Edgar Filing: Wayfair Inc.

10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q


x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2015


o	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		36-4791999
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

4 Copley Place, 7th Floor, Boston, MA		02116
(Address of principal executive offices)		(Zip Code)

(617) 532-6100

(Registrant’s telephone number, including area code)

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 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 x No o

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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

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 o		Accelerated filer o

Non-accelerated filer x (Do not check if a smaller reporting company)		Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No x



Class		Outstanding at October 31, 2015
Class A Common Stock, $0.001 par value per share		44,505,054
Class B Common Stock, $0.001 par value per share		39,621,692

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WAYFAIR INC.

INDEX TO QUARTERLY REPORT ON FORM 10-Q

For the Quarterly Period Ended September 30, 2015



		Page

PART 1. FINANCIAL INFORMATION

Item 1.	Unaudited Consolidated and Condensed Financial Statements

	Consolidated and Condensed Balance Sheets as of September 30, 2015 and December 31, 2014	3

	Consolidated and Condensed Statements of Operations for the Three and Nine Months Ended September 30, 2015 and 2014	4

	Consolidated and Condensed Statements of Comprehensive Loss for the Three and Nine Months Ended September 30, 2015 and 2014	5

	Consolidated and Condensed Statements of Cash Flows for the Three and Nine Months Ended September 30, 2015 and 2014	6

	Notes to the Unaudited Consolidated and Condensed Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	30

Item 4.	Controls and Procedures	31

PART 2. OTHER INFORMATION

Item 1.	Legal Proceedings	32

Item 1A.	Risk Factors	32

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	50

Item 6.	Exhibits	51

Signatures		52

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements. All statements other than statements of historical fact contained in this Quarterly Report on Form 10-Q, 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 Quarterly Report on Form 10-Q 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 Quarterly Report on Form 10-Q and are subject to a number of risks, uncertainties and assumptions described in the Part II, Item 1A, Risk Factors, and elsewhere in this Quarterly Report on Form 10-Q. 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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WAYFAIR INC.

CONSOLIDATED AND CONDENSED BALANCE SHEETS

(In thousands, except share and per share data)

(Unaudited)



	September 30, 2015			December 31, 2014
Assets
Current assets
Cash and cash equivalents	$	278,690		$	355,859
Short-term investments	46,654			60,000
Accounts receivable, net of allowance of $3,240 and $2,545 at September 30, 2015 and December 31, 2014, respectively	9,719			5,949
Inventories	22,552			19,798
Prepaid expenses and other current assets	75,486			45,262
Total current assets	433,101			486,868
Property and equipment, net	88,642			60,639
Goodwill and intangible assets, net	3,899			6,478
Long-term investments	74,460			—
Other noncurrent assets	1,242			1,538
Total assets	$	601,344		$	555,523
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable	$	192,552		$	147,873
Accrued expenses	52,083			42,335
Deferred revenue	45,027			26,784
Other current liabilities	24,070			15,600
Total current liabilities	313,732			232,592
Other liabilities	32,916			17,392
Total liabilities	346,648			249,984
Commitments and contingencies (Note 6)
Convertible preferred stock, $0.001 par value per share: 10,000,000 shares authorized and none issued at September 30, 2015 and December 31, 2014	—			—
Stockholders’ equity:
Class A common stock, par value $0.001 per share, 500,000,000 shares authorized, 44,145,083 and 37,002,874 shares issued and outstanding at September 30, 2015 and December 31, 2014, respectively	44			37
Class B common stock, par value $0.001 per share, 164,000,000 shares authorized, 39,894,391 and 46,179,192 shares issued and outstanding at September 30, 2015 and December 31, 2014, respectively	40			46
Additional paid-in capital	374,794			363,944
Accumulated deficit	(120,070		)	(58,122		)
Accumulated other comprehensive loss	(112		)	(366		)
Total stockholders’ equity	254,696			305,539
Total liabilities and stockholders’ equity	$	601,344		$	555,523

The accompanying notes are an integral part of these Unaudited Consolidated and Condensed Financial Statements.

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WAYFAIR INC.

CONSOLIDATED AND CONDENSED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)



	Three months ended September 30,						Nine months ended September 30,
	2015			2014			2015			2014
Net revenue	$	593,972		$	336,188		$	1,510,095		$	910,332
Cost of goods sold	452,586			257,161			1,145,073			697,644
Gross profit	141,386			79,027			365,022			212,688

Operating expenses:
Customer service and merchant fees	21,109			14,239			55,417			37,321
Advertising	70,711			49,763			190,249			136,478
Merchandising, marketing and sales	27,083			13,437			74,131			41,868
Operations, technology, general and administrative	40,912			25,203			109,887			71,558
Amortization of acquired intangible assets	208			249			694			748
Total operating expenses	160,023			102,891			430,378			287,973
Loss from operations	(18,637		)	(23,864		)	(65,356		)	(75,285		)
Interest income, net	325			89			897			222
Other income (expense), net	2,746			(309		)	2,542			(405		)
Loss before income taxes	(15,566		)	(24,084		)	(61,917		)	(75,468		)
(Benefit from) provision for income taxes	(88		)	59			31			76
Net loss	(15,478		)	(24,143		)	(61,948		)	(75,544		)
Accretion of convertible redeemable preferred units	—			(4,748		)	—			(16,503		)
Net loss attributable to common stockholders	$	(15,478	)	$	(28,891	)	$	(61,948	)	$	(92,047	)
Net loss attributable to common stockholders per share, basic and diluted	$	(0.18	)	$	(0.71	)	$	(0.74	)	$	(2.26	)
Weighted average common shares outstanding, basic and diluted	83,886			40,513			83,569			40,722

The accompanying notes are an integral part of these Unaudited Consolidated and Condensed Financial Statements.

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WAYFAIR INC.

CONSOLIDATED AND CONDENSED STATEMENTS OF COMPREHENSIVE LOSS

(In thousands)

(Unaudited)



	Three months ended September 30,						Nine months ended September 30,
	2015			2014			2015			2014
Net loss	$	(15,478	)	$	(24,143	)	$	(61,948	)	$	(75,544	)
Other comprehensive loss:
Foreign currency translation adjustments	371			—			323			—
Net unrealized loss on available-for-sale investments	(67		)	(67		)	(69		)	(59		)
Comprehensive loss	$	(15,174	)	$	(24,210	)	$	(61,694	)	$	(75,603	)

The accompanying notes are an integral part of these Unaudited Consolidated and Condensed Financial Statements.

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WAYFAIR INC.

CONSOLIDATED AND CONDENSED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)



	Nine months ended September 30,
	2015			2014
Cash flows from operating activities
Net loss	$	(61,948	)	$	(75,544	)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation and amortization	23,351			14,438
Equity based compensation	21,741			5,528
Gain on sale of a business	(2,997		)	—
Other non-cash adjustments	1,395			888
Changes in operating assets and liabilities:
Accounts receivable	(3,832		)	2,376
Inventories	(2,778		)	(6,155		)
Prepaid expenses and other current assets	(28,419		)	(12,721		)
Accounts payable and accrued expenses	60,340			(1,108		)
Deferred revenue and other liabilities	37,927			24,578
Other assets	(25		)	(3,117		)
Net cash provided by (used in) operating activities	44,755			(50,837		)

Cash flows from investing activities
Purchase of short-term and long-term investments	(141,309		)	(110,000		)
Sale and maturities of short-term investments	78,715			59,964
Purchase of property and equipment	(36,695		)	(31,168		)
Site and software development costs	(13,107		)	(10,643		)
Cash received from the sale of a business (net of cash sold)	2,860			—
Other investing activities, net	302			(3,015		)
Net cash used in investing activities	(109,234		)	(94,862		)

Cash flows from financing activities
Taxes paid related to net share settlement of equity awards	(12,899		)	—
Net proceeds from exercise of stock options	374			—
Net proceeds from issuance of Series B convertible redeemable preferred units	—			154,774
Repurchase of common units	—			(23,500		)
Dividends paid to Series A convertible redeemable preferred holders	—			(15,000		)
Repurchase of employee equity	—			(5,528		)
Net cash (used in) provided by financing activities	(12,525		)	110,746
Effect of exchange rate changes on cash and cash equivalents	(165		)	(29		)
Net (decrease) in cash and cash equivalents	(77,169		)	(34,982		)
Cash and cash equivalents
Beginning of period	355,859			65,289
End of period	$	278,690		$	30,307

Supplemental disclosure of non-cash investing activities
Purchase of property and equipment included in accounts payable and accrued expenses and in other liabilities	$	2,636		$	2,079
Construction costs capitalized under finance lease obligations	$	8,687		$	—
Supplemental disclosure of non-cash financing activities
Accretion of preferred unit dividends	$	—		$	16,503

The accompanying notes are an integral part of these Unaudited Consolidated and Condensed Financial Statements.

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Notes to Consolidated and Condensed Financial Statements

(Unaudited)


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 and condensed financial statements and other disclosures contained in this Quarterly Report on Form 10-Q are those of the Company. The Company was incorporated as a Delaware corporation on August 8, 2014. Prior to the effectiveness of the Company’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. For additional information regarding the change in reporting entity, see Note 1, Basis of Presentation, in the Notes to Consolidated Financial Statements included in Part II, Item 8, Financial Statements and Supplementary Data, of the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.

The consolidated and condensed balance sheet data as of December 31, 2014 was derived from audited financial statements. The accompanying consolidated and condensed balance sheet as of September 30, 2015, the consolidated statements of operations, consolidated statements of comprehensive loss, and consolidated statements of cash flows for the periods ended September 30, 2015 and 2014 are unaudited. The unaudited interim financial statements have been prepared on the same basis as the audited consolidated financial statements and in the opinion of management, reflect all adjustments, consisting of only normal recurring adjustments, necessary for the fair statement of the Company’s financial position as of September 30, 2015 and statements of operations, comprehensive loss, and cash flows for the periods ended September 30, 2015 and 2014. The financial data and the other information disclosed in these notes to the consolidated and condensed financial statements related to these periods are unaudited.

The consolidated and condensed statements of operations, comprehensive loss, and cash flows for the periods ended September 30, 2015 are not necessarily indicative of the results of operations and cash flows that may be expected for the year ending December 31, 2015, or for any other period.


2.	Summary of Significant Accounting Policies

The Company has identified the significant accounting policies that are critical to understanding its business and results of operations. The Company believes that there have been no significant changes during the three and nine months ended September 30, 2015 to the items disclosed in Note 2, Summary of Significant Accounting Policies, in the Notes to the Consolidated Financial Statements included in Part II, Item 8, Financial Statements and Supplementary Data, of the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 other than those noted below.

Marketable Securities

The Company classifies its marketable securities as “available-for-sale” or “trading” securities.

Available-for-sale securities are classified as short term investments and long-term investments on the consolidated and condensed 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 and condensed 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 September 30, 2015, the Company’s available-for-sale securities

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consisted of investment securities. The maturities of the Company’s long-term marketable securities generally range from one to three years.


3.	Marketable Securities and Fair Value Measurements

Marketable Securities

As of September 30, 2015, all of the Company’s marketable securities were classified as available-for-sale and their estimated fair values were $91.1 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 September 30, 2015 (in thousands):



	September 30, 2015
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Short-term:
Investment securities	$	16,646	$	9	$	(1	)	$	16,654
Long-term:
Investment securities	74,535		55		(130		)	74,460
Total	$	91,181	$	64	$	(131	)	$	91,114

Fair Value Measurements

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

The following tables set forth the fair value of the Company’s financial assets measured at fair value on a recurring basis as of September 30, 2015 and December 31, 2014 based on the three-tier value hierarchy (in thousands):



	September 30, 2015
	Level 1		Level 2		Level 3		Total
Cash equivalents:
Money market funds	$	182,227	$	—	$	—	$	182,227
Short-term investments:
Certificates of deposit	30,000		—		—		30,000
Investment securities	—		16,654		—		16,654
Long-term:
Investment securities	—		74,460		—		74,460
Total	$	212,227	$	91,114	$	—	$	303,341

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	December 31, 2014
	Level 1		Level 2		Level 3		Total
Cash equivalents:
Money market funds	$	302,595	$	—	$	—	$	302,595
Short-term investments:
Certificates of deposit	60,000		—		—		60,000
Restricted cash:
Money market funds	302		—		—		302
Total	$	362,897	$	—	$	—	$	362,897


4.	Intangible Assets and Goodwill

The following table summarizes intangible assets as of September 30, 2015 and December 31, 2014 (in thousands):



	Weighted-Average	September 30, 2015
	Amortization Period (Years)	Gross Carrying Amount		Accumulated Amortization			Net Book Value
Trademarks	5	$	1,900	$	(823	)	$	1,077
Customer relationships	5	1,300		(563		)	737
Non-compete agreements	3 - 5	100		(72		)	28
Other intangibles	3	373		(242		)	131
Domain names	5	2,687		(2,685		)	2
Total		$	6,360	$	(4,385	)	$	1,975



	Weighted-Average	December 31, 2014
	Amortization Period (Years)	Gross Carrying Amount		Accumulated Amortization			Net Book Value
Trademarks	5	$	2,001	$	(604	)	$	1,397
Customer relationships	5	1,300		(368		)	932
Non-compete agreements	3 - 5	108		(52		)	56
Technology	5	718		(467		)	251
Other intangibles	3	373		(158		)	215
Domain names	5	2,687		(2,684		)	3
Total		$	7,187	$	(4,333	)	$	2,854

Amortization expense related to intangible assets was $0.2 million for the three months ended September 30, 2015 and 2014, and $0.7 million for the nine months ended September 30, 2015 and 2014.

The following table presents the changes in goodwill during the nine months ended September 30, 2015 (in thousands):



	Net Book Value
Goodwill as of December 31, 2014	$	3,624
Sale during the period	(1,520		)
Foreign currency exchange rate effect	(180		)
Goodwill as of September 30, 2015	$	1,924

In July 2015 the Company sold its Australian-based business in order to strategically focus its resources on its North America and Europe markets. At the time of the sale, the net carrying amounts of the goodwill and intangible assets of the

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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 and condensed statements of operations.


5.	Property and Equipment, net

The following table summarizes property and equipment, net as of September 30, 2015 and December 31, 2014 (in thousands):



	September 30, 2015			December 31, 2014
Furniture and computer equipment	$	60,881		$	48,399
Site and software development costs	47,653			36,294
Leasehold improvements	27,351			14,290
Construction in progress	9,556			4,800
	145,441			103,783
Less accumulated depreciation and amortization	(56,799		)	(43,144		)
Property and equipment, net	$	88,642		$	60,639

Property and equipment depreciation and amortization expense was $9.0 million and $5.3 million for the three months ended September 30, 2015 and 2014, respectively, and $22.7 million and $13.6 million for the nine months ended September 30, 2015 and 2014, respectively.


6.	Commitments and Contingencies

Leases

The Company leases office space under non-cancelable leases. These leases expire at various dates through 2024 and include discounted rental periods and fixed escalation clauses, which are amortized straight-line over the terms of the lease. Rent expense under operating leases was $3.8 million and $2.6 million in the three months ended September 30, 2015 and 2014, respectively, and $12.3 million and $8.8 million in the nine months ended September 30, 2015 and 2014, respectively. The Company has issued letters of credit for approximately $4.7 million as security for these lease agreements as of September 30, 2015 and December 31, 2014.

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 and Utah. 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 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, or collectively, the Plaintiffs, under sections 10(b) and 20(a) of the Securities and 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. The

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Plaintiff’s complaint seeks class certification, damages in an unspecified amount, and attorney’s fees and costs. The company 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.


7.	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 and as described in Note 1, Basis of Presentation, the Company 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. In addition, all of the outstanding common units and incentive units of Wayfair LLC were exchanged for shares of common stock or incentive units for common stock, and then were converted into shares of Class B common stock or incentive units for Class B common stock of the Company. Accordingly, common option units, restricted common units and deferred units were converted to stock options, restricted common stock and restricted stock units (“RSU”), respectively, and may be referred to as such in these notes to the consolidated and condensed financial statements. In connection with the IPO, the board of directors of the Company took over administration of the 2010 Plan and 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 1,840,624 shares had been issued as of September 30, 2015. Shares or RSUs forfeited, withheld for minimum statutory tax obligations, and unexercised stock option lapses from the 2010 Plan 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. The Company recorded an expense of $5.5 million in the nine months ended September 30, 2014.

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The following table presents activity relating to stock options under the 2010 Plan during the nine months ended September 30, 2015:



	Shares		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (Years)
Outstanding at December 31, 2014	449,046		$	2.98	6.5
Options exercised	(143,887	)	$	2.96
Options forfeited/canceled	(2,542	)	$	3.24
Outstanding at September 30, 2015	302,617		$	2.98	5.7
Exercisable at September 30, 2015	298,336		$	2.98	5.7
Expected to vest as of September 30, 2015	2,676		$	3.42	5.7

Intrinsic value of stock options exercised was $4.4 million for the nine months ended September 30, 2015. Aggregate intrinsic value of stock options outstanding and currently exercisable is $9.7 million and $9.6 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 September 30, 2015.

The following table presents activity relating to restricted common stock under the 2010 Plan during the nine months ended September 30, 2015:



	Shares		Weighted- Average Grant Date Fair Value
Outstanding at December 31, 2014	161,476		$	4.75
Restricted stock vested	(155,475	)	$	4.75
Unvested at September 30, 2015	6,001		$	4.75
Expected to vest as of September 30, 2015	3,753		$	4.75

The intrinsic value of restricted common stock vested was $4.1 million for the nine months ended September 30, 2015. Aggregate intrinsic value of restricted common stock unvested is $0.2 million as of June 30, 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 0.2 years as of September 30, 2015.

The following table presents activity relating to RSUs under the 2010 and 2014 Plans during the nine months ended September 30, 2015:



	Shares		Weighted- Average Grant Date Fair Value
Outstanding at December 31, 2014	4,542,231		$	17.67
RSUs granted	1,840,624		$	33.67
RSUs vested	(1,114,485	)	$	17.00
RSUs forfeited/canceled	(353,032	)	$	22.15
Outstanding at September 30, 2015	4,915,338		$	23.62
Expected to vest as of September 30, 2015	3,629,795		$	24.10

The intrinsic value of RSUs vested was $35.4 million for the nine months ended September 30, 2015. Aggregate intrinsic value of RSUs outstanding is $172.3 million as of September 30, 2015. Unrecognized equity based compensation expense related to RSUs expected to vest is $60.7 million with a weighted average remaining vesting term of 1.7 years as of September 30, 2015.

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8.	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):



	Three months ended September 30,				Nine months ended September 30,
	2015		2014		2015		2014
Net revenue
Direct Retail	$	544,971	$	285,502	$	1,354,665	$	755,036
Other	49,001		50,686		155,430		155,296
Net revenue	$	593,972	$	336,188	$	1,510,095	$	910,332

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):



	Three months ended September 30,				Nine months ended September 30,
	2015		2014		2015		2014
Geographic net revenue:
United States	$	566,227	$	314,754	$	1,431,466	$	851,585
International	27,745		21,434		78,629		58,747
Total	$	593,972	$	336,188	$	1,510,095	$	910,332



	September 30, 2015		December 31, 2014
Geographic long-lived assets:
United States	$	86,426	$	59,013
International	2,216		1,626
Total	$	88,642	$	60,639


9.	Income Taxes

For the three and nine months ended September 30, 2015, income tax (benefit) expense of less than $(0.1) million and less than $0.1 million was recorded, respectively. The income tax benefit recorded in the three months ended September 30, 2015 is primarily related to the recognition of $0.2 million of previously unrecognized tax benefit upon expiration of applicable statute of limitations and partially offset by various foreign income tax assessments and to a lesser extent the amortization of goodwill for tax purposes for which there is no corresponding book deduction. The income tax expense recorded in the nine months ended September 30, 2015 is primarily related to various foreign income tax assessments and to a lesser extent the amortization of goodwill for tax purposes for which there is no corresponding book deduction, partially offset by $0.2 million of previously unrecognized tax benefit.

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During the three and nine months ended September 30, 2014, the Company was operating as a limited liability company and was taxed as a partnership under the Internal Revenue Code, and accordingly, no provision for federal or state and local income taxes was made on income since the members were individually liable for federal and state and local income taxes on their share of the Company’s earnings. The Company recorded less than $0.1 million in the three and nine months ended September 30, 2014 associated with various foreign income tax assessments. Deferred income taxes reflect the impact of temporary differences between the amounts of assets and liabilities for financial reporting purposes and such amounts as measured by tax laws. The Company has deferred tax assets related to its net operating loss carryforwards accumulated since its corporate reorganization in the fourth quarter of 2014 and related to net operating loss carryforwards of certain of its foreign subsidiaries. A valuation allowance against net deferred tax assets is required if, based upon the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. The Company reassesses the valuation allowance on a quarterly basis and has provided a valuation allowance for the full amount of its net deferred tax assets.

The Company had no unrecognized tax benefits as of September 30, 2015 and was $0.2 million as of December 31, 2014. The Company’s policy is to recognize interest and penalties related to unrecognized tax benefits as a component of income tax expense.


10.	Stockholders’ Equity

Corporate Reorganization

On October 1, 2014, in anticipation of the IPO, the Company completed a corporate reorganization as described further in Note 1, Basis of Presentation. Pursuant to the corporate reorganization, 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 was incorporated as a Delaware corporation on August 8, 2014. In connection with this corporate reorganization, $306.2 million of accumulated deficit from Wayfair LLC was transferred to additional paid in capital of the Company.

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 the Company. 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 the Company.

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 and 2013 and 2012, respectively. At the time of the conversion of Series A and Series B redeemable 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 September 30, 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

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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 44,145,083 and 37,002,874 shares of Class A common stock and 39,894,391 and 46,179,192 shares of Class B common stock were outstanding as of September 30, 2015 and December 31, 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 entitled to ten votes per share and is convertible into one share of Class A common stock. 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 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 September 30, 2015, 30,708,834 shares of Class B common stock were converted to Class A common stock.


11.	Credit Agreement

The Company has a credit agreement with Bank of America, which was renewed on July 31, 2015. The credit agreement currently provides the Company with a 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 September 30, 2015 and December 31, 2014. The Company did not borrow any amounts under the credit agreement during the three and nine months ended September 30, 2015 and the year ended December 31, 2014.


12.	Net Loss per Share

Basic and diluted net loss per share is presented using the two class method required for participating securities. Class A and Class B common stock have been the only outstanding equity in the Company since the 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 as described in Note 10, Stockholder’s Equity.

Basic net 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 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 during the period. The Company’s common stock equivalents consist of shares issuable upon the release of RSUs, and to a lesser extent, the incremental shares of common stock issuable upon the exercise of stock options and unvested restricted stock. The dilutive effect of these common stock equivalents is reflected in diluted earnings 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 loss per share. As a result, basic and diluted net loss per share of Class A and Class B common stock are equivalent.

Prior to the conversion of the Series A and Series B convertible preferred stock to Class B 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 attributable to common stockholders is determined by allocating undistributed earnings between common stock and participating securities. Undistributed earnings are calculated as net 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

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did not have a contractual obligation to share in the losses of the Company, the net loss attributable to common stockholders for each periods 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):



	Three months ended September 30,						Nine months ended September 30,
	2015			2014			2015			2014
Net loss	$	(15,478	)	$	(24,143	)	$	(61,948	)	$	(75,544	)
Accretion of convertible redeemable preferred units	—			(4,748		)	—			(16,503		)
Net loss attributable to common stockholders	$	(15,478	)	$	(28,891	)	$	(61,948	)	$	(92,047	)
Weighted average common shares used for basic and diluted net loss per share computation	83,886			40,513			83,569			40,722

Net loss unit attributable to common stockholders per share:
Basic and Diluted	$	(0.18	)	$	(0.71	)	$	(0.74	)	$	(2.26	)

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:



	Three and nine months ended September 30,
	2015	2014
Series A convertible redeemable preferred units	—	21,551,801
Series B convertible redeemable preferred units	—	5,995,133
Stock options	302,617	643,003
Restricted stock	6,001	3,271,516
Restricted stock units	4,915,338	6,929,484
Total	5,223,956	38,390,937


13.	Recent Accounting Pronouncements

In August 2014, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU 2014-15”), Presentation of Financial Statements, Going Concern. 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 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 (“ASU 2014-09”), Revenue from Contracts with Customers. 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.

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ITEM 2. 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 and condensed financial statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q. 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 II, Item 1A, Risk Factors, of this Quarterly Report on Form 10-Q, our actual results may differ materially from those anticipated in these forward-looking statements.

Unless the context requires otherwise, references in this Quarterly Report on Form 10-Q to “Wayfair,” “the Company,” “we,” “us” or “our” refer to Wayfair Inc. and its consolidated subsidiaries.

Overview

Wayfair is one of the world’s largest online destinations for the home. 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.

The typical Wayfair customer is a 35 to 65 year old woman with an annual household income of $60,000 to $175,000, 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, home furnishings, décor and 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 22 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, home furnishings, décor and 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.

In the three and nine months ended September 30, 2015, we generated net revenue of $594.0 million and $1,510.1 million, up 76.7% and 65.9%, respectively over the same periods in 2014. Our net revenue in the three and nine months ended September 30, 2015 included $545.0 million and $1,354.7 million, respectively, from Direct Retail, which we define as sales generated primarily through the sites of our five brands. Our net revenue in the three and nine months ended September 30, 2015 included $49.0 million and $155.4 million, respectively, 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 three months ended September 30, 2015, we generated a net loss of $15.5 million and Adjusted EBITDA of $(1.4) million, increases of $8.7 million and $16.9 million, respectively, over the same periods in 2014. In the nine months ended September 30, 2015, we generated a net loss of $61.9 million and Adjusted EBITDA of $(18.8) million, an increase of $13.6 million and an increase of $36.6 million, respectively, over the same periods in 2014. Our net loss and Adjusted EBITDA results were primarily due to a decrease in advertising as a percentage of net revenue in the three and nine months ended September 30, 2015 compared to the same periods in 2014, which were driven by increased leverage from our growing base of repeat customers, and television advertising expense not increasing at the same rate as revenue growth. For additional information about Adjusted EBITDA, our use of this measure, the 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, refer to Key Financial and Operating Metrics below.

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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):



	Three months ended September 30,
	2015			2014			% Change
Consolidated Financial Metrics
Net Revenue	$	593,972		$	336,188		76.7	%
Adjusted EBITDA	$	(1,445	)	$	(18,317	)
Free cash flow	$	35,332		$	(22,398	)
Direct Retail Financial and Operating Metrics
Direct Retail Net Revenue	$	544,971		$	285,502		90.9	%
Active Customers	4,591			2,858			60.6	%
LTM Net Revenue per Active Customer	$	371		$	342		8.5	%
Orders Delivered	2,323			1,314			76.8	%
Average Order Value	$	235		$	217		8.3	%



	Nine months ended September 30,
	2015			2014			% Change
Consolidated Financial Metrics
Net Revenue	$	1,510,095		$	910,332		65.9	%
Adjusted EBITDA	$	(18,757	)	$	(55,319	)
Free cash flow	$	(5,047	)	$	(92,648	)
Direct Retail Financial and Operating Metrics
Direct Retail Net Revenue	$	1,354,665		$	755,036		79.4	%
Active Customers	4,591			2,858			60.6	%
LTM Net Revenue per Active Customer	$	371		$	342		8.5	%
Orders Delivered	6,079			3,536			71.9	%
Average Order Value	$	223		$	214		4.2	%

Non-GAAP Financial Measures

Adjusted EBITDA

To provide investors with additional information regarding our financial results, we have disclosed here and elsewhere in this Quarterly Report on Form 10-Q Adjusted EBITDA, a non-GAAP financial measure that we calculate as 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 Quarterly Report on Form 10-Q 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

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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.

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 the compensation charge associated with a tender offer we completed in April 2014 and the equity based compensation and related taxes recorded in the 2015 periods as described in Part 1, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Liquidity and Capital Resources.


•	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) income and our other GAAP results.

The following table presents the reconciliation of net loss to Adjusted EBITDA for each of the periods indicated (in thousands):



	Three months ended September 30,						Nine months ended September 30,
	2015			2014			2015			2014
Reconciliation of Adjusted EBITDA
Net loss	$	(15,478	)	$	(24,143	)	$	(61,948	)	$	(75,544	)
Depreciation and amortization	9,207			5,547			23,351			14,438
Equity based compensation and related taxes	7,985			—			23,248			5,528
Interest (income), net	(325		)	(89		)	(897		)	(222		)
Other (income) expense, net	(2,746		)	309			(2,542		)	405
(Benefit from) provision for income taxes	(88		)	59			31			76
Adjusted EBITDA	(1,445		)	(18,317		)	(18,757		)	(55,319		)

Free Cash Flow

To provide investors with additional information regarding our financial results, we have also disclosed here and elsewhere in this Quarterly Report on Form 10-Q free cash flow, a non-GAAP financial measure that we calculate as net cash (used in) 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 (used in) provided by operating activities, the most directly comparable GAAP financial measure.

We have included free cash flow in this Quarterly Report on Form 10-Q because it is an important indicator of our business performance as it measures the amount of cash we generate. Accordingly, we believe that free cash flow provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management.

Free cash flow has limitations as an analytical tool, 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 (used in) operating activities, capital expenditures and our other GAAP results.

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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):



	Three months ended September 30,						Nine months ended September 30,
	2015			2014			2015			2014
Net cash provided by (used in) operating activities	$	51,504		$	(11,066	)	$	44,755		$	(50,837	)
Purchase of property, equipment, and leasehold improvements	(11,491		)	(6,837		)	(36,695		)	(31,168		)
Site and software development costs	(4,681		)	(4,495		)	(13,107		)	(10,643		)
Free cash flow	$	35,332		$	(22,398	)	$	(5,047	)	$	(92,648	)

Key Operating Metrics (Direct Retail)

Active Customers

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 II, Item 1A, Risk Factors, of this Quarterly Report on Form 10-Q.

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.

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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 in North America and a majority of our international 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. In 2013, we signed a lease to increase our office space, and subsequently have further increased our office space to accommodate the anticipated growth of our headcount in our corporate headquarters, and in 2014 and 2015 we also signed leases to expand our warehouse and customer service capacity. 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.

Components of Our Results of Operations

Certain prior period operating expense captions in the consolidated statements of operations have been expanded to provide greater detail and to conform to current period presentation.

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, rewards 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.

We maintain a membership rewards program that allows enrolled customers to earn points which can be redeemed on future purchases. We defer the portion of our revenue associated with rewards which are expected to be redeemed prior to its expiration.

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.

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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 quarterly 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. Increase 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.

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 a foreign currency gains (losses), and in the 2015 period, a gain related to the sale of our Australian operations.

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Results of Consolidated Operations (in thousands)

Comparison of the three months ended September 30, 2015 and 2014

Net revenue



	Three months ended September 30,
	2015		2014		% Change
Net revenue
Direct Retail	$	544,971	$	285,502	90.9	%
Other	49,001		50,686		-3.3	%
Net revenue	$	593,972	$	336,188	76.7	%

In the three months ended September 30, 2015, net revenue increased by $257.8 million, or 76.7% compared to the same period in 2014, primarily as a result of an increase in Direct Retail net revenue. In the three months ended September 30, 2015, Direct Retail net revenue increased by $259.5 million, or 90.9% compared to the same period in 2014, primarily due to sales to a larger customer base, as the number of active customers increased 60.6% in the three months ended September 30, 2015 compared to the same period in 2014. Additionally, LTM net revenue per active customer increased 8.5% in the three months ended September 30, 2015 compared with the same period in 2014. The $1.7 million or -3.3% decrease in other revenue in the three months ended September 30, 2015 as compared to the same period in 2014 was primarily due to decreased sales through our retail partners.

Cost of goods sold



	Three months ended September 30,
	2015			2014			% Change
Cost of goods sold
Cost of goods sold	$	452,586		$	257,161		76.0	%
As a percentage of net revenue	76.2		%	76.5		%

In the three months ended September 30, 2015, cost of goods sold increased by $195.4 million, or 76.0%, compared to the same period in 2014. Of the increase in cost of goods sold, $160.6 million was due to the increase in products sold to our larger customer base. In addition, shipping and fulfillment costs increased $34.8 million as a result of the increase in products sold during the period. Cost of goods sold as a percentage of net revenue decreased in the three months ended September 30, 2015 compared to the same period in 2014 as a result of changes in the mix of the products sold and shipping costs.

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Operating expenses



	Three months ended September 30,
	2015			2014			% Change
Customer service and merchant fees (1)	$	21,109		$	14,239		48.2	%
Advertising	70,711			49,763			42.1	%
Merchandising, marketing and sales (1)	27,083			13,437			101.6	%
Operations, technology, general and administrative (1)	40,912			25,203			62.3	%
Amortization of acquired intangible assets	208			249			-16.5	%
	$	160,023		$	102,891		55.5	%
As a percentage of net revenue
Customer service and merchant fees	3.6		%	4.2		%
Advertising	11.9		%	14.8		%
Merchandising, marketing and sales	4.6		%	4.0		%
Operations, technology, general and administrative	6.9		%	7.5		%
Amortization of acquired intangible assets	—		%	0.1		%
	27.0		%	30.6		%

(1) Excluding equity-based compensation and related taxes as follows:



Customer service and merchant fees	3.5	%	4.2	%
Merchandising, marketing and sales	4.0	%	4.0	%
Operations, technology, general and administrative	6.2	%	7.5	%

In the three months ended September 30, 2015, excluding the impact of equity based compensation and related taxes of $0.2 million and zero recorded in the three months ended September 30, 2015 and 2014, respectively, customer service costs and merchant processing fees increased by $6.7 million, from $14.2 million in the three months ended September 30, 2014 to $20.9 million primarily due to the increase in sales during the three months ended September 30, 2015. Our advertising expenses increased by $20.9 million from $49.8 million in the three months ended September 30, 2014 to $70.7 million in the same period 2015, primarily as a result of an increase in online and television advertising. Advertising decreased as a percentage of net revenue in the three months ended September 30, 2015 compared to the same period in 2014 primarily due to increased leverage from our growing base of repeat customers, and television advertising expense not increasing at the same rate as revenue growth. Excluding the impact of equity based compensation and related taxes of $3.4 million and zero recorded in the three months ended September 30, 2015 and 2014, respectively, merchandising, marketing and sales expenses increased by $10.3 million, from $13.4 million in the three months ended September 30, 2014 to $23.7 million in the same period of 2015. The increase in merchandising, marketing and sales expenses was due to an increase in headcount primarily to grow and retain our customer base. In the three months ended September 30, 2015, excluding the impact of equity based compensation and related taxes of $4.2 million and zero recorded in the three months ended September 30, 2015 and 2014, respectively, operations, technology, general and administrative expense increased by $11.5 million from $25.2 million in the three months ended September 30, 2014 to $36.7 million in the same period of 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 the three months ended September 30, 2015, amortization of purchased intangible assets decreased by less than $0.1 million compared to the same period of 2014.

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Comparison of the nine months ended September 30, 2015 and 2014

Net revenue



	Nine months ended September 30,
	2015		2014		% Change
Net revenue
Direct Retail	$	1,354,665	$	755,036	79.4	%
Other	155,430		155,296		0.1	%
Net revenue	$	1,510,095	$	910,332	65.9	%

In the nine months ended September 30, 2015, net revenue increased by $599.8 million, or 65.9% compared to the same period in 2014, primarily as a result of an increase in Direct Retail net revenue. In the nine months ended September 30, 2015, Direct Retail net revenue increased by $599.6 million, or 79.4% compared to the same period in 2014, primarily due to sales to a larger customer base, as the number of active customers increased 60.6% in the nine months ended September 30, 2015 compared to the same period in 2014. Additionally, LTM net revenue per active customer increased 8.5% in the nine months ended September 30, 2015 compared with the same period in 2014. The $0.1 million or 0.1% increase in other revenue in the nine months ended September 30, 2015 as compared to the same period in 2014 was primarily due to increased sales through our retail partners.

Cost of goods sold



	Nine months ended September 30,
	2015			2014			% Change
Cost of goods sold
Cost of goods sold	$	1,145,073		$	697,644		64.1	%
As a percentage of net revenue	75.8		%	76.6		%

In the nine months ended September 30, 2015, cost of goods sold increased by $447.4 million, or 64.1%, compared to the same period in 2014. Of the increase in cost of goods sold, $366.4 million was due to the increase in products sold to our larger customer base. In addition, shipping and fulfillment costs increased $81.0 million as a result of the increase in products sold during the period. Cost of goods sold as a percentage of net revenue decreased in the nine months ended September 30, 2015 compared to the same period in 2014 as a result of changes in the mix of the products sold and shipping costs.

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Operating expenses



	Nine months ended September 30,
	2015			2014			% Change
Customer service and merchant fees (1)	$	55,417		$	37,321		48.5	%
Advertising	190,249			136,478			39.4	%
Merchandising, marketing and sales (1)	74,131			41,868			77.1	%
Operations, technology, general and administrative (1)	109,887			71,558			53.6	%
Amortization of acquired intangible assets	694			748			-7.2	%
	$	430,378		$	287,973		49.5	%
As a percentage of net revenue
Customer service and merchant fees	3.7		%	4.1		%
Advertising	12.6		%	15.0		%
Merchandising, marketing and sales	4.9		%	4.6		%
Operations, technology, general and administrative	7.3		%	7.9		%
Amortization of acquired intangible assets	—		%	0.1		%
	28.5		%	31.7		%

(1) Excluding equity-based compensation and related taxes as follows:



Customer service and merchant fees	3.6	%	4.1	%
Merchandising, marketing and sales	4.2	%	4.2	%
Operations, technology, general and administrative	6.5	%	7.7	%

In the nine months ended September 30, 2015, excluding the impact of equity based compensation and related taxes of $0.7 million and $0.3 million recorded in the nine months ended September 30, 2015 and 2014, respectively, customer service costs and merchant processing fees increased by $17.6 million, from $37.1 million in the nine months ended September 30, 2014 to $54.7 million primarily due to the increase in sales during the nine months ended September 30, 2015. Our advertising expenses increased by $53.8 million from $136.5 million in the nine months ended September 30, 2014 to $190.3 million in the same period 2015, primarily as a result of an increase in online and television advertising. Advertising decreased as a percentage of net revenue in the nine months ended September 30, 2015 compared to the same period in 2014 primarily due to increased leverage from our growing base of repeat customers, and television advertising expense not increasing at the same rate as revenue growth. Excluding the impact of equity based compensation and related taxes of $10.5 million and $4.1 million recorded in the nine months ended September 30, 2015 and 2014, respectively, merchandising, marketing and sales expenses increased by $25.8 million, from $37.8 million in the nine months ended September 30, 2014 to $63.6 million in the same period of 2015. The increase in merchandising, marketing and sales expenses was due to an increase in headcount primarily to grow and retain our customer base. In the nine months ended September 30, 2015, excluding the impact of equity based compensation and related taxes of $11.8 million and $1.2 million recorded in the nine months ended September 30, 2015 and 2014, respectively, operations, technology, general and administrative expense increased by $27.8 million from $70.3 million in the nine months ended September 30, 2014 to $98.1 million in the same period of 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 the nine months ended September 30, 2015, amortization of purchased intangible assets decreased by less than $0.1 million compared to the same period of 2014.

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Liquidity and Capital Resources

Sources of Liquidity



	September 30,		December 31,
	2015		2014
	(in thousands)
Cash and cash equivalents	$	278,690	$	355,859
Short-term investments	$	46,654	$	60,000
Long-term investments	$	74,460	$	—
Accounts receivable, net	$	9,719	$	5,949
Working capital	$	119,369	$	254,276

Historical Cash Flows



	Nine months ended September 30,
	2015			2014
	(in thousands)
Net loss	$	(61,948	)	$	(75,544	)
Net cash provided by (used in) operating activities	$	44,755		$	(50,837	)
Net cash used in investing activities	$	(109,234	)	$	(94,862	)
Net cash (used in) provided by financing activities	$	(12,525	)	$	110,746

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 September 30, 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 and proceeds from the IPO 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. Our future capital requirements and the adequacy of available funds will depend on many factors, including those described in Part II, Item 1A, Risk Factors, of this Quarterly Report on Form 10-Q. 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, and certain other non-cash expenses, as well as the effect of changes in working capital and other activities.

Cash provided by operating activities in the nine months ended September 30, 2015 was $44.8 million and was driven primarily by cash provided by operating assets and liabilities of $63.2 million, certain non-cash items including depreciation and amortization expense of $23.4 million, equity based compensation of $21.7 million, and other non-cash items of $1.4

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million, partially offset by net loss of $61.9 million and gain on sale of a 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 used in operating activities in the nine months ended September 30, 2014 was $50.8 million and was driven by a net loss of $75.5 million, partially offset by cash provided by certain non-cash items including depreciation and amortization expense of $14.4 million, equity based compensation of $5.5 million, operating assets and liabilities of $3.9 million, and other non-cash items of $0.9 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 maturities of marketable securities, leasehold improvements for our facilities and acquisitions of businesses.

Cash used in investing activities in the nine months ended September 30, 2015 was $109.2 million and was primarily driven by purchases of short-term and long-term investments of $141.3 million, purchases of property and equipment of $36.7 million, and site and software development costs of $13.1 million, partially offset by net increase in the maturity of short-term investments of $78.7 million, cash received for sale of a business (net of cash sold) of $2.9 million, and other net investing activities of $0.3 million.

Cash used in investing activities in the nine months ended September 30, 2014 was $94.9 million and was primarily driven by purchases of short-term investments of $110.0 million, purchases of property and equipment of $31.2 million, site and software development costs of $10.6 million, and other net investing activities of $3.0 million, partially offset by net increase in the maturity of short-term investments of $60.0 million.

Financing Activities

Cash used in financing activities in the nine months ended September 30, 2015 was $12.5 million and was primarily due to $12.9 million taxes paid related to net share settlements of equity awards, partially offset by $0.4 million net proceeds from exercise of stock options.

Cash provided by financing activities in the nine months ended September 30, 2014 was $110.7 million and was primarily due to net proceeds from issuance of Series B convertible redeemable preferred units of $154.8 million, partially offset by the repurchase of common units of $23.5 million, the dividend distribution to our Series A preferred unit holders of $15.0 million and the repurchase of our securities of $5.5 million.

Credit Agreement

For information regarding our credit agreement, see Note 11, Credit Agreement, in the Notes to the Unaudited Consolidated and Condensed Financial Statements included in Part I, Item 1, Unaudited Consolidated and Condensed Financial Statements, of this Quarterly Report on Form 10-Q.

Off-Balance Sheet Arrangements

We do not engage in any off-balance sheet activities. We do not have any off-balance sheet interest in variable interest entities, which include special purpose entities and other structured finance entities.

Contractual Obligations

For information regarding our contractual obligations, see Note 6, Commitments and Contingencies, in the Notes to the Unaudited Consolidated and Condensed Financial Statements included in Part I, Item 1, Unaudited Consolidated and Condensed Financial Statements, of this Quarterly Report on Form 10-Q. There have been no material changes to our critical accounting policies and estimates as compared to the contractual obligations described in Contractual Obligations included in Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.

Critical Accounting Policies

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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.

There have been no material changes to our critical accounting policies and estimates as compared to the critical accounting policies and estimates described in Note 2, Summary of Significant Accounting Policies, in the Notes to the Consolidated Financial Statements included in Part II, Item 8, Financial Statements and Supplementary Data, of the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 except those described in Note 1, Basis of Presentation, in the Notes to the Unaudited Consolidated and Condensed Financial Statements included in Part I, Item 1, Unaudited Consolidated and Condensed Financial Statements, of this Quarterly Report on Form 10-Q.

Recent Accounting Pronouncements

For information about recent accounting pronouncements, see Note 13, Recent Accounting Pronouncements, included in Part I, Item 1, Unaudited Consolidated and Condensed Financial Statements, of this Quarterly Report on Form 10-Q.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES 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 are held primarily in cash deposits, certificates of deposit, money market funds, commercial paper, corporate bonds, and treasury securities. 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, Australian Dollar 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.

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ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2015. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act of 1934, as amended, or the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the rules and forms of the Securities and Exchange Commission, or SEC. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of September 30, 2015, our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) or 15d-15(d) of the Exchange Act during the period covered by this Quarterly Report on Form 10-Q that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II

OTHER INFORMATION

Item 1. Legal Proceedings.

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 have any pending litigation to which we are a party or to which our property is subject that we believe to be material. 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 information regarding our legal proceedings, see Note 6, Commitments and Contingencies, in the Notes to the Consolidated and Condensed Financial Statements included in Part I, Item 1, Unaudited Consolidated and Condensed Financial Statements, of this Quarterly Report on Form 10-Q.

Item 1A. Risk Factors.

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 Quarterly Report on Form 10-Q 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:


•	build our brands and launch new brands;

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•	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 3,251 full-time equivalents as of September 30, 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, “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

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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.

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 brand 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.

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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 in the United States and 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:


•	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;


•