Notes to Consolidated and Condensed Financial Statements
(Unaudited)
1. Basis of Presentation
Wayfair Inc. (the “Company”) is one of the world's largest online destinations for the home. Through its e-commerce business model, the Company offers visually inspired browsing, compelling merchandising, easy product discovery and attractive prices for over
eight million
products from approximately
10,000
suppliers.
The consolidated and condensed financial statements and other disclosures contained in this Quarterly Report on Form 10-Q are those of the Company. The consolidated and condensed balance sheet data as of
December 31, 2016
was derived from audited financial statements. The accompanying consolidated and condensed balance sheet as of
September 30, 2017
, the consolidated and condensed statements of operations, consolidated and condensed statements of comprehensive loss, and consolidated and condensed statements of cash flows for the periods ended
September 30, 2017
and
2016
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, 2017
and statements of operations, comprehensive loss, and cash flows for the periods ended
September 30, 2017
and
2016
. 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 period ended
September 30, 2017
are not necessarily indicative of the results of operations and cash flows that may be expected for the year ending
December 31, 2017
, 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
nine
months ended
September 30, 2017
to the items disclosed in Note 2,
Summary of Significant Accounting Policies
, included in Part II, Item 8,
Financial Statements and Supplementary Data
, of the Company’s Annual Report on Form 10-K for the year ended
December 31, 2016
.
3. Marketable Securities and Fair Value Measurements
Marketable Securities
As of
September 30, 2017
and
December 31, 2016
, all of the Company’s marketable securities were classified as available-for-sale and their estimated fair values were
$86.5 million
and
$99.7 million
, respectively. The Company periodically reviews its available-for-sale securities for other-than-temporary impairment. The Company considers factors such as the duration, severity and the reason for the decline in value, the potential recovery period, and its intent to sell. As of
September 30, 2017
, the Company’s available-for-sale securities primarily consisted of corporate bonds and other government obligations that are priced at fair value. During the
three and nine
months ended
September 30, 2017
and
2016
, the Company did not recognize any other-than-temporary impairment losses. The maturities of the Company’s long-term marketable securities generally range from
one
to
three
years. The cost basis of a marketable security sold is determined by the Company using the specific identification method. During the
three and nine
months ended
September 30, 2017
and
2016
, we did not have any realized gains or losses.
The following tables present details of the Company’s marketable securities as of
September 30, 2017
and
December 31, 2016
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Estimated
Fair Value
|
Short-term:
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities
|
|
$
|
56,719
|
|
|
$
|
12
|
|
|
$
|
(32
|
)
|
|
$
|
56,699
|
|
Long-term:
|
|
|
|
|
|
|
|
|
|
Investment securities
|
|
29,837
|
|
|
22
|
|
|
(50
|
)
|
|
29,809
|
|
Total
|
|
$
|
86,556
|
|
|
$
|
34
|
|
|
$
|
(82
|
)
|
|
$
|
86,508
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Estimated
Fair Value
|
Short-term:
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities
|
|
$
|
63,135
|
|
|
$
|
7
|
|
|
$
|
(39
|
)
|
|
$
|
63,103
|
|
Commercial paper
|
|
5,641
|
|
|
1
|
|
|
(2
|
)
|
|
5,640
|
|
Long-term:
|
|
|
|
|
|
|
|
|
Investment securities
|
|
30,985
|
|
|
16
|
|
|
(34
|
)
|
|
30,967
|
|
Total
|
|
$
|
99,761
|
|
|
$
|
24
|
|
|
$
|
(75
|
)
|
|
$
|
99,710
|
|
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
|
This hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value. The Company measures its cash equivalents and short-term and long-term investments at fair value. The Company classifies its cash equivalents and restricted cash within Level 1 because the Company values these investments using quoted market prices. The fair value of the Company's Level 1 financial assets is based on quoted market prices of the identical underlying security. The Company classifies short-term and long-term investments within Level 2 because unadjusted quoted prices for identical or similar assets in markets are not active. The Company does not have any assets or liabilities classified as Level 3 financial assets.
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, 2017
and
December 31, 2016
based on the three-tier value hierarchy (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds and other funds
|
|
$
|
512,929
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
512,929
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
|
Investment securities
|
|
—
|
|
|
56,699
|
|
|
—
|
|
|
56,699
|
|
Restricted cash:
|
|
|
|
|
|
|
|
|
Certificate of deposit
|
|
5,000
|
|
|
—
|
|
|
—
|
|
|
5,000
|
|
Long-term:
|
|
|
|
|
|
|
|
|
|
Investment securities
|
|
—
|
|
|
29,809
|
|
|
—
|
|
|
29,809
|
|
Total
|
|
$
|
517,929
|
|
|
$
|
86,508
|
|
|
$
|
—
|
|
|
$
|
604,437
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
200,867
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
200,867
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities
|
|
—
|
|
|
63,103
|
|
|
—
|
|
|
63,103
|
|
Commercial paper
|
|
—
|
|
|
5,640
|
|
|
—
|
|
|
5,640
|
|
Restricted cash:
|
|
|
|
|
|
|
|
|
Certificate of deposit
|
|
5,000
|
|
|
—
|
|
|
—
|
|
|
5,000
|
|
Long-term:
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities
|
|
—
|
|
|
30,967
|
|
|
—
|
|
|
30,967
|
|
Total
|
|
$
|
205,867
|
|
|
$
|
99,710
|
|
|
$
|
—
|
|
|
$
|
305,577
|
|
4. Intangible Assets and Goodwill
The following table summarizes intangible assets as of
September 30, 2017
and
December 31, 2016
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted - Average Amortization
Period (Years)
|
|
September 30, 2017
|
|
|
|
Gross Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net Book Value
|
Trademarks
|
|
5
|
|
$
|
1,900
|
|
|
$
|
(1,583
|
)
|
|
$
|
317
|
|
Technology
|
|
3
|
|
1,453
|
|
|
(525
|
)
|
|
928
|
|
Customer relationships
|
|
5
|
|
1,300
|
|
|
(1,083
|
)
|
|
217
|
|
Total
|
|
|
|
$
|
4,653
|
|
|
$
|
(3,191
|
)
|
|
$
|
1,462
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted - Average Amortization
Period (Years)
|
|
December 31, 2016
|
|
|
|
Gross Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net Book Value
|
Trademarks
|
|
5
|
|
$
|
1,900
|
|
|
$
|
(1,298
|
)
|
|
$
|
602
|
|
Technology
|
|
3
|
|
1,453
|
|
|
(161
|
)
|
|
1,292
|
|
Customer relationship
|
|
5
|
|
1,300
|
|
|
(888
|
)
|
|
412
|
|
Total
|
|
|
|
$
|
4,653
|
|
|
$
|
(2,347
|
)
|
|
$
|
2,306
|
|
Amortization expense related to intangible assets was
$0.3 million
and $
0.2 million
for the
three months ended September 30, 2017
and
2016
, respectively, and
$0.8 million
and
$0.6 million
for the
nine
months ended
September 30, 2017
and
2016
, respectively.
Goodwill as of
September 30, 2017
was
$1.9 million
, unchanged from
December 31, 2016
.
5. Property and Equipment, net
The following table summarizes property and equipment, net as of
September 30, 2017
and
December 31, 2016
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2017
|
|
December 31,
2016
|
Furniture and computer equipment
|
|
$
|
198,903
|
|
|
$
|
133,297
|
|
Site and software development costs
|
|
108,456
|
|
|
77,429
|
|
Leasehold improvements
|
|
80,512
|
|
|
62,090
|
|
Construction in progress
|
|
10,416
|
|
|
47,013
|
|
Buildings (leased - Note 6)
|
|
83,681
|
|
|
29,856
|
|
|
|
481,968
|
|
|
349,685
|
|
Less accumulated depreciation and amortization
|
|
(163,095
|
)
|
|
(110,331
|
)
|
Property and equipment, net
|
|
$
|
318,873
|
|
|
$
|
239,354
|
|
Property and equipment depreciation and amortization expense was $
22.6 million
and
$15.2 million
for the
three months ended September 30, 2017
and
2016
, respectively, and
$61.7 million
and
$37.9 million
for the
nine
months ended
September 30, 2017
and
2016
, respectively.
6. Commitments and Contingencies
Leases
The Company leases office and warehouse spaces under non-cancelable leases. These leases expire at various dates through 2029 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
$10.6 million
and
$9.1 million
in the
three months ended September 30, 2017
and
2016
, respectively, and
$33.3 million
and
$23.9 million
in the
nine
months ended
September 30, 2017
and
2016
, respectively. The Company has issued letters of credit for approximately
$13.8 million
and
$10.6 million
as security for these lease agreements as of
September 30, 2017
and
December 31, 2016
, respectively.
As of
December 31, 2016
, the future minimum rental commitments under non-cancelable leases with initial or remaining terms in excess of one year totaled
$568.7 million
. Subsequent to
December 31, 2016
, the Company entered into additional non-cancelable leases in the United States ("U.S.") with initial or remaining terms in excess of one year with total future minimum lease commitments of
$231.0 million
. Future lease payments have not been reduced by minimum sublease rentals of
$9.4 million
due to the Company in the future under non-cancelable subleases through
2020
.
The Company establishes assets and liabilities for the estimated construction costs incurred under lease arrangements where the Company is considered the owner for accounting purposes only, or build-to-suit leases, to the extent the Company is involved in the construction of structural improvements or takes construction risk prior to commencement of a lease. Upon occupancy of facilities under build-to-suit leases, the Company assesses whether these arrangements qualify for sales recognition under the sale-leaseback accounting guidance. If the Company continues to be the deemed owner, the facilities are accounted for as financing leases.
The construction of
one
warehouse lease arrangement was completed during the three months ended June 30, 2016, and because the Company concluded it had a letter of credit of
$1.2 million
, the Company did not meet the sale-leaseback criteria for derecognition of the building asset and liability. The construction of a second warehouse lease arrangement was completed in the three months ended March 31, 2017, and because the Company concluded it had a letter of credit of
$0.8 million
, the Company did not meet the sale-leaseback criteria for derecognition of the building asset and liability. The construction of a third warehouse lease arrangement was completed in the three months ended June 30, 2017, and because the Company concluded it had a letter of credit of
$1.0 million
, the Company did not meet the sale-leaseback criteria for derecognition of the building asset and liability. Accordingly, these leases were accounted for as financing obligations and
$28.9 million
,
$12.6 million
, and
$41.2 million
was recorded in "Lease financing obligation" in the Company’s unaudited consolidated and condensed balance sheets as of June 30, 2016, March 31, 2017, and June 30, 2017, respectively. The monthly rent payments made to the lessor under the lease agreement are recorded in the Company’s financial statements as land lease expense and principal and interest on the financing obligation. Interest expense on the lease financing obligation reflects the portion of the Company's monthly lease payments that is allocated to interest expense. For the
three and nine
months ended
September 30, 2017
, land lease expense was
$0.2 million
and
$0.7 million
, respectively, and interest expense on lease financing obligations was
$2.0 million
and
$4.9 million
, respectively. As of
September 30, 2017
, future minimum commitments related to the financing obligations were
$6.7 million
and
$39.0 million
for principal and interest, respectively, through
September 30,
2022.
Collection of Sales or Other Similar Taxes
In the U.S., Supreme Court decisions restrict states' rights to require remote sellers to collect state and local sales taxes (although some states are seeking to have the Supreme Court revisit these decisions). States have, and may again in the future, issued assessments and presented legal claims alleging that the Company is required to collect and remit sales or other similar taxes. The Company does not believe that it is obligated to collect and remit such taxes, and intends to vigorously defend its position. At this time, the Company believes any losses that may arise from these assessments and claims would be immaterial; however, no assurance can be given as to the outcomes and the Company could be subject to significant additional tax liabilities.
Legal Matters
In September 2016, a putative class action complaint was filed against the Company in the Superior Court of the province of Quebec (Naomi Zouzout v. Wayfair LLC, Case No. PQ 500-06-000809-166) by an individual on behalf of herself and on behalf of all other similarly situated individuals alleging violations of various Canadian consumer protection statutes. Among other remedies, this lawsuit seeks compensatory and punitive money damages, costs, and various fees. In June 2017, the Company entered into a settlement of the litigation, subject to judicial approval. The parties presented the settlement for review and approval by the court in September 2017. This settlement is not expected to have a material adverse effect on the Company's results of operation or financial condition.
From time to time the Company is involved in claims that arise during the ordinary course of business. Although the results of litigation and claims cannot be predicted with certainty, the Company does not currently believe that the outcome of any of these other legal matters will have a material adverse effect on the Company's results of operation or financial condition. Regardless of the outcome, litigation can be costly and time consuming, as it can divert management's attention from important business matters and initiatives, negatively impacting the Company's overall operations. In addition, the Company may also find itself at greater risk to outside party claims as it increases its operations in jurisdictions where the laws with respect to the potential liability of online retailers are uncertain, unfavorable, or unclear.
7. Equity-Based Compensation
The board of directors of the Company (the "Board") adopted the 2014 Incentive Award Plan ("2014 Plan") to grant cash and equity incentive awards to eligible participants in order to attract, motivate and retain talent. The 2014 Plan is administered by the Board with respect to awards to non-employee directors and by the compensation committee of the Board with respect to other participants and provides for the issuance of stock options, SARs, restricted stock, restricted stock units ("RSUs"), performance shares, stock payments, cash payments, dividend awards and other incentives. Prior to the adoption of the 2014 Plan, Wayfair LLC issued certain equity awards pursuant to the Wayfair LLC Amended and Restated Common Unit Plan (the “2010 Plan”), which was administered by the board of directors of Wayfair LLC. Awards issued under the 2010 Plan that remain outstanding currently represent Class A or Class B common stock of the Company.
8,603,066
shares of Class A common stock were initially available for issuance under awards granted pursuant to the 2014 Plan. The 2014 Plan also contains an evergreen provision whereby the shares available for future grant are increased on the first day of each calendar year beginning January 1, 2016 and ending on and including January 1, 2024. As of January 1, 2017,
8,389,750
shares of Class A common stock were available for future grant under the 2014 Plan. Shares or RSUs forfeited, withheld for minimum statutory tax obligations, and unexercised stock option lapses from the 2010 and 2014 Plans are available for grants of awards under the 2014 Plan. All equity awards granted prior to the initial public offering ("IPO") were subject to
two
vesting conditions: (i) a service period (typically
five years
) and (ii) a performance condition (a liquidity event in the form of either a change of control or an IPO, 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, pre-IPO awards for employees that continued providing service continued to vest over the remaining service period. 2014 Plan awards are expected to vest over the service period.
The Company adopted Financial Accounting Standards Board ("FASB") Accounting Standards Update ("ASU") No. 2016-09, "Compensation - Stock Compensation" ("ASU 2016-09") as of January 1, 2017. For additional information, refer to Note 14,
Recent Accounting Pronouncements
.
The following table presents activity relating to stock options for the
nine
months ended
September 30, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
Weighted-
Average Exercise
Price
|
|
Weighted-
Average
Remaining
Contractual
Term (Years)
|
Outstanding at December 31, 2016
|
|
209,759
|
|
|
$
|
2.98
|
|
|
4.5
|
Options exercised
|
|
(72,296
|
)
|
|
$
|
2.92
|
|
|
|
Outstanding and exercisable at September 30, 2017
|
|
137,463
|
|
|
$
|
3.01
|
|
|
3.7
|
Intrinsic value of stock options exercised was
$4.1 million
for the
nine
months ended
September 30, 2017
. Aggregate intrinsic value of stock options outstanding and currently exercisable is
$8.9 million
. All stock options were fully vested at
September 30, 2017
.
The following table presents activity relating to restricted common stock for the
nine
months ended
September 30, 2017
:
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted-
Average Fair Value
|
Outstanding at December 31, 2016
|
|
60,000
|
|
|
$
|
35.05
|
|
Unvested at September 30, 2017
|
|
60,000
|
|
|
$
|
67.40
|
|
Aggregate intrinsic value of restricted common stock unvested is
$4.0 million
as of
September 30, 2017
. Unrecognized equity based compensation expense related to unvested restricted common stock is
$2.7 million
with a weighted average remaining vesting term of
1.3 years
as of
September 30, 2017
.
The following table presents activity relating to RSUs for the
nine
months ended
September 30, 2017
:
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted-
Average Grant
Date Fair Value
|
Outstanding at December 31, 2016
|
|
6,986,776
|
|
|
$
|
34.21
|
|
RSUs granted
|
|
2,271,235
|
|
|
$
|
52.39
|
|
RSUs vested
|
|
(1,766,511
|
)
|
|
$
|
32.30
|
|
RSUs forfeited/canceled
|
|
(1,117,090
|
)
|
|
$
|
37.53
|
|
Outstanding at September 30, 2017
|
|
6,374,410
|
|
|
$
|
41.04
|
|
The intrinsic value of RSUs vested was
$99.3 million
for the
nine
months ended
September 30, 2017
. Aggregate intrinsic value of RSUs outstanding is
$429.6 million
as of
September 30, 2017
. Unrecognized equity based compensation expense related to outstanding RSUs is
$231.5 million
with a weighted average remaining vesting term of
1.7
years at
September 30, 2017
.
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.
Beginning the fourth quarter of 2016, the Company changed its operating and reportable segments to U.S. and International. These segments reflect the way the CODM allocates resources and evaluates financial performance, which is based upon each segment's Adjusted EBITDA. Adjusted EBITDA is defined as loss before depreciation and amortization, equity-based compensation and related taxes, interest and other income and expense, provision for income taxes, and non-recurring items. These charges are excluded from evaluation of segment performance because it facilitates reportable segment performance comparisons on a period-to-period basis. Refer to Note 2,
Summary of Significant Accounting Policies
for
the accounting policies of segments.
The Company allocates certain operating expenses to the operating and reportable segments, including "Customer service and merchant fees," "Merchandising, marketing and sales," and "Operations, technology, general and administrative" based on the usage and relative contribution provided to the segments. It excludes from the allocations certain operating expense lines,
including "Depreciation and amortization, "Equity based compensation and related taxes," "Interest (income), net," "Other (income) expense, net," and "Provision for income taxes." There are no revenue transactions between the Company's reportable segments.
U.S.
The U.S. segment primarily consists of amounts earned through product sales through the Company's sites in the U.S. and through sites operated by third parties in the U.S.
International
The International segment primarily consists of amounts earned through product sales through the Company's international sites.
Revenue from external customers for each group of similar products and services are not reported to the CODM. Separate identification of this information for purposes of segment disclosure is impractical, as it is not readily available and the cost to develop it would be excessive. No individual country outside of the U.S. provided greater than 10% of total revenue.
The following tables present Direct Retail and Other net revenues and Adjusted EBITDA attributable to the Company's reportable segments for the periods presented (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
U.S. Direct Retail
|
|
$
|
1,033,669
|
|
|
$
|
759,674
|
|
|
$
|
2,847,898
|
|
|
$
|
2,134,782
|
|
U.S. Other
|
|
16,975
|
|
|
28,127
|
|
|
57,843
|
|
|
91,613
|
|
U.S. segment net revenue
|
|
1,050,644
|
|
|
787,801
|
|
|
2,905,741
|
|
|
2,226,395
|
|
International Direct Retail
|
|
147,554
|
|
|
72,724
|
|
|
376,138
|
|
|
165,119
|
|
International Other
|
|
—
|
|
|
1,000
|
|
|
—
|
|
|
4,287
|
|
International segment net revenue
|
|
147,554
|
|
|
73,724
|
|
|
376,138
|
|
|
169,406
|
|
Total net revenue
|
|
$
|
1,198,198
|
|
|
$
|
861,525
|
|
|
$
|
3,281,879
|
|
|
$
|
2,395,801
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Adjusted EBITDA
|
|
|
|
|
|
|
|
|
U.S.
|
|
$
|
4,531
|
|
|
$
|
(7,857
|
)
|
|
$
|
28,684
|
|
|
$
|
(11,816
|
)
|
International
|
|
(27,203
|
)
|
|
(22,992
|
)
|
|
(74,498
|
)
|
|
(64,850
|
)
|
Total reportable segments Adjusted EBITDA
|
|
(22,672
|
)
|
|
(30,849
|
)
|
|
(45,814
|
)
|
|
(76,666
|
)
|
Less: reconciling items (1)
|
|
(53,757
|
)
|
|
(30,091
|
)
|
|
(126,029
|
)
|
|
(73,753
|
)
|
Net loss
|
|
$
|
(76,429
|
)
|
|
$
|
(60,940
|
)
|
|
$
|
(171,843
|
)
|
|
$
|
(150,419
|
)
|
(1) Adjustments are made to reconcile total reportable segments Adjusted EBITDA to consolidated net loss including the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Depreciation and amortization (1)
|
|
$
|
22,913
|
|
|
$
|
15,463
|
|
|
$
|
62,588
|
|
|
$
|
38,528
|
|
Equity based compensation and related taxes
|
|
19,598
|
|
|
15,308
|
|
|
50,539
|
|
|
37,265
|
|
Interest expense (income), net
|
|
2,008
|
|
|
292
|
|
|
3,857
|
|
|
(791
|
)
|
Other expense (income), net
|
|
227
|
|
|
(889
|
)
|
|
(400
|
)
|
|
(1,804
|
)
|
Provision for (benefit from) income taxes
|
|
237
|
|
|
(83
|
)
|
|
671
|
|
|
555
|
|
Other (1)
|
|
8,774
|
|
|
—
|
|
|
8,774
|
|
|
—
|
|
Total reconciling items
|
|
$
|
53,757
|
|
|
$
|
30,091
|
|
|
$
|
126,029
|
|
|
$
|
73,753
|
|
(1) The Company recorded
$9.6 million
of one-time charges in the three and nine months ended September 30, 2017 in "
Operations, technology, general and administrative
" in the unaudited consolidated and condensed statements of operations related to a warehouse the Company vacated in July 2017. Of the
$9.6 million
charges,
$8.8 million
was included in "Other" and related primarily to the excess of the Company's estimated future remaining lease commitments through 2023 over its expected sublease income over the same period, and
$0.8 million
was included in "Depreciation and amortization" related to accelerated depreciation of leasehold improvements in the warehouse.
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,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Net revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct Retail
|
|
$
|
1,181,223
|
|
|
$
|
832,398
|
|
|
$
|
3,224,036
|
|
|
$
|
2,299,901
|
|
Other
|
|
16,975
|
|
|
29,127
|
|
|
57,843
|
|
|
95,900
|
|
Net revenue
|
|
$
|
1,198,198
|
|
|
$
|
861,525
|
|
|
$
|
3,281,879
|
|
|
$
|
2,395,801
|
|
The following table presents long-lived assets by segment (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2017
|
|
December 31,
2016
|
Geographic long-lived assets
|
|
|
|
|
|
|
U.S.
|
|
$
|
311,565
|
|
|
$
|
233,099
|
|
International
|
|
7,308
|
|
|
6,255
|
|
Total
|
|
$
|
318,873
|
|
|
$
|
239,354
|
|
9. Income Taxes
Income tax expense (benefit) was $
0.2 million
and $
(0.1) million
for the
three months ended September 30, 2017
and
2016
, respectively, and
$0.7 million
and
$0.6 million
for the
nine months ended September 30, 2017
and
2016
, respectively. The income tax expense recorded in the
three and nine
months ended
September 30, 2017
and
2016
is primarily related to various foreign income tax assessments, state income taxes and to a lesser extent the amortization of goodwill for tax purposes for which there is no corresponding book deduction.
Deferred income taxes reflect the impact of temporary differences between the amounts of assets and liabilities for financial reporting purposes and such amounts as measured by tax laws. The Company has deferred tax assets related to its net operating loss carryforwards accumulated since the fourth quarter of 2014 and related to net operating loss carryforwards of certain of its foreign subsidiaries. A valuation allowance against net deferred tax assets is required if, based upon the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. The Company reassesses the valuation allowance on a quarterly basis and has provided a valuation allowance for the full amount of its net deferred tax assets.
The Company had
no
unrecognized tax benefits as of
September 30, 2017
and
December 31, 2016
. 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 (Deficit)
Preferred Stock
The Company authorized
10,000,000
shares of undesignated preferred stock,
$0.001
par value per share, for future issuance. As of
September 30, 2017
, the Company had
no
shares of undesignated preferred stock issued or outstanding.
Common Stock
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
56,355,606
and
49,945,202
shares of Class A common stock and
31,290,483
and
35,885,692
shares of Class B common stock were outstanding as of
September 30, 2017
and
December 31, 2016
, 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 and each share of Class B common stock is entitled to
ten
votes per share. Each share of Class B common stock may be converted into
one
share of Class A common stock at the option of its holder and will be automatically converted into
one
share of Class A common stock upon transfer thereof, subject to certain exceptions. In addition, upon the date on which the outstanding shares of Class B common stock represent less than
10%
of the aggregate number of shares of the then outstanding Class A common stock and Class B common stock, or in the event of the affirmative vote or written consent of holders of at least
66 2/3%
of the outstanding shares of Class B common stock, all outstanding shares of Class B common stock shall convert automatically into Class A common stock. Subject to preferences that may apply to any shares of preferred stock outstanding at the time, the holders of common stock are entitled to receive dividends out of funds legally available if the Board, 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, 2017
,
43,039,105
shares of Class B common stock were converted to Class A common stock.
11. Credit Agreement
On February 22, 2017, the Company entered into a
$40 million
credit card program and a credit agreement consisting of a
$100 million
secured revolving credit facility (the "Revolver") with Citibank, N.A. ("Citibank"). The Citibank credit facility replaced the Company's existing credit facility with Bank of America, N.A. ("Bank of America"), which was terminated on February 22, 2017 as described below. On September 11, 2017, the Citibank credit agreement was amended with a new letter of credit sublimit (
$25 million
) and to make clarifying edits to the mandatory prepayment provisions of the credit agreement.
The Citibank Revolver has a
$25 million
letter of credit sublimit and a
$10 million
swing line sublimit, and a final maturity date of February 21, 2020. Wayfair LLC is the borrower (the "Borrower") under the Citibank credit agreement. Subject to certain conditions, the Borrower has the right to increase the Revolver by
$25 million
. Borrowings under the Revolver will bear interest through maturity at a variable rate based upon, at the Borrower’s option, either the Eurodollar rate or the base rate (which is the highest of (x) Citibank's prime rate, (y) one-half of 1.00% in excess of the federal funds effective rate, and (z)
1.00%
in excess of the one-month Eurodollar rate), plus, in each case an applicable margin. From closing until September 30, 2019, the applicable margin for Eurodollar rate loans is
1.75%
per annum and the applicable margin for base rate loans is
0.75%
per annum. After September 30, 2019, the applicable margin is subject to specified changes depending on the applicable consolidated leverage ratio. Any amounts outstanding under the Revolver are due at maturity. In addition, subject to the terms and conditions set forth in the credit agreement, the Borrower is required to make certain mandatory prepayments prior to maturity.
The Citibank credit agreement contains affirmative and negative covenants customarily applicable to senior secured credit facilities, including covenants that, among other things, will limit or restrict the ability of the Company and its subsidiaries, subject to negotiated exceptions, to incur additional indebtedness and additional liens on their assets, engage in mergers or acquisitions or dispose of assets, pay dividends or make other distributions, voluntarily prepay other indebtedness, enter into transactions with affiliated persons, make investments, and change the nature of their businesses. In addition, the Citibank credit agreement requires the Company to maintain certain financial ratios. As of
September 30, 2017
, the Company was in compliance with its covenants under the Revolver.
The Company previously had a credit agreement with Bank of America, which was replaced by the Citibank credit agreement on February 22, 2017. The Bank of America credit agreement provided the Company with a
$20.0 million
revolving line of credit to support direct borrowings and letters of credit, provided that a maximum of
$5.0 million
could be applied to direct borrowings under the revolving line of credit, plus an additional
$45.0 million
credit card program (which the Company continued to utilize on a transitional basis as of September 30, 2017), for a maximum aggregate commitment of
$65.0 million
. Subject to the terms and conditions of the Bank of America credit agreement, advances under the line of credit, if any, would bear interest at the LIBOR rate, plus
1.75%
. The Bank of America credit agreement also required the Company to maintain certain covenants, including debt service coverage, tangible net worth and unencumbered liquid assets.
The Company did not borrow any amounts under the Revolver or the Bank of America credit agreement during the
nine
months ended
September 30, 2017
and the year ended
December 31, 2016
.
12. Convertible Debt
On September 15, 2017, the Company issued
$431.25 million
aggregate principal amount of
0.375%
Convertible Senior Notes due 2022 (the "Notes"), which includes the exercise in full of the
$56.25 million
over-allotment option, to Citigroup Global Markets Inc. and Goldman Sachs & Co. LLC as the initial purchasers of the Notes (the "Initial Purchasers").
The net proceeds from the sale of the Notes were approximately
$420.4 million
, after deducting the Initial Purchasers’ discounts and the estimated offering expenses payable by the Company. The Company used approximately
$44.2 million
of the net proceeds from the offering to pay the cost of the capped call transactions, as further described below, with
three
financial institutions (the "Option Counterparties"). The Company intends to use the remainder of the net proceeds for working capital and general corporate purposes.
The Notes were issued pursuant to an indenture, dated September 15, 2017 (the "Indenture"), between the Company and U.S. Bank National Association, as trustee. The Company will pay interest on the Notes semiannually in arrears at a rate of
0.375%
per annum on March 1 and September 1 of each year commencing on March 1, 2018. The Notes are convertible based upon an initial conversion rate of
9.61
shares of the Company’s Class A common stock per
$1,000
principal amount of Notes (equivalent to a conversion price of approximately
$104.06
per share of the Company’s Class A common stock). The conversion rate will be subject to adjustment upon the occurrence of certain specified events, including certain distributions and dividends to all or substantially all of the holders of the Company’s Class A common stock, but will not be adjusted for accrued and unpaid interest. The Company will settle any conversions of the Notes in cash, shares of the Company’s Class A common stock or a combination thereof, with the form of consideration determined at the Company’s election.
The Notes will mature on September 1, 2022, unless earlier purchased, redeemed or converted. Prior to June 1, 2022, holders may convert all or a portion of their Notes only under the following circumstances: (1) during any calendar quarter commencing after the calendar quarter ending on December 31, 2017 (and only during such calendar quarter), if the last reported sale price of the Company’s Class A common stock for at least
20
trading days (whether or not consecutive) during a period of
30
consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to
130%
of the conversion price on each applicable trading day; (2) during the
five
business day period after any
ten
consecutive trading day period (the "measurement period") in which the trading price per
$1,000
principal amount of Notes for each trading day of the measurement period was less than
98%
of the product of the last reported sale price of the Company’s Class A common stock and the conversion rate on each such trading day; (3) with respect to any Notes called for redemption by the Company, at any time prior to the close of business on the second scheduled trading day immediately preceding the redemption date; or (4) upon the occurrence of specified corporate events. On and after June 1, 2022 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert their Notes at any time, regardless of the foregoing circumstances. Holders of Notes who convert their Notes in connection with a make-whole fundamental change or a notice of redemption (each as defined in the Indenture) may be entitled to a premium in the form of an increase in the conversion rate of the Notes.
The Company may not redeem the Notes prior to September 8, 2020. On or after September 8, 2020, the Company may redeem for cash all or part of the Notes if the last reported sale price of the Company’s Class A common stock equals or exceeds
130%
of the conversion price then in effect for at least
20
trading days (whether or not consecutive), including at least
one
of the
five
trading days immediately preceding the date on which the Company provides notice of redemption, during any
30
consecutive trading days ending on, and including the trading day immediately preceding the date on which the Company provides notice of the redemption. The redemption price will be
100%
of the principal amount of the Notes to be redeemed, plus accrued and unpaid interest, if any.
Upon the occurrence of a fundamental change (as defined in the Indenture), holders may require the Company to repurchase all or a portion of their Notes for cash at a price equal to
100%
of the principal amount of the Notes to be repurchased plus any accrued but unpaid interest to, but excluding, the fundamental change repurchase date.
The Indenture contains customary terms and covenants, including that upon certain events of default occurring and continuing, either the Trustee or the holders of not less than
25%
in aggregate principal amount of the Notes then outstanding may declare the entire principal amount of all the Notes plus accrued interest, if any, to be immediately due and payable.
The Notes are general unsecured obligations of the Company. The Notes rank senior in right of payment to any of the Company’s future indebtedness that is expressly subordinated in right of payment to the Notes; rank equal in right of payment to the Company’s existing and future unsecured indebtedness that is not so subordinated; are effectively subordinated in right of payment to any of the Company’s secured indebtedness to the extent of the value of the assets securing such indebtedness; and are structurally subordinated to all existing and future indebtedness and liabilities of the Company’s subsidiaries.
In accounting for the issuance of the Notes, the Company separated the Notes into liability and equity components. The carrying amount of the liability component was calculated by measuring the fair value of a similar liability that does not have an associated convertible feature. The carrying amount of the equity component, representing the conversion option, was determined by deducting the fair value of the liability component from the par value of the Notes. The difference between the principal amount of the Notes and the liability component represents the debt discount, which is recorded as a direct deduction from the related debt liability in the consolidated and condensed balance sheet and amortized to interest expense using the effective interest method over the term of the Notes. The equity component of the Notes of approximately
$95.8 million
is included in additional paid-in capital in the consolidated and condensed balance sheet and is not remeasured as long as it continues to meet the conditions for equity classification. The Company allocated transaction costs related to the Notes using the same proportions as the proceeds from the Notes. Transaction costs attributable to the liability component were recorded as a direct deduction from the related debt liability in the consolidated and condensed balance sheet and amortized to interest expense over the term of the Notes, and transaction costs attributable to the equity component were netted with the equity component in shareholders’ equity.
Interest expense related to the Notes for the
three and nine
months ended
September 30, 2017
was
$0.9 million
and
$0.9 million
, respectively, which is also comprised of the amortization of debt discount and debt issuance costs and the contractual coupon interest. Accrued interest related to the Notes as of
September 30, 2017
was
$0.9 million
and is recorded in "
Accrued expenses
" in the unaudited consolidated and condensed balance sheet.
The estimated fair value of the Notes was
$415.0 million
as of September 30, 2017. The estimated fair value of the Notes was determined through consideration of quoted market prices. The fair value is classified as Level 2, as defined in Note 3,
Marketable Securities and Fair Value Measurements
.
On September 11, 2017, the Company entered into privately negotiated capped call transactions (the "Base Capped Call Transactions") with the Option Counterparties and, in connection with the exercise in full of the over-allotment option by the Initial Purchasers, on September 14, 2017 entered into additional capped call transactions (such additional capped call transactions, the "Additional Capped Call Transactions" and, together with the Base Capped Call Transactions, the "Capped Call Transactions") with the Option Counterparties. The Capped Call Transactions are expected generally to reduce the potential dilution and/or offset the cash payments the Company is required to make in excess of the principal amount of the Notes upon conversion of the Notes in the event that the market price per share of the Company’s Class A common stock is greater than the strike price of the Capped Call Transactions (which initially corresponds to the initial conversion price of the Notes and is subject to certain adjustments under the terms of the Capped Call Transactions), with such reduction and/or offset subject to a cap based on the cap price of the Capped Call Transactions. The Capped Call Transactions have an initial cap price of
$154.16
per share of the Company’s Class A common stock, which represents a premium of
100%
over the last reported sale price of the Company’s Class A common stock on September 11, 2017, and is subject to certain adjustments under the terms of the Capped Call Transactions. Collectively, the Capped Call Transactions cover, initially, the number of shares of the Company’s Class A common stock underlying the Notes, subject to anti-dilution adjustments substantially similar to those applicable to the Notes.
The Capped Call Transactions are separate transactions, in each case, entered into by the Company with the Option Counterparties, and are not part of the terms of the Notes and will not affect any holder’s rights under the Notes. Holders of the Notes will not have any rights with respect to the Capped Call Transactions. The Capped Call Transactions do not meet the criteria for separate accounting as a derivative as they are indexed to the Company's stock. The premiums paid for the Capped Call Transactions have been included as a net reduction to additional paid-in capital within shareholders’ equity.
13. 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. The rights of the holders of Class A and Class B common stock are identical, except with respect to voting and conversion. For more information on the rights of Class A and Class B common stockholders, see Note 10,
Stockholders' Equity (Deficit)
.
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 restricted stock units and unvested restricted stock, the exercise of stock options and potential shares from instruments convertible into common 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 attributable 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 Class A and Class B shares are equivalent.
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,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Net loss
|
|
$
|
(76,429
|
)
|
|
$
|
(60,940
|
)
|
|
$
|
(171,843
|
)
|
|
$
|
(150,419
|
)
|
Weighted average common shares used for basic and diluted net loss per share computation
|
|
87,283
|
|
|
85,105
|
|
|
86,679
|
|
|
84,779
|
|
Net loss per share:
|
|
|
|
|
|
|
|
|
Basic and Diluted
|
|
$
|
(0.88
|
)
|
|
$
|
(0.72
|
)
|
|
$
|
(1.98
|
)
|
|
$
|
(1.77
|
)
|
Dilutive common stock equivalents, representing potentially dilutive common stock options, restricted stock and restricted stock units, of
6.6 million
for the three and
nine
months ended
September 30, 2017
and
6.8 million
for the three and
nine
months ended
September 30, 2016
, were excluded from diluted earnings per share calculations for these periods because of their anti-dilutive effect. For the three and
nine
month periods ended
September 30, 2017
, the Company also excluded the potentially dilutive impact to Class A shares from the issuance of the Notes, since their effect would have been anti-dilutive. The Capped Call Transactions are designed to reduce potential dilution of our Class A shares upon conversion of the Notes. For more information on the Notes and the Capped Call Transactions, see Note 12,
Convertible Debt
.
14. Recent Accounting Pronouncements
Stock Compensation
In March 2016, the FASB issued ASU No. 2016-09, "Compensation - Stock Compensation" ("ASU 2016-09"). This ASU revises the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and an option to recognize gross stock compensation expense with actual forfeitures recognized as they occur, as well as certain classifications on the statement of cash flows. This ASU is effective for annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting year, and early adoption is permitted.
The Company adopted ASU 2016-09 as of January 1, 2017 using a modified retrospective approach with the option to recognize gross stock compensation expense with actual forfeitures recognized as they occur, with a cumulative-effect adjustment to retained earnings recognized as of January 1, 2017 of
$8.7 million
. The adoption of ASU 2016-09 also requires all income tax adjustments to be recorded in the consolidated and condensed statements of operations.
Revenue Recognition
In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers" ("ASU 2014-09"). This ASU is a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. This ASU was originally effective for annual reporting periods beginning after December 15, 2016 and early adoption was not permitted.
In August 2015, the FASB issued ASU No. 2015-14, "Revenue from Contracts with Customers – Deferral of the Effective Date" (ASU-2015-14), which defers the effective date of ASU 2014-09 for one year and permits early adoption as early as the original effective date of ASU 2014-09. Accordingly, ASU 2014-09 is now effective for annual reporting periods beginning after December 15, 2017 and early adoption is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting year.
In March 2016, the FASB issued ASU No. 2016-08, "Revenue from Contracts with Customers - Principal versus Agent Considerations" ("ASU 2016-08"). This ASU clarifies the implementation guidance for principal versus agent considerations in ASU 2014-09. This ASU is effective at the same period as ASU 2015-14 and ASU 2014-09.
Management expects to adopt ASU 2014-09, ASU 2015-14, and ASU 2016-08 (collectively, the "Revenue Recognition Accounting Pronouncements") for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting year. While management is still in its assessment process, management generally expects to identify substantially similar performance obligations after adoption of the Revenue Recognition Accounting Pronouncements as compared with deliverables and separate units of accounting under previous revenue recognition guidance. Therefore, the Company generally does not expect the impact of the adoption of the Revenue Recognition Accounting Pronouncements to be significant to its consolidated financial statements, processes, or systems. As we continue to evaluate the impact of the Revenue Recognition Accounting Pronouncements, we have identified no material changes to our current revenue recognition accounting policy for product sales generated through the Company's sites, or Direct Retail, which we identified as our most significant revenue stream. Management expects to apply the Revenue Recognition Accounting Pronouncements retrospectively with the cumulative effect of initially applying the Revenue Recognition Accounting Pronouncements recognized at the date of initial application recorded as an adjustment to retained earnings, referred to as the "Modified Retrospective Approach."
Leases
In February 2016, the FASB issued ASU No. 2016-02, "Leases" ("ASU 2016-02"). This ASU revises the accounting related to leases by requiring lessees to recognize a lease liability and a right-of-use asset for all leases. The new lease guidance also simplifies the accounting for sale and leaseback transactions. This ASU is effective for annual reporting periods beginning after December 15, 2018 and early adoption is permitted. Management expects to adopt ASU 2016-02 for annual reporting periods beginning after December 15, 2018. Management is currently evaluating the impact of the adoption of this ASU on the Company’s consolidated financial statements, and expects it will have a material impact on our consolidated financial statements, primarily the consolidated balance sheets and related disclosures.