UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 2015
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from
to
Commission File Number: 001-36666
Wayfair Inc.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
4 Copley Place, 7th Floor, Boston, MA
(Address of principal executive offices)
36-4791999
(I.R.S. Employer
Identification Number)
02116
(Zip Code)
(617) 532-6100
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Class A Common Stock, $0.001 par value
Name of each exchange on which registered
The New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
No
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes
No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data
File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act:
Large accelerated filer
Accelerated filer
Non-accelerated filer
(Do not check if a
smaller reporting company)
Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
No
The aggregate market value of the voting and non-voting common equity held by non-affiliates as of June 30, 2015 computed by reference to
the closing sale price of $37.64 per share as reported on the New York Stock Exchange on that date was $868.7 million.
Class
Class A Common Stock, $0.001 par value per share
Class B Common Stock, $0.001 par value per share
Outstanding at January 31, 2016
46,159,314
38,221,410
Certain sections of the registrant's definitive Proxy Statement for the 2016 Annual Meeting of Stockholders to be filed with the Securities and
Exchange Commission pursuant to Rule 14A not later than 120 days after end of this fiscal year covered by this Form 10-K are incorporated by
reference into Part III of this Form 10-K.
DOCUMENTS INCORPORATED BY REFERENCE
Wayfair Inc.
Annual Report on Form 10-K
For the Fiscal Year Ended December 31, 2015
TABLE OF CONTENTS
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART II
Business.
Risk Factors.
Unresolved Staff Comments.
Properties.
Legal Proceedings.
Mine Safety Disclosures.
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
PART III
Item 10.
Item 11.
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities.
Selected Consolidated Financial Data
Management's Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
Item 13.
Item 14.
PART IV
ITEM 15. Exhibits and Financial Statement Schedules
SIGNATURES
EXHIBIT INDEX
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements. All statements other than statements of historical
fact contained in this Annual Report on Form 10-K, including statements regarding our future results of operations and financial
position, business strategy and plans and objectives of management for future operations, 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. The forward-looking statements in this Annual Report on Form 10-K
are only predictions. We have based these forward-looking statements largely on our current expectations and projections about
future events and financial trends that we believe may affect our business, financial condition and results of operations. These
forward-looking statements speak only as of the date of this Annual Report on Form 10-K and are subject to a number of risks,
uncertainties and assumptions described in Part I, Item 1A, Risk Factors and elsewhere in this Annual Report on Form 10-K.
Because forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or
quantified, you should not rely on these forward-looking statements as predictions of future events. The events and circumstances
reflected in our forward-looking statements may not be achieved or occur and actual results could differ materially from those
projected in the forward-looking statements. 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.
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Item 1. Business.
Overview
PART I
Wayfair 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 seven million
products from over 7,000 suppliers across five distinct brands: Wayfair.com, Joss & Main, AllModern, DwellStudio and Birch
Lane.
The typical Wayfair customer is a 35 to 65 year old woman with an annual household income of $50,000 to $250,000, who
we consider to be a mass market consumer and who we believe is underserved by traditional brick and mortar and other online
retailers of home goods. Because each of our customers has a different taste, style, purchasing goal and budget when shopping for
her home, we have built one of the largest online selections of furniture, décor, decorative accents, housewares, seasonal decor
and other home goods. We are able to offer this vast selection of products while holding minimal inventory because we typically
ship products directly from our suppliers to our customers. This supplier direct fulfillment network is a key component of our
custom-built technology and operational platform, which also includes extensive supplier integrations, a proprietary transportation
delivery network and superior customer service.
We founded our company in May 2002 and have since delivered over 26 million orders. From 2002 through 2011, the
Company was bootstrapped by our co-founders and operated as hundreds of niche websites, such as bedroomfurniture.com and
allbarstools.com. In 2006, we launched AllModern. In late 2011, we made the strategic decision to close and permanently redirect
over 240 of our niche websites into Wayfair.com to create a one-stop shop for furniture, décor and home goods and to build brand
awareness, drive customer loyalty and increase repeat purchasing.
Our co-founders are lifetime tech innovators who have worked together in the commercial internet sector since 1995 and
have created a company culture deeply rooted in technology. Our technology and data focus facilitates critical e-commerce
capabilities such as tailored shopping experiences across our five brands, consumer targeting and personalization, and “anytime,
anywhere” shopping across our websites, mobile-optimized websites and mobile applications, which we collectively refer to as
our sites.
Our Industry
The home goods market is large and characterized by specific consumer trends, structural challenges and market dynamics
that are shaping the future of our industry.
Addressable Market Size and Growth
The home goods market is large, global and growing. We believe the mass market for home goods represents the largest
addressable opportunity within the home goods sector and that the mass market consumer is underserved due to structural
limitations of brick and mortar and other online retailers. In 2015, women represented 75% of our customers. According to data
released by the United States ("U.S.") Census Bureau, there are approximately 160 million women in the U.S., of which
approximately 60 million are between the ages of 35 and 65. We believe these women control an outsized share of spending,
particularly spending related to furniture, décor, decorative accents, housewares, seasonal decor and other home goods. In
addition, we believe there are approximately 70 million millennials (which we define as individuals currently between the ages of
20 to 33) in the United States, many of whom are accustomed to purchasing goods online. As millennials age, start new families
and move into new homes, we expect online sales of home goods to increase. In addition, we believe the online home goods
market will further grow as older generations of consumers become increasingly comfortable purchasing online. Additionally,
mobile commerce is growing rapidly and is just beginning in home goods. The proliferation of smartphones and tablets has made
mobile commerce one of the fastest growing online channels. Since consumers have access to their mobile devices virtually
anytime and anywhere, they have the opportunity to browse, discover and shop throughout the day.
Why Home is Different
Home is Shopped Differently than Other Retail Verticals: Homes are personal expressions of self and identity, which is
why many consumers seek uniqueness, crave originality and enjoy the feeling created by home design, furniture and décor.
Consumers shopping for home goods often cannot articulate what they are looking for other than to describe a feeling or visual
image that they want to capture in their home. In addition, while consumers typically know the names of big box and specialty
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retailers that offer various home products, we believe they rarely know the names of the product brands or suppliers. We believe
traditional search-based sites that rely on directed product search (e.g., "running sneakers") or brand name search (e.g., "Samsung
32-inch LCD television") have difficulty serving customers shopping for home products in this more emotional, visual and
inspirational manner.
Home Shoppers Desire Uniqueness, which Requires Vast Selection: In the mass market for home goods, consumers with
different tastes, styles, purchasing goals and budgets require a broad selection of products and choices. This need for selection
applies across many home categories, including furniture, décor, lighting, kitchen, bed & bath, outdoor, home improvement and
baby & kids, each of which has dozens of sub-categories with hundreds to tens of thousands of products. Brick and mortar home
goods retailers must balance a consumer's desire for uniqueness, which requires massive selection, with the challenges of high
inventory carrying costs and limited showroom and storage space.
Time Consuming and Inconvenient for Consumers to Shop across Brick and Mortar Home Retailers: To browse a vast
selection of products across highly-fragmented brick and mortar retailers, consumers must shop multiple stores. For example, if a
nearby furniture retailer has 20 bedroom sets on its showroom floor, a consumer may feel she must visit multiple stores to see a
wide enough selection to make an informed purchase decision that satisfies her style and budget needs. We believe the lack of an
easy-to-browse, one-stop shopping experience with massive selection has led to dissatisfaction with brick and mortar home goods
shopping. In contrast, Wayfair.com offers over 1,500 bedroom sets across many styles and prices, which mitigates the need for a
consumer to visit multiple stores to find the perfect item at a price she can afford.
Difficult to Browse, Value Shop and Price Compare: Mass market home goods shoppers frequently seek a wide variety of
information from disparate online and offline sources to research home goods products. Because this information is not easily
comparable, it is difficult for consumers to make informed home décor and design-related decisions. In addition, consumers may
struggle to mix and match different home goods items they are considering buying from multiple traditional brick and mortar
retailers.
Challenging Logistics for Consumers and Retailers: Logistics, fulfillment and customer service for home goods products
are challenging given the various categories, shapes, sizes, weights and price points in the home market. Given the personal
nature and high touch physical characteristics of home goods products, many consumers seek first-rate customer service so they
are not burdened with managing delivery, shipping and return logistics on their own. However, we believe big box retailers that
serve the mass market for home goods are often unable or unwilling to provide this level of service. In addition, many regional
retailers do not ship nationally, which we believe is because they lack the required scalable technology, operations and distribution
infrastructure.
Our Solution
Key Benefits for Our Customers
We offer our consumers vast selection, easy access and value, inspirational content, personalized and mobile shopping
experiences and superior customer service to help them find the perfect item at a price they can afford.
Broad Selection and Choice: We offer one of the largest online selections of furniture, décor, decorative accents,
housewares, seasonal décor and other home goods with over seven million products from over 7,000 suppliers.
Easy Access and Value: We offer consumers a one-stop shop with home goods pricing designed to be on par with big box
retailers and a merchandising experience designed to be on par with specialty retailers.
Inspirational Photography and Editorial Content: To inspire customers, we produce beautiful imagery and highly-tailored
editorial content both in house and through third parties.
Personalized and Mobile Shopping Experiences: We use personalization, based on past browsing, shopping patterns and
personal preferences, to create a more engaging consumer experience. Our investment in mobile allows us to deliver value,
convenience and inspiration to consumers anytime and anywhere.
Superior Customer Service: Our customer service organization has over 1,000 representatives who help consumers
navigate our sites, answer questions and help complete orders. This team helps us build trust with consumers, build our brand
awareness, enhance our reputation and drive sales.
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Key Benefits for Our Suppliers
Through our technology platform, we offer our suppliers a cost-effective channel, the ability to leverage our technological
expertise, a real-time view of our demand and proven logistics capabilities to help sell their products.
Cost-Effective Access to Our Large Customer Base: We sell products from over 7,000 suppliers, many of which are small,
family-run operations without well-known product brands and without easy retail access to a large customer base. We provide our
suppliers with access to our customer base of 5.4 million active customers, enabling them to increase their sales and access the
growing e-commerce market.
Ability to Leverage Our Technological Expertise to Drive Sales: Our technology platform is designed to allow suppliers to
easily provide us with their full product selection. Through our technology platform, we believe many of our suppliers have
increased their sales, which has strengthened their loyalty to us.
Real-Time View of Demand and Inventory Needs via Data and Analytics: We offer our suppliers a real-time view of our
demand and inventory needs via powerful data and analytics.
Proven Logistics Capabilities: Our logistics infrastructure allows us to ship directly from our suppliers to our customers.
This supplier direct fulfillment network is a key component of our custom-built and seamlessly integrated technology and
operational platform.
Our Strengths
We believe we have achieved our market leading position through the following key strengths:
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our large scale drives powerful network effects;
superior logistics infrastructure and supplier direct fulfillment network require minimal inventory and capital
expenditures;
trusted brand with rapidly growing awareness;
personalized shopping experiences and differentiated use of data, analytics and technology drive high customer
repeat rates;
powerful and custom-built technology platform;
well-positioned to benefit from platform shift to mobile; and
proven and operationally disciplined management team.
Our Growth Strategy
Our goal is to further improve our leadership in the home goods market by pursuing the following key strategies:
continue building our leading retail home brands;
acquire more customers;
continue to invest in the consumer experience;
increase repeat purchasing through merchandising, data, analytics and technology;
add new suppliers and deepen relationships with our existing suppliers;
continue to invest in our technology and operational platform, including our mobile platform;
expand internationally; and
opportunistically pursue strategic acquisitions.
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Brands
Each of our customers has a different taste, style, purchasing goal and budget when shopping for her home. To help her find
the right products for her home, we offer five distinct brands: Wayfair.com, Joss & Main, AllModern, DwellStudio and Birch
Lane. Each brand has a unique identity that offers a tailored shopping experience and rich product selection to a different target
audience.
Wayfair.com: an online destination for all things home
Joss & Main: where beautiful furniture and finds meet irresistible savings
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AllModern: a go-to online source for modern design
DwellStudio: a design house for fashion-forward modern furnishings
Birch Lane: a collection of classic furnishings and timeless home décor
In addition to our five brands, we also generate net revenue through two other sources:
Retail Partners: A portion of our net revenue is generated online by retail partners. These relationships allow consumers to
purchase Wayfair products through the retail partners' sites.
Wayfair Media Solutions: Wayfair helps selected manufacturers, retailers and other advertisers market to our large
consumer audience.
Technology
We have custom-built our proprietary technology and operational platform to deliver the best experience for both our
customers and suppliers. Our success has been built on a culture of data-driven decision-making, operational discipline and an
unwavering focus on the customer. We employ over 450 engineers and data scientists and believe we are able to attract and retain
some of the best technological minds. Our engineering department is organized into four operating groups that have built a full set
of technology solutions specific for the home goods market:
Storefront: A large set of tools and systems with which our customers directly interact. Our storefront team develops an
experience specifically tuned for shopping the home goods category.
Operations: A majority of the software we have written is designed to deliver the reliable and consistent experience
consumers desire, but is not consumer facing.
Infrastructure: We have developed a variety of tools and systems that enable us to move quickly and efficiently as we scale
our organization. Our infrastructure group supports a variety of proprietary, purchased as well as open source systems. Our
infrastructure group is primarily focused on the tools, processes, systems and platforms that provide the technical infrastructure
that drives our business.
Corporate IT: In addition to developing a large amount of software that is specific to our business, we run systems common
across multiple industries.
Competition
The market for online home goods and furniture is highly competitive, fragmented and rapidly changing. While we are
primarily focused on the mass market, we compete across all segments of the home goods market. Our competition includes
furniture stores, big box retailers, department stores, specialty retailers and online retailers and marketplaces:
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Furniture Stores: Ashley Furniture, Bob's Discount Furniture, Havertys, Raymour & Flanigan and Rooms To Go;
Big Box Retailers: Bed Bath & Beyond, Home Depot, IKEA, Lowe's, Target and Walmart;
Department Stores: JCPenney and Macy's;
Specialty Retailers: Crate and Barrel, Ethan Allen, HomeGoods, Pottery Barn and Restoration Hardware; and
Online Retailers and Marketplaces: Amazon and eBay.
We believe that the primary competitive factors in the mass market are vast selection, visually inspiring browsing,
compelling merchandising, ease of product discovery, price, convenience, reliability, speed of fulfillment and customer service.
We believe our technological and operational expertise allows us to provide our customers with a vast selection of goods,
attractive price points, reliable and timely fulfillment, plus superior customer service, and that the combination of these
capabilities is what provides us with a sustainable competitive advantage.
Sales and Marketing
Our sales and marketing efforts bring new and repeat customers to our sites and help us acquire their email addresses
through various paid and non-paid advertising methods. Our paid advertising efforts include search engine marketing, display
advertising, paid social media, catalog and television advertisements. Our non-paid advertising efforts include search engine
optimization, non-paid social media, mobile "push" notifications and email. Upon acquiring a customer or a potential customer's
email address, we seek to increase their engagement with our sites and drive repeat purchases. This effort to increase engagement
and repeat purchasing is primarily accomplished via unpaid mobile "push" notifications and email marketing efforts. We
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rigorously manage our paid marketing efforts, to ensure that each new spending initiative is cost-effective with a measurable
return on investment within a short period of time.
Employees
As of December 31, 2015, we had 3,809 full-time equivalent employees. Additionally, we rely on independent contractors
and temporary personnel to supplement our workforce, primarily in our fulfillment centers. None of our employees is represented
by a labor union or covered by a collective bargaining agreement. We consider our relationship with our employees to be good.
Intellectual Property
Our intellectual property, including any trademarks, copyrights, domain names, patents, trade dress, trade secrets and
proprietary technologies, is an important part of our business. To protect our intellectual property, we rely on a combination of
laws and regulations, as well as contractual restrictions. We pursue the registration of our trademarks, including "Wayfair" and
certain variations thereon, copyrights and domain names in the United States and certain foreign locations. We also rely on the
protection of laws regarding unregistered copyrights for our proprietary software and certain other content we create. We will
continue to evaluate the merits applying for copyright registrations in the future. We have an issued patent regarding our
proprietary technology and we are evaluating additional patent applications. We expect to consider filing patent applications for
future technology inventions. We also rely on trade secret laws to protect our proprietary technology and other intellectual
property. To further protect our intellectual property, we enter into confidentiality and assignment of invention assignment
agreements with employees and certain contractors and confidentiality agreements with other third parties, such as suppliers.
Segments
See Note 11 to our Consolidated Financial Statements, Segment and Geographic Information, included in Part II, Item 8,
Financial Statements and Supplementary Data, of this Annual Report on Form 10-K.
Company Information
We began operating as Smart Tech Toys, Inc., a Massachusetts corporation, in May 2002 and changed our name to CSN
Stores, Inc. in February 2003. In March 2008, we formed, and contributed all of the assets and liabilities of CSN Stores, Inc. to, a
subsidiary, CSN Stores LLC, and we continued operating our business through this Delaware limited liability company. In late
2011, we changed the name of CSN Stores, Inc. to SK Retail, Inc. and changed our name from CSN Stores LLC to Wayfair LLC.
In connection with our initial public offering, we completed a corporate reorganization, as a result of which Wayfair Inc. was
formed to be a holding company with no material assets other than 100% of the equity interests in Wayfair LLC and SK
Retail, Inc. For additional information regarding our corporate reorganization, see Note 1 to our Consolidated Financial
Statements, Basis of Presentation, included in Part II, Item 8, Financial Statements and Supplementary Data, of this Annual
Report on Form 10-K.
Our executive offices are located at 4 Copley Place, 7th Floor, Boston, MA 02116, and our telephone number is
(617) 532-6100. Our corporate website address is Wayfair.com. The information contained in, or accessible through, our website
does not constitute part of this Annual Report on Form 10-K.
Available Information
We encourage investors to use our investor relations website, investor.wayfair.com, to find information about us. We
promptly make available on this website, free of charge, the reports that we file or furnish with the Securities and Exchange
Commission ("SEC"), and corporate governance information (including our Code of Business Conduct and Ethics). We file
annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy and information statements
and amendments to reports filed or furnished pursuant to Sections 13(a), 14 and 15(d) of the Securities Exchange Act of 1934, as
amended (the “Exchange Act”). All material we file with the SEC is publicly available at the SEC's Public Reference Room at
100 F Street NE, Washington, DC 20549. You may obtain information on the operation of the SEC's Public Reference Room by
calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains a website at www.sec.gov that contains reports, proxy and
information statements and other information regarding Wayfair and other issuers that file electronically with the SEC. Our
website and the information contained therein or connected thereto are not a part of, or incorporated into, this Annual Report on
Form 10-K.
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Item 1A. Risk Factors
Our operations and financial results are subject to various risks and uncertainties, including those described below. We
caution you that the following important factors, among others, could cause our actual results to differ materially from those
expressed in forward-looking statements made by us or on our behalf in filings with the SEC, press releases, communications with
investors and oral statements. Any or all of our forward-looking statements in this Annual Report on Form 10-K and in any other
public statements we make may turn out to be wrong. They can be affected by inaccurate assumptions we might make or by known
or unknown risks and uncertainties. Many factors mentioned in the discussion below will be important in determining future
results. Consequently, no forward-looking statement can be guaranteed. Actual future results may differ materially from those
anticipated in forward-looking statements. We undertake no obligation to update any forward-looking statements, whether as a
result of new information, future events or otherwise. You are advised, however, to consult any further disclosure we make in our
reports filed with the SEC.
Risks Related to Our Business and Industry
Our recent growth rates may not be sustainable or indicative of our future growth.
In late 2011, we closed and permanently redirected over 240 of our niche websites into Wayfair.com. Additionally, we
launched Joss & Main. In 2013, we acquired DwellStudio, and in 2014, we launched Birch Lane. Because we launched most of
our brands in recent years, we have a limited amount of information regarding the purchasing patterns of our customers on these
websites. We depend heavily on this information to plan and forecast our business, including anticipated customer acquisition
costs, net revenue per active customer and other key performance metrics. If our assumptions prove to be wrong, we may spend
more than we anticipate acquiring and retaining customers or may generate less net revenue per active customer than anticipated,
any of which could have a negative impact on our business and results of operations. In addition, our historical growth rates may
not be sustainable or indicative of future growth.
We believe that our continued revenue growth will depend upon, among other factors, our ability to:
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build our brands and launch new brands;
acquire more customers;
develop new features to enhance the consumer experience on our websites, mobile-optimized websites and mobile
applications, which we collectively refer to as our sites;
increase the frequency with which new and repeat customers purchase products on our sites through merchandising,
data, analytics and technology;
add new suppliers and deepen our relationships with our existing suppliers;
enhance the systems our consumers use to interact with our sites and invest in our infrastructure platform;
expand internationally; and
pursue strategic acquisitions.
We cannot assure you we will be able to achieve any of the foregoing. Our customer base may not continue to grow or may
decline as a result of increased competition and the maturation of our business. Failure to continue our revenue growth rates could
have a material adverse effect on our financial condition and results of operations. You should not rely on our historical rate of
revenue growth as an indication of our future performance.
If we fail to manage our growth effectively, our business, financial condition and operating results could be harmed.
To manage our growth effectively, we must continue to implement our operational plans and strategies, improve and expand
our infrastructure of people and information systems and expand, train and manage our employee base. We have rapidly increased
employee headcount since our inception to support the growth in our business. The number of our employees increased from
2,353 full-time equivalents as of December 31, 2014 to 3,809 full-time equivalents as of December 31, 2015. To support
continued growth, we must effectively integrate, develop and motivate a large number of new employees. We face significant
competition for personnel, particularly in the Boston, Massachusetts area where our headquarters are located. Failure to manage
our hiring needs effectively or successfully integrate our new hires may have a material adverse effect on our business, financial
condition and operating results.
Additionally, the growth of our business places significant demands on our management and other employees. For example,
we typically launch hundreds of promotional events across thousands of products each month on Wayfair.com, in addition to
hundreds of promotional events—or "Daily Events"—on Joss & Main in which we promote thousands of products via emails,
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"push" notifications and personalized displays. These events require us to produce updates of our sites and emails to our
customers on a daily basis with different products, photos and text. The growth of our business may require significant additional
resources to meet these daily requirements, which may not scale in a cost-effective manner or may negatively affect the quality of
our sites and customer experience. We are also required to manage relationships with a growing number of suppliers, customers
and other third parties. Our information technology systems and our internal controls and procedures may not be adequate to
support future growth of our supplier base. If we are unable to manage the growth of our organization effectively, our business,
financial condition and operating results may be materially adversely affected.
If we fail to acquire new customers, or fail to do so in a cost-effective manner, we may not be able to increase net revenue
per active customer or achieve profitability.
Our success depends on our ability to acquire customers in a cost-effective manner. In order to expand our customer base,
we must appeal to and acquire customers who have historically used other means of commerce to purchase home goods and may
prefer alternatives to our offerings, such as traditional brick and mortar retailers, the websites of our competitors or our suppliers'
own websites. We have made significant investments related to customer acquisition and expect to continue to spend significant
amounts to acquire additional customers. For example, we have continued to expand our national U.S. television branding and
advertising campaigns. Such campaigns are expensive and may not result in the cost-effective acquisition of customers. We
cannot assure you that the net profit from new customers we acquire will ultimately exceed the cost of acquiring those customers.
If we fail to deliver a quality shopping experience, or if consumers do not perceive the products we offer to be of high value and
quality, we may not be able to acquire new customers. If we are unable to acquire new customers who purchase products in
numbers sufficient to grow our business, we may not be able to generate the scale necessary to drive beneficial network effects
with our suppliers, our net revenue may decrease, and our business, financial condition and operating results may be materially
adversely affected.
We believe that many of our new customers originate from word-of- mouth and other non-paid referrals from existing
customers. Therefore, we must ensure that our existing customers remain loyal to us in order to continue receiving those referrals.
If our efforts to satisfy our existing customers are not successful, we may not be able to acquire new customers in sufficient
numbers to continue to grow our business, or we may be required to incur significantly higher marketing expenses in order to
acquire new customers.
We also utilize paid and non-paid advertising. Our paid advertising includes search engine marketing, display advertising,
paid social media and television advertisements. Our non-paid advertising efforts include search engine optimization, non-paid
social media, mobile "push" notifications and email. We obtain a significant amount of traffic via search engines and, therefore,
rely on search engines such as Google, Bing and Yahoo!. Search engines frequently update and change the logic that determines
the placement and display of results of a user's search, such that the purchased or algorithmic placement of links to our sites can
be negatively affected. Moreover, a search engine could, for competitive or other purposes, alter its search algorithms or results,
causing our sites to place lower in search query results. A major search engine could change its algorithms in a manner that
negatively affects our paid or non-paid search ranking, and competitive dynamics could impact the effectiveness of search engine
marketing or search engine optimization. We also obtain a significant amount of traffic via social networking websites or other
channels used by our current and prospective customers. As e-commerce and social networking continue to rapidly evolve, we
must continue to establish relationships with these channels and may be unable to develop or maintain these relationships on
acceptable terms. If we are unable to cost-effectively drive traffic to our sites, our ability to acquire new customers and our
financial condition would suffer.
Our success depends in part on our ability to increase our net revenue per active customer. If our efforts to increase
customer loyalty and repeat purchasing as well as maintain high levels of customer engagement and average order values of
our customers are not successful, our growth prospects and revenue will be materially adversely affected.
Our ability to grow our business depends on our ability to retain our existing customer base and generate increased revenue
and repeat purchases from this customer base, and maintain high levels of customer engagement. To do this, we must continue to
provide our customers and potential customers with a unified, convenient, efficient and differentiated shopping experience by:
•
providing imagery, tools and technology that attract customers who historically would have bought elsewhere;
• maintaining a high-quality and diverse portfolio of products;
• managing over 7,000 suppliers to deliver products on time and without damage; and
•
continuing to invest in our mobile platforms.
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If we fail to increase net revenue per active customer, generate repeat purchases or maintain high levels of customer
engagement and average order value, our growth prospects, operating results and financial condition could be materially
adversely affected.
Our business depends on our ability to build and maintain strong brands. We may not be able to maintain and enhance
our existing brands if we receive unfavorable customer complaints, negative publicity or otherwise fail to live up to consumers'
expectations, which could materially adversely affect our business, results of operations and growth prospects.
We currently offer five distinct brands to our customers, but we have a limited operating history with most of these brands.
Maintaining and enhancing these brands are critical to expanding our base of customers and suppliers. However, a significant
portion of our customers' brand experience depends on third parties outside of our control, including suppliers and logistics
providers such as FedEx, UPS and the U.S. Postal Service. If these third parties do not meet our or our customers' expectations,
our brands may suffer irreparable damage. In addition, maintaining and enhancing these brands may require us to make
substantial investments, and these investments may not be successful. If we fail to promote and maintain our brands, or if we
incur excessive expenses in this effort, our business, operating results and financial condition may be materially adversely
affected. We anticipate that, as our market becomes increasingly competitive, maintaining and enhancing our brands may become
increasingly difficult and expensive. Maintaining and enhancing our brands will depend largely on our ability to provide high
quality products to our customers and a reliable, trustworthy and profitable sales channel to our suppliers, which we may not do
successfully.
Customer complaints or negative publicity about our sites, products, product delivery times, customer data handling and
security practices or customer support, especially on blogs, social media websites and our sites, could rapidly and severely
diminish consumer use of our sites and consumer and supplier confidence in us and result in harm to our brands.
Our efforts to launch new brands and expand our existing brand portfolio internationally may not be successful.
Our business success depends to some extent on our ability to expand our customer offerings by launching new brands and
expanding our existing brand portfolio into new geographies. For example, in 2014 we launched Birch Lane, and in 2015 we
launched Wayfair.ca in Canada. Launching new brands or expanding our existing brand portfolio internationally requires
significant upfront investments, including investments in marketing, information technology and additional personnel. Expanding
our brands internationally is particularly challenging because it requires us to gain country-specific knowledge about consumers
and regional competitors, construct home goods catalogs specific to the country, build local logistics capabilities and customize
portions of our technology for local markets. We may not be able to generate satisfactory revenue from these efforts to offset these
upfront costs. Any lack of market acceptance of our efforts to launch new brands or expand our existing brand portfolio could
have a material adverse effect on our business, prospects, financial condition and results of operations.
Expansion of our international operations will require management attention and resources, involves additional risks,
and may be unsuccessful, which could harm our future business development and existing domestic operations.
We believe international expansion represents a significant growth opportunity for us. Today, we deliver products to
customers in a number of countries, and plan to expand into other international markets in order to grow our business, which will
require significant management attention and resources. For example, we have made and will continue to make significant
investments in information technology, logistics, supplier relationships, merchandising and marketing in the foreign jurisdictions
in which we operate or plan to operate. We have limited experience in selling our products to conform to different local cultures,
standards and regulations, and the products we offer may not appeal to customers in the same manner, if at all, in other
geographies. We may have to compete with local companies which understand the local market better than we do and/or may
have greater brand recognition than we do. In addition, to deliver satisfactory performance for customers in international
locations, it may be necessary to locate physical facilities, such as consolidation centers, in foreign markets, and we may have to
invest in these facilities before we can determine whether or not our foreign operations are successful. We have limited experience
establishing such facilities internationally and therefore may decide not to continue with the expansion of operations. We may not
be successful in expanding into additional international markets or in generating net revenue from foreign operations.
Furthermore, different privacy, censorship, liability, intellectual property and other laws and regulations in foreign countries may
cause our business, financial condition and operating results to be materially adversely affected.
Our future results could be materially adversely affected by a number of factors inherent in international operations,
including:
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localization of our product offerings, including translation into foreign languages and adaptation for local practices;
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the need to vary our practices in ways with which we have limited or no experience or which are less profitable or
carry more risk to us;
unexpected changes in regulatory requirements, taxes, trade laws, tariffs, export quotas, custom duties or other trade
restrictions;
differing labor regulations where labor laws may be more advantageous to employees as compared to the United
States;
• more stringent regulations relating to data privacy and security, including the use of commercial and personal
information, particularly in the European Union;
changes in a specific country's or region's political or economic conditions;
the rising cost of labor in the foreign countries in which our suppliers operate, resulting in increases in our costs of
doing business internationally;
challenges inherent in efficiently managing an increased number of employees over large geographic distances,
including the need to implement appropriate systems, policies, benefits and compliance programs and maintain our
corporate culture across geographies;
risks resulting from changes in currency exchange rates;
limitations on our ability to reinvest earnings from operations in one country to fund the capital needs of our
operations in other countries;
different or lesser intellectual property protection;
exposure to liabilities under anti-corruption and anti-money laundering laws, including the U.S. Foreign Corrupt
Practices Act and similar laws and regulations in other jurisdictions;
import/export controls; and
logistics and sourcing.
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Operating internationally requires significant management attention and financial resources. We cannot be certain that the
investment and additional resources required to establish and expand our international operations will produce desired levels of
net revenue or profitability. If we invest substantial time and resources to establish and expand our international operations and
are unable to do so successfully and in a timely manner, our business, financial condition and operating results may be materially
adversely affected.
We have a history of losses and expect to have increasing operating losses and negative cash flow as we continue to
expand our business.
We have a history of losses, and we accumulated $306.2 million in common members' deficit as Wayfair LLC and an
additional $135.6 million loss as Wayfair Inc. through December 31, 2015. We expect our operating losses and negative cash flow
to continue in the near-term as we increase investment in our business. Because the market for purchasing home goods online is
rapidly evolving and has not yet reached widespread adoption, it is difficult for us to predict our future operating results. As a
result, our losses may be larger than anticipated, and we may never achieve profitability. We expect our operating expenses to
increase over the next several years as we increase our advertising budget, hire additional personnel and continue to develop
features on our sites. In particular, we intend to continue to invest substantial resources in marketing to acquire new customers. In
addition, as we grow as a company, we have and will continue to incur additional significant legal, accounting and other expenses
that we did not previously incur as a private company. Furthermore, if our future growth and operating performance fail to meet
investor or analyst expectations, or if we have future negative cash flow or losses resulting from our investment in acquiring new
customers, our financial condition and stock price could be materially adversely affected.
System interruptions that impair customer access to our sites or other performance failures in our technology
infrastructure could damage our business, reputation and brand and substantially harm our business and results of
operations.
The satisfactory performance, reliability and availability of our sites, transaction processing systems and technology
infrastructure are critical to our reputation and our ability to acquire and retain customers, as well as maintain adequate customer
service levels.
We currently utilize three third-party data center hosting facilities. If one of our facilities fails or suffers an interruption or
degradation of services, we could lose customer data and miss order fulfillment deadlines, which could harm our business. Our
systems and operations are vulnerable to damage or interruption from fire, flood, power loss, telecommunications failure, terrorist
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attacks, cyber-attacks, data loss, acts of war, break-ins, earthquake and similar events. In the event of a failure of a facility, the
failover to its back-up facility could take substantial time, during which time our sites could be completely shut down. Our back-
up facilities are designed to support transaction volumes at a level slightly above our average daily sales, but may not be adequate
to support spikes in demand. Our back-up facilities may not process effectively during times of higher traffic to our sites and may
process transactions more slowly and may not support all of our sites' functionality.
We use complex proprietary software in our technology infrastructure, which we seek to continually update and improve.
We may not always be successful in executing these upgrades and improvements, and the operation of our systems may be subject
to failure. In particular, we have in the past and may in the future experience slowdowns or interruptions in some or all of our sites
when we are updating them, and new technologies or infrastructures may not be fully integrated with existing systems on a timely
basis, or at all. Additionally, if we expand our use of third-party services, including cloud-based services, our technology
infrastructure may be subject to increased risk of slowdown or interruption as a result of integration with such services and/or
failures by such third-parties, which are out of our control. Our net revenue depends on the number of visitors who shop on our
sites and the volume of orders we can handle. Unavailability of our sites or reduced order fulfillment performance would reduce
the volume of goods sold and could also materially adversely affect consumer perception of our brand. We may experience
periodic system interruptions from time to time. In addition, continued growth in our transaction volume, as well as surges in
online traffic and orders associated with promotional activities or seasonal trends in our business, place additional demands on our
technology platform and could cause or exacerbate slowdowns or interruptions. If there is a substantial increase in the volume of
traffic on our sites or the number of orders placed by customers, we will be required to further expand and upgrade our
technology, transaction processing systems and network infrastructure. There can be no assurance that we will be able to
accurately project the rate or timing of increases, if any, in the use of our sites or expand and upgrade our systems and
infrastructure to accommodate such increases on a timely basis. In order to remain competitive, we must continue to enhance and
improve the responsiveness, functionality and features of our sites, which is particularly challenging given the rapid rate at which
new technologies, customer preferences and expectations and industry standards and practices are evolving in the e-commerce
industry. Accordingly, we redesign and enhance various functions on our sites on a regular basis, and we may experience
instability and performance issues as a result of these changes.
Any slowdown or failure of our sites and the underlying technology infrastructure could harm our business, reputation and
our ability to acquire, retain and serve our customers, which could materially adversely affect our results of operations. Our
disaster recovery plan may be inadequate, and our business interruption insurance may not be sufficient to compensate us for the
losses that could occur.
Our business is highly competitive. Competition presents an ongoing threat to the success of our business.
Our business is rapidly evolving and intensely competitive, and we have many competitors in different industries. Our
competition includes: furniture stores, big box retailers, department stores, specialty retailers, and online retailers and
marketplaces, including:
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Furniture Stores: Ashley Furniture, Bob's Discount Furniture, Havertys, Raymour & Flanagan and Rooms To Go;
Big Box Retailers: Bed, Bath & Beyond, Home Depot, IKEA, Lowe's, Target and Walmart;
Department Stores: JCPenney and Macy's;
Specialty Retailers: Crate and Barrel, Ethan Allen, HomeGoods, Pottery Barn and Restoration Hardware; and
Online Retailers and Online Marketplaces: Amazon and eBay.
We expect competition in e-commerce generally to continue to increase. We believe that our ability to compete successfully
depends upon many factors both within and beyond our control, including:
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the size and composition of our customer base;
the number of suppliers and products we feature on our sites;
our selling and marketing efforts;
the quality, price and reliability of products offered either by us;
the convenience of the shopping experience that we provide;
our ability to distribute our products and manage our operations; and
our reputation and brand strength.
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Many of our current competitors have, and potential competitors may have, longer operating histories, greater brand
recognition, larger fulfillment infrastructures, greater technical capabilities, faster and less costly shipping, significantly greater
financial, marketing and other resources and larger customer bases than we do. These factors may allow our competitors to derive
greater net revenue and profits from their existing customer base, acquire customers at lower costs or respond more quickly than
we can to new or emerging technologies and changes in consumer habits. These competitors may engage in more extensive
research and development efforts, undertake more far-reaching marketing campaigns and adopt more aggressive pricing policies,
which may allow them to build larger customer bases or generate net revenue from their customer bases more effectively than we
do.
Purchasers of home goods may not choose to shop online, which would prevent us from growing our business.
The online market for home goods in the United States is less developed than the online market for apparel, consumer
electronics and other consumer products in the United States and, we believe, only accounts for a small portion of the market as a
whole. If the online market for home goods does not gain acceptance, our business may suffer. Our success will depend, in part,
on our ability to attract consumers who have historically purchased home goods through traditional retailers. Furthermore, we
may have to incur significantly higher and more sustained advertising and promotional expenditures in order to attract additional
online consumers to our sites and convert them into purchasing customers. Specific factors that could impact consumers'
willingness to purchase home goods from us include:
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concerns about buying products, and in particular larger products, without a physical storefront, face-to-face
interaction with sales personnel and the ability to physically examine products;
delivery time associated with online orders;
actual or perceived lack of security of online transactions and concerns regarding the privacy of personal
information;
delayed shipments or shipments of incorrect or damaged products;
inconvenience associated with returning or exchanging items purchased online; and
usability, functionality and features of our sites.
If the shopping experience we provide does not appeal to consumers or meet the expectations of existing customers, we
may not acquire new customers at rates consistent with historical periods, and existing customers' buying patterns and levels may
be less than historical rates.
We may be subject to product liability claims if people or property are harmed by the products we sell.
Some of the products we sell or have manufactured for us may expose us to product liability claims and litigation or
regulatory action relating to personal injury, death or environmental or property damage. Some of our agreements with our
suppliers and international manufacturers may not indemnify us from product liability for a particular supplier's or international
manufacturer's products, or our suppliers or international manufacturers may not have sufficient resources or insurance to satisfy
their indemnity and defense obligations. Although we maintain liability insurance, we cannot be certain that our coverage will be
adequate for liabilities actually incurred or that insurance will continue to be available to us on economically reasonable terms, or
at all.
Risks associated with the suppliers from whom our products are sourced could materially adversely affect our financial
performance as well as our reputation and brand.
We depend on our ability to provide our customers with a wide range of products from qualified suppliers in a timely and
efficient manner. Political and economic instability, the financial stability of suppliers, suppliers' ability to meet our standards,
labor problems experienced by suppliers, the availability of raw materials, merchandise quality issues, currency exchange rates,
transport availability and cost, transport security, inflation, and other factors relating to the suppliers are beyond our control.
Our agreements with most of our suppliers do not provide for the long-term availability of merchandise or the continuation
of particular pricing practices, nor do they usually restrict such suppliers from selling products to other buyers. There can be no
assurance that our current suppliers will continue to seek to sell us products on current terms or that we will be able to establish
new or otherwise extend current supply relationships to ensure product acquisitions in a timely and efficient manner and on
acceptable commercial terms. Our ability to develop and maintain relationships with reputable suppliers and offer high quality
merchandise to our customers is critical to our success. If we are unable to develop and maintain relationships with suppliers that
would allow us to offer a sufficient amount and variety of quality merchandise on acceptable commercial terms, our ability to
satisfy our customers' needs, and therefore our long-term growth prospects, would be materially adversely affected.
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We also are unable to predict whether any of the countries in which our suppliers' products are currently manufactured or
may be manufactured in the future will be subject to trade restrictions imposed by the U.S. or foreign governments or the
likelihood, type or effect of any such restrictions. Any event causing a disruption or delay of imports from suppliers with
international manufacturing operations, including the imposition of additional import restrictions, restrictions on the transfer of
funds or increased tariffs or quotas, could increase the cost or reduce the supply of merchandise available to our customers and
materially adversely affect our financial performance as well as our reputation and brand. Furthermore, some or all of our
suppliers' foreign operations may be adversely affected by political and financial instability, resulting in the disruption of trade
from exporting countries, restrictions on the transfer of funds or other trade disruptions.
In addition, our business with foreign suppliers, particularly with respect to our international sites, may be affected by
changes in the value of the U.S. dollar relative to other foreign currencies. For example, any movement by any other foreign
currency against the U.S. dollar may result in higher costs to us for those goods. Declines in foreign currencies and currency
exchange rates might negatively affect the profitability and business prospects of one or more of our foreign suppliers. This, in
turn, might cause such foreign suppliers to demand higher prices for merchandise in their effort to offset any lost profits
associated with any currency devaluation, delay merchandise shipments, or discontinue selling to us altogether, any of which
could ultimately reduce our sales or increase our costs.
We may be unable to source additional or strengthen our relationships with suppliers.
As of December 31, 2015, we had relationships with over 7,000 suppliers. Our agreements with suppliers are generally
terminable at will by either party upon short notice. If we do not maintain our existing relationships or build new relationships
with suppliers on acceptable commercial terms, we may not be able to maintain a broad selection of merchandise, and our
business and prospects would suffer severely.
In order to attract quality suppliers to our platform, we must:
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demonstrate our ability to help our suppliers increase their sales;
offer suppliers a high quality, cost-effective fulfillment process; and
continue to provide suppliers a dynamic and real-time view of our demand and inventory needs via powerful data
and analytics capabilities.
If we are unable to provide our suppliers with a compelling return on investment and an ability to increase their sales, we
may be unable to maintain and/or expand our supplier network, which would negatively impact our business.
We depend on our suppliers to perform certain services regarding the products that we offer.
As part of offering our suppliers' products for sale on our sites, these suppliers generally agree to conduct a number of
traditional retail operations with respect to their respective products, including maintaining inventory and preparing merchandise
for shipment to our customers. We may be unable to ensure that these suppliers will continue to perform these services to our or
our customers' satisfaction in a manner that provides our customer with a unified brand experience or on commercially reasonable
terms. If our customers become dissatisfied with the services provided by our suppliers, our business, reputation and brands could
suffer.
We depend on our relationships with other third parties, including our retail partners, and changes in our relationships
with these parties could adversely impact our revenue and profits.
In the years ending December 31, 2015 and 2014, approximately 9% and 16%, respectively, of our net revenue was
generated from other operations, consisting primarily of revenue generated online by third parties, which we refer to as our retail
partners. Our relationships with our retail partners allow consumers to purchase products offered by us though their websites and
mobile applications. Because our agreements with our retail partners are generally terminable at will, we may be unable to
maintain these relationships, and our results of operations could fluctuate significantly from period to period depending on the
performance of our retail partners and their willingness to continue to offer and/or promote our products. Our agreements with our
retail partners may also restrict our ability to market certain products, and not all of our suppliers may permit us to market through
all of our retail partners' sites. Because some of our retail partners are competitors or potential competitors in the home goods
market, some or all of our retail partners may in the future determine they no longer wish to do business with us or may decide to
take other actions that could harm our business. We may also determine that we no longer want to do business with them. Because
we do business with a small number of retail partners, if any one of our contracts with our retailer partners were to terminate, our
revenue from our retail partners may decline and our relationships with our suppliers may be adversely affected.
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Because we rely on FedEx, UPS and the U.S. Postal Service to deliver most of the small parcel products we offer on our
sites, we are subject to shipping delays or disruptions caused by inclement weather, natural disasters, labor activism, health
epidemics or bioterrorism. In addition, because we rely on national and regional major transportation companies for the delivery
of some of our other products, we are also subject to risks of breakage or other damage during delivery by any of these third
parties. We also use and rely on other services from third parties, such as our telecommunications services, and those services may
be subject to outages and interruptions that are not within our control. For example, failures by our telecommunications providers
have in the past and may in the future interrupt our ability to provide phone support to our customers. If these products are not
delivered in a timely fashion or are damaged during the delivery process, or if we are not able to provide adequate customer
support, our customers could become dissatisfied and cease buying products through our sites, which would adversely affect our
operating results.
If our internal control over financial reporting or our disclosure controls and procedures are not effective, we may not be
able to accurately report our financial results, prevent fraud or file our periodic reports in a timely manner, which may cause
investors to lose confidence in our reported financial information and may lead to a decline in our stock price.
We were a private company for 12 years prior to our initial public offering (the “IPO”) in October 2014 and, as such, have
not historically had the internal control and financial reporting requirements that are required of a publicly-traded company. The
year ending December 31, 2015 was the first year during which we were required to comply with the requirements of The
Sarbanes-Oxley Act of 2002, which requires that we maintain effective internal control over financial reporting and disclosure
controls and procedures. In particular, we must perform system and process evaluation, document our controls and perform
testing of our key control over financial reporting to allow management and our independent public accounting firm to report on
the effectiveness of our internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act. Our
testing, or the subsequent testing by our independent public accounting firm, may reveal deficiencies in our internal control over
financial reporting that are deemed to be material weaknesses. If we are not able to comply with the requirements of Section 404
in a timely manner, or if we or our accounting firm identify deficiencies in our internal control over financial reporting that are
deemed to be material weaknesses, the market price of our stock would likely decline and we could be subject to lawsuits,
sanctions or investigations by regulatory authorities, which would require additional financial and management resources.
We continue to invest in more robust technology and in more resources in order to manage those reporting requirements.
Implementing the appropriate changes to our internal controls may distract our officers and employees, result in substantial costs
if we implement new processes or modify our existing processes and require significant time to complete. Any difficulties or
delays in implementing these controls could impact our ability to timely report our financial results. In addition, we currently rely
on a manual process in some areas which increases our exposure to human error or intervention in reporting our financial results.
For these reasons, we may encounter difficulties in the timely and accurate reporting of our financial results, which would impact
our ability to provide our investors with information in a timely manner. As a result, our investors could lose confidence in our
reported financial information, and our stock price could decline.
In addition, any such changes do not guarantee that we will be effective in maintaining the adequacy of our internal
controls, and any failure to maintain that adequacy could prevent us from accurately reporting our financial results.
We may be unable to accurately forecast net revenue and appropriately plan our expenses in the future.
Net revenue and operating results are difficult to forecast because they generally depend on the volume, timing and type of
the orders we receive, all of which are uncertain. We base our expense levels and investment plans on our estimates of total net
revenue and gross margins and have not historically relied on a formalized forecasting and budgeting process. In addition, we
have been operating as five distinct brands for a short period of time, and we cannot be sure the same growth rates, trends and
other key performance metrics are meaningful predictors of future growth. Our business is affected by general economic and
business conditions in the United States, and we anticipate that it will be increasingly affected by conditions in international
markets. In addition, we experience seasonal trends in our business, and our mix of product offerings is highly variable from day-
to-day and quarter-to-quarter. This variability makes it difficult to predict sales and could result in significant fluctuations in our
net revenue from period-to-period. A significant portion of our expenses is fixed, and as a result, we may be unable to adjust our
spending in a timely manner to compensate for any unexpected shortfall in net revenue. Any failure to accurately predict net
revenue or gross margins could cause our operating results to be lower than expected, which could materially adversely affect our
financial condition and stock price.
Our ability to raise capital in the future may be limited, and our failure to raise capital when needed could prevent us
from growing.
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In the future, we could be required to raise capital through public or private financing or other arrangements. Such financing
may not be available on acceptable terms, or at all, and our failure to raise capital when needed could harm our business. We may
sell Class A common stock, convertible securities and other equity securities in one or more transactions at prices and in a manner
as we may determine from time to time. If we sell any such securities in subsequent transactions, investors may be materially
diluted. New investors in such subsequent transactions could gain rights, preferences and privileges senior to those of holders of
our Class A common stock. Debt financing, if available, may involve restrictive covenants and could reduce our operational
flexibility or profitability. If we cannot raise funds on acceptable terms, we may not be able to grow our business or respond to
competitive pressures.
Our business may be adversely affected if we are unable to provide our customers a cost-effective shopping platform that
is able to respond and adapt to rapid changes in technology.
The number of people who access the Internet through devices other than personal computers, including mobile phones,
smartphones, handheld computers such as notebooks and tablets, video game consoles, and television set-top devices, has
increased dramatically in the past few years. The smaller screen size, functionality, and memory associated with some alternative
devices may make the use of our sites and purchasing our products more difficult. The versions of our sites developed for these
devices may not be compelling to consumers. In addition, it is time consuming and costly to keep pace with rapidly changing and
continuously evolving technology. We launched our mobile applications for Joss & Main in 2012, Wayfair.com in 2014,
AllModern in 2015 and all of our international sites in 2016. In addition, all of our sites are mobile-optimized.
As new mobile devices and platforms are released, it is difficult to predict the problems we may encounter in developing
applications for alternative devices and platforms, and we may need to devote significant resources to the creation, support and
maintenance of such applications. If we are unable to attract consumers to our websites through these devices or are slow to
develop a version of our websites that is more compatible with alternative devices or a mobile application, we may fail to capture
a significant share of consumers in the home goods market, which could adversely affect our business.
Further, we continually upgrade existing technologies and business applications, and we may be required to implement new
technologies or business applications in the future. The implementation of upgrades and changes requires significant investments.
Our results of operations may be affected by the timing, effectiveness and costs associated with the successful implementation of
any upgrades or changes to our systems and infrastructure. In the event that it is more difficult for our customers to buy products
from us on their mobile devices, or if our customers choose not to buy products from us on their mobile devices or to use mobile
products that do not offer access to our websites, our customer growth could be harmed and our business, financial condition and
operating results may be materially adversely affected.
Significant merchandise returns could harm our business.
We allow our customers to return products, subject to our return policy. If merchandise returns are significant, our business,
prospects, financial condition and results of operations could be harmed. Further, we modify our policies relating to returns from
time to time, which may result in customer dissatisfaction or an increase in the number of product returns. Many of our products
are large and require special handling and delivery. From time to time our products are damaged in transit, which can increase
return rates and harm our brand.
Uncertainties in global economic conditions and their impact on consumer spending patterns, particularly in the home
goods segment, could adversely impact our operating results.
Consumers may view a substantial portion of the products we offer as discretionary items rather than necessities. As a
result, our results of operations are sensitive to changes in macro-economic conditions that impact consumer spending, including
discretionary spending. Some of the factors adversely affecting consumer spending include levels of unemployment, consumer
debt levels, changes in net worth based on market changes and uncertainty, home foreclosures and changes in home values,
fluctuating interest rates, credit availability, government actions, fluctuating fuel and other energy costs, fluctuating commodity
prices and general uncertainty regarding the overall future economic environment. Adverse economic changes in any of the
regions in which we sell our products could reduce consumer confidence and could negatively affect net revenue and have a
material adverse effect on our operating results.
Our business relies heavily on email and other messaging services, and any restrictions on the sending of emails or
messages or an inability to timely deliver such communications could materially adversely affect our net revenue and business.
Our business is highly dependent upon email and other messaging services for promoting our sites and products. Daily
promotions offered through emails and other messages sent by us, or on our behalf by our vendors, generate a significant portion
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of our revenue. We provide daily emails and "push" communications to customers and other visitors informing them of what is
available for purchase on our sites that day, and we believe these messages are an important part of our customer experience and
help generate a substantial portion of our net revenue. If we are unable to successfully deliver emails or other messages to our
subscribers, or if subscribers decline to open our emails or other messages, our net revenue and profitability would be materially
adversely affected. Changes in how webmail applications organize and prioritize email may reduce the number of subscribers
opening our emails. For example, in 2013 Google Inc.'s Gmail service began offering a feature that organizes incoming emails
into categories (for example, primary, social and promotions). Such categorization or similar inbox organizational features may
result in our emails being delivered in a less prominent location in a subscriber's inbox or viewed as "spam" by our subscribers
and may reduce the likelihood of that subscriber opening our emails. Actions by third parties to block, impose restrictions on or
charge for the delivery of emails or other messages could also adversely impact our business. From time to time, Internet service
providers or other third parties may block bulk email transmissions or otherwise experience technical difficulties that result in our
inability to successfully deliver emails or other messages to third parties. Changes in the laws or regulations that limit our ability
to send such communications or impose additional requirements upon us in connection with sending such communications would
also materially adversely impact our business. Our use of email and other messaging services to send communications about our
sites or other matters may also result in legal claims against us, which may cause us increased expenses, and if successful might
result in fines and orders with costly reporting and compliance obligations or might limit or prohibit our ability to send emails or
other messages. We also rely on social networking messaging services to send communications and to encourage customers to
send communications. Changes to the terms of these social networking services to limit promotional communications, any
restrictions that would limit our ability or our customers' ability to send communications through their services, disruptions or
downtime experienced by these social networking services or decline in the use of or engagement with social networking services
by customers and potential customers could materially adversely affect our business, financial condition and operating results.
We are subject to risks related to online payment methods.
We accept payments using a variety of methods, including credit card, debit card, PayPal and gift cards. As we offer new
payment options to consumers, we may be subject to additional regulations, compliance requirements and fraud. For certain
payment methods, including credit and debit cards, we pay interchange and other fees, which may increase over time and raise
our operating costs and lower profitability. We are also subject to payment card association operating rules and certification
requirements, including the Payment Card Industry Data Security Standard and rules governing electronic funds transfers, which
could change or be reinterpreted to make it difficult or impossible for us to comply. As our business changes, we may also be
subject to different rules under existing standards, which may require new assessments that involve costs above what we currently
pay for compliance. If we fail to comply with the rules or requirements of any provider of a payment method we accept, if the
volume of fraud in our transactions limits or terminates our rights to use payment methods we currently accept, or if a data breach
occurs relating to our payment systems, we may, among other things, be subject to fines or higher transaction fees and may lose,
or face restrictions placed upon, our ability to accept credit card and debit card payments from consumers or facilitate other types
of online payments. If any of these events were to occur, our business, financial condition and operating results could be
materially adversely affected.
We occasionally receive orders placed with fraudulent credit card data. We may suffer losses as a result of orders placed
with fraudulent credit card data even if the associated financial institution approved payment of the orders. Under current credit
card practices, we may be liable for fraudulent credit card transactions. If we are unable to detect or control credit card fraud, our
liability for these transactions could harm our business, financial condition and results of operations.
Government regulation of the Internet and e-commerce is evolving, and unfavorable changes or failure by us to comply
with these regulations could substantially harm our business and results of operations.
We are subject to general business regulations and laws as well as regulations and laws specifically governing the Internet
and e-commerce. Existing and future regulations and laws could impede the growth of the Internet, e- commerce or mobile
commerce. These regulations and laws may involve taxes, tariffs, privacy and data security, anti-spam, content protection,
electronic contracts and communications, consumer protection, Internet neutrality and gift cards. It is not clear how existing laws
governing issues such as property ownership, sales and other taxes and consumer privacy apply to the Internet as the vast majority
of these laws were adopted prior to the advent of the Internet and do not contemplate or address the unique issues raised by the
Internet or e-commerce. It is possible that general business regulations and laws, or those specifically governing the Internet or e-
commerce, may be interpreted and applied in a manner that is inconsistent from one jurisdiction to another and may conflict with
other rules or our practices. We cannot be sure that our practices have complied, comply or will comply fully with all such laws
and regulations. Any failure, or perceived failure, by us to comply with any of these laws or regulations could result in damage to
our reputation, a loss in business and proceedings or actions against us by governmental entities or others. Any such proceeding or
action could hurt our reputation, force us to spend significant amounts in defense of these proceedings, distract our management,
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increase our costs of doing business, decrease the use of our sites by consumers and suppliers and may result in the imposition of
monetary liability. We may also be contractually liable to indemnify and hold harmless third parties from the costs or
consequences of non-compliance with any such laws or regulations. In addition, it is possible that governments of one or more
countries may seek to censor content available on our sites or may even attempt to completely block access to our sites. Adverse
legal or regulatory developments could substantially harm our business. In particular, in the event that we are restricted, in whole
or in part, from operating in one or more countries, our ability to retain or increase our customer base may be adversely affected,
and we may not be able to maintain or grow our net revenue and expand our business as anticipated.
Failure to comply with federal, state and international laws and regulations relating to privacy, data protection and
consumer protection, or the expansion of current or the enactment of new laws or regulations relating to privacy, data
protection and consumer protection, could adversely affect our business and our financial condition.
A variety of federal, state and international laws and regulations govern the collection, use, retention, sharing, export and
security of consumer data. Laws and regulations relating to privacy, data protection and consumer protection are evolving and
subject to potentially differing interpretations. These requirements may be interpreted and applied in a manner that is inconsistent
from one jurisdiction to another or may conflict with other rules or our practices. As a result, our practices may not have complied
or may not comply in the future with all such laws, regulations, requirements and obligations. Any failure, or perceived failure, by
us to comply with our posted privacy policies or with any federal, state or international privacy or consumer protection- related
laws, regulations, industry self-regulatory principles, industry standards or codes of conduct, regulatory guidance, orders to which
we may be subject or other legal obligations relating to privacy or consumer protection could adversely affect our reputation,
brand and business, and may result in claims, proceedings or actions against us by governmental entities or others or other
liabilities or require us to change our operations and/or cease using certain data sets. Any such claim, proceeding or action could
hurt our reputation, brand and business, force us to incur significant expenses in defense of such proceedings, distract our
management, increase our costs of doing business, result in a loss of customers and suppliers and may result in the imposition of
monetary penalties. We may also be contractually required to indemnify and hold harmless third parties from the costs or
consequences of non-compliance with any laws, regulations or other legal obligations relating to privacy or consumer protection
or any inadvertent or unauthorized use or disclosure of data that we store or handle as part of operating our business.
Federal, state and international governmental authorities continue to evaluate the privacy implications inherent in the use of
third-party "cookies" and other methods of online tracking for behavioral advertising and other purposes. U.S. and foreign
governments have enacted, have considered or are considering legislation or regulations that could significantly restrict the ability
of companies and individuals to engage in these activities, such as by regulating the level of consumer notice and consent required
before a company can employ cookies or other electronic tracking tools or the use of data gathered with such tools. Additionally,
some providers of consumer devices and web browsers have implemented, or announced plans to implement, means to make it
easier for Internet users to prevent the placement of cookies or to block other tracking technologies, which could if widely
adopted result in the use of third-party cookies and other methods of online tracking becoming significantly less effective. The
regulation of the use of these cookies and other current online tracking and advertising practices or a loss in our ability to make
effective use of services that employ such technologies could increase our costs of operations and limit our ability to acquire new
customers on cost-effective terms and consequently, materially adversely affect our business, financial condition and operating
results.
Foreign data protection, privacy and other laws and regulations are often more restrictive than those in the United States.
The European Union, for example, traditionally has imposed stricter obligations under its laws and regulations relating to privacy,
data protection and consumer protection than the United States. Individual EU member countries currently still have discretion
with respect to their interpretation and implementation of these laws and the penalties for breach and have their own regulators
with differing attitudes towards enforcement, which results in varying privacy standards and enforcement risk from country to
country. Legislation and regulation in the European Union and some EU member states require companies to give specific types
of notice and in some cases seek consent from consumers before using their data for certain purposes, including some marketing
activities. In the majority of EU member countries, consent must be obtained prior to setting cookies or other tracking
technologies. Outside of the European Union, there are many countries with data protections laws, and new countries are adopting
data protection legislation with increasing frequency. Many of these laws may require consent from consumers for the use of data
for various purposes, including marketing, which may reduce our ability to market our products. There is no harmonized approach
to these laws and regulations globally. Consequently, we increase our risk of non-compliance with applicable foreign data
protection laws and regulations as we continue our international expansion. We may need to change and limit the way we use
consumer information in operating our business and may have difficulty maintaining a single operating model that is compliant.
Compliance with such laws and regulations will result in additional costs and may necessitate changes to our business practices
and divergent operating models, which may adversely affect our business and financial condition.
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In addition, various federal, state and foreign legislative and regulatory bodies, or self-regulatory organizations, may expand
current laws or regulations, enact new laws or regulations or issue revised rules or guidance regarding privacy, data protection and
consumer protection. Any such changes may force us to incur substantial costs or require us to change our business practices. This
could compromise our ability to pursue our growth strategy effectively and may adversely affect our ability to acquire customers
or otherwise harm our business, financial condition and operating results.
Our failure or the failure of third-party service providers to protect our sites, networks and systems against security
breaches, or otherwise to protect our confidential information, could damage our reputation and brand and substantially harm
our business and operating results.
We collect, maintain, transmit and store data about our customers, suppliers and others, including credit card information
and personally identifiable information, as well as other confidential and proprietary information. We also employ third-party
service providers that store, process and transmit proprietary, personal and confidential information on our behalf. We rely on
encryption and authentication technology licensed from third parties in an effort to securely transmit confidential and sensitive
information, including credit card numbers. Advances in computer capabilities, new technological discoveries or other
developments may result in the whole or partial failure of this technology to protect transaction data or other confidential and
sensitive information from being breached or compromised. Our security measures, and those of our third-party service providers,
may not detect or prevent all attempts to hack our systems, denial-of-service attacks, viruses, malicious software, break-ins,
phishing attacks, social engineering, security breaches or other attacks and similar disruptions that may jeopardize the security of
information stored in or transmitted by our sites, networks and systems or that we or our third-party service providers otherwise
maintain, including payment card systems which may subject us to fines or higher transaction fees or limit or terminate our access
to certain payment methods. We and our service providers may not anticipate or prevent all types of attacks until after they have
already been launched, and techniques used to obtain unauthorized access to or sabotage systems change frequently and may not
be known until launched against us or our third-party service providers. In addition, security breaches can also occur as a result of
non-technical issues, including intentional or inadvertent breaches by our employees or by persons with whom we have
commercial relationships.
Breaches of our security measures or those of our third-party service providers or cyber security incidents could result in
unauthorized access to our sites, networks and systems; unauthorized access to and misappropriation of consumer information,
including consumers' personally identifiable information, or other confidential or proprietary information of ourselves or third
parties; viruses, worms, spyware or other malware being served from our sites, networks or systems; deletion or modification of
content or the display of unauthorized content on our sites; interruption, disruption or malfunction of operations; costs relating to
breach remediation, deployment of additional personnel and protection technologies, response to governmental investigations and
media inquiries and coverage; engagement of third party experts and consultants; litigation, regulatory action and other potential
liabilities. If any of these breaches of security occur, our reputation and brand could be damaged, our business may suffer, we
could be required to expend significant capital and other resources to alleviate problems caused by such breaches and we could be
exposed to a risk of loss, litigation or regulatory action and possible liability. Actual or anticipated attacks may cause us to incur
increasing costs, including costs to deploy additional personnel and protection technologies, train employees and engage third-
party experts and consultants. In addition, any party who is able to illicitly obtain a subscriber's password could access the
subscriber's transaction data or personal information. Any compromise or breach of our security measures, or those of our third-
party service providers, could violate applicable privacy, data security and other laws, and cause significant legal and financial
exposure, adverse publicity and a loss of confidence in our security measures, which could have a material adverse effect on our
business, financial condition and operating results. Although we maintain privacy, data breach and network security liability
insurance, we cannot be certain that our coverage will be adequate for liabilities actually incurred or that insurance will continue
to be available to us on economically reasonable terms, or at all. We may need to devote significant resources to protect against
security breaches or to address problems caused by breaches, diverting resources from the growth and expansion of our business.
Changes in tax treatment of companies engaged in e-commerce may adversely affect the commercial use of our sites and
our financial results.
Due to the global nature of the Internet, it is possible that various states or foreign countries might attempt to impose
additional or new regulation on our business or levy additional or new sales, income or other taxes relating to our activities. Tax
authorities at the international, federal, state and local levels are currently reviewing the appropriate treatment of companies
engaged in e-commerce. New or revised international, federal, state or local tax regulations may subject us or our customers to
additional sales, income and other taxes. For example, Congress is considering various approaches to legislation that would
require companies engaged in e-commerce to collect sales tax taxes on Internet revenue. We cannot predict the effect of current
attempts to impose sales, income or other taxes on e-commerce. New or revised taxes and, in particular, sales taxes, VAT and
similar taxes would likely increase the cost of doing business online and decrease the attractiveness of selling products over the
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Internet. New taxes could also create significant increases in internal costs necessary to capture data and collect and remit taxes.
Any of these events could have a material adverse effect on our business, financial condition and operating results.
Taxing authorities may successfully assert that we should have collected or in the future should collect sales and use,
commercial activity, VAT or similar taxes, and we could be subject to liability with respect to past or future sales, which could
adversely affect our operating results.
We do not collect sales and use, commercial activity, VAT or similar taxes in all jurisdictions in which we have sales, based
on our belief that such taxes are not applicable. Sales and use, VAT and similar tax laws and rates vary greatly by jurisdiction.
Several states have presented us with tax assessments, alleging that we are required to collect and remit sales or other similar
taxes. The aggregate amount of claims from these states, not including taxes allegedly owed for periods subsequent to such
assessments or interest and penalties after the date we last received such assessments, is approximately $12.9 million. While we
do not believe that we are obligated to collect and remit such taxes and intend to vigorously defend our position, we cannot be
sure of the outcome of our discussions and/or appeals with these states. In the event of an adverse outcome, we could face
assessments for additional time periods since the last assessments we received, plus any additional interest and penalties. We also
expect additional jurisdictions may make similar assessments in the future. In addition, in the future we may also decide to engage
in activities, such as owning or leasing property, that would require us to pay sales and use, commercial activity, VAT or similar
taxes in new jurisdictions. As a result, we may be required to collect such taxes in additional jurisdictions in the future. Such tax
assessments, penalties and interest or future requirements may materially adversely affect our business, financial condition and
operating results.
We may expend substantial funds in connection with the tax liabilities that arise upon the settlement of restricted stock
units.
We may expend substantial funds to satisfy minimum statutory tax withholding and remittance obligations when we settle a
portion of our restricted stock units ("RSUs"). Our RSUs typically vest over a period of five years. On the settlement dates for our
RSUs, we currently plan to withhold shares and remit income taxes on behalf of the holders of our RSUs at the applicable
minimum statutory rates based on the then current value of the underlying shares of our common stock, which we refer to as a net
settlement. In connection with these net settlements, we will withhold and remit the tax liabilities on behalf of the RSU holders to
the relevant tax authorities in cash. For example, from the closing of our IPO through December 31, 2015 our tax obligation was
approximately $47.1 million in the aggregate.
In order to fund the tax withholding and remittance obligations on behalf of our RSU holders, we expect to use a portion of
our cash and cash equivalent balances. Alternatively, we may choose to borrow funds or use a combination of cash and borrowed
funds to satisfy these obligations.
We expect to pursue acquisitions, which could have a material adverse effect on our business, as could the integration of
the businesses following acquisition.
As part of our business strategy, we may acquire other companies or businesses. Acquisitions involve numerous risks, any
of which could harm our business, including: difficulties in integrating the technologies, operations, existing contracts and
personnel of an acquired company; difficulties in supporting and transitioning suppliers, if any, of an acquired company; diversion
of financial and management resources from existing operations or alternative acquisition opportunities; failure to realize the
anticipated benefits or synergies of a transaction; failure to identify all of the problems, liabilities or other shortcomings or
challenges of an acquired company or technology, including issues related to intellectual property, regulatory compliance
practices, revenue recognition or other accounting practices or employee or customer issues; risks of entering new markets in
which we have limited or no experience; potential loss of key employees, customers and suppliers from either our current
business or an acquired company's business; inability to generate sufficient net revenue to offset acquisition costs; additional costs
or equity dilution associated with funding the acquisition; and possible write-offs or impairment charges relating to acquired
businesses.
We may also pursue acquisitions in businesses that are complementary to our business but otherwise new to our
organization. Pursuing complementary business opportunities would require significant time and resources that may divert
management's attention from other business activities. In addition, any complementary businesses we acquire may expose us to
additional laws, regulations and risks, including the risk that we may incur ongoing operating expenses in such businesses in
excess of revenue, which could harm our results of operations and financial condition. The financial profile of any such new
businesses may be different than our current financial profile, which could also materially adversely affect our financial condition.
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We rely on the performance of members of management and highly skilled personnel, and if we are unable to attract,
develop, motivate and retain well-qualified employees, our business could be harmed.
We believe our success has depended, and continues to depend, on the efforts and talents of Niraj Shah, one of our co-
founders, co-chairman of the board of directors and our Chief Executive Officer, Steven Conine, one our co-founders and co-
chairman of the board of directors, and other members of our management team. Our future success depends on our continuing
ability to attract, develop, motivate and retain highly qualified and skilled employees, particularly mid-level managers, engineers
and merchandising and technology personnel. The market for such positions in the Boston area and other cities in which we
operate is competitive. Qualified individuals are in high demand, and we may incur significant costs to attract them. In addition,
the loss of any of our senior management or key employees or our inability to recruit and develop mid-level managers could
materially adversely affect our ability to execute our business plan, and we may not be able to find adequate replacements. All of
our officers and other U.S. employees are at-will employees, meaning that they may terminate their employment relationship with
us at any time, and their knowledge of our business and industry would be extremely difficult to replace. If we do not succeed in
attracting well-qualified employees or retaining and motivating existing employees, our business, financial condition and
operating results may be materially adversely affected.
We may not be able to adequately protect our intellectual property rights.
We regard our subscriber list, trademarks, domain names, copyrights, patent, trade dress, trade secrets, proprietary
technology and similar intellectual property as critical to our success, and we rely on trademark, copyright and patent law, trade
secret protection, agreements and other methods with our employees and others to protect our proprietary rights. We might not be
able to obtain broad protection in the United States or internationally for all of our intellectual property, and we might not be able
to obtain effective intellectual property protection in every country in which we sell products. The protection of our intellectual
property rights may require the expenditure of significant financial, managerial and operational resources. Moreover, the steps we
take to protect our intellectual property may not adequately protect our rights or prevent third parties from infringing or
misappropriating our proprietary rights, and we may not be able to broadly enforce all of our trademarks. Any of our patents,
marks or other intellectual property rights may be challenged by others or invalidated through administrative process or litigation.
Our patent and trademark applications may never be granted. Additionally, the process of obtaining patent protection is expensive
and time-consuming, and we may not be able to prosecute all necessary or desirable patent applications at a reasonable cost or in
a timely manner. Even if issued, there can be no assurance that these patents will adequately protect our intellectual property, as
the legal standards relating to the validity, enforceability and scope of protection of patent and other intellectual property rights
are uncertain. We also cannot be certain that others will not independently develop or otherwise acquire equivalent or superior
technology or intellectual property rights.
We might be required to spend significant resources to monitor and protect our intellectual property rights. We may not be
able to discover or determine the extent of any infringement, misappropriation or other violation of our intellectual property rights
and other proprietary rights. We may initiate claims or litigation against others for infringement, misappropriation or violation of
our intellectual property rights or proprietary rights or to establish the validity of such rights. Despite our efforts, we may be
unable to prevent third parties from infringing upon, misappropriating or otherwise violating our intellectual property rights and
other proprietary rights. Any litigation, whether or not it is resolved in our favor, could result in significant expense to us and
divert the efforts of our technical and management personnel, which may materially adversely affect our business, financial
condition and operating results.
We have been, and may again be, accused of infringing intellectual property rights of third parties.
The e-commerce industry is characterized by vigorous protection and pursuit of intellectual property rights, which has
resulted in protracted and expensive litigation for many companies. We are subject to claims and litigation by third parties that we
infringe their intellectual property rights, and we expect additional claims and litigation with respect to infringement to occur in
the future. The costs of supporting such litigation and disputes are considerable, and there can be no assurances that favorable
outcomes will be obtained. As our business expands and the number of competitors in our market increases and overlaps occur,
we expect that infringement claims may increase in number and significance. Any claims or proceedings against us, whether
meritorious or not, could be time-consuming, result in considerable litigation costs, require significant amounts of management
time or result in the diversion of significant operational resources, any of which could materially adversely affect our business,
financial condition and operating results.
Legal claims regarding intellectual property rights are subject to inherent uncertainties due to the oftentimes complex issues
involved, and we cannot be certain that we will be successful in defending ourselves against such claims. In addition, some of our
larger competitors have extensive portfolios of issued patents. Many potential litigants, including patent holding companies, have
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the ability to dedicate substantially greater resources to enforce their intellectual property rights and to defend claims that may be
brought against them. Furthermore, a successful claimant could secure a judgment that requires us to pay substantial damages or
prevents us from conducting our business as we have historically done or may desire to do in the future. We might also be
required to seek a license and pay royalties for the use of such intellectual property, which may not be available on commercially
acceptable terms, or at all. Alternatively, we may be required to develop non-infringing technology or intellectual property, which
could require significant effort and expense and may ultimately not be successful.
We have received in the past, and we may receive in the future, communications alleging that certain items posted on or
sold through our sites violate third-party copyrights, designs, marks and trade names or other intellectual property rights or other
proprietary rights. Brand and content owners and other proprietary rights owners have actively asserted their purported rights
against online companies, including Wayfair. In addition to litigation from rights owners, we may be subject to regulatory, civil or
criminal proceedings and penalties if governmental authorities believe we have aided and abetted in the sale of counterfeit or
infringing products.
Such claims, whether or not meritorious, may result in the expenditure of significant financial, managerial and operational
resources, injunctions against us or the payment of damages by us. We may need to obtain licenses from third parties who allege
that we have violated their rights, but such licenses may not be available on terms acceptable to us, or at all. These risks have been
amplified by the increase in third parties whose sole or primary business is to assert such claims.
The inability to acquire, use or maintain our marks and domain names for our sites could substantially harm our
business and operating results.
We currently are the registrant of marks for our brands in numerous jurisdictions and are the registrant of the Internet
domain name for the websites of Wayfair.com and our other sites, as well as various related domain names. However, we have not
registered our marks or domain names in all major international jurisdictions. Domain names generally are regulated by Internet
regulatory bodies. If we do not have or cannot obtain on reasonable terms the ability to use our marks in a particular country, or to
use or register our domain name, we could be forced either to incur significant additional expenses to market our products within
that country, including the development of a new brand and the creation of new promotional materials and packaging, or to elect
not to sell products in that country. Either result could materially adversely affect our business, financial condition and operating
results.
Furthermore, the regulations governing domain names and laws protecting marks and similar proprietary rights could
change in ways that block or interfere with our ability to use relevant domains or our current brand. Also, we might not be able to
prevent third parties from registering, using or retaining domain names that interfere with our consumer communications or
infringe or otherwise decrease the value of our marks, domain names and other proprietary rights. Regulatory bodies also may
establish additional generic or country-code top-level domains or may allow modifications of the requirements for registering,
holding or using domain names. As a result, we might not be able to register, use or maintain the domain names that utilize the
name Wayfair or our other brands in all of the countries in which we currently or intend to conduct business.
Our use of open source software may pose particular risks to our proprietary software and systems.
We use open source software in our software and systems and will use open source software in the future. The licenses
applicable to open source software may require that the source code subject to the license be made available to the public and that
any modifications or derivative works to certain open source software continue to be licensed under open source licenses. From
time to time, we may face claims from third parties claiming infringement of their intellectual property rights, or demanding the
release or license of the open source software or derivative works that we developed using such software (which could include
our proprietary source code) or otherwise seeking to enforce the terms of the applicable open source license. These claims could
result in litigation and could require us to purchase a costly license, publicly release the affected portions of our source code, be
limited in or cease using the implicated software unless and until we can re-engineer such software to avoid infringement or
change the use of the implicated open source software. In addition to risks related to license requirements, use of certain open
source software can lead to greater risks than use of third-party commercial software, as open source licensors generally do not
provide warranties, indemnities or other contractual protections with respect to the software (for example, non-infringement or
functionality). Our use of open source software may also present additional security risks because the source code for open source
software is publicly available, which may make it easier for hackers and other third parties to determine how to breach our sites
and systems that rely on open source software. Any of these risks could be difficult to eliminate or manage, and, if not addressed,
could have a material adverse effect on our business, financial condition and operating results.
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Risks Related to Ownership of our Class A Common Stock
Although we do not rely on "controlled company" exemptions from certain corporate governance requirements under
the New York Stock Exchange, or NYSE, rules, if we use these exemptions in the future, you will not have the same
protections afforded to stockholders of companies that are subject to such requirements.
Our co-founders control a majority of the voting power of our outstanding common stock. As a result, we qualify as a
"controlled company" within the meaning of the corporate governance standards of the NYSE. Under these rules, a listed
company of which more than 50% of the voting power is held by an individual, group or another company is a "controlled
company" and may elect not to comply with certain corporate governance requirements, including:
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the requirement that a majority of the board of directors consist of independent directors as defined under the listing
rules of the NYSE;
the requirement that we have a nominating and corporate governance committee that is composed entirely of
independent directors with a written charter addressing the committee's purpose and responsibilities;
the requirement that we have a compensation committee that is composed entirely of independent directors with a
written charter addressing the committee's purpose and responsibilities; and
the requirement for an annual performance evaluation of the nominating and corporate governance and
compensation committees.
To the extent we still qualify, we may choose to take advantage of any of these exemptions in the future. As a result, in the
future, we may not have a majority of independent directors and we may not have independent director oversight of decisions
regarding executive compensation and director nominations.
The dual class structure of our common stock has the effect of concentrating voting control with our co-founders, which
will limit your ability to influence corporate matters.
Our Class B common stock has ten votes per share, and our Class A common stock, which is the stock that is publicly
traded, has one vote per share. Following the IPO, our Class B common stock was held primarily by our co-founders, other
executive officers, directors and their affiliates. Due to optional conversions of Class B common stock into Class A common stock
following the IPO, our Class B common stock is currently held primarily by our co-founders and their affiliates. As of
December 31, 2015, our co-founders and their affiliates own shares representing approximately 45.5% of the economic interest
and 89.1% of the voting power of our outstanding capital stock. This concentrated control limits your ability to influence
corporate matters for the foreseeable future. For example, these stockholders are able to control elections of directors,
amendments of our certificate of incorporation or bylaws, increases to the number of shares available for issuance under our
equity incentive plans or adoption of new equity incentive plans and approval of any merger or sale of assets for the foreseeable
future. This control may materially adversely affect the market price of our Class A common stock. Additionally, holders of our
Class B common stock may cause us to make strategic decisions or pursue acquisitions that could involve risks to you or may not
be aligned with your interests. The holders of our Class B common stock are also entitled to a separate vote in the event we seek
to amend our certificate of incorporation to increase or decrease the par value of a class of our common stock or in a manner that
alters or changes the powers, preferences or special rights of the Class B common stock in a manner that affects its holders
adversely.
Future transfers by holders of Class B common stock will generally result in those shares converting on a 1:1 basis to
Class A common stock, which will have the effect, over time, of increasing the relative voting power of those holders of Class B
common stock who retain their shares in the long-term, which may include our executive officers.
Our stock price may be volatile or may decline regardless of our operating performance.
The market price of our Class A common stock may fluctuate significantly in response to numerous factors, many of which
are beyond our control, including:
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actual or anticipated fluctuations in our results of operations;
the financial projections we may provide to the public, any changes in these projections or our failure to meet these
projections;
failure of securities analysts to initiate or maintain coverage of our company, changes in financial estimates or
ratings by any securities analysts who follow our company or our failure to meet these estimates or the expectations
of investors;
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announcements by us or our competitors of significant technical innovations, acquisitions, strategic partnerships,
joint ventures, operating results or capital commitments;
changes in operating performance and stock market valuations of other technology or retail companies generally, or
those in our industry in particular;
price and volume fluctuations in the overall stock market, including as a result of trends in the economy as a whole;
changes in our board of directors or management;
sales of large blocks of our Class A common stock, including sales by our executive officers, directors and
significant stockholders;
lawsuits threatened or filed against us;
changes in laws or regulations applicable to our business;
changes in our capital structure, such as future issuances of debt or equity securities;
short sales, hedging and other derivative transactions involving our capital stock;
general economic conditions in the United States and abroad; and
other events or factors, including those resulting from war, incidents of terrorism or responses to these events.
In addition, stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect
the market prices of equity securities of many technology companies, including e-commerce companies. Stock prices of many
technology companies, including e-commerce companies, have fluctuated in a manner unrelated or disproportionate to the
operating performance of those companies. In the past, stockholders have instituted securities class action litigation following
periods of market volatility. For example, the securities class action compliant described in Part I, Item 3, Legal Proceedings, of
this Annual Report on Form 10-K was filed against us in November 2015. Securities litigation can subject us to substantial costs,
divert resources and the attention of management from our business and materially adversely affect our business, financial
condition and operating results.
Substantial sales of shares of our Class A common stock could cause the market price of our Class A common stock to
decline.
Sales of a substantial number of shares of our Class A common stock in the public market, or the perception that these sales
might occur, could depress the market price of our Class A common stock and could impair our ability to raise capital through the
sale of additional equity securities. We are unable to predict the effect that such sales may have on the prevailing market price of
our Class A common stock.
If securities or industry analysts do not publish research or reports about our business, or publish negative reports about
our business, our share price and trading volume could decline.
The trading market for our Class A common stock depends in part on the research and reports that securities or industry
analysts publish about us or our business, our market and our competitors. We do not have any control over these analysts. If one
or more of the analysts who cover us downgrade our shares or change their opinion of our shares, our share price would likely
decline. If one or more of these analysts cease coverage of our company or fail to regularly publish reports on us, we could lose
visibility in the financial markets, which could cause our share price or trading volume to decline.
Our management has broad discretion over our existing cash resources and might not use such funds in ways that
increase the value of your investment.
Our management generally has broad discretion over the use of our cash resources, and you will be relying on the judgment
of our management regarding the application of these resources. Our management might not apply these resources in ways that
increase the value of your investment.
The requirements of being a public company may strain our resources, divert management's attention and affect our
ability to attract and retain additional executive management and qualified board members.
As a public company, we are subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act, the Dodd-
Frank Wall Street Reform and Consumer Protection Act, the listing requirements of the NYSE and other applicable securities
rules and regulations. Compliance with these rules and regulations will continue to increase our legal and financial compliance
costs, make some activities more difficult, time-consuming or costly and increase demand on our systems and resources. The
Exchange Act requires, among other things, that we file annual, quarterly and current reports with respect to our business and
results of operations. The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and
23
procedures and internal control over financial reporting. In order to maintain and, if required, improve our disclosure controls and
procedures and internal control over financial reporting to meet this standard, significant resources and management oversight
may be required. As a result, management's attention may be diverted from other business concerns, which could materially
adversely affect our business and results of operations. We will need to hire additional employees or engage outside consultants to
comply with these requirements, which will increase our costs and expenses.
In addition, changing laws, regulations and standards relating to corporate governance and public disclosure are creating
uncertainty for public companies, increasing legal and financial compliance costs and making some activities more time-
consuming. These laws, regulations and standards are subject to varying interpretations, in many cases due to their lack of
specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and
governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by
ongoing revisions to disclosure and governance practices. We intend to invest resources to comply with evolving laws, regulations
and standards, and this investment may result in increased general and administrative expenses and a diversion of management's
time and attention from revenue-generating activities to compliance activities. If our efforts to comply with new laws, regulations
and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to their application
and practice, regulatory authorities may initiate legal proceedings against us, and our business may be materially adversely
affected.
As a result of disclosure of information required of a public company, our business and financial condition will become
more visible, which we believe may result in threatened or actual litigation, including by competitors and other third parties. If
such claims are successful, our business and results of operations could be materially adversely affected, and even if the claims do
not result in litigation or are resolved in our favor, these claims, and the time and resources necessary to resolve them, could divert
the resources of our management and materially adversely affect our business, financial condition and operating results.
Anti-takeover provisions in our charter documents and under Delaware law could make an acquisition of our company
more difficult, limit attempts by our stockholders to replace or remove our current management and limit the market price of
our Class A common stock.
Provisions in our certificate of incorporation and bylaws may have the effect of delaying or preventing a change of control
or changes in our management. Our certificate of incorporation and bylaws include provisions that:
•
•
•
•
•
•
•
•
•
•
permit the board of directors to establish the number of directors and fill any vacancies and newly created
directorships;
when the outstanding shares of our Class B common stock represent less than 10% of the then outstanding shares of
Class A common stock and Class B common stock, provide that our board of directors will be classified into three
classes with staggered, three year terms and that directors may only be removed for cause;
require super-majority voting to amend some provisions in our certificate of incorporation and bylaws;
authorize the issuance of "blank check" preferred stock that our board of directors could use to implement a
stockholder rights plan;
eliminate the ability of our stockholders to call special meetings of stockholders;
when the outstanding shares of our Class B common stock represent less than 10% of the then outstanding shares of
Class A common stock and Class B common stock, prohibit stockholder action by written consent, which requires
all stockholder actions to be taken at a meeting of our stockholders;
provide that the board of directors is expressly authorized to make, alter or repeal our bylaws;
restrict the forum for certain litigation against us to Delaware;
reflect the dual class structure of our common stock, as discussed above; and
establish advance notice requirements for nominations for election to our board of directors or for proposing matters
that can be acted upon by stockholders at annual stockholder meetings.
These provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management
by making it more difficult for stockholders to replace members of our board of directors, which is responsible for appointing the
members of our management. In addition, because we are incorporated in Delaware, we are governed by the provisions of
Section 203 of the Delaware General Corporation Law, which generally prohibits a Delaware corporation from engaging in any of
a broad range of business combinations with any holder of at least 15% of our capital stock for a period of three years following
the date on which the stockholder became a 15% stockholder.
24
Item 1B. Unresolved Staff Comments.
None.
Item 2.
Properties.
Our corporate headquarters are in Boston, MA, where we currently occupy approximately 381 thousand square feet of
office space pursuant to a lease that expires in June 2025. We currently lease a total of approximately 2 million additional square
feet of fulfillment center, customer service center and office space in various locations in the United States. Our European
headquarters are located in Galway, Ireland, where we lease space in two locations. We also lease additional office space in
London, England and Berlin, Germany for our international operations.
Item 3. Legal Proceedings.
On September 2, 2015, a putative class action complaint was filed against us in the U.S. District Court for the Southern
District of New York (Dingee v. Wayfair Inc., et al., Case No. 1:15-cv-06941) by an individual on behalf of himself and on behalf
of all other similarly situated individuals (collectively, the "Dingee Plaintiffs"), under sections 10(b) and 20(a) of the Exchange
Act related to a drop in stock price that had followed a report issued by Citron Research. On September 3, a second putative class
action complaint was filed, asserting nearly identical claims (Jenkins v. Wayfair Inc., et al., Case No. 1:15-cv-06985). On
November 2, 2015, the plaintiff in the Dingee action moved to consolidate the two lawsuits, and to designate himself as lead
plaintiff in the class action and his attorney as lead counsel for the class. On November 3, plaintiff in the Jenkins action
voluntarily dismissed his complaint. As a result, only the Dingee action remains pending. On November 13, 2015, the court
appointed Dingee as lead plaintiff. On January 11, 2016, Dingee filed an amended complaint along with a second named plaintiff,
Michael Lamp. The Dingee Plaintiff’s complaint seeks class certification, damages in an unspecified amount, and attorney’s fees
and costs. We intend to defend the lawsuit vigorously.
On February 2, 2016, a putative class action complaint was filed against us in the U.S. District Court for the Central District
of California (Carson, et al., v. Wayfair Inc., Case No. 2:16-cv-00716) by two individuals on behalf of themselves and on behalf
of all other similarly situated individuals (collectively, the "Carson Plaintiffs"). The complaint alleges that Wayfair engaged in a
deceptive marketing campaign in which we advertised certain “original” or “regular” retail prices, which the Carson Plaintiffs
allege were false. The Carson Plaintiffs’ complaint seeks injunctive relief, attorney’s fees, punitive damages and damages. We
intend to defend the lawsuit vigorously.
From time to time we are involved in claims that arise during the ordinary course of business. Although the results of
litigation and claims cannot be predicted with certainty, we do not currently believe that the outcome of any of these other legal
matters will have a material adverse effect on our 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 our overall operations. In addition, we may also find ourselves at greater risk to outside party claims as we
increase our operations in jurisdictions where the laws with respect to the potential liability of online retailers are uncertain,
unfavorable, or unclear.
For additional information regarding our legal proceedings, see Note 7 to our Consolidated Financial Statements,
Commitments and Contingencies, included in Part II, Item 8, Financial Statements and Supplementary Data, of this Annual
Report on Form 10-K.
Item 4. Mine Safety Disclosures.
Not applicable.
25
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities.
Certain Information Regarding the Trading of Our Common Stock
Our Class A common stock began trading on the New York Stock Exchange ("NYSE") under the symbol "W" on October 2,
2014. Prior to that time, there was no public market for our Class A common stock. The following table sets forth, for the periods
indicated, the high and low sales prices of our Class A common stock as reported on the NYSE.
2014
October 2 through December 31
2015
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Holders of Our Common Stock
Sales Price
High
Low
$
$
$
$
$
39.43
34.10
39.43
56.84
50.00
$
$
$
$
$
16.74
18.12
27.36
31.17
32.56
As of January 31, 2016, there were 15 holders of record of shares of our Class A common stock and 597 holders of record
of shares of our Class B common stock. The actual number of stockholders is greater than this numbers of record holders, and
includes stockholders who are beneficial owners, whose shares are held of record by banks, brokers, and other financial
institutions.
Dividends
We do not expect to pay any dividends on our Class A common stock or Class B common stock in the foreseeable future.
Any future determination to pay dividends will be at the sole discretion of our board of directors, subject to applicable laws. Our
board of directors may take into account general and economic conditions, our financial condition and operating results, our
available cash and current and anticipated cash needs, our capital requirements, contractual, legal, tax and regulatory restrictions,
and implications on the payment of dividends by us to our stockholders or by our subsidiaries to us and such other factors as our
board of directors may deem relevant.
Prior to our IPO and related corporate reorganization, we operated as a limited liability company and made tax distributions
to our then-current stockholders to the extent we have had taxable net income attributable to them. In March 2014 and October
2014, we distributed cash dividends to our Series A preferred stockholders in the aggregate amount of $39.5 million as further
described in Note 10, Stockholders' Equity (Deficit), to the consolidated financial statements included in Item 8 of Part II of this
Annual Report on Form 10-K.
Securities Authorized for Issuance Under Equity Compensation Plans
Information regarding our equity compensation plans and securities authorized for issuance thereunder is set forth under
Part III, Item 12, Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters, of this
Annual Report on Form 10-K.
Recent Sales of Unregistered Securities
During the three months ended December 31, 2015, we issued 248,120 shares of Class B common stock upon the vesting of
outstanding restricted stock units, net of shares withheld to satisfy statutory minimum tax withholding obligations. The issuance
of these securities were pursuant to written compensatory plans or arrangements with our employees, consultants, advisors and
directors in reliance on the exemption provided by Rule 701 promulgated under the Securities Act, relative to transactions by an
issuer not involving any public offering, to the extent an exemption from registration was required.
26
Use of Proceeds from Public Offering of Common Stock
In October 2014, we completed our IPO, pursuant to which we issued and sold 10,500,000 shares of Class A common stock
and the selling stockholders sold 2,150,000 shares of Class A common stock, including 1,650,000 shares of Class A common
stock pursuant to the exercise in full of the underwriters' option to purchase additional shares. The shares sold in the IPO were
registered under the Securities Act of 1933, as amended, pursuant to a Registration Statement on Form S-1 (File No. 333-198171),
which was declared effective on October 1, 2014. The offering commenced on October 2, 2014.
The shares of Class A common stock were sold at an initial offering price to the public of $29.00 per share for an aggregate
offering price of $366.9 million. We did not receive any proceeds from the shares sold by the selling stockholders. We received
net proceeds of $282.9 million after deducting approximately $21.6 million in underwriting discount and expenses. We distributed
$24.5 million of the net proceeds to our stockholders that held Series A preferred stock immediately prior to the completion of the
IPO. Our co-founders and certain of our directors, executive officers and holders of more than 5% of our voting securities held
85% of our outstanding shares of Series A preferred stock and, as a result of their ownership, received 85% of the dividend
payment, or approximately $20.8 million. We also used approximately $22.6 million of the net proceeds to satisfy statutory
minimum tax withholding and remittance obligations primarily related to the vesting of restricted stock units that settled upon the
completion of the IPO.
Issuer Purchases of Equity Securities
None
27
Item 6.
Selected Consolidated Financial Data
The selected consolidated financial and other data should be read in conjunction with Part II, Item 7, Management's
Discussion and Analysis of Financial Condition and Results of Operations and Part II, Item 8, Financial Statements and
Supplementary Data. You should read the following selected consolidated financial data below in conjunction with Part II, Item 7,
Management's Discussion and Analysis of Financial Condition and Results of Operations and the consolidated financial
statements, related notes and other financial information included in this Annual Report on Form 10-K. The following
consolidated statements of operations data for the fiscal years ended December 31, 2015, 2014, and 2013 and the consolidated
balance sheet data as of December 31, 2015 and 2014 are derived from our audited consolidated financial statements included in
this Annual Report on Form 10-K. The following consolidated balance sheet data as of December 31, 2013 and the consolidated
statements of operations data for the fiscal year ended December 31, 2012 is derived from our audited consolidated financial
statements that are not included in this Annual Report on Form 10-K. The following consolidated balance sheet data as of
December 31, 2012 is derived from the audited consolidated financial statements of Wayfair LLC that are not included in this
Annual Report on Form 10-K. Historical results are not necessarily indicative of the results to be expected in the future.
Year Ended December 31,
2015
2014
2013
2012
(in thousands, except per share data)
Consolidated Statements of Operations:
Net revenue
Cost of goods sold (1)
Gross profit
Operating expenses:
Customer service and merchant fees (1)
Advertising
Merchandising, marketing and sales (1)
Operations, technology, general and administrative (1)
Amortization of acquired intangible assets
Total operating expenses
Loss from operations
Interest income, net
Other income (expense), net
Loss before income taxes
Provision for income taxes
Net loss
Accretion of convertible redeemable preferred units
Net loss attributable to common unit holders
Net loss attributable to common unit holders per unit—basic
and diluted
Weighted average number of common stock outstanding used
in computing per share amounts, basic and diluted
$
$
$
2,249,885
$
1,318,951
$
915,843
$
1,709,161
540,724
1,007,853
311,098
81,230
278,224
106,149
155,580
891
622,074
(81,350)
1,284
2,718
55,804
191,284
80,113
130,701
980
458,882
(147,784)
350
(489)
(77,348)
(147,923)
95
(77,443)
—
175
(148,098)
(2,071)
691,602
224,241
35,500
108,469
33,506
62,246
539
240,260
(16,019)
245
294
(15,480)
46
(15,526)
(25,388)
(77,443) $
(150,169) $
(40,914) $
601,028
455,879
145,149
25,730
65,504
22,136
52,961
212
166,543
(21,394)
234
155
(21,005)
50
(21,055)
(12,154)
(33,209)
(0.92) $
(2.97) $
(0.99) $
(0.80)
83,726
50,642
41,332
41,272
(1)
Includes equity based compensation and related taxes as follows (in thousands):
Cost of goods sold
Customer service and merchant fees
Merchandising, marketing and sales
Operations, technology, general and administrative
2015
Year Ended December 31,
2014
2013
2012
280
$
369
$
— $
1,007
15,436
16,252
2,265
28,514
32,096
—
—
—
32,975
$
63,244
$
— $
—
—
—
—
—
$
$
28
December 31,
2015
2014
2013
2012
(in thousands)
Consolidated Balance Sheet Data:
Cash and cash equivalents and short-term investments
$
386,071
$
415,859
$
115,308
$
Working capital
Total assets
Deferred revenue
Convertible redeemable preferred units
Total stockholders' equity (deficit)
95,297
694,581
50,884
—
242,545
254,276
555,523
26,784
—
305,539
18,118
196,300
13,397
241,186
100,878
42,031
163,577
12,282
215,798
(191,178)
(151,130)
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion of our financial condition and results of operations should be read in conjunction with the
consolidated financial statements and the notes thereto included elsewhere in this Annual Report on Form 10-K. This discussion
contains forward-looking statements that involve risks and uncertainties. As a result of many factors, such as those included in
the Special Note Regarding Forward Looking Statements and Part I, Item 1A, Risk Factors, of this Annual Report on Form 10-K,
our actual results may differ materially from those anticipated in these forward-looking statements.
Overview
Through our e-commerce business model, we offer visually inspiring browsing, compelling merchandising, easy product
discovery and attractive prices for over seven million products from over 7,000 suppliers across five distinct brands—
Wayfair.com, Joss & Main, AllModern, DwellStudio and Birch Lane. We have built one of the largest online selections of
furniture, décor, decorative accents, housewares, seasonal décor and other home goods.
We founded our company in May 2002 and have since delivered over 26 million orders. From 2003 to 2011, we grew our
net revenue organically from $7.7 million to $517.3 million, representing a 69.2% CAGR. In late 2011, we made the strategic
decision to close and permanently redirect over 240 of our niche websites into Wayfair.com to create a one-stop shop for
furniture, décor, decorative accents, housewares, seasonal décor and other home goods and to build brand awareness, drive
customer loyalty and increase repeat purchasing. We also changed our name from CSN Stores LLC to Wayfair LLC.
We plan to grow our customer base by attracting more unique visitors to our sites through two main strategies—increasing
brand awareness and expanding direct online marketing—and then converting those visitors to active customers. Our online
efforts are focused on building brand awareness to drive visitor traffic via direct navigation, search engine optimization and
email marketing campaigns. In addition, we have made significant investments to improve the consumer experience on our sites,
such as creating highly engaging visual imagery and merchandising, as well as easy-to-use navigation tools and personalization
features that enable better product discovery. We plan to continue investing in our infrastructure, including enhancing our
merchandising, data, analytics, and technology platform, as well as developing additional logistics and transportation solutions,
self-service tools for our suppliers, fulfillment offerings and enhancing our development, testing and deployment systems.
Until late 2012, we were primarily focused on growing our U.S. business. In 2012, we began laying the groundwork for
expanding our international business by building our international infrastructure, developing deeper country-specific knowledge,
building international supplier networks and establishing our brand presence in select international regions. We currently deliver
products to customers in a number of countries, including the United States, the United Kingdom, Canada, and Germany. In the
year ended December 31, 2015, we generated net revenue outside of the U.S. of $114.4 million or 5.1% of our total net revenue.
In the year ended December 31, 2015, we generated net revenue of $2.2 billion, up 70.6% over the year ended
December 31, 2014. Our net revenue in the year ended December 31, 2015 included $2.0 billion from Direct Retail, which we
define as sales generated primarily through the sites of our five brands and $0.2 billion from Other, which we define as net
revenue generated primarily online through third parties, which we refer to as our retail partners and net revenue from third-
party advertisers. In the year ended December 31, 2015, we generated a net loss of $(77.4) million and Adjusted EBITDA of
$(15.9) million, decreases of $70.7 million and $46.6 million, respectively, over the year ended December 31, 2014. Our net loss
and Adjusted EBITDA results were driven primarily by our investment in advertising in the year ended December 31, 2015.
Refer to Key Financial and Operating Metrics below for further discussion of Adjusted EBITDA, our use of this measure, the
29
limitations of this measure as an analytical tool and the reconciliation of Adjusted EBITDA to net loss, the most directly
comparable generally accepted accounting principle ("GAAP") financial measure.
On October 7, 2014, we completed our IPO of 12,650,000 shares of our Class A common stock at a public offering price of
$29.00 per share, of which 10,500,000 shares were sold by us and 2,150,000 shares were sold by our selling stockholders,
including 1,650,000 shares pursuant to the underwriters' option to purchase additional shares, resulting in net proceeds to us of
approximately $282.9 million, after deducting underwriting discounts and offering expenses. We did not receive any proceeds
from the sale of shares by the selling stockholders.
The consolidated financial statements and other disclosures contained in this Annual Report on Form 10-K are those of
Wayfair Inc. Prior to our IPO, Wayfair LLC was the principal operating entity. In connection with the IPO, Wayfair LLC
completed a corporate reorganization pursuant to which Wayfair LLC became a wholly-owned subsidiary of Wayfair Inc. For
additional information regarding our corporate reorganization and how it is accounted for in the consolidated financial
statements and other disclosures contained in this Annual Report on Form 10-K, see Note 1 to our Consolidated Financial
Statements, Basis of Presentation, included in Part II, Item 8, Financial Statements and Supplementary Data, of this Annual
Report on Form 10-K.
Key Financial and Operating Metrics
We measure our business using both financial and operating metrics. Our net revenue, Adjusted EBITDA and free cash flow
metrics are measured on a consolidated basis. All other key financial and operating metrics are derived and reported from our
Direct Retail sales, which includes sales generated primarily through the sites of our five distinct brands. These metrics do not
include net revenue derived from the sites operated by our retail partners. We do not have access to certain customer level
information on net revenue derived through our retail partners and therefore cannot measure or disclose it.
We use the following metrics to assess the near-term and longer-term performance of our overall business (in thousands,
except LTM Net Revenue per Active Customer and Average Order Value):
Consolidated Financial Metrics
Net Revenue
Adjusted EBITDA
Free Cash Flow
Direct Retail Financial and Operating Metrics
Direct Retail Net Revenue
Active Customers
LTM Net Revenue Per Active Customer
Orders Delivered
Average Order Value
Non-GAAP Financial Measures
Adjusted EBITDA
Year Ended December 31,
2015
2014
2013
$
$
$
$
$
$
2,249,885
$
1,318,951
$
915,843
(15,929) $
72,937
2,040,238
5,360
381
9,170
222
$
$
$
$
(62,537) $
(41,860) $
(2,928)
18,634
1,101,686
3,217
342
5,237
210
$
$
$
673,446
2,092
322
3,314
204
To provide investors with additional information regarding our financial results, we have disclosed here and elsewhere in
this Annual Report on Form 10-K Adjusted EBITDA, a non-GAAP financial measure that we calculate as earnings (loss) before
depreciation and amortization, equity-based compensation and related taxes, interest and other income and expense and (benefit
from) provision for income taxes. We have provided a reconciliation below of Adjusted EBITDA to net loss, the most directly
comparable GAAP financial measure.
We have included Adjusted EBITDA in this Annual Report on Form 10-K because it is a key measure used by our
management and board of directors 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. 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 board of directors.
30
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 as well as the compensation charge
associated with a tender offer we completed in April 2014;
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; 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 loss and our other GAAP results.
The following table reflects the reconciliation of net loss to Adjusted EBITDA for each of the periods indicated (in
thousands):
Reconciliation of Adjusted EBITDA
Net loss
Depreciation and amortization
Equity based compensation and related taxes
Interest (income), net
Other (income) expense, net
Taxes
Adjusted EBITDA
Free Cash Flow
Year Ended December 31,
2015
2014
2013
$
(77,443) $
(148,098) $
32,446
32,975
(1,284)
(2,718)
95
22,003
63,244
(350)
489
175
(15,526)
13,091
—
(245)
(294)
46
$
(15,929) $
(62,537) $
(2,928)
To provide investors with additional information regarding our financial results, we have also disclosed here and elsewhere
in this Annual Report on Form 10-K free cash flow, a non-GAAP financial measure that we calculate as net cash provided by
operating activities less net cash used to purchase property and equipment including leasehold improvements and site and
software development costs. We have provided a reconciliation below of free cash flow to net cash provided by operating
activities, the most directly comparable GAAP financial measure.
We have included free cash flow in this Annual Report on Form 10-K, 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, and you should not consider it in isolation or as a substitute for analysis
of our results as reported under GAAP. There are limitations to using non-GAAP financial measures, including that other
companies, including companies in our industry, may calculate free cash flow differently. Because of these limitations, you should
consider free cash flow alongside other financial performance measures, including net cash provided by operating activities,
capital expenditures and our other GAAP results.
31
The following table presents a reconciliation of free cash flow to net cash provided by operating activities for each of the
periods indicated (in thousands):
Net cash provided by operating activities
Purchase of property and equipment
Site and software development costs
Free cash flow
Key Operating Metrics (Direct Retail)
Active Customers
Year Ended December 31,
2015
2014
2013
$
$
135,121
$
4,125
$
(44,648)
(17,536)
(31,855)
(14,130)
72,937
$
(41,860) $
34,413
(6,739)
(9,040)
18,634
As of the last date of each reported period, 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
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.
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 I, Item 1A, Risk Factors.
Growth in Brand Awareness and Visitors to our Sites
We intend to continue investing in our brand awareness strategy and direct online marketing efforts. In late 2011, we made a
strategic decision to close and permanently redirect over 240 of our niche websites into Wayfair.com. Since late 2011, we have
marketed our brands, in particular Wayfair.com, through TV advertising, display advertising, paid search advertising, social media
advertising and direct mail, catalog and print advertising. We believe that attracting new visitors to our sites and converting them
into customers is key to driving our net revenue growth and operating results.
32
Growth in Customer Acquisition and Customer Retention
Our goal is to convert visitors into active customers and then encourage repeat purchases because it increases our operating
leverage since it costs more to acquire a customer than to retain one. Our continued investments in infrastructure, including
enhancing our merchandising, data, analytics, and technology platform, allow us to deliver increasingly tailored and personalized
shopping experiences for customers across our sites. We believe our focus on a personalized shopping experience drives sales
from new customers as well as repeat customers.
Revenue Growth Through Mobile Platform
Mobile is an increasingly important part of our business. We launched our mobile applications for Joss & Main in 2012,
Wayfair.com in 2014, and AllModern in 2015, and all of our sites are mobile-optimized. Due to the relative newness of
smartphones, tablets, and mobile shopping in general, we do not know if this increase in mobile use will continue.
Investment in Growth
We have aggressively invested in the growth of our business and this investment will continue. We anticipate that our
operating expenses will increase substantially as we continue to increase our advertising spending, hire additional personnel
primarily in merchandising, technology, operations, customer service and general and administrative functions and continue to
develop features on our sites. We have continued to increase our office space to accommodate the anticipated growth of our
headcount in our corporate headquarters and have expanded our warehouse space. These investments are expected to continue to
generate losses near term and yield returns in the long term, but there is no guarantee that we will be able to realize the return on
our investments.
Net Revenue
Net revenue consists primarily of sales of product from our sites and through the sites of our online retail partners and
includes related shipping fees. We deduct cash discounts, allowances and estimated returns from gross revenue to determine 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 primarily fulfilled with
product we ship to our customers directly from our suppliers and, to a lesser extent, from our fulfillment centers.
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 is recognized in the period in which the click, action or impression occurs. This revenue has not been material to
date.
Cost of Goods Sold
Cost of goods sold consists of the cost of product sold to customers, shipping and handling costs and shipping supplies and
fulfillment costs. Fulfillment costs include costs incurred in operating and staffing the fulfillment centers, such as costs attributed
to receiving, inspecting, picking, packaging and preparing customer orders for shipment. Cost of goods sold also includes direct
and indirect labor costs including equity-based compensation for fulfillment center oversight, including payroll and related benefit
costs. The increase in cost of goods sold is primarily driven by growth in orders delivered, the mix of the product available for
sale on our sites and transportation costs related to delivering orders to our customers.
We earn rebates on our incentive programs with our suppliers. These rebates are earned upon shipment of goods. Amounts
due from suppliers as a result of these rebate programs are included as a receivable and are reflected as a reduction of cost of
goods sold on the consolidated statements of operations. We expect cost of goods sold expenses to remain relatively stable as a
percentage of net revenue but some fluctuations are expected due to the wide variety of products we sell.
Customer Service and Merchant Fees
Customer service and merchant fees consist of labor-related costs including equity-based compensation of our employees
involved in customer service activities and merchant processing fees associated with customer payments made by credit cards.
Increases in our customer service and merchant fees are driven by the growth in our revenue and are expected to remain relatively
consistent as a percentage of revenue.
33
Advertising
Advertising consists of direct response performance marketing costs, such as television advertising, display advertising,
paid search advertising, social media advertising, search engine optimization, comparison shopping engine advertising, direct
mail, catalog and print advertising. We expect advertising expense to continue to increase but decrease as a percentage of net
revenue over time.
Merchandising, Marketing and Sales
Merchandising, marketing and sales expenses include labor-related costs including equity-based compensation for our
category managers, buyers, site merchandisers, merchants, marketers and the team who executes our advertising strategy. Sales,
marketing and merchandising expenses are primarily driven by investments to grow and retain our customer base. We expect
merchandising, marketing and sales expenses to continue to increase as we grow our net revenue.
Operations, Technology and General and Administrative
Operations, technology, general and administrative expenses primarily include labor-related costs including equity-based
compensation of our operations group that lead our supply chain and logistics, our technology team, building and supporting our
sites, and our corporate general and administrative, 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 anticipate that we will incur additional personnel expenses, professional service fees,
including audit and legal, investor relations, costs of compliance with securities laws and regulations, and higher director and
officer insurance costs related to operating as a public company. We expect operations, technology, general and administrative
expenses will continue to increase as we grow our net revenue and operations.
Amortization of Acquired Intangible Assets
We have recorded identifiable intangible assets in conjunction with our acquisitions and are amortizing those assets over
their estimated useful lives. We perform impairment testing of goodwill and intangibles with definite lives annually and whenever
events or circumstances indicate that an impairment may have occurred.
Interest Income, Net
Interest income, net consists primarily of interest earned on cash, cash equivalents and short-term and long-term
investments held by us.
Other Income (Expense), Net
Other income (expense), net consists primarily of foreign currency gains (losses), and in the year ended December 31, 2015,
a $3.0 million gain related to the sale of our Australian operations.
34
Results of Consolidated Operations (in thousands)
Consolidated Statements of Operations:
Net revenue
Cost of goods sold (1)
Gross profit
Operating expenses:
Customer service and merchant fees (1)
Advertising
Merchandising, marketing and sales (1)
Operations, technology, general and administrative (1)
Amortization of acquired intangible assets
Total operating expenses
Loss from operations
Interest income, net
Other income (expense), net
Loss before income taxes
Provision for income taxes
Net loss
Year Ended December 31,
2015
2014
2013
(in thousands, except per share data)
$
2,249,885
$
1,318,951
$
1,709,161
540,724
1,007,853
311,098
915,843
691,602
224,241
35,500
108,469
33,506
62,246
539
240,260
(16,019)
245
294
(15,480)
46
(15,526)
(25,388)
(40,914)
81,230
278,224
106,149
155,580
891
622,074
(81,350)
1,284
2,718
55,804
191,284
80,113
130,701
980
458,882
(147,784)
350
(489)
(77,348)
(147,923)
95
(77,443)
—
175
(148,098)
(2,071)
(77,443) $
(150,169) $
Accretion of convertible redeemable preferred units
Net loss attributable to common stockholders
Net loss attributable to common stockholders per share, basic and diluted
Weighted average number of common stock outstanding used in computing per
share amounts, basic and diluted
$
$
(0.92) $
(2.97) $
(0.99)
83,726
50,642
41,332
(1)
Includes equity based compensation and related taxes as follows (in thousands):
Cost of goods sold
Customer service and merchant fees
Merchandising, marketing and sales
Operations, technology, general and administrative
Comparison of the year ended December 31, 2015 and 2014
Net revenue
Direct Retail
Other
Net revenue
Year Ended December 31,
2014
2013
2015
280
$
369
$
1,007
15,436
16,252
2,265
28,514
32,096
32,975
$
63,244
$
—
—
—
—
—
$
$
Year Ended December 31,
2015
2014
% Change
$
$
2,040,238
209,647
2,249,885
$
$
1,101,686
217,265
1,318,951
85.2%
(3.5)
70.6%
35
In 2015, net revenue increased by $930.9 million, or 70.6% compared to 2014, primarily as a result of an increase in Direct
Retail net revenue, partially offset by the 3.5% decrease in Other revenue. In 2015, Direct Retail net revenue increased by $938.6
million, or 85.2% compared to 2014. The increase in Direct Retail net revenue was primarily due to sales to a larger customer
base, as the number of active customers increased 66.6% in 2015 compared to the number of active customers in 2014.
Additionally, LTM net revenue per active customer increased 11.4% in 2015 compared with 2014. The decrease in Other revenue
was primarily due to decreased sales through our retail partners.
Cost of Goods Sold
Cost of goods sold
As a percentage of net revenue
Year Ended December 31,
2015
2014
% Change
$
1,709,161
$
1,007,853
69.6%
76.0%
76.4%
In 2015, costs of goods sold increased by $701.3 million, or 69.6%, compared to 2014. Of the increase in cost of goods
sold, $573.5 million was due to the increase in products sold to a larger customer base. In addition, shipping and fulfillment costs
increased $127.8 million as a result of the increase in products sold during the period. Costs of goods sold as a percentage of net
revenue decreased the year ended December 31, 2015 compared to the year ended December 31, 2014 as a result of changes in
the mix of the products sold and shipping costs.
Operating Expenses
Year Ended December 31,
2015
2014
% Change
Customer service and merchant fees (1)
$
81,230
$
Advertising
Merchandising, marketing and sales (1)
Operations, technology, general and administrative (1)
Amortization of acquired intangible assets
Total operating expenses
As a percentage of net revenue
Customer service and merchant fees
Advertising
Merchandising, marketing and sales
Operations, technology, general and administrative
Amortization of acquired intangible assets
(1) Excluding equity based compensation and related taxes as follows:
Customer service and merchant fees
Merchandising, marketing and sales
Operations, technology, general and administrative
278,224
106,149
155,580
891
55,804
191,284
80,113
130,701
980
$
622,074
$
458,882
3.6%
12.4%
4.7%
6.9%
—%
27.6%
3.6%
4.0%
6.2%
4.2%
14.5%
6.1%
9.9%
0.1%
34.8%
4.1%
3.9%
7.5%
45.6%
45.5
32.5
19.0
(9.1)
35.6%
Excluding the impact of equity based compensation and related taxes of $1.0 million and $2.3 million recorded in 2015 and
2014, respectively, customer service costs and merchant processing fees increased by $26.7 million from $53.5 million in 2014 to
$80.2 million in 2015 primarily due to the increase in net revenue during 2015. Our advertising expenses increased by $86.9
million from $191.3 million in 2014 to $278.2 million in 2015, primarily as a result of an increase in television and online
advertising. Excluding the impact of equity based compensation and related taxes of $15.4 million and $28.5 million recorded in
2015 and 2014, respectively, merchandising, marketing and sales expenses increased by $39.1 million from $51.6 million in 2014
to $90.7 million in 2015. The increase in merchandising, marketing and sales expenses was due to an increase in headcount
primarily to grow and retain our customer base.
36
Excluding the impact of equity based compensation and related taxes of $16.3 million and $32.1 million recorded in 2015
and 2014, respectively, operations, technology, general and administrative expense increased by $40.7 million from $98.6 million
in 2014 to $139.3 million in 2015. As our revenue continues to grow, we have invested in headcount in both operations and
technology to continue to deliver a great experience for our customers. The increase in operations, technology, general and
administrative expense was primarily attributable to personnel costs, rent, information technology, depreciation and amortization
and costs related to operating as a public company.
In 2015, amortization of purchased intangible assets decreased by $0.1 million, or 9.1%, compared to 2014.
Comparison of years ended December 31, 2014 and 2013
Net revenue
Direct Retail
Other
Net revenue
Year ended December 31,
2014
2013
% Change
$
$
1,101,686
217,265
1,318,951
$
$
673,446
242,397
915,843
63.6 %
(10.4)%
44.0 %
In 2014, net revenue increased by $403.1 million, or 44.0% compared to 2013 primarily as a result of increase in Direct
Retail net revenue. In 2014, Direct Retail net revenue increased by $428.2 million, or 63.6% compared to 2013. The increase in
Direct Retail net revenue was primarily due to sales to a larger customer base, as the number of active customers increased 53.8%
in 2014 compared to the number of active customers in 2013. Additionally, LTM net revenue per active customer increased 6.2%
in 2014 compared with 2013. The increase in Other revenue was primarily due to increased sales through our existing and new
retail partners.
Cost of Goods Sold
Cost of goods sold
As a percentage of net revenue
Year ended
December 31,
2014
2013
% Change
$
1,007,853
$
691,602
45.7%
76.4%
75.5%
In 2014, costs of goods sold increased by $316.3 million, or 45.7%, compared to 2013 primarily due to the 44% increase in
sales of products. Of the increase in cost of goods sold, $249.9 million was due to the increase in products sold to a larger
customer base. In addition, shipping and fulfillment costs increased $66.4 million as a result of the increase in products sold
during the period. Costs of goods sold as a percentage of net revenue increased in the year ended December 31, 2014 compared to
the year ended December 31, 2013 as a result of changes in product mix and more favorable customer return and free shipping
policies.
37
Operating expenses
Year Ended
December 31,
2014
2013
% Change
Customer service and merchant fees (1)
$
55,804
$
Advertising
Merchandising, marketing and sales (1)
Operations, technology, general and administrative (1)
Amortization of acquired intangible assets
Total operating expenses
As a percentage of net revenue
Customer service and merchant fees
Advertising
Merchandising, marketing and sales
Operations, technology, general and administrative
Amortization of acquired intangible assets
(1) Excluding equity based compensation and related taxes as follows:
Customer service and merchant fees
Merchandising, marketing and sales
Operations, technology, general and administrative
191,284
80,113
130,701
980
35,500
108,469
33,506
62,246
539
$
458,882
$
240,260
4.2%
14.5%
6.1%
9.9%
0.1%
34.8%
4.1%
3.9%
7.5%
3.9%
11.7%
3.7%
6.8%
0.1%
26.2%
3.9%
3.7%
6.8%
57.2%
76.3%
139.1%
110.0%
81.8%
91.0%
Excluding the impact of equity based compensation and related taxes of $2.3 million recorded in 2014, customer service
costs and merchant processing fees increased by $18.0 million from $35.5 million in 2013 to $53.5 million primarily due to the
increase in sales of products during 2014. Our advertising expenses increased by $82.8 million from $108.5 million in 2013 to
$191.3 million in 2014, primarily as a result of an increase in television and online advertising. Excluding the impact of equity
based compensation and related taxes of $28.5 million recorded in 2014, merchandising, marketing and sales expenses increased
by $18.1 million from $33.5 million in 2013 to $51.6 million. The increase in merchandising, marketing and sales expenses was
due to an increase in headcount primarily to grow and retain our customer base.
Excluding the impact of equity based compensation and related taxes of $32.1 million recorded in 2014, operations,
technology, general and administrative expense increased by $36.4 million from $62.2 million in 2013 to $98.6 million. As our
revenue continues to grow, we have invested in headcount in both Operations and Technology to continue to deliver a great
experience for our customers. The increase in general and administrative expense was primarily attributable to personnel costs,
rent, information technology, depreciation and amortization and costs related to operating as a public company.
In 2014, amortization of purchased intangible assets increased by $0.4 million, or 81.8%, compared to 2013. The increase in
amortization expense for 2014 was primarily the result of our acquisition of DwellStudio in July of 2013.
Unaudited Quarterly Results of Operations and Other Financial and Operations Data
The following tables set forth selected unaudited quarterly results of operations and other financial and operations data for
the eight quarters ended December 31, 2015, as well as the percentage that each line item represents of net revenue. The
information for each of these quarters has been prepared on the same basis as the audited consolidated financial statements
included elsewhere in this Annual Report on Form 10-K and in the opinion of management, reflects all adjustments, consisting of
only normal recurring adjustments, necessary for the fair statement of our consolidated results of operations for these periods.
This data should be read in conjunction with our consolidated financial statements and related notes included elsewhere in the
Annual Report on Form 10-K. Historical results are not necessarily indicative of the results to be expected in the future.
38
March 31,
2014
June 30,
2014
September 30,
2014
December 31,
2014
March 31,
2015
June 30,
2015
September 30,
2015
December 31,
2015
Three months ended
(in thousands, except per share data)
Consolidated Statements of
Operations:
Net revenue
$
278,707
$
295,437
$
336,188
$
408,619
$
424,371
$
491,752
$
593,972
$
Cost of goods sold(1)
Gross profit
Operating expenses:
Customer service and
merchant fees(1)
Advertising
Merchandising, marketing
and sales(1)
Operations, technology,
general and administrative(1)
Amortization of acquired
intangible assets
Total operating expenses
Loss from operations
Interest income, net
Other (expense) income, net
213,500
65,207
226,983
68,454
257,161
79,027
310,209
98,410
321,536
102,835
370,951
120,801
10,969
44,204
12,113
42,511
15,171
13,260
22,769
23,586
249
93,362
(28,155)
56
88
250
91,720
(23,266)
77
(184)
14,239
49,763
13,437
25,203
249
102,891
(23,864)
89
(309)
18,483
54,806
15,978
57,999
18,330
61,539
38,245
23,234
23,814
59,143
32,620
36,355
232
170,909
(72,499)
128
(84)
250
130,081
(27,246)
264
(108)
236
140,274
(19,473)
308
(96)
Loss before income taxes
(28,011)
(23,373)
(24,084)
(72,455)
(27,090)
(19,261)
Provision for income taxes
15
2
59
99
46
73
Net loss
(28,026)
(23,375)
(24,143)
(72,554)
(27,136)
(19,334)
452,586
141,386
21,109
70,711
27,083
40,912
208
160,023
(18,637)
325
2,746
(15,566)
(88)
(15,478)
739,790
564,088
175,702
25,813
87,975
32,018
45,693
197
191,696
(15,994)
387
176
(15,431)
64
(15,495)
Accretion of convertible
redeemable preferred units
Net loss attributable to common
stockholders
Net loss attributable to common
stockholders per share, basic
and diluted
$
$
Weighted average number of
common stock outstanding
used in computing per share
amounts, basic and diluted
(7,150)
(4,605)
(4,748)
14,432
—
—
—
—
(35,176)
$
(27,980)
$
(28,891)
$
(58,122)
$
(27,136)
$
(19,334)
$
(15,478)
$
(15,495)
(0.85)
$
(0.69)
$
(0.71)
$
(0.73)
$
(0.33)
$
(0.23)
$
(0.18)
$
(0.18)
41,144
40,515
40,513
80,078
83,210
83,603
83,886
84,191
(1) Includes equity based compensation and related taxes as follows:
Cost of goods sold
$
— $
— $
— $
369
$
71
$
79
$
96
$
Customer service and merchant
fees
Merchandising, marketing and
sales
Operations, technology, general
and administrative
69
3,858
627
$
4,554
$
184
196
594
974
—
—
—
2,012
24,460
30,875
219
3,866
4,006
288
3,204
3,530
236
3,414
4,239
$
— $
57,716
$
8,162
$
7,101
$
7,985
$
34
264
4,952
4,477
9,727
39
March 31,
2014
June 30,
2014
September 30,
2014
December 31,
2014
March 31,
2015
June 30,
2015
September 30,
2015
December 31,
2015
Three months ended
(in thousands, except Average Order Value and LTM Net Revenue Per Active Customer)
Consolidated Financial
Metrics
Net Revenue
Adjusted EBITDA
Free Cash Flow
Direct Retail Financial and
Operating Metrics
Direct Retail Net Revenue
Active Customers
LTM Net Revenue Per Active
Customer
Orders Delivered
Average Order Value
$
$
$
$
$
$
278,707
(19,403)
(38,506)
$
$
$
295,437
(17,599)
(31,744)
$
$
$
336,188
(18,317)
(22,398)
$
$
$
408,619
(7,218)
50,788
$
$
$
424,371
(12,340)
(51,368)
$
$
$
491,752
(4,972)
10,989
$
$
$
593,972
(1,445)
35,332
$
$
$
739,790
2,828
77,984
226,000
$
243,534
$
285,502
$
346,650
$
369,395
$
440,297
$
544,971
$
685,573
2,409
323
1,138
199
$
$
2,635
332
1,084
225
$
$
2,858
342
1,314
217
$
$
3,217
342
1,701
204
$
$
3,597
346
1,797
206
$
$
4,044
357
1,959
225
$
$
4,591
371
2,323
235
$
$
5,360
381
3,091
222
The following table reflects the reconciliation of net loss to Adjusted EBITDA for each of the periods indicated (in
thousands):
Three months ended
Net loss
$
(28,026)
$
(23,375)
$
(24,143)
$
(72,554)
$
(27,136)
$
(19,334)
$
(15,478)
$
(15,495)
March 31,
2014
June 30,
2014
September 30,
2014
December 31,
2014
March 31,
2015
June 30,
2015
September 30,
2015
December 31,
2015
Depreciation and
amortization
Equity based compensation
Interest income, net
Other (expense) income,
net
Taxes
4,198
4,554
(56)
(88)
15
4,693
5,547
974
(77)
184
2
—
(89)
309
59
7,565
57,716
(128)
84
99
6,744
8,162
(264)
108
46
7,400
7,101
(308)
96
73
9,207
7,985
(325)
(2,746)
(88)
Adjusted EBITDA
$
(19,403)
$
(17,599)
$
(18,317)
$
(7,218)
$
(12,340)
$
(4,972)
$
(1,445)
$
9,095
9,727
(387)
(176)
64
2,828
The following table presents a reconciliation of free cash flow to net cash provided by operating activities for each of the
periods indicated (in thousands):
Net cash provided by operating
activities, net of acquisition
Purchase of property,
equipment, and leasehold
improvements
Site and software development
costs
March 31,
2014
June 30,
2014
September 30,
2014
December 31,
2014
March 31,
2015
June 30,
2015
September 30,
2015
December 31,
2015
Three months ended
$
(24,432)
$
(15,339)
$
(11,066)
$
54,962
$
(35,202)
$
28,453
$
51,504
$
90,366
(11,357)
(12,974)
(2,717)
(3,431)
(6,837)
(4,495)
(687)
(12,051)
(13,153)
(11,491)
(7,953)
(3,487)
(4,115)
(4,311)
(4,681)
(4,429)
77,984
Free cash flow
$
(38,506)
$
(31,744)
$
(22,398)
$
50,788
$
(51,368)
$
10,989
$
35,332
$
40
Liquidity and Capital Resources
Sources of Liquidity
Cash and cash equivalents
Short-term investments
Accounts receivable, net
Long-term investments
Working capital
Historical Cash Flows
Net loss
Net cash provided by operating activities
Net cash used in investing activities
Net cash (used in) provided by financing activities
December 31,
2015
2014
(in thousands)
$
334,176
$
51,895
9,906
79,883
95,297
355,859
60,000
5,949
—
254,276
Year Ended December 31,
2015
2014
2013
(77,443)
135,121
(137,728)
(18,616)
(in thousands)
(148,098)
4,125
(55,435)
341,150
(15,526)
34,413
(46,991)
—
Since our inception, we have financed our operations, capital expenditures and acquisitions primarily through cash flows
generated by operations and, since 2011, also through private sales of convertible redeemable preferred stock and sales of
common stock in connection with our IPO. Since inception through December 31, 2015, we have raised a total of approximately
$646.0 million from the sale of preferred stock and common stock, net of costs and expenses associated with such financings, or
approximately $453.8 million, net of repurchases of our securities and dividends paid to Series A redeemable convertible
preferred stockholders.
On October 7, 2014, we completed our IPO of 12,650,000 shares of our Class A common stock at a public offering price of
$29.00 per share, of which 10,500,000 shares were sold by us and 2,150,000 shares were sold by selling stockholders, including
1,650,000 shares pursuant to the underwriters’ option to purchase additional shares, resulting in net proceeds to us of
approximately $282.9 million, after deducting underwriting discounts and offering expenses. We did not receive any proceeds
from the sale of shares by the selling stockholders. We used these proceeds to distribute $24.5 million of cash to our Series A
redeemable convertible preferred stockholders and pay $22.6 million in minimum tax withholding obligations on the vesting of
our restricted stock units upon the closing of our initial public offering.
We believe that our existing cash and cash equivalents, together with cash generated from operations, 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. Capital expenditures were 2.8% of net
revenue for the year ended December 31, 2015, and related primarily to additional capacity to support our supply chain
infrastructure, including warehouses and our distribution network, investments in our technology and operational platform,
including our mobile platform, and additional resources required to establish and expand our international operations. We expect
capital expenditures to be approximately 3.0% to 4.0% of net revenues in 2016. Our future capital requirements and the adequacy
of available funds will depend on many factors, including those described in Part I, Item 1A, Risk Factors. We may not be able to
secure additional financing to meet our operating requirements on acceptable terms, or at all.
Operating Activities
Cash provided by operating activities consisted of net 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.
41
Cash provided by operating activities in the year ended December 31, 2015 was $135.1 million and was driven primarily by
cash provided by operating assets and liabilities of $149.1 million, certain non-cash items including depreciation and amortization
expense of $32.4 million, equity based compensation of $31.0 million, and other non-cash items of $3.0 million, partially offset
by net loss of $77.4 million and gain on sale of our Australian business of $3.0 million. Operating cash flows can be volatile and
are sensitive to many factors, including changes in working capital and our net loss.
Cash provided by operating activities in the year ended December 31, 2014 was $4.1 million and was driven primarily by
net loss of $148.1 million, adjusted for certain non-cash items including depreciation and amortization expense of $22.0 million,
equity based compensation of $60.8 million and other non-cash items of $0.6 million and cash provided by operating assets and
liabilities of $68.8 million. Operating cash flows can be volatile and are sensitive to many factors, including changes in working
capital and our net loss.
Cash provided by operating activities in the year ended December 31, 2013 was $34.4 million and was driven by a net loss
of $15.5 million, adjusted for certain non-cash items including depreciation and amortization expense of $13.1 million and other
non-cash items of $0.1 million offset by cash provided by operating assets and liabilities of $36.7 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, purchases and disposal of short-term and long-term
investments, leasehold improvements for our facilities and acquisitions of businesses.
Cash used in investing activities in the year ended December 31, 2015 was $137.7 million and was primarily driven by
purchases of short-term and long-term investments of $207.3 million, property and equipment of purchases of property and
equipment of $44.6 million, site and software development costs of $17.5 million, other net investing activities of $4.8 million,
partially offset by sale and maturities of short-term investments of $133.6 million and cash received from the sale of a business
(net of cash sold) of $2.9 million.
Cash used in investing activities in the year ended December 31, 2014 was $55.4 million and was primarily driven by net
purchases of short-term investments of $10.0 million, purchases of property and equipment of $31.9 million, site and software
development costs of $14.1 million partially offset by net decrease in restricted cash of $0.5 million.
Cash used in investing activities in the year ended December 31, 2013 was $47.0 million and was driven by net purchases
of short-term investments of $27.0 million, purchases of property and equipment of $6.7 million, cash paid for the acquisition of
DwellStudio of $3.7 million, site and software development costs of $9.0 million and other net investing activities of $0.5 million.
Financing Activities
Cash used in financing activities in the year ended December 31, 2015 was $18.6 million and was primarily due to statutory
minimum taxes paid related to net share settlement of equity awards of $19.1 million, partially offset by net proceeds from
exercise of stock options of $0.5 million.
Cash provided by financing activities in the year ended December 31, 2014 was $341.2 million and was primarily due to net
proceeds from the IPO of $282.9 million, issuance of Series B convertible redeemable preferred units of $154.8 million partially
offset by the dividend distribution to our Series A preferred unit holders of $39.5 million, the repurchase of our securities and our
2014 tender offer of $29.0 million and statutory minimum taxes paid related to net share settlement of equity awards of
$28.0 million.
There were no financing activities in the year ended December 31, 2013.
Credit Agreement
For information regarding our credit agreement, see Note 13, Credit Agreement, in the Notes to the Consolidated Financial
Statements included in Part II, Item 8, Consolidated Financial Statements, of this Annual Report on Form 10-K.
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.
42
Contractual Obligations
The following table summarizes our contractual obligations as of December 31, 2015:
Payment Due by Period
Less than
1 year
1 - 3
Years
3 - 5
Years
More than
5 Years
Total
Lease Obligations
$
21,131
$
56,857
$
53,503
$
109,071
$
240,562
We lease office space under non-cancelable leases. These leases expire at various dates through 2028 and include
discounted rental periods and fixed escalation clauses, which are amortized straight-line over the terms of the lease. We recognize
rent expense on a straight-line basis over the lease periods.
Critical Accounting Policies
Our financial statements are prepared in accordance with accounting principles generally accepted in the United States. 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. See Note 2, Summary of Significant Accounting Policies, in the Notes to the Consolidated Financial Statements
included in Part II, Item 8, Consolidated Financial Statements, of this Annual Report on Form 10-K for information about these
critical accounting policies, as well as a description of our other significant accounting policies.
Revenue Recognition
We recognize revenue only when the following four criteria are met: (1) persuasive evidence of an arrangement exists;
(2) delivery has occurred; (3) the selling price is fixed or determinable; and (4) collectability is reasonably assured.
We recognize net revenue from sales of our products upon delivery to the customer. 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 record our product revenue at the gross amount as we are the primary obligor with the customer and provide
the primary customer service for all products sold on our sites, have latitude in establishing price and selecting products sold on
our sites, have discretion in selecting suppliers of products sold on our sites, maintain inventory risk from shipment through
delivery date and upon accepting returns, and have credit risk. Net revenue includes shipping costs charged to the customer and
are recorded net of taxes collected from customers, which are remitted to governmental authorities. Cash discounts, estimated
returns and rebates are deducted from gross revenue in determining net revenue. We record an allowance for returns based on
current period revenue and historical returns experience. We defer revenue when cash is collected from our customer prior to the
satisfaction of the revenue recognition criteria.
We also earn revenue through third-party advertisers that pay us based on the number of advertisement related clicks,
actions, or impressions for ads placed on our sites. Revenue earned under these arrangements is included in net revenue and is
recognized in the period in which the click, action, or impression occurs.
Site and Software Development Costs
We capitalize certain external costs and internal labor-related costs, including equity based compensation, associated with
the development of our sites and internal-use software products after the preliminary project stage is complete and until the
software is ready for its intended use. Initial costs are charged to operating expenses prior to the selection of a vendor and
determination of performance requirements. Costs incurred after the software is ready for use are charged to operating expenses
as incurred. Abandoned projects previously capitalized are charged to operating expenses in the period of abandonment. The
Company expenses site development costs that manage, monitor, and operate the Company's sites, except for costs that provide
additional functionality, which are capitalized. Capitalized software costs are included in property and equipment within our
consolidated balance sheets and are amortized over a two-year period.
43
Stock-Based Compensation
In 2010, the Company established an equity incentive plan and, in 2011, the plan was amended and restated as the Wayfair
LLC Amended and Restated 2010 Common Unit Plan (the “2010 Plan”). The 2010 Plan was administered by the board of
directors of Wayfair LLC and provided for the issuance of common option units, restricted common units (all common units), and
deferred units, which currently represent Class A or Class B common stock of the Company. We issue equity awards to employees
and non-employees, generally in the form of common stock options, common stock and restricted stock units ("RSUs"). We
account for equity awards to our employees in accordance with Financial Accounting Standards Board, or FASB, Accounting
Standard Codification Topic 718, Compensation—Stock Compensation, or ASC 718, which requires all equity-based payments to
employees, including grants of employee options and restricted stock units and modifications to existing options and restricted
stock units, to be recognized in the consolidated statements of operations and comprehensive loss based on their grant date fair
values. We account for equity awards to non-employees in accordance with FASB ASC Topic 505-50, Equity-Based Payments to
Non-Employees, which requires the fair value of an award to non-employees be remeasured at fair value as the award vests. All
equity awards granted prior to the IPO were subject to two vesting triggers: a service period (typically five years) and a
performance condition (a liquidity event in the form of either a change of control or an initial public offering, each as defined in
the Amended Plan). Employees were able to retain provisionally vested stock options and shares upon departure. We determined
that a liquidity event was not probable until the closing of our IPO on October 7, 2014, and as such, no expense was recognized
until that date. After the IPO awards for employees still providing service will continue to vest over the remaining service period.
In the fourth quarter of 2014 we recorded $57.7 million of equity based compensation and related employer taxes; the service
period for the majority of this expense was satisfied prior to the IPO. Since April 2011, we have only granted restricted stock units
and have not granted any stock options or restricted stock. Since our IPO, restricted stock unit values are determined based on the
quoted market price of our common stock on the date of grant.
Until our IPO, our estimated fair value of our common stock was determined by our board. We have periodically
determined for financial reporting purposes the estimated fair value of our common stock at various dates using contemporaneous
valuations performed in accordance with the guidance outlined in the American Institute of Certified Public Accountants Practice
Aid, Valuation of Privately-Held Company Equity Securities Issued as Compensation, also known as the Practice Aid. We
generally used the income and market approaches prescribed in the Practice Aid, in particular the income approach's discounted
cash flow method, which was based on our projections and estimated discount rate and the guideline public company, guideline
transactions and precedent transaction methodologies, based on inputs from comparable public companies' equity valuations,
comparable acquisition transactions and transactions in our own equity securities, to estimate the enterprise value of our company.
We performed these contemporaneous valuations as of December 31, 2011, June 30, 2012, December 31, 2012, June 30, 2013,
September 30, 2013, December 31, 2013, March 31, 2014 and June 30, 2014. The assumptions underlying these valuations
represent management's best estimates, which involve inherent uncertainties and the application of management judgment. As a
result, if factors or expected outcomes change and we use significantly different assumptions or estimates, our equity-based
compensation could be materially different.
In connection with the preparation of the financial statements for the year ended December 31, 2013, we undertook a
retrospective reassessment of the fair market value of our common stock for certain of our 2013 grants for financial reporting
purposes. As part of that reassessment, we determined that the grant date fair values of our May, August and November 2013
grants to be $6.46, $10.88 and $20.87, respectively. Our fair value previously determined at various valuation dates increased
substantially in 2013 and there was no particular transaction or event that caused this increase. The grants made in May, August
and November 2013 were between the dates when we performed our valuations. Accordingly, we calculated grant date fair value
for these grants on a linear basis between each valuation date and believe it to be a reasonable method. Similarly, in connection
with the preparation of the financial statements for the quarter ended September 30, 2014, we undertook a retrospective
reassessment of the fair market value of our common stock for our grants made in September 2014 to be equal to our October 2,
2014 IPO price of $29.00.
Inventory
Inventories consisting of finished goods are stated at the lower of cost or market, determined by the first-in, first-out (FIFO)
method, and consist of merchandise for resale. This valuation requires us to make judgments based on currently-available
information about the likely method of disposition, such as through sales to individual customers, liquidations, and expected
recoverable values of each disposition category.
44
Recent Accounting Pronouncements
For information about recent accounting pronouncements, see Note 2, Summary of Significant Accounting Policies, included
in Part II, Item 8, Consolidated Financial Statements, of this Annual Report on Form 10-K.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
We have operations both within the United States and internationally, and we are exposed to market risks in the ordinary
course of our business, including the effects of foreign currency fluctuations, interest rate changes 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-term 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-term and long-term
investments would not be significantly affected by either an increase or decrease in interest rates due mainly to the short-term
nature of these instruments. Interest on the revolving line of credit incurred pursuant to the credit agreement described above
would accrue 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 change in prevailing interest rates will have a material impact on our results of operations.
Foreign Currency Risk
Most of our sales are denominated in U.S. dollars, and therefore, our revenue is not currently subject to significant foreign
currency risk. Our operating expenses are denominated in the currencies of the countries in which our operations are located, and
may be subject to fluctuations due to changes in foreign currency exchange rates, particularly changes in the British Pound, and
Euro. Fluctuations in foreign currency exchange rates may cause us to recognize transaction gains and losses in our statement 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.
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.
45
Item 8.
Financial Statements and Supplementary Data
INDEX TO FINANCIAL STATEMENTS
Audited consolidated financial statements of Wayfair Inc.:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Loss
Consolidated Statements of Stockholders' Equity (Deficit)
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
47
48
49
50
51
52
53
46
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of Wayfair Inc.
We have audited the accompanying consolidated balance sheets of Wayfair Inc. (the Company) as of December 31, 2015 and
2014, and the related consolidated statements of operations, comprehensive loss, changes in stockholders’ equity, and cash flows for
each of the three years in the period ended December 31, 2015. These financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial
position of Wayfair Inc. at December 31, 2015 and 2014, and the consolidated results of its operations and its cash flows for each
of the three years ended December 31, 2015, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),
Wayfair Inc.’s internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control-
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and
our report dated February 29, 2016, expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Boston, Massachusetts
February 29, 2016
47
WAYFAIR INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
Assets
Current assets
Cash and cash equivalents
Short-term investments
Accounts receivable, net of allowance of $2,767 and $2,545 at December 31, 2015 and
December 31, 2014, respectively
Inventories
Prepaid expenses and other current assets
Total current assets
Property and equipment, net
Goodwill and intangible assets, net
Long-term investments
Other noncurrent assets
Total assets
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable
Accrued expenses
Deferred revenue
Other current liabilities
Total current liabilities
Other liabilities
Total liabilities
Commitments and contingencies (Note 7)
Convertible preferred stock, $0.001 par value per share: 10,000,000 shares authorized and none
issued at December 31, 2015 and December 31, 2014
Stockholders’ equity:
Class A common stock, par value $0.001 per share, 500,000,000 shares authorized, 45,814,237 and
37,002,874 shares issued and outstanding at December 31, 2015 and December 31, 2014,
respectively
Class B common stock, par value $0.001 per share, 164,000,000 shares authorized, 38,496,562 and
46,179,192 shares issued and outstanding at December 31, 2015 and December 31, 2014,
respectively
Additional paid-in capital
Accumulated deficit
Accumulated other comprehensive loss
Total stockholders’ equity
Total liabilities and stockholders’ equity
December 31,
2015
2014
$
334,176
$
51,895
9,906
19,900
76,446
492,323
112,325
3,702
79,883
6,348
355,859
60,000
5,949
19,798
45,262
486,868
60,639
6,478
—
1,538
$
$
694,581
$
555,523
270,913
$
147,873
51,560
50,884
23,669
397,026
55,010
452,036
—
46
38
378,162
(135,565)
(136)
242,545
$
694,581
$
42,335
26,784
15,600
232,592
17,392
249,984
—
37
46
363,944
(58,122)
(366)
305,539
555,523
The accompanying notes are an integral part of these Consolidated Financial Statements.
48
WAYFAIR INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Net revenue
Cost of goods sold
Gross profit
Operating expenses:
Customer service and merchant fees
Advertising
Merchandising, marketing and sales
Operations, technology, general and administrative
Amortization of acquired intangible assets
Total operating expenses
Loss from operations
Interest income, net
Other income (expense), net
Loss before income taxes
Provision for income taxes
Net loss
Accretion of convertible redeemable preferred units
Net loss attributable to common stockholders
Net loss attributable to common stockholders per share, basic and diluted
Weighted average number of common stock outstanding used in computing per
share amounts, basic and diluted
Year Ended December 31,
2015
2014
2013
$
2,249,885
$
1,318,951
$
1,709,161
540,724
1,007,853
311,098
81,230
278,224
106,149
155,580
891
622,074
(81,350)
1,284
2,718
55,804
191,284
80,113
130,701
980
458,882
(147,784)
350
(489)
(77,348)
(147,923)
95
(77,443)
—
175
(148,098)
(2,071)
$
$
(77,443) $
(150,169) $
(0.92) $
(2.97) $
915,843
691,602
224,241
35,500
108,469
33,506
62,246
539
240,260
(16,019)
245
294
(15,480)
46
(15,526)
(25,388)
(40,914)
(0.99)
83,726
50,642
41,332
The accompanying notes are an integral part of these Consolidated Financial Statements.
49
WAYFAIR INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
Net loss
Other comprehensive loss:
Foreign currency translation adjustments
Net unrealized loss on available-for-sale investments
Comprehensive loss
Year Ended December 31,
2015
2014
2013
(77,443) $
(148,098) $
(15,526)
532
(302)
(38)
—
(390)
—
(77,213) $
(148,136) $
(15,916)
$
$
The accompanying notes are an integral part of these Consolidated Financial Statements.
50
WAYFAIR INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(In thousands)
Series A
Convertible
Redeemable
Preferred
Units
Series A
Convertible
Redeemable
Members'
Equity
Series B
Convertible
Redeemable
Preferred
Units
Series B
Convertible
Redeemable
Members'
Equity
Class A and Class B
Common Stock
Common
Units
Shares
Amount
Additional
Paid-In
Capital
Accumulated
Deficit
Accumulated
Other
Comprehensive
Income (Loss)
44,819
— $
— $
— $
(151,192)
$
Total
Stockholders'
(Deficit) Equity
$
(151,130)
Balance at December 31, 2012
Net loss
Cumulative translation adjustment
Accretion of Series A convertible redeemable preferred units
Forfeiture of unvested units
Equity issued as part of acquisition, net
Equity compensation expense
Balance at December 31, 2013
Net loss
Cumulative translation adjustment
Issuance of Series B convertible redeemable preferred units, net
of issuance costs
Accretion of convertible redeemable preferred units
Reduction of carrying value of convertible redeemable preferred
stock
Conversion of convertible redeemable preferred stock to common
stock
Conversion from LLC to Corporation
Issuance of Class A common stock—net of issuance costs
5
1
Forfeiture of unvested units
Repurchase of vested common units
Dividends paid to Series A convertible redeemable preferred
unitholders
Exercise of options to purchase common stock
Issuance of common stock upon vesting of RSUs
Shares withheld related to net settlement of RSUs
Repurchase of common units
Return of equity held in escrow as part of acquisition
Equity compensation expense
Balance at December 31, 2014
Net loss
Other comprehensive income
Exercise of options to purchase common stock
Issuance of common stock upon vesting of RSUs
Shares withheld related to net settlement of RSUs
Equity compensation expense
Balance at December 31, 2015
21,552
$
215,798
— $
—
—
—
—
—
—
—
—
25,388
—
—
—
21,552
241,186
—
—
—
—
—
—
—
—
14,417
(14,801)
—
—
—
—
—
—
—
—
—
5,995
—
—
—
—
—
—
—
—
—
—
—
—
154,774
2,455
—
(21,552)
(201,286)
(5,995)
(157,229)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
— $
—
—
—
—
(39,516)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
— $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(56)
141
—
44,904
—
—
—
—
—
—
(44,904)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
27,547
44,904
10,500
(104)
(203)
—
157
2,199
(918)
(896)
(4)
—
83,182
—
—
164
1,515
(550)
—
84,311
$
—
—
—
—
—
—
—
—
—
—
—
—
28
44
10
—
—
—
—
2
—
—
—
—
—
—
—
—
—
—
—
—
358,487
(306,229)
282,883
—
—
—
12
—
(1)
(27,985)
—
—
56,776
363,944
—
—
495
—
(19,111)
32,834
—
—
—
83
—
—
—
1
—
—
84
(15,526)
—
(25,388)
—
1,194
62
(190,850)
(148,098)
—
—
(16,872)
14,801
—
306,185
—
—
—
—
—
—
—
(23,500)
(49)
261
(58,122)
(77,443)
—
—
—
—
—
62
—
(390)
—
—
—
—
(328)
—
(38)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(366)
—
230
—
—
—
—
(15,526)
(390)
(25,388)
—
1,194
62
(191,178)
(148,098)
(38)
—
(16,872)
14,801
358,515
—
282,893
—
—
—
12
2
(27,986)
(23,500)
(49)
57,037
305,539
(77,443)
230
495
1
(19,111)
32,834
242,545
The accompanying notes are an integral part of these Consolidated Financial Statements.
$
378,162
$
(135,565)
$
(136)
$
WAYFAIR INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Cash flows from operating activities
Net loss
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation and amortization
Equity based compensation
Gain on sale of a business
Other non-cash adjustments
Changes in operating assets and liabilities:
Accounts receivable
Inventories
Prepaid expenses and other current assets
Accounts payable and accrued expenses
Deferred revenue and other liabilities
Other assets
Net cash provided by operating activities
Cash flows from investing activities
Purchase of short-term and long-term investments
Sale and maturities of short-term investments
Purchase of property and equipment
Site and software development costs
Cash received from the sale of a business (net of cash sold)
Cash paid for acquisition
Other investing activities, net
Net cash used in investing activities
Cash flows from financing activities
Taxes paid related to net share settlement of equity awards
Net proceeds from exercise of stock options
Net proceeds from issuance of Series B convertible redeemable preferred units
Repurchase of common units
Dividends paid to Series A convertible redeemable preferred holders
Repurchase of employee equity
Proceeds from initial public offering, net of fees
Net cash (used in) provided by financing activities
Effect of exchange rate changes on cash and cash equivalents
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents
Beginning of year
End of year
Supplemental disclosure of non-cash investing activities
Purchase of property and equipment included in accounts payable and accrued expenses and in
other liabilities
Construction costs capitalized under finance lease obligations
Issuance of common units in connection with acquisition
Supplemental disclosure of non-cash financing activities
Accretion of preferred unit dividends
Year Ended December 31,
2015
2014
2013
$
(77,443) $
(148,098) $
(15,526)
32,446
31,015
(2,997)
3,027
(4,033)
(131)
(29,513)
135,855
47,031
(136)
135,121
(207,303)
133,596
(44,648)
(17,536)
2,860
—
(4,697)
(137,728)
(19,111)
495
—
—
—
—
—
(18,616)
(460)
(21,683)
22,003
60,809
—
570
1,741
(4,835)
(20,143)
59,521
32,616
(59)
4,125
(135,000)
125,019
(31,855)
(14,130)
—
—
531
(55,435)
(27,985)
12
154,774
(23,500)
(39,516)
(5,528)
282,893
341,150
730
290,570
355,859
334,176
$
65,289
355,859
$
5,258
27,295
$
$
— $
7,567
3,960
$
$
— $
13,091
—
—
121
8,112
(6,630)
(9,159)
40,853
4,195
(644)
34,413
(93,000)
65,998
(6,739)
(9,040)
—
(3,741)
(469)
(46,991)
—
—
—
—
—
—
—
—
6
(12,572)
77,861
65,289
—
—
1,194
— $
2,071
$
25,388
$
$
$
$
$
The accompanying notes are an integral part of these Consolidated Financial Statements.
52
Notes to Consolidated Financial Statements
1. Basis of Presentation
Wayfair Inc. (the “Company”) is an e-commerce business offering visually inspiring browsing, compelling merchandising,
easy product discovery and attractive prices for over seven million products from over 7,000 suppliers across five distinct brands
— Wayfair.com, Joss & Main, AllModern, DwellStudio, and Birch Lane. In addition to generating net revenue through Direct
Retail sales, which includes all sales generated primarily through the Company’s websites, mobile optimized websites, and mobile
applications (“sites”), net revenue is also generated through sites operated by third parties and through third party advertising
distribution providers that pay the Company based on the number of advertisement related clicks, actions, or impressions for
advertisements placed on the Company’s sites.
The consolidated financial statements and other disclosures contained in this Annual Report on Form 10-K are those of the
Company. The Company was incorporated as a Delaware corporation on August 8, 2014. Prior to the effectiveness of
Wayfair Inc.'s registration statement on Form S-1 related to its initial public offering ("IPO") in October 2014, Wayfair LLC was
the principal operating entity. In connection with the IPO of the Company, Wayfair LLC completed a corporate reorganization
pursuant to which Wayfair LLC became a wholly-owned subsidiary of the Company, and the holders of equity interests in
Wayfair LLC became stockholders of the Company. The Company accounted for this restructuring in accordance with the
guidance provided for entities under common ownership because the holders of the equity interests in Wayfair LLC held the same
ownership interests in Wayfair Inc. as they did in Wayfair LLC immediately prior to the corporate reorganization. SK Retail, Inc.
was the only holder of equity interest in Wayfair LLC with operations. Accordingly, the historical financial statements of SK
Retail, Inc. have been combined with the historical financial statements of Wayfair LLC for the periods presented. In addition, all
of our outstanding common units of Wayfair LLC were exchanged for, and all of our incentive units converted into, shares of
Class B common stock. In addition, all of outstanding preferred units were exchanged for shares of Series A and Series B
convertible preferred stock. Immediately prior to the completion of the IPO, all of our outstanding shares of Series A and Series B
convertible preferred stock converted into shares of Class B common stock. In connection with this the Company also reclassified
members' deficit of $306.2 million, accumulated under Wayfair LLC, to additional paid in capital.
The consolidated statements of operations, comprehensive loss, and cash flows for the year ended December 31, 2015 are
not necessarily indicative of the results of operations and cash flows that may be expected for the year ending December 31, 2016,
or for any other period.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements of Wayfair Inc. include its wholly owned subsidiaries including the
accounts of Wayfair LLC and its wholly owned subsidiaries (collectively the "Company" or "Wayfair"). All intercompany
accounts and transactions have been eliminated. Below is a summary of the wholly-owned subsidiaries of the Company with
operations:
Subsidiary
Wayfair LLC
Wayfair Securities Corporation
SK Retail, Inc.
Wayfair Stores Limited
Wayfair (UK) Limited
Wayfair GmbH
Wayfair (BVI) Ltd.
Location
USA
USA
USA
Republic of Ireland
United Kingdom
Germany
British Virgin Islands
53
Notes to Consolidated Financial Statements (Continued)
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of
America ("GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and
liabilities, and disclosure of contingent assets and liabilities, at the date of the financial statements, and the reported amounts of
revenue and expenses during the reported period. On an ongoing basis, management evaluates these estimates and judgments,
including those related to revenue recognition, capitalization of site and software development costs, stock-based compensation,
and inventory. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an original maturity (at the date of purchase) of three
months or less to be the equivalent of cash for the purpose of consolidated balance sheets and statements of cash flows
presentation. Cash equivalents, which consist primarily of money market accounts, are carried at cost, which approximates market
value.
Restricted Cash
As of December 31, 2015 and 2014, there was $5.0 million and $0.3 million, respectively, of cash that was restricted from
withdrawal and held by banks to guarantee the Company's letters of credit issued principally for certain vendor arrangements and
to secure certain property leases, respectively.
Short-Term Investments
Short-term investments consist of certificates of deposits and marketable securities with original maturities of greater than
three months and mature in less than twelve months.
Accounts Receivable
Accounts receivable are stated at the amount management expects to collect from outstanding balances. The Company
estimates the allowance for doubtful accounts based on historical losses, existing economic conditions, and other information
available at the consolidated balance sheets dates. Uncollectible amounts are written off against the allowance after all collection
efforts have been exhausted.
Marketable Securities
The Company classifies its marketable securities as “available-for-sale” securities. Available-for-sale securities are
classified as short term investments and long-term investments on the consolidated balance sheets and are carried at fair value.
Unrealized gains and losses on available-for-sale securities that are considered temporary are recorded, net of taxes, in the
“Accumulated other comprehensive loss” caption of the Company’s consolidated balance sheets. Unrealized losses, excluding
losses related to the credit rating of the security (credit losses), on available-for-sale securities that are considered other-than-
temporary but relate to securities that the Company (i) does not intend to sell and (ii) will not be required to sell below cost are
also recorded, net of taxes, in “Accumulated other comprehensive loss.” Further, the Company does not believe it will be required
to sell such securities below cost. Therefore, the only other-than-temporary losses the Company records in “Other income, net” in
its consolidated statements of operations are related to credit losses. As of December 31, 2015, the Company’s available-for-sale
securities consisted of investment securities. The maturities of the Company’s long-term marketable securities generally range
from one to three years. As of December 31, 2015, the Company’s available-for-sale securities primarily consisted of corporate
bonds and other government obligations that are priced at fair value.
Fair Value of Financial Instruments
The Company's financial assets and liabilities are measured at fair value, which is defined as the price that would be
received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement
date (exit price). The three levels of inputs used to measure fair value are as follows:
•
•
•
Level 1—Unadjusted quoted prices in active markets for identical assets or liabilities
Level 2—Unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for
identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are
observable or can be corroborated by observable market data for substantially the full-term of the asset or liability
Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value
of the asset or liability
54
Notes to Consolidated Financial Statements (Continued)
This hierarchy requires the Company to use observable market data, when available, and to minimize the use of
unobservable inputs when determining fair value. The Company measures its cash equivalents and short-term and long-term
investments at fair value. The Company classifies its cash equivalents and restricted cash within Level 1 because the Company
values these investments using quoted market prices. The fair value of the Company's Level 1 financial assets is based on quoted
market prices of the identical underlying security. The Company classifies short-term and long-term investments within Level 2
because unadjusted quoted prices for identical or similar assets in markets are not active. The Company does not have any assets
or liabilities classified as Level 3 financial assets. Refer to Note 3, Fair Value Measurements, for additional detail.
Concentrations of Credit Risk
Financial instruments that subject the Company to credit risk consist of cash and cash equivalents, short-term and long-term
investments, and accounts receivable. The risk with respect to cash and cash equivalents and short-term and long-term
investments is minimized by the Company's policy of investing in financial instruments (i.e., cash equivalents) with near-term
maturities issued by highly rated financial institutions. At times, these balances may exceed federally insured limits; however, to
date, the Company has not incurred any losses on these investments. As of December 31, 2015 and 2014, the Company had $3.9
million and $2.1 million, respectively, in banks located outside the United States. The risk with respect to accounts receivable is
managed by the Company through its policy of monitoring the creditworthiness of its customers to which it grants credit terms in
the normal course of business.
Leases
The Company leases office space in several countries around the world under non-cancelable lease agreements. The
Company generally leases its office facilities under operating lease agreements. Office facilities subject to an operating lease and
the related lease payments are not recorded on the balance sheet. The terms of certain lease agreements provide for rental
payments on a graduated basis, however, the Company recognizes rent expense on a straight-line basis over the lease period in
accordance with authoritative accounting guidance. Any lease incentives are recognized as reductions of rental expense on a
straight-line basis over the term of the lease. The lease term begins on the date the Company becomes legally obligated for the
rent payments or when it takes possession of the office space, whichever is earlier.
The Company establishes assets and liabilities for the estimated construction costs incurred under lease arrangements where
the Company is considered the owner for accounting purposes only, or build-to-suit leases, to the extent the Company is involved
in the construction of structural improvements or take construction risk prior to commencement of a lease. Upon occupancy of
facilities under build-to-suit leases, the Company assesses whether these arrangements qualify for sales recognition under the
sale-leaseback accounting guidance. If the Company continues to be the deemed owner, the facilities are accounted for as
financing leases.
Foreign Currency Translation
The functional currency of the Company is the United States dollar, while the functional currency of certain wholly-owned
subsidiaries outside of the United States is as follows:
Subsidiary
Wayfair Stores Limited
Wayfair (UK) Limited
Wayfair GmbH
Wayfair (BVI) Ltd.
Currency
Euro
Pound sterling
Euro
Euro
The financial statements of the Company are translated to United States dollars using year-end exchange rates as to assets
and liabilities and average exchange rates as to revenue and expenses. Capital accounts are translated at their historical exchange
rates when the capital transaction occurred. The effects of foreign currency translation are included in other comprehensive loss in
the consolidated statements of comprehensive loss. Transaction gains and losses are included in the Company's consolidated
statements of operations. Translation adjustments arising from the use of differing exchange rates from period to period are
included in accumulated other comprehensive loss within total stockholders' equity.
55
Notes to Consolidated Financial Statements (Continued)
Inventories
Inventories consisting of finished goods are stated at the lower of cost or market, determined by the first-in, first-out (FIFO)
method, and consist of product for resale. Inventory costs consist of cost of product and inbound shipping and handling costs.
Inventory costs also include direct and indirect labor costs, rents and depreciation expenses associated with the Company's
fulfillment centers. Inventory valuation requires the Company to make judgments, based on currently-available information, about
the likely method of disposition, such as through sales to individual customers, liquidations, and expected recoverable values of
each disposition category.
Goods In-Transit
Goods in-transit directly from suppliers to customers are recorded in prepaid expenses and other current assets. Risk of loss
and the transfer of title from the supplier to the Company occur at freight on board shipping point. As of December 31, 2015 and
2014, goods in-transit amounted to $34.1 million, and $19.6 million, respectively.
Property and Equipment
Property and equipment are stated at cost, net of depreciation and amortization. Depreciation and amortization on property
and equipment is calculated on the straight-line method over the estimated useful lives of the assets as follows:
Class
Furniture and computer equipment
Site and software development costs
Leasehold improvements
Site and Software Development Costs
Range of Life
(In Years)
3 to 7
2
The lesser of useful
life or lease term
The Company capitalizes costs associated with the development of its sites and internal-use software products after the
preliminary project stage is complete and until the software is ready for its intended use. The capitalized costs are amortized over
a two-year period. Costs incurred in the preliminary stages of development, after the software is ready for its intended use and for
maintenance of internal-use software are expensed as incurred. Upgrade and enhancements are capitalized to the extent they will
result in added functionality.
Total costs capitalized, net of accumulated amortization, totaled $18.1 million and $14.2 million as of December 31, 2015
and 2014, respectively, and are included in property and equipment, net in the accompanying consolidated balance sheets.
Amortization expense for the years ended December 31, 2015, 2014 and 2013 were $15.3 million, $9.9 million, and $7.0 million,
respectively. Capitalized site and software development costs are included in property and equipment within our consolidated
balance sheets.
Goodwill
Goodwill represents the excess of cost over the fair value of tangible and identifiable intangible assets acquired and
liabilities assumed. Goodwill is not amortized, but is subject to an annual impairment test, or more frequently as impairment
indicators arise.
The Company tests goodwill for impairment at least annually. The Company reviews goodwill for impairment on the last
day of its fiscal year and whenever events or changes in circumstances indicate that the carrying amount of this asset may exceed
its fair value. The assessment is performed at the reporting unit level. The Company first assesses qualitative factors to determine
whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a
reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is
not more likely than not that the fair value of a reporting unit is less than its carrying amount, then the two-step impairment test is
not required. If the qualitative assessment requires the Company to perform the two-step goodwill impairment test to identify
potential goodwill impairment, then the first step is to compare the fair value of the reporting unit to the book value including
goodwill. If the fair value of the reporting unit exceeds the book value, goodwill is not impaired. If the book value exceeds the
fair value, the second step of the process is performed to measure the amount of impairment.
56
Notes to Consolidated Financial Statements (Continued)
Long-Lived Assets
The Company reviews long-lived assets for impairment whenever events or changes in circumstances, such as service
discontinuance or technological obsolescence, indicate that the carrying amount of the long-lived asset may not be recoverable.
When such events occur, the Company compares the carrying amount of the asset to the undiscounted expected future cash flows
related to the asset. If the comparison indicates that an impairment exists, the amount of the impairment is calculated as the
difference between the excess of the carrying amount over the fair value of the asset. If a readily determinable market price does
not exist, fair value is estimated using discounted expected cash flows attributable to the asset. For the years ended December 31,
2015, 2014 and 2013, no impairment of long-lived assets or identifiable intangibles had been indicated.
Revenue Recognition
The Company generates net revenue through product sales generated primarily through the sites of the Company's five
distinct brands and through sites operated by third parties.
The Company recognizes revenue only when the following four criteria are met: (1) persuasive evidence of an arrangement
exists; (2) delivery has occurred; (3) the selling price is fixed or determinable; and (4) collectability is reasonably assured. The
Company recognizes net revenue from sales of its products, upon delivery to the customer. The Company records product revenue
at the gross amount as the Company is the primary obligor with the customer and provides the primary customer service for all
products sold on its sites, has latitude in establishing price and selecting products sold on its sites, has discretion in selecting
suppliers of products sold on its sites, maintains inventory risk from shipment through delivery date and upon accepting returns,
and has credit risk. Net revenue includes shipping costs charged to the customer and is recorded net of taxes collected from
customers, which are remitted to governmental authorities. Cash discounts, returns and rebates are deducted from gross revenue
in determining net revenue. In addition, the Company defers revenue when cash is collected from its customer prior to the
satisfaction of the revenue recognition criteria.
The Company maintains a membership rewards program that allows enrolled customers to earn points which can be
redeemed for future purchases. The Company defers a portion of its revenue associated with rewards that are ultimately expected
to be redeemed prior to expiration.
The Company also earns revenue through third-party advertisers that pay based on the number of advertisement related
clicks, actions, or impressions for advertisements placed on the Company's sites. Revenue earned under these arrangements is
included in net revenue and is recognized in the period in which the click, action, or impression occurs.
Vendor Rebates
The Company earns rebates under a volume incentive programs with its suppliers. These rebates are earned upon shipment
of goods. Amounts earned and due from suppliers under these rebate programs are included in other current assets on the
consolidated balance sheets and are reflected as a reduction of cost of goods sold on the consolidated statements of operations.
Vendor allowances received by the Company reduce the carrying cost of inventory and are recognized in cost of goods sold when
the related inventory is sold.
Costs of Goods Sold
Cost of goods sold consists of the cost of product sold to customers, shipping and handling costs and shipping supplies and
fulfillment costs. Fulfillment costs include costs incurred in operating and staffing the fulfillment centers, such as costs attributed
to receiving, inspecting, picking, packaging and preparing customer orders for shipment. Cost of goods sold also includes direct
and indirect labor costs for fulfillment center oversight, including payroll and related benefit costs.
Advertising Costs
Expenditures for advertising are expensed in the period that the advertising first takes place. Advertising expense amounted
to approximately $278.2 million, $191.3 million, and $108.5 million in the years ended December 31, 2015, 2014, and 2013,
respectively. Included in prepaid expenses at December 31, 2015 and 2014 are approximately $1.2 million and $0.6 million,
respectively, of prepaid advertising costs.
57
Notes to Consolidated Financial Statements (Continued)
Merchant Processing Fees
Merchant processing fees totaling $46.9 million, $27.6 million, and $19.4 million in the years ended December 31, 2015,
2014, and 2013, respectively, are included in customer service and merchant fees expense in the accompanying consolidated
statements of operations. These fees are charged by third parties that provide merchant processing services for credit cards and
debit cards.
Retail Partner Fees
The Company sells its products through sites owned and operated by third-party online retailers, or retail partners. The
Company pays a fee for sales generated through these sites and records them as merchant processing fees and advertising costs.
Retail partner fees included in merchant processing fees are $3.5 million, $4.4 million, and $4.3 million for the years ended
December 31, 2015, 2014, and 2013, respectively. Retail partner fees included in advertising costs are $20.2 million, $24.3
million, and $25.2 million for the years ended December 31, 2015, 2014, and 2013, respectively.
Equity-Based Compensation
The Company accounts for its equity-based compensation awards in accordance with ASC Topic 718, Compensation—
Stock Compensation ("ASC 718"). ASC 718 requires all equity-based payments to employees, to be recognized as expense in the
statements of operations based on their grant date fair values. The Company has granted stock options, restricted shares and
restricted stock units. Since April 2011, the Company has only granted restricted stock units and has not granted any stock options
or restricted stock. Restricted stock unit values are determined based on the quoted market price of our Class A common stock on
the date of grant. The Company accounts for equity awards to non-employees in accordance with FASB ASC Topic 505-50,
Equity-Based Payments to Non-Employees, which requires the fair value of an award to non-employees be remeasured at fair
value as the award vests.
The Company estimated the grant date fair value of each common stock option award using the Black-Scholes option-
pricing model. The use of the Black-Scholes option-pricing model required management to make assumptions with respect to the
expected term of the option, the expected volatility of the common stock consistent with the expected life of the option, risk-free
interest rates and expected dividend yields of the common stock. Until its IPO in October 2014, the fair value of restricted stock
and restricted stock units on the date of grant was determined by the board. Since April 2011, the Company has only granted
restricted stock units and has not granted any stock options or restricted stock. Since our IPO, restricted stock unit values are
determined based on the quoted market price of our common stock on the date of grant.
Prior to the IPO the Company periodically determined for financial reporting purposes the estimated fair value of our
common stock at various dates using contemporaneous valuations performed in accordance with the guidance outlined in the
American Institute of Certified Public Accountants Practice Aid, Valuation of Privately Held Company Equity Securities Issued as
Compensation, also known as the Practice Aid. The Company generally used the income and market approaches prescribed in the
Practice Aid, in particular the income approach's discounted cash flow method, which was based on the Company's projections
and estimated discount rate and the guideline public company, guideline transactions and precedent transaction methodologies,
based on inputs from comparable public companies' equity valuations, comparable acquisition transactions and transactions in the
Company's own equity securities, to estimate the enterprise value of the company.
In connection with the preparation of the financial statements for the year ended December 31, 2013, the Company
undertook a retrospective reassessment of the fair market value of its common stock for certain of its 2013 grants for financial
reporting purposes. As part of that reassessment, the Company determined that the grant date fair values of its May, August and
November 2013 grants to be $6.46, $10.88 and $20.87, respectively. The fair value previously determined at various valuation
dates increased substantially in 2013 and there was no particular transaction or event that caused this increase. The grants made in
May, August and November 2013 were between the dates when the Company performed its valuation. Accordingly, the Company
calculated grant date fair value for these grants on a linear basis between each valuation date and believe it to be a reasonable
method. Similarly, in connection with the preparation of the financial statements for the quarter ended September 30, 2014, the
Company undertook a retrospective reassessment of the fair market value of our common stock for our grants made in September
2014 to be equal to our October 2, 2014 IPO price of $29.00.
Income Taxes
Income taxes are accounted for under the asset and liability method. Under the asset and liability method, deferred tax assets
and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases.
58
Notes to Consolidated Financial Statements (Continued)
Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the enactment date. The Company records valuation
allowances to reduce deferred income tax assets to the amount that is more likely than not to be realized. The Company
determines whether it is more likely than not that a tax position will be sustained upon examination. If it is not more likely than
not that a position will be sustained, no amount of benefit attributable to the position is recognized. The tax benefit to be
recognized of any tax position that meets the more likely than not recognition threshold is calculated as the largest amount that is
more than 50% likely of being realized upon resolution of the contingency.
Prior to the IPO, the Company's main operating entity had not been subject to U.S. federal income taxes as it was organized
as a limited liability company. As such, the taxable income or loss was passed through to and included in the tax returns of the
members. The Company was subject to entity level taxation in certain states, and certain domestic and foreign subsidiaries were
subject to entity level U.S. and foreign income taxes. As a result of the internal restructuring prior to the IPO, a portion of the
Company's income will be subject to U.S. federal, state, local, and foreign income taxes and taxed at the prevailing corporate tax
rates.
Net Loss Attributable to Common Stockholders Per Share
The Company follows the two-class method when computing net loss attributable to common stockholders per share as the
Company had issued shares that meet the definition of participating securities which converted to common stock upon the IPO.
Prior to the corporate reorganization, the Company's convertible redeemable preferred units contractually entitled the holders of
such units to participate in dividends, but did not contractually require the holders of such units to participate in losses of the
Company. Accordingly, in periods prior to 2014 in which the Company reports a net loss or a net loss attributable to common
stockholders resulting from preferred stock dividends or accretion, net losses are not allocated to participating securities. After the
IPO the Company has continued to follow the two-class method because it has issued two classes of common stock—Class A and
Class B.
Basic net income (loss) attributable to common stockholders per share is computed by dividing the net income (loss)
attributable to common stockholders by the weighted average number of common stock outstanding for the period. For periods in
which the Company has reported net losses, diluted net loss per share attributable to common shareholders is the same as basic
net loss per share attributable to common stockholders, since dilutive common stock are not assumed to have been issued if their
effect is anti-dilutive.
Subsequent Events
The Company considers events or transactions that have occurred after the balance sheet date of December 31, 2015, but
prior to the filing of the financial statements with the U.S. Securities and Exchange Commission, to provide additional evidence
relative to certain estimates or to identify matters that require additional recognition or disclosure. Subsequent events have been
evaluated through the filing of these financial statements.
Recent Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No.
2016-02, "Leases" ("ASU 2016-02"). This ASU revises the accounting related to leases by requiring lessees to recognize a lease
liability and a right-of-use asset for all leases. The new lease guidance also simplifies the accounting for sale and leaseback
transactions. This ASU is effective for annual reporting periods beginning after December 15, 2018 and early adoption is
permitted. Management is currently evaluating the impact of the adoption of this ASU on the Company’s consolidated financial
statements.
In November 2015, the FASB issued ASU No. 2015-17, "Income Taxes (Topic 740): Balance Sheet Classification of
Deferred Taxes" ("ASU 2015-17"). The standard requires that deferred tax assets and liabilities be classified as noncurrent on the
balance sheet rather than being separated into current and noncurrent. The Company early adopted its provisions during fiscal
year 2015 on a prospective basis. Accordingly, as permitted by ASU 2015-17, the current deferred taxes have been classified as
noncurrent on the Balance Sheet. The prospective adoption of ASU 2015-17 does not require a restatement of prior year balances;
as such, they have not been adjusted.
In August 2014, the FASB issued ASU 2014-15, "Presentation of Financial Statements, Going Concern." ("ASU 2014-15").
ASU-2014-15 will explicitly require management to assess an entity’s ability to continue as a going concern, and to provide
related footnote disclosure in certain circumstances. The new standard will be effective for all entities in the first annual period
59
Notes to Consolidated Financial Statements (Continued)
ending after December 15, 2016 and earlier adoption is permitted. Management does not expect that the application of ASU
2014-15 will have an impact on the Company’s financial condition, results of operations or cash flows.
In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers" ("ASU 2014-09"). This ASU
is a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods
or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services.
This ASU is effective for annual reporting periods beginning after December 15, 2016 and early adoption is not permitted.
Accordingly, the Company will adopt this ASU on January 1, 2017. Management is currently evaluating which transition
approach to use and the impact of the adoption of this ASU on the Company’s financial condition, results of operations or cash
flows.
3. Marketable Securities and Fair Value Measurements
Marketable Securities
As of December 31, 2015, all of the Company’s marketable securities were classified as available-for-sale and their
estimated fair values were $96.8 million The Company did not hold any available-for-sale securities at December 31, 2014.
The following table presents details of the Company’s marketable securities as of December 31, 2015 (in thousands):
Short-term:
Investment securities
Long-term:
Investment securities
Total
Fair Value Measurements
Amortized
Cost
December 31, 2015
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair Value
$
$
16,908
$
— $
(13) $
16,895
80,172
97,080
$
2
2
$
(291)
(304) $
79,883
96,778
The following tables set forth the fair value of the Company's financial assets measured at fair value on a recurring basis as
of December 31, 2015 and 2014 based on the three-tier value hierarchy (in thousands):
Cash equivalents:
Money market funds
Short-term investments:
Certificates of deposit
Investment securities
Restricted cash:
Certificate of deposit
Long-term:
Investment securities
Total
Level 1
Level 2
Level 3
Total
December 31, 2015
$
267,300
$
— $
— $
267,300
35,000
—
5,000
—
16,895
—
—
79,883
—
—
—
—
$
307,300
$
96,778
$
— $
35,000
16,895
5,000
79,883
404,078
60
Notes to Consolidated Financial Statements (Continued)
Level 1
Level 2
Level 3
Total
December 31, 2014
$
302,595
$
— $
— $
302,595
60,000
302
—
—
—
—
60,000
302
$
362,897
$
— $
— $
362,897
Cash equivalents:
Money market funds
Short-term investments:
Certificates of deposit
Restricted cash:
Money market funds
Total
4. Intangible assets and Goodwill
The following table summarizes intangible assets as of December 31, 2015 and 2014 (in thousands):
Trademarks
Customer relationships
Non-compete agreements
Other intangibles
Domain names
Total
Trademarks
Customer relationships
Non-compete agreements
Technology
Other intangibles
Domain names
Total
Weighted-Average
December 31, 2015
Amortization
Period (Years)
Gross Carrying
Amount
Accumulated
Amortization
Net Book Value
5
5
3 - 5
3
5
Weighted-Average
Amortization
Period (Years)
5
5
3 - 5
5
3
5
$
$
$
$
1,900
$
(918) $
1,300
100
373
2,687
(628)
(81)
(270)
(2,685)
982
672
19
103
2
6,360
$
(4,582) $
1,778
December 31, 2014
Gross Carrying
Amount
Accumulated
Amortization
Net Book Value
2,001
$
1,300
108
718
373
2,687
(604) $
1,397
(368)
(52)
(467)
(158)
(2,684)
932
56
251
215
3
7,187
$
(4,333) $
2,854
Amortization expense related to intangible assets was $0.9 million, $1.0 million, and $0.5 million for the years ended
December 31, 2015 and 2014, and 2013, respectively. The estimated future amortization expense of purchased intangible assets as
of December 31, 2015, is as follows (in thousands):
2016
2017
2018
Thereafter
Total
61
Total
765
640
373
—
1,778
$
$
Notes to Consolidated Financial Statements (Continued)
The following table presents the changes in goodwill during the years ended December 31, 2015 and 2014, respectively
(in thousands):
Goodwill as of December 31, 2014
Sale during the period
Foreign currency exchange rate effect
Goodwill as of December 31, 2015
Net Book Value
$
$
3,624
(1,520)
(180)
1,924
In July 2015, the Company sold its Australian business. At the time of the sale, the net carrying amounts of the goodwill
and intangible assets of the Australian business were $1.5 million and $0.2 million, respectively. The proceeds from the sale
exceeded the carrying value of the Australian business, resulting in a $3.0 million gain, recorded in "Other income (expense), net"
in the unaudited consolidated statements of operations.
5. Property and Equipment, net
The following table summarizes property and equipment, net as of December 31, 2015 and 2014 (in thousands):
Furniture and computer equipment
Site and software development costs
Leasehold improvements
Construction in progress
Less accumulated depreciation and amortization
Property and equipment, net
December 31,
2015
2014
$
68,416
$
50,907
29,315
27,563
176,201
(63,876)
$
112,325
$
48,399
36,294
14,290
4,800
103,783
(43,144)
60,639
Property and equipment depreciation and amortization expense was $31.6 million, $20.8 million, and $12.5 million for the
years ended December 31, 2015, 2014 and 2013, respectively.
6. Prepaid Expenses and Other Current Assets, Accrued Expenses and Other Liabilities
The following table presents the components of selected balance sheet items as of December 31, 2015 and 2014 (in
thousands):
Prepaid expenses and other current assets:
Deferred costs in transit
Supplier receivable
Supplier credits receivable
Other prepaid and other current assets
Total prepaid expenses and other current assets
December 31,
2015
2014
$
$
34,102
$
17,316
7,344
17,684
76,446
$
19,621
9,507
3,989
12,145
45,262
62
Notes to Consolidated Financial Statements (Continued)
Accrued expenses:
Employee compensation and related benefits
Advertising
Accrued property, plant and equipment
Credit card
Audit, legal and professional fees
Other accrued expenses
Total accrued expenses
Other liabilities:
Deferred rent
Construction costs capitalized under finance lease obligations
Other liabilities
Total other liabilities
7. Commitments and Contingencies
Leases
December 31,
2015
2014
$
24,928
$
15,244
6,695
3,069
6,621
2,326
7,921
9,561
7,151
3,560
898
5,921
$
51,560
$
42,335
December 31,
2015
2014
$
$
24,669
$
27,295
3,046
55,010
$
12,821
3,960
611
17,392
The Company maintains its principal offices in Boston, Massachusetts and fulfillment center, customer service center and
office space in various locations throughout the United States and abroad. Future minimum rental commitments under non-
cancelable leases with initial or remaining terms in excess of one year at December 31, 2015 were as follows (in thousands):
2016
2017
2018
2019
2020
Thereafter
Total
Amount
21,131
27,871
28,986
27,497
26,006
109,071
240,562
$
$
Rent expense under operating leases was $16.3 million, $11.4 million, and $4.6 million in the years ended December 31,
2015, 2014 and 2013, respectively. The Company has issued letters of credit for approximately $5.9 million as security for these
lease agreements as of December 31, 2015.
Future lease payments have not been reduced by minimum sublease rentals of $3.2 million due to the Company in the future
under non-cancelable subleases through 2017. The Company has entered into additional leases throughout the United States
subsequent to December 31, 2015, where the future minimum rental commitments under non-cancelable leases with initial or
remaining terms in excess of one year are $12.7 million in the aggregate.
Restricted Cash
The Company has deposited $5.0 million and $0.3 million with Bank of America as collateral for letters of credit and has
classified these amounts as “Other noncurrent assets” on its consolidated balance sheets at December 31, 2015 and 2014,
respectively.
63
Notes to Consolidated Financial Statements (Continued)
Collection of Sales or Other Similar Taxes
Based on the location of the Company’s current operations, it collects and remits sales tax in Kentucky, Massachusetts, New
York, Utah, and California. The Company does not currently collect sales or other similar taxes for the sale of goods in states
where no obligation to collect these taxes is required under applicable law. Several states have presented the Company with
assessments, alleging that it is required to collect and remit sales or other similar taxes. The aggregate amount of claims from
these states, not including taxes allegedly owed for periods subsequent to such assessments or interest and penalties after the date
the Company last received such assessments, is approximately $12.9 million. The Company does not believe that it was obligated
to collect and remit such taxes, and intends to vigorously defend its position. At this time, the Company believes a loss is not
probable and therefore has not recorded a liability; however, no assurance can be given as to the outcome of these assessments.
Legal Matters
On September 2, 2015, a putative class action complaint was filed against the Company in the U.S. District Court for the
Southern District of New York (Dingee v. Wayfair Inc., et al., Case No. 1:15-cv-06941) by an individual on behalf of himself and
on behalf of all other similarly situated individuals, or collectively, the Dingee Plaintiffs, under sections 10(b) and 20(a) of the
Exchange Act related to a drop in stock price that had followed a report issued by Citron Research. On September 3, 2015 a
second putative class action complaint was filed, asserting nearly identical claims (Jenkins v. Wayfair Inc., et al., Case No. 1:15-
cv-06985). On November 2, 2015, the plaintiff in the Dingee action moved to consolidate the two lawsuits, and to designate
himself as lead plaintiff in the class action and his attorney as lead counsel for the class. On November 3, 2015 plaintiff in the
Jenkins action voluntarily dismissed his complaint. As a result, only the Dingee action remains pending. On November 13, 2015,
the Court appointed Dingee as lead plaintiff. On January 11, 2016, Dingee filed an amended complaint along with a second
named plaintiff, Michael Lamp. The Dingee Plaintiff’s complaint seeks class certification, damages in an unspecified amount, and
attorney’s fees and costs. The Company believes a loss is not probable and intends to defend the lawsuit vigorously.
On February 2, 2016, a putative class action complaint was filed against the Company in the U.S. District Court for the
Central District of California (Carson, et al., v. Wayfair Inc., Case No. 2:16-cv-00716) by two individuals on behalf of themselves
and on behalf of all other similarly situated individuals (collectively, the "Carson Plaintiffs"). The complaint alleges that Wayfair
engaged in a deceptive marketing campaign in which the Company advertised certain “original” or “regular” retail prices, which
the Carson Plaintiffs allege were false. The Carson Plaintiffs’ complaint seeks injunctive relief, attorney’s fees, punitive damages
and damages. The Company believes a loss is not probable and intends to defend the lawsuit vigorously.
The Company is subject to legal proceedings and claims in the ordinary course of business. However, the Company is not
currently aware of any legal proceedings or claims that it believes will have, individually or in the aggregate, a material adverse
effect on the Company’s financial position, results of operations or cash flows.
8. Employee Benefit Plans
The Company has a defined-contribution, incentive savings plan pursuant to Section 401(k) of the Internal Revenue Code.
The plan covers all full-time employees who have reached the age of 21 years. Employees may elect to defer compensation up to
a dollar limit (as allowable by the Internal Revenue Code), of which up to 4% of an employee's salary will be matched by the
Company. The amounts deferred by the employee and the matching amounts contributed by the Company both vest immediately.
The amount expensed under the plan totaled approximately $3.3 million, $2.4 million, and $1.8 million in the years ended
December 31, 2015, 2014 and 2013, respectively.
9. Equity-Based Compensation
In 2010, the Company established an equity incentive plan and, in 2011, the plan was amended and restated as the Wayfair
LLC Amended and Restated 2010 Common Unit Plan (the “2010 Plan”). The 2010 Plan was administered by the board of
directors of Wayfair LLC and provided for the issuance of common option units, restricted common units (all common units), and
deferred units, which currently represent Class A or Class B common stock of the Company.
In connection with the IPO, the board of directors of the Company adopted the 2014 Incentive Award Plan ("2014 Plan") to
grant cash and equity incentive awards to eligible service providers in order to attract, motivate and retain the talent for which the
Company competes. The 2014 Plan is administered by the board of directors of the Company with respect to awards to non-
employee directors and by the compensation committee with respect to other participants and provides for the issuance of stock
options, SARs, restricted stock, RSUs, performance shares, stock payments, cash payments, dividend awards and other incentives.
The 2014 Plan authorizes up to 8,603,066 shares of Class A common stock to be issued, of which RSUs for 3,098,159 shares had
64
Notes to Consolidated Financial Statements (Continued)
been issued as of December 31, 2015. Shares or RSUs forfeited, withheld for minimum statutory tax obligations, and unexercised
stock option lapses from the 2010 and 2014 Plans are available for grants of awards under the 2014 Plan.
All equity awards granted prior to the IPO were subject to two vesting triggers: a service period (typically five years) and a
performance condition (a liquidity event in the form of either a change of control or an initial public offering, each as defined in
the 2010 Plan). Employees were able to retain provisionally vested stock options and shares upon departure. The Company
determined that a liquidity event was not probable until the closing of its IPO on October 7, 2014, and as such, no expense was
recognized until that date. After the IPO awards for employees still providing service will continue to vest over the remaining
service period. Any future grants of awards are expected to vest over the service period.
In April 2014, the Company completed a tender offer to repurchase provisionally vested (defined as service period
completed) stock options and restricted common stock from certain employees at a price of $26.23 per share. A total of 202,757
shares of restricted common stock and 9,028 stock options were tendered for an aggregate of approximately $5.5 million in net
cash after adjusting for the exercise prices associated with the stock options. This tender offer was accounted for as a modification
resulting in a $5.5 million compensation charge when accepted by the employee in 2014.
A summary of the status and activity for awards of stock options for the year ended December 31, 2015 is as follows:
Outstanding at December 31, 2014
Exercised
Forfeited/cancelled
Outstanding at December 31, 2015
Exercisable at December 31, 2015
Expected to vest as of December 31, 2015
Stock
Options
Weighted-Average
Exercise Price
Weighted-Average
Remaining
Contractual Term
(Years)
449,046
$
(164,590) $
(4,865) $
279,591
277,937
1,022
$
$
$
2.98
2.96
3.19
2.98
2.98
3.42
6.5
5.5
5.5
5.5
Intrinsic value of stock options exercised and repurchased was $5.2 million and $4.3 million for the years ended
December 31, 2015 and 2014, respectively. Aggregate intrinsic value of stock options outstanding and currently exercisable is
$12.5 million and $12.4 million respectively. Unrecognized equity based compensation expense related to stock options expected
to vest is less than $0.1 million with a weighted average remaining vesting term of 0.2 years as of December 31, 2015.
A summary of the status and activity for awards of restricted common stock for the year ended December 31, 2015 is as
follows:
Unvested at December 31, 2014
Vested
Unvested at December 31, 2015
Expected to vest as of December 31, 2015
Restricted
Stock
Weighted-Average
Grant Date
Fair Value
161,476
$
(159,483) $
1,993
1,228
$
$
4.75
4.75
4.75
4.75
The intrinsic value of restricted common stock vested and repurchased was $4.3 million and $101.5 million for the years
ended December 31, 2015 and 2014, respectively. Aggregate intrinsic value of restricted common stock unvested is $0.1 million
as of December 31, 2015. Unrecognized equity based compensation expense related to restricted common stock expected to vest
is less than $0.1 million with a weighted average remaining vesting term of 0.1 years as of December 31, 2015.
65
Notes to Consolidated Financial Statements (Continued)
A summary of the status and activity for awards of RSUs for the year ended December 31, 2015 is as follows:
Unvested at December 31, 2014
Granted
Vested
Forfeited/cancelled
Unvested at December 31, 2015
Expected to vest as of December 31, 2015
Restricted
Stock Units
Weighted-Average
Grant Date
Fair Value
4,542,231
3,098,159
$
$
(1,514,576) $
(517,947) $
5,607,867
4,161,263
$
$
17.67
36.91
17.28
21.56
28.30
28.82
The intrinsic value of RSU vested was $51.6 million and $69.0 million for the years ended December 31, 2015 and 2014,
respectively. Aggregate intrinsic value of RSUs unvested is $267.0 million as of December 31, 2015. Unrecognized equity based
compensation expense related to RSUs expected to vest is $91.0 million with a weighted average remaining vesting term of
1.7 years as of December 31, 2015.
10. Stockholders' Equity (Deficit)
Series A and Series B Convertible Redeemable Preferred Units of Wayfair LLC
In connection with the corporate reorganization, all of the outstanding Series A and Series B preferred units of Wayfair LLC
were exchanged for shares of Series A and Series B convertible preferred stock of Wayfair Inc. Immediately prior to the
completion of the IPO, all of the outstanding shares of Series A and Series B convertible preferred stock converted into
27,546,934 shares of Class B common stock of Wayfair Inc.
The Company recognized changes in the redemption value of the convertible redeemable preferred stock immediately as
they occurred by adjusting the carrying amount of the redeemable security to what would be the redemption amount assuming the
security was redeemable at the balance sheet date. Accordingly, the Company recorded accretion of the Series A convertible
preferred stock of $14.4 million credit, $25.4 million, and $12.2 million for the years ended December 31, 2014, 2013, and 2012,
respectively. At the time of the conversion of Series A and Series B convertible preferred stock an adjustment of $14.8 million
was recorded as a reduction of accretion expense when the carrying value of the convertible redeemable preferred units was
reduced to its conversion value. The Company recorded accretion on the Series B redeemable convertible preferred stock of $2.5
million for the year ended December 31, 2014.
Upon the issuance of Series B preferred units by Wayfair LLC in March 2014, the Company distributed $15.0 million in
accrued dividends to Series A convertible preferred stock holders and upon the completion of the IPO in October 2014 distributed
the remaining accrued dividends of $24.5 million to Series A convertible preferred stock holders.
Preferred Stock
Upon the closing of the IPO in October 2014, the Company authorized 10,000,000 shares of undesignated preferred stock,
$0.001 par value per share, for future issuance. As of December 31, 2015, the Company had no shares of undesignated preferred
stock issued or outstanding.
Common Stock
On October 7, 2014, the Company completed its IPO of 12,650,000 shares of its Class A common stock at a public offering
price of $29.00 per share, of which 10,500,000 shares were sold by the Company and 2,150,000 shares were sold by its selling
stockholders, including 1,650,000 shares pursuant to the underwriters' option to purchase additional shares, resulting in net
proceeds to the Company of approximately $282.9 million, after deducting underwriting discounts and offering expenses. The
Company did not receive any proceeds from the sale of shares by the selling stockholders.
The Company 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 45,814,237 and 37,002,874 shares of Class A common stock and
38,496,562 and 46,179,192 shares of Class B common stock were outstanding as of December 31, 2015 and 2014, respectively.
The rights of the holders of Class A common stock and Class B common stock are identical, except with respect to voting and
conversion rights. Each share of Class A common stock is entitled to one vote per share. Each share of Class B common stock is
66
Notes to Consolidated Financial Statements (Continued)
entitled to ten votes per share and is convertible into one share of Class A common stock. Each share of Class B common stock
may be converted into one share of Class A common stock at the option of its holder and will be automatically converted into one
share of Class A common stock upon transfer thereof, subject to certain exceptions. In addition, upon the date on which the
outstanding shares of Class B common stock represent less than 10% of the aggregate number of shares of the then outstanding
Class A common stock and Class B common stock, or in the event of the affirmative vote or written consent of holders of at least
66 2/3% of the outstanding shares of Class B common stock, all outstanding shares of Class B common stock shall convert
automatically into Class A common stock. Subject to preferences that may apply to any shares of preferred stock outstanding at
the time, the holders of common stock are entitled to receive dividends out of funds legally available if the Board, in its
discretion, determines to issue dividends and then only at the times and in the amounts that the Board may determine. Since the
IPO through December 31, 2015, 32,124,686 shares of Class B common stock were converted to Class A common stock.
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 CODM reviews financial information presented on a consolidated basis for purposes of making operating decisions,
allocating resources and evaluating financial performance. As a result, the Company identified that it has one operating and
reportable segment.
The following table presents the activity related to the Company’s net revenue from Direct Retail sales derived through the
Company’s sites and Other sales derived through sites operated by third parties and fees from third-party advertising distribution
providers (in thousands):
Net revenue
Direct Retail
Other
Net revenue
Year Ended December 31,
2015
2014
2013
$
$
2,040,238
209,647
2,249,885
$
$
1,101,686
217,265
1,318,951
$
$
673,446
242,397
915,843
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 United States provided greater than 10% of total revenue.
The following table presents revenue and long-lived assets by geographic area (in thousands):
Geographic net revenue:
United States
International
Total
Geographic long-lived assets:
United States
International
Total
Year Ended December 31,
2015
2014
2013
$
$
2,135,492
114,393
2,249,885
$
$
1,236,215
82,736
1,318,951
$
$
857,001
58,842
915,843
Year Ended
December 31,
2015
2014
$
$
110,042
2,283
112,325
$
$
59,013
1,626
60,639
67
Notes to Consolidated Financial Statements (Continued)
12. Income Taxes
Income tax expense (benefit) for the years ended December 31, 2015, 2014 and 2013 attributable to income (loss) from
operation is presented below (in thousands):
Year ended December 31, 2015
Current
Deferred
Total
Federal
State
Foreign
Year ended December 31, 2014
Federal
State
Foreign
Year ended December 31, 2013
Federal
State
Foreign
$
$
$
$
$
— $
(202)
331
129
$
$
54
7
(95)
(34) $
Current
Deferred
Total
— $
1
138
139
$
32
4
—
36
$
$
Current
Deferred
Total
— $
— $
1
41
42
—
4
4
54
(195)
236
95
32
5
138
175
—
1
45
46
The actual income tax expense (benefit) differs from the expected income tax expense (benefit) computed by applying the
United States Federal corporate income tax rate of 35% to income before tax expense (benefit) as follows (in thousands):
Computed expected tax expense (benefit)
Decrease in income taxes resulting from:
Partnership losses not creating tax benefit
Effect of conversion to C-corporation
State income tax expense, net of federal benefit
Foreign tax rate differential
Equity based compensation expense
Change in valuation allowance
Impact of sale of Australian subsidiary
Other
Net income tax expense
Year Ended December 31,
2015
2014
2013
$
(27,072) $
(51,773) $
(5,417)
—
—
(1,424)
9,278
1,415
12,394
4,248
1,256
21,369
(28,034)
(2,517)
2,826
5,555
52,921
—
(172)
$
95
$
175
$
3,920
—
(269)
619
—
1,418
—
(225)
46
The components of results of income before income tax expense (benefit) determined by tax jurisdiction, are as follows (in
thousands):
United States
Foreign
Total
Year Ended December 31,
2015
2014
2013
$
$
(38,963) $
(128,505) $
(38,385)
(19,418)
(77,348) $
(147,923) $
(9,895)
(5,585)
(15,480)
68
Notes to Consolidated Financial Statements (Continued)
The tax effects of temporary differences that give rise to significant portions of deferred tax assets and liabilities for the
periods presented are as follows (in thousands):
Deferred tax asset:
Accounts receivable
Inventories
Operating loss carry-forwards
Equity based compensation expense
Intangibles
Accrued expenses
Charitable contributions
Deferred rent
Gross deferred tax asset
Less: Valuation allowance
Net deferred tax asset
Deferred tax liability:
Prepaid expenses
Capitalized technology
Property and equipment
Goodwill
Other
Total deferred tax liabilities
Net deferred tax assets (liabilities)
Current net deferred tax asset
Current net deferred tax liability
Non-current net deferred tax asset
Non-current net deferred tax liability
December 31
2015
2014
$
$
926
280
32,678
10,716
24,205
307
143
21,219
90,474
(70,614)
19,860
(561)
(6,444)
(12,646)
(96)
(126)
(19,873)
(13)
—
—
—
(13)
(13)
1,009
295
17,939
11,529
26,557
3,555
18
7,161
68,063
(58,980)
9,083
(783)
(5,019)
(3,281)
(36)
—
(9,119)
(36)
—
(55)
19
—
(36)
As of December 31, 2015, the Company had federal net operating loss carryforwards available to offset future federal
taxable income of $141.7 million. Approximately $82.2 million of the federal net operating loss carryforward will result in an
increase to additional paid-in capital if and when these carryforwards are used to reduce income taxes payable.
In addition, the Company had state net operating loss carryforwards available in the amount of $130.0 million which are
available to offset future state taxable income. Approximately $74.4 million of the state net operating loss carryforward will result
in an increase to additional paid-in capital if and when these carryforwards are used to reduce income taxes payable.
The federal net operating loss carryforwards begin to expire in the year ended December 31, 2034. The state net operating
loss carryforwards begin to expire in the year ended December 31, 2029.
The Company's ability to utilize these federal and state net operating loss carry-forwards may be limited in the future if the
Company experiences an ownership change pursuant to Internal Revenue Code Section 382. An ownership change occurs when
the ownership percentages of 5% or greater stockholders change by more than 50% over a three-year period.
The Company also had foreign net operating loss carry-forwards available to offset future foreign income of $73.3 million.
Approximately $0.8 million of the foreign net operating loss carryforward will result in an increase to additional paid-in-capital if
and when these carryforwards are used to reduce income taxes payable. The foreign net operating loss carryforwards have no
expiration.
In assessing the realizability of its net deferred tax assets, the Company considered whether it is more likely than not that
some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets depends upon the
69
Notes to Consolidated Financial Statements (Continued)
generation of future taxable income during the periods in which those temporary differences become deductible. As of
December 31, 2015, based upon an evaluation of the positive and negative evidence, the Company concluded that an increase of
$11.6 million of the deferred tax asset valuation allowance was appropriate, resulting in a valuation allowance of $70.6 million as
of December 31, 2015. The total expense from the net change in valuation allowance is $(12.4) million.
As of December 31, 2015, the Company has not provided for U.S. deferred income taxes on undistributed earnings of its
foreign subsidiaries of approximately $1.5 million since these earnings are to be indefinitely reinvested. Upon distribution of
those earnings in the form of dividends or otherwise, the Company will be subject to additional U.S. and state income taxes (less
foreign tax credits), as well as withholding taxes in its foreign locations. The amount of taxes attributable to the undistributed
earnings is not practicably determinable.
The Company establishes reserves for uncertain tax positions based on management's assessment of exposure associated
with tax deductions, permanent tax differences and tax credits. The tax reserves are analyzed periodically and adjustments are
made as events occur to warrant adjustment to the reserve. The Company's policy is to recognize interest and penalties related to
unrecognized tax benefits as a component of income tax expense.
The Company had gross unrecognized tax benefits of $0.2 million as of December 31, 2014 and 2013. In 2015 the
Company recognized the tax benefit of $0.2 million upon the expiration of the applicable statute of limitations. Accordingly, the
Company does not have any gross unrecognized tax benefit as of December 31, 2015
The Company recognizes interest accrued related to unrecognized tax benefits and penalties as income tax expense. Related
to the unrecognized tax benefits noted above, the Company did not accrue any penalties and interest during 2015, 2014, and 2013,
respectively, because it believes that such additional interest and penalties would be insignificant.
The Company's tax jurisdictions include the United States, the UK, Germany, Ireland, Australia, and the British Virgin
Islands. The statute of limitations with respect to the Company's United States federal income taxes has expired for years prior to
2012. The relevant state and foreign statutes vary. However, preceding years remain open to examination by United States federal
and state and foreign taxing authorities to the extent of future utilization of net operating losses and research and development tax
credits generated in each preceding year.
13. Credit Agreement
The Company has a credit agreement with Bank of America, which provides the Company with an unused line of credit and
a credit card program with a maximum commitment of $35.0 million, $45.0 million and $35.0 million for the periods of July 31,
2015 through September 30, 2015, October 1, 2015 through February 28, 2016 and March 1, 2016 through July 31, 2016,
respectively, with the committed amounts of $10.0 million to be used for a revolving line of credit and to support letters of credit
and the remainder to be used to support the Company’s credit card program. The credit agreement is renewable on an annual basis
and, if not renewed, will expire on July 31, 2016. The Company is required to maintain certain covenants, including tangible net
worth and unencumbered liquid assets, with which the Company was compliant at December 31, 2015 and 2014. The Company
did not borrow any amounts under the credit agreement during the years ended December 31, 2015, 2014 and 2013.
14. Net Loss per Share
Basic and diluted net (loss) income per share is presented using the two class method required for participating securities.
Class A and Class B common stock are the only outstanding equity in the Company since our IPO in October 2014. The rights of
the holders of Class A and Class B common stock are identical, except with respect to voting and conversion. Each share of
Class A common stock is entitled to one vote per share and each share of Class B common stock is entitled to ten votes per share.
The Class B common stock also has approval rights over certain corporate actions. Each share of Class B common stock may be
converted into one share of Class A common stock at any time at the option of the stockholder, and will be automatically
converted into one share of Class A common stock upon a sale or transfer, subject to certain limited 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 at least 66 2/3% of the outstanding shares of Class B common stock, all outstanding shares of Class B common stock will
automatically convert into Class A common stock.
Basic net income (loss) per share attributable to common stockholders is computed using the weighted-average number of
shares of common stock outstanding during the period. Diluted net income (loss) per share attributable to common stockholders is
computed using the weighted-average number of shares of common stock and, if dilutive, common stock equivalents outstanding
70
Notes to Consolidated Financial Statements (Continued)
during the period. The Company's common stock equivalents consist of shares issuable upon the release of restricted stock units,
and to a lesser extent, the incremental shares of common stock issuable upon the exercise of stock options and unvested restricted
stock. The dilutive effect of these common stock equivalents is reflected in diluted earnings per share by application of the
treasury stock method. The Company's basic and diluted net loss per share are the same because the Company has generated net
loss to common stockholders and common stock equivalents are excluded from diluted net loss per share because they have an
antidilutive impact.
The Company allocates undistributed earnings between the classes on a one-to-one basis when computing net income (loss)
per share. As a result, basic and diluted net income (loss) per Class A and Class B shares are equivalent.
Even prior to the conversion of its Series A and Series B convertible preferred stock to common stock, effective October 7,
2014, the Company applied the two class method for calculating and presenting earnings per share. Under the two class method,
net (loss) income attributable to common stockholders is determined by allocating undistributed earnings between common stock
and participating securities. Undistributed earnings are calculated as net income (loss) less distributed earnings and accretion of
Series A and Series B convertible preferred stock. As holders of Series A and Series B convertible preferred stock did not have a
contractual obligation to share in the losses of the Company, the net loss attributable to common stockholders for each period
prior to the IPO was not allocated between common stock and participating securities. Accordingly, Series A and Series B
convertible preferred stock are excluded from the calculation of basic and diluted net loss per share. The Company's basic and
diluted net loss per share are the same because the Company has generated net loss to common stockholders and common stock
equivalents are excluded from diluted net loss per share because they have an antidilutive impact.
The following table presents the calculation of basic and diluted net loss per share (in thousands, except per share data):
Numerator:
Net loss
Accretion of preferred units to redemption value
Net loss attributable to common stockholders per share—basic and diluted
Denominator:
Weighted average shares used for basic and diluted net loss per share
computation
Net loss per common share attributable to common stockholders:
Basic and Diluted
Year Ended December 31,
2015
2014
2013
(77,443) $
(148,098) $
—
(2,071)
(77,443) $
(150,169) $
(15,526)
(25,388)
(40,914)
83,726
50,642
41,332
(0.92) $
(2.97) $
(0.99)
$
$
$
The following have been excluded from the computation of basic and diluted net loss per share attributable to common
stockholders as their effect would have been antidilutive:
Series A convertible redeemable preferred units
Stock options
Restricted stock
Restricted stock units
Year Ended December 31,
2015
2014
2013
—
279,591
1,993
5,607,867
5,889,451
—
21,551,801
449,046
161,476
4,542,231
5,152,753
664,232
3,490,968
5,255,113
30,962,114
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None
71
Item 9A. Controls and Procedures
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 defined in Rule 13a-15(e) of the Exchange Act, as of December 31, 2015. Based on
this evaluation, our chief executive officer and chief financial officer concluded that, as of December 31, 2015, our disclosure
controls and procedures were effective to provide reasonable assurance that the information required to be disclosed by us in the
reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods
specified in the SEC's rules and forms and to provide reasonable assurance that such information is accumulated and
communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely
decisions regarding required disclosure.
Management's Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as
defined in Rule 13a-15(f) of the Exchange Act. Our management conducted an evaluation of the effectiveness of our internal
control over financial reporting based on the framework in Internal Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (2013 framework). Based on this evaluation, management concluded that
our internal control over financial report was effective as of December 31, 2015. Management reviewed the results of its
assessment with our Audit Committee. The effectiveness of our internal control over financial reporting as of December 31, 2015
has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in its report which is
included immediately following Item 9A. Controls and Procedures, in this Annual Report on Form 10-K.
Changes in Internal Control Over Financial Reporting
No change in our internal control over financial reporting, as defined in Rule 13a-15(f) of the Exchange Act, occurred
during the quarter ended December 31, 2015 that materially affected, or is reasonably likely to materially affect, our internal
controls over financial reporting.
Limitations on Disclosure Controls and Procedures and Internal Control over Financial Reporting
Our disclosure controls and procedures and internal control over financial reporting are designed to provide reasonable
assurance of achieving their objectives as specified above. Management does not expect, however, that our disclosure controls
and procedures or our internal control over financial reporting will prevent or detect all error and fraud. Any control system, no
matter how well designed and operated, is based upon certain assumptions and can provide only reasonable, not absolute,
assurance that its objectives will be met. Further, no evaluation of controls can provide absolute assurance that misstatements due
to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected.
72
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of Wayfair Inc.
We have audited Wayfair Inc.’s internal control over financial reporting as of December 31, 2015, based on criteria established
in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013
framework) (the COSO criteria). Wayfair Inc.’s management is responsible for maintaining effective internal control over financial
reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying
Management's Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the company’s
internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control
over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control
over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness
of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances.
We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets
of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being
made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a
material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Wayfair Inc. maintained, in all material respects, effective internal control over financial reporting as of December
31, 2015, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),
the consolidated balance sheets of Wayfair Inc. (the Company) as of December 31, 2015 and 2014, and the related consolidated
statements of operations, comprehensive loss, changes in stockholders’ equity, and cash flows for each of the three years in the period
ended December 31, 2015 of Wayfair Inc. and our report dated February 29, 2016 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Boston, Massachusetts
February 29, 2016
73
Item 9B. Other Information
None.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
We have adopted a written code of business conduct and ethics that applies to our directors, officers and employees,
including our principal executive officer, principal financial officer, principal accounting officer or controller, or persons
performing similar functions. The code of business conduct and ethics is available on our website at investor.wayfair.com.
The other information required by this item is incorporated by reference from our proxy statement for our 2016 annual
meeting of stockholders, which we will file with the Securities and Exchange Commission within 120 days of December 31,
2015.
Item 11. Executive Compensation
The information required by this item is incorporated by reference from our proxy statement for our 2016 annual meeting of
stockholders, which we will file with the Securities and Exchange Commission within 120 days of December 31, 2015.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this item is incorporated by reference from our proxy statement for our 2016 annual meeting of
stockholders, which we will file with the Securities and Exchange Commission within 120 days of December 31, 2015.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this item is incorporated by reference from our proxy statement for our 2016 annual meeting of
stockholders, which we will file with the Securities and Exchange Commission within 120 days of December 31, 2015.
Item 14. Principal Accounting Fees and Services
The information required by this item is incorporated by reference from our proxy statement for our 2016 annual meeting of
stockholders, which we will file with the Securities and Exchange Commission within 120 days of December 31, 2015.
PART IV
ITEM 15. Exhibits and Financial Statement Schedules
(a) Financial Statements
The following financial statements and supplementary data are included in Part II of Item 8 filed of this Annual Report on
Form 10-K:
•
•
•
•
•
•
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Loss
Consolidated Statements of Stockholders' Equity (Deficit)
Consolidated Statements of Cash Flows
74
•
Notes to Consolidated Financial Statements
(b) Financial Statement Schedules
Schedules not listed above have been omitted because the information required to be set forth therein is not applicable or is
shown in the financial statements or notes herein
(c) Exhibits
See the Exhibit Index immediately following the signature page of this Annual Report on Form 10-K, which is incorporated
herein by reference.
75
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused
this annual report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
WAYFAIR INC.
By:
/s/ NIRAJ SHAH
Niraj Shah
Chief Executive Officer and Co-Founder
Date: February 29, 2016
Pursuant to the requirements of the Securities Exchange Act of 1934, this annual report has been signed by the following
persons on behalf of the registrant in the capacities indicated.
Signature
Title
Date
/s/ NIRAJ SHAH
Niraj Shah
Chief Executive Officer, Co-Founder and Director
(Principal Executive Officer)
February 29, 2016
/s/ MICHAEL FLEISHER
Chief Financial Officer (Principal Financial Officer)
February 29, 2016
Michael Fleisher
/s/ NICHOLAS MALONE
Nicholas Malone
Chief Administrative Officer (Principal Accounting
Officer)
February 29, 2016
/s/ STEVEN CONINE
Co-Founder and Director
February 29, 2016
Steven Conine
/s/ NEERAJ AGRAWAL
Director
Neeraj Agrawal
/s/ JULIE BRADLEY
Director
Julie Bradley
/s/ ROBERT GAMGORT
Director
Robert Gamgort
February 29, 2016
February 29, 2016
February 29, 2016
/s/ MICHAEL KUMIN
Director
February 29, 2016
Michael Kumin
/s/ IAN LANE
Ian Lane
Director
February 29, 2016
/s/ ROMERO RODRIGUES
Director
Romero Rodrigues
February 29, 2016
76
Exhibit
Number
Exhibit Description
2.1 Contribution and Exchange Agreement dated as of
August 15, 2014 between the Company and the other and
the other parties thereto
3.1 Restated Certificate of Incorporation of the Company
3.2 Amended and Restated Bylaws of the Company
4.1 Specimen stock certificate evidencing the shares of
Class A common stock of the Company
10.1 Second Amended and Restated 2010 Incentive Plan
10.2 Form of Deferred Unit Agreement under the Second
Amended and Restated 2010 Incentive Plan
10.3
2014 Incentive Award Plan
10.4 Form of Option Agreement under the 2014 Incentive
Award Plan
10.5 Form of Restricted Stock Unit Agreement under the 2014
Incentive Award Plan
10.6 Form of Restricted Stock Award Agreement under the
2014 Incentive Award Plan
10.7
Investors' Rights Agreement, dated August 15, 2014, by
and among the Company and the other parties thereto
EXHIBIT INDEX
Incorporated by Reference
Filed
Herewith
Form
S-1
File No.
333-198171
Filing Date
8/15/2014
Exhibit
Number
2.1
8-K
8-K
S-1
S-1
S-1
S-1
S-1
S-1
S-1
001-36666
001-36666
333-198171
10/8/2014
10/8/2014
9/19/2014
333-198171
333-198171
8/15/2014
8/15/2014
333-198171
333-198171
9/19/2014
9/19/2014
333-198171
9/19/2014
333-198171
9/19/2014
10-K
001-36666
3/19/2015
3.1
3.2
4.1
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.8 Form of Indemnification Agreement for Directors and
S-1
333-198171
8/15/2014
Officers
10.9 Office Lease dated April 18, 2013 between Copley Place
X
Associates, LLC and the Company, as amended by the
First Amendment to Lease dated February 11, 2014, as
further amended by the Second Amendment to Lease
dated October 24, 2014, as further amended by the Third
Amendment to Lease dated October 8, 2015, and as
further amended by the Fourth Amendment to Lease
dated February 3, 2016
77
Exhibit
Number
Exhibit Description
10.10 Wayfair International Assignment Agreement dated April
1, 2015 between the Company and John Mulliken
Incorporated by Reference
Filed
Herewith
Form
10-Q
File No.
001-36666
Filing Date
5/15/2015
Exhibit
Number
10.10
10.11 Form of Amended and Restated Letter Agreement dated
S-1
333-198171
8/15/2014
10.11
S-1
333-198171
8/15/2014
10.12
May 6, 2014 between the Company and each of Niraj
Shah and Steven Conine
10.12 Letter Agreement dated October 2, 2013 between the
Company and Michael Fleisher, as amended May 5,
2014
10.13 Loan Agreement dated October 29, 2012 between Bank
of America, N.A. and the Company, as amended by
amendments dated October 29, 2013, June 6, 2014 and
July 31, 2015
21.1 Subsidiaries of the Company
23.1 Consent of Ernst & Young LLP
31.1 Certification of Chief Executive Officer pursuant to
Rule 13a-14(a) of the Securities Exchange Act of 1934,
as amended, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to
Rule 13a-14(a) of the Securities Exchange Act of 1934,
as amended, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer pursuant to 18
U.S.C. §1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to 18
U.S.C. §1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
101.INS XBRL Instance Document
101.SCH XBRL Taxonomy Schema Linkbase Document
X
X
X
X
X
X
X
X
X
78
Exhibit
Number
101.CAL XBRL Taxonomy Calculation Linkbase Document
Exhibit Description
101.DEF XBRL Taxonomy Definition Linkbase Document
101.LAB XBRL Taxonomy Labels Linkbase Document
101.PRE XBRL Taxonomy Presentation Linkbase Document
Incorporated by Reference
Filed
Herewith Form
File No.
Filing Date
Exhibit
Number
X
X
X
X
79
Stock Price Performance Graph
The graph set forth below compares cumulative total return on the Class A common stock with the cumulative total
return of the S&P Retail Select Industry Index and the NYSE Composite, resulting from an initial investment
of $100 in each and, assuming the reinvestment of any dividends, based on closing prices. Measurement points are
the last trading day of each fiscal quarter after our initial public offering on October 2, 2014 to the last trading day of
our 2015 fiscal year, December 31, 2015.
Note: Stock price performance shown in the Stock Price Performance Graph for the Class A common stock is historical
and not necessarily indicative of future price performance.