreak. We are continually monitoringmonitor and assessingassess the COVID-19 situation and our internal controls to minimize any impact on their design and operating effectiveness.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
For information regarding our legal proceedings, see Note 8,5, Commitments and Contingencies - Legal Matters, included in Part I, Item 1, Unaudited Consolidated and Condensed Financial Statements, of this Quarterly Report on Form 10-Q, which is incorporated into this item by reference.
Item 1A. Risk Factors
Except as set forth below, asAs of the date of this report, there are no material changes from the risk factors previously disclosed in Part I, Item 1A, Risk Factors, of our Annual Report on Form 10-K for the year ended December 31, 2019.2020.
The recent global outbreak and spread of the novel coronavirus (“COVID-19”), and any future outbreak or other public health emergency, could materially affect our operations, liquidity, financial performance and results of operations.
In March 2020, the World Health Organization declared the COVID-19 outbreak to be a global pandemic. In response to this declaration and the rapid spread of COVID-19 globally, authorities across the U.S. and the globe have implemented varying degrees of restriction on social and commercial activity to promote social distancing in an effort to slow the spread of the illness, some of which have been subsequently rescinded or modified, such as travel bans, stay-at-home orders and shutdowns of certain businesses. These measures have impacted and may continue to impact all or portions of our workforce, operations, suppliers and customers and demand for our products and services. For example, the COVID-19 outbreak has disrupted the global supply chain, including many of our suppliers, as factory closures and reduced manufacturing output impacted inventory levels, potentially exacerbated by surging demand for products. During the COVID-19 outbreak, however, we have seen increased sales and order activity and, at times, lower advertising costs in the market.
The virus also impacted our workforce, moving a large portion of our employees to working-from-home and adding administrative complexity to our everyday human resources and employee technology functions. Disruption caused by business responses to the COVID-19 outbreak, including working-from-home arrangements, may create increased vulnerability to cybersecurity incidents, including breaches of information systems security, which could damage our reputation and commercial relationships, disrupt operations, increase costs and/or decrease net revenues, and expose us to claims from customers, suppliers, financial institutions, regulators, payment card associations, employees and others, any of which could have a material adverse effect on our financial condition and results of operations.
The spread of COVID-19, and any future pandemic, epidemic or similar outbreak, may disrupt our third-party business partners’ ability to meet their obligations to us, which may negatively affect our operations. These third parties include our suppliers and logistics providers, such as FedEx, UPS, DHL, the U.S. Postal Service and other third-party delivery agents, as their workers may be prohibited or otherwise unable to report to work and transporting products within regions or countries may be limited due to extended holidays, factory closures, port closures and increased border controls and closures, among other things. We may also incur higher shipping costs due to various surcharges by third-party delivery agents on retailers related to the increased shipping demand resulting from the COVID-19 outbreak. These higher costs may affect us in the fourth quarter of 2020 as a result of peak surcharges during the holiday season and could continue to affect us thereafter.
Further, our efforts to mitigate the impact of COVID-19 through social distancing measures, enhanced cleaning measures and the increased use of personal protective equipment at our warehouses and sites, as well as other steps taken to protect the health, safety and financial security of our employees, may result in other negative impacts on our operations, including increased costs, reduced efficiency levels or labor disputes resulting in a strike or other work stoppage or interruption.
The COVID-19 outbreak has also significantly increased economic uncertainty and has led to disruption and volatility in the global capital markets, which could increase the cost of and accessibility to capital. If we need to access the capital markets, there can be no assurance that financing may be available on attractive terms, if at all. The COVID-19 outbreak has caused a significant economic slowdown, which could be of an unknown duration, and could lead to increased unemployment, reduced discretionary consumer spending and a corresponding reduction in demand for our products, and could result in a material adverse effect on our business, financial performance and results of operations.
The ultimate magnitude of the impact of COVID-19, including the extent of its impact on our business and financial performance, will depend on numerous evolving factors that we may not be able to accurately predict, including: the length of time that the outbreak continues; its effect on our suppliers, logistics providers and the demand for our products; the effect of governmental regulations imposed in response to the outbreak; the effect on our customers, their communities and customer
demand and ability to pay for our products and services, which may be affected by prolonged high unemployment, increased consumer debt levels, changes in net worth due to market conditions, and other factors that impact consumer confidence; disruptions or restrictions on our employees’ ability to work and travel, as well as uncertainty regarding all of the foregoing. We cannot at this time predict the full impact of the COVID-19 outbreak, but it could have a larger material adverse effect on our business, liquidity, financial performance and results of operations beyond what is discussed within this report. We will continue to actively monitor the COVID-19 situation and may take further actions that alter our business operations as may be required by federal, state, local or foreign authorities, or that we determine are in the best interests of our customers, employees, suppliers, partners, stockholders and communities. We cannot predict with any certainty whether and to what degree the disruption caused by the COVID-19 outbreak and reactions thereto will continue, and expect to face difficulty in accurately predicting our internal financial forecasts.
As noted above, however, in the short term we have continued to see increased sales and order activity since the COVID-19 outbreak. These results, as well as those of other metrics such as net revenues, gross margins and other financial and operating data, may not be indicative of results for future periods. Some of the increased demand is likely due to customers being required or encouraged to stay at home, school closures and employers requiring employees to work remotely. Some is also likely attributable to the timing of tax refunds and COVID-related stimulus payments. Such increased demand may increase beyond manageable levels, may fluctuate significantly, or may not continue, including the possibility that demand may decrease from historical levels. Much is unknown, including the duration and severity of the COVID-19 pandemic, the amount of time it will take for normal economic activity to resume, and future government actions that may be taken, and accordingly the situation remains dynamic and subject to rapid and possibly material change, including but not limited to changes that may materially affect the operations of our suppliers, logistics providers and customers, which ultimately could result in material adverse effects on our business, financial performance and results of operations.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Recent Purchases of Equity Securities
The following table provides information regarding the Company’sWayfair’s purchase of its common stock during the periods indicated. See Note 13,6, Stockholders’ Deficit, included in Part I, Item 1, Unaudited Consolidated and Condensed Financial Statements, of this Quarterly Report on Form 10-Q for information regarding our stock repurchase programs.
| Issuer Purchases of Equity Securities | Issuer Purchases of Equity Securities | Issuer Purchases of Equity Securities |
| | Total Number of Shares Purchased (1) | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2) | | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (3) (in thousands) | | Total Number of Shares Purchased (1) | | Average Price Paid per Share (2) | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1) | | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (3) (in thousands) |
Period | Period | | Period | |
July 1-31, 2020 | | — | | | $ | — | | | — | | | $ | — | | |
August 1-31, 2020 | | 843,941 | | | $ | 331.65 | | | 843,941 | | | $ | 562,800 | | |
September 1-30, 2020 | | — | | | $ | — | | | — | | | $ | — | | |
April 1-30, 2021 | | April 1-30, 2021 | | — | | | $ | — | | | — | | | $ | — | |
May 1-31, 2021 | | May 1-31, 2021 | | 982,008 | | | $ | 305.50 | | | 982,008 | | | $ | 162,600 | |
June 1-30, 2021 | | June 1-30, 2021 | | — | | | $ | — | | | — | | | $ | — | |
Total | Total | | 843,941 | | | $ | 331.65 | | | 843,941 | | | $ | 562,800 | | Total | | 982,008 | | | $ | 305.50 | | | 982,008 | | | $ | 162,600 | |
Item 6. Exhibits.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.