Consolidated revenue of $483 million (12% growth) and pre-tax
loss of ($65.9) million
Overstock.com, Inc. (NASDAQ:OSTK), a tech-driven online retailer
and advancer of blockchain technology, today reported financial
results for the quarter ended June 30, 2018.
Dear Owners,
Recently an investor lamented to me that Overstock is among the
most difficult-to-value stocks on Wall Street. While that is
regrettable, I have always tended to be less concerned with making
valuation easy and more concerned with building value in the firm
for you, its owners. However, we have reached a crucial juncture in
our firm’s history and it is becoming increasingly important to
elucidate the different parts of our business and their potential
value. As a result, this letter and the accompanying earnings
webcast will be unusually informative (I encourage watching the
webcast over just reading the transcript because of the numerous
visual aids therein).
In preparation for that call, here are a few highlights on
tZERO, Other Medici, and Retail, before I dive deeper on each of
these in the letter that follows:
- tZERO (owned 80% by our blockchain
subsidiary Medici Ventures) has:
-
- closed out its Security Token offering raising $134
million in aggregate consideration (this sum includes $30 million
from repayment of intercompany debt between tZERO and Overstock:
GSR has signed a repurchase agreement to acquire these tokens)
-
- obtained a term sheet agreement from GSR to purchase
from tZERO up to $270 million in tZERO equity at a $1.5 billion
post-money valuation; and
-
- secured a term sheet agreement from GSR to purchase
up to 3.1 million shares of OSTK for $104 million ($33.72/share
August 1st closing price less 5%)
We will provide thorough descriptions of these agreements in our
10Q.
- Other Medici Ventures: We are
increasingly enthusiastic about blockchain and Medici Ventures’
unique position in the field. In addition to tZERO, we have funded
13 blockchain projects within Medici Ventures, with Jonathan
Johnson ably overseeing their build-out. We believe at least one or
two of those companies (perhaps more) have tZERO-like potential.
Beyond that, we have accumulated a valuable core blockchain
development group of approximately 30 (this is in addition to the
11 that Medici recently transferred to tZERO, and to the many
dozens who create within the firms which we have helped fund). When
it comes to the world of crypto, I am well-traveled, and can assure
you that it is an unusually large, strong group of blockchain
talent in and around Medici Ventures.
- Retail: The strategy adopted earlier
this year of running our retail site like a conventional internet
firm has produced a 25% revenue acceleration (from -13% in Q4 to
+12% in Q2). Yet the marketing and price testing that fueled that
growth has come at a significant cost ($57 million in Q2).
Significant dilution always accompanies a growth ecommerce
strategy, and, given the rapidly growing value of our non-retail
assets, we think shareholders are better served now by a
cash-conservative strategy. I believe Overstock can focus on
developing more non-traditional means of growth and profitability,
something that has been a hallmark of our success over the years.
As a result, we recently reverted to a retail strategy that has
narrowed these losses significantly in the month of July and will
narrow them further this quarter and again next.
I once worked as an equity analyst at First Manhattan under the
tutelage of two wonderful gentlemen, Sandy Gottesman and Arthur
Zankel (RIP). I often think of, given my current bird’s-eye view of
what is going on within Overstock, what I as an analyst looking at
Overstock might have expected by way of disclosure. As I indicated
above, now is a particularly appropriate time to be sure that all
cards are laid on the table. So, I will expand on each of the
preceding points at length.
I. tZERO:
tZERO is a leader in the emerging field of Security Tokens.
Briefly, Security Tokens are smart contracts embedded within
blockchains that represent fractional ownership of assets.
Collectively, there is the better part of a quadrillion dollars of
fractional ownership around the globe represented in various
securities instruments: approximately $73 trillion in stocks, $215
trillion in debt, and $217 trillion in real estate, for example. In
the eyes of an increasing number of people, Security Tokens are
disruptive to all these instruments and the ecosystems around them
because the technology of Security Tokens provides a more secure,
efficient, and transparent way to represent fractional ownership in
assets. However large proves the disruption that Security Tokens
brings to those instruments, such tokens are going to need a
vehicle for issuance and a place to trade. That is what we have
built in tZERO. We believe tZERO is the best positioned firm on the
planet to serve as a marketplace for this coming wave of Security
Tokens for the following reasons:
- Regulatory advantage:
- OSTKP, the first issuance of a regulated blockchain
instrument: We can claim more experience with regulated
blockchain instruments than anyone in the field. In March 2015,
tZERO’s Alternative Trading System, ProSecurities ATS, filed with
the SEC its plans to facilitate secondary trading of blockchain
instruments. Shortly thereafter, in August 2015, we issued a
private blockchain instrument (our $5 million bond). In December
2016, Overstock issued OSTKP, the world’s first SEC-registered
blockchain security, which trades on the ProSecurities
ATS.
- Boston Exchange Joint Venture: This quarter we
worked with BOX Digital Markets LLC to form a new company to
operate the first U.S. security token exchange, expanding our
capabilities beyond what operating only an Alternative Trading
System can allow. Our partners have deep experience running a
national securities exchange: BOX Digital Markets is owned by BOX
Holding Group LLC, a national securities exchange established in
2002 and registered with the SEC. Lisa Fall, the President of BOX,
has become the CEO of our new JV. This arrangement puts further
regulatory distance between us and any followers.
- Technology: There are two technology
components of tZERO to understand: our routing and exchange
technology, and our blockchain technology.
- Routing and exchange technology: tZERO was
built on top of technology originally developed by SpeedRoute, a
firm we entered in to an agreement to purchase in 2015. SpeedRoute
is a routing and execution firm that is currently routing ~6
billion shares per day and is already deeply integrated into the
U.S. National Market System. Thus, the blockchain innovations we
are building within tZERO are accessible to the traditional capital
markets system, providing current market participants the
opportunity to access crypto-securities without having to incur
switching costs. tZERO represents a regulated bridge between the
traditional securities markets and the fast-emerging world of
crypto-securities.
- Blockchain technology: tZERO’s blockchain
trading technologies (such as OSTKP) have progressed with the help
of development talent from Medici, which has one of the most
developed group of blockchain engineers in the world. Now that
we’ve completed the tZERO Security Token offering, our objective is
to enable secondary trading in non-U.S. markets of the tZERO
Security Tokens by Regulation S investors in the fourth
quarter.
- Human capital: tZERO started with expertise
residing in SpeedRoute regarding routing and executing trades that
I believe is second to none in the US capital markets. In Q2, the
tZERO board appointed Overstock’s former president, Saum
Noursalehi, as the CEO of tZERO. I could not be more confident in
Saum’s capabilities given his performance at Overstock and
leadership over Overstock’s former innovation arm, OLabs. He
effectively restructured Overstock Retail during some of our
critical years to make our teams more agile and efficient. Since
his appointment as CEO of tZERO, Saum has brought a tremendous pool
of blockchain and general technologists into tZERO, and he has a
significant advantage by being able to draw upon the resources and
expertise of Medici Ventures and Overstock while building that
team.
- Capital: Having concluded its Security Token
offering, tZERO has raised aggregate consideration of $134 million.
This figured includes $30 million from repayment of intercompany
debt between tZERO and Overstock. GSR has signed a repurchase
agreement to acquire these tokens. As I will diagram in our
earnings call, we have designed quite an ecosystem with a scale
that matches the enormous opportunity in front of it. When GSR
completes its planned investments, we should have over
half-a-billion dollars. We believe this will provide ample
capitalization with which to build a company that can upend global
capital markets.
- Board: This quarter we made a tremendous
addition to the tZERO board: Bruce Fenton. After having spent over
twenty-five years in the traditional securities industry, Bruce has
become one of the world’s great visionaries regarding blockchain
securities. He is uniquely suited to coach tZERO forward, and to
bridge the gap between traditional securities and security tokens.
- Brand: I spent time this quarter meeting with
hundreds of crypto-minds from Israel to Seoul. I am humbly
gratified to discover that tZERO already has a remarkable brand
globally.
In sum, we believe that Security Tokens are an innovation of
historic proportions, and we are leading the field. This scaling up
of tZERO reflects the seriousness with which I take this project
and my belief in its enormous potential. This year’s infusion of
financial and human capital into tZERO will be overwhelmingly
positive in preparing tZERO to compete and win the coming
competition of security token exchanges.
II. Other Medici Ventures:
There are other investments within Medici Ventures’ portfolio
which we believe have tZERO-like potential. Others have smaller,
but still great, potential. Two investments worth mentioning
now are Bitsy and Medici Land Governance.
Bitsy: Bitsy is a crypto wallet that we will be
introducing in beta in September. We believe it will be superior to
competing products in the market (such as Coinbase) for a variety
of reasons that will be mentioned on our conference call, but which
include superior user experience and key management. We will be
using Overstock Retail’s large amount of traffic (31.4 million
unique visitors in June) to promote this wallet.
Medici Land Governance: Medici Land Governance
(MLG) is applying blockchain to government land governance systems
to address global poverty. How? The idea of eradicating poverty by
improving land governance has been a part of the intellectual
arsenal of development theorists since the 1970’s, but we believe
that with blockchain, mobile apps, and digital marketing, the
process can be done more quickly, more securely, and at massive
scale. MLG has signed agreements with the World Bank and with the
Zambian Ministry of Land and Natural Resources to pilot these
technologies in Africa. Several other negotiations are taking place
in partnership with the World Bank for additional projects in
Africa and on other continents. In January of this year, we
announced that we had signed a Memorandum of Understanding (MOU) to
partner with the Peruvian economist Hernando de Soto to apply
blockchain to the field of property rights. Sadly, more than four
months after signing that MOU, Hernando and I were unable to
finalize a contract on terms reflecting that MOU or on any other
terms that protected the interests of shareholders, so we ceased
operations in Peru and discontinued our project there with
Hernando. We then founded MLG and secured a relationship with the
World Bank, which has proven to be an ideal partner to execute on
pilots quickly. It is not out of the question that we might still
work something out with Hernando, but, in the meantime, we are
finding the World Bank to be an exceptional and quite
entrepreneurial partner. With us, they are moving with a speed I
would not have imagined possible.
In addition to the above-mentioned projects, I am tremendously
excited about Medici Ventures itself. Jonathan Johnson, president
of Medici Ventures has led the development of a world-class
blockchain organization. Engineers at Medici Ventures are allowed
to rotate among various projects, some internal and some as
contract work for portfolio companies. This allows for
cross-pollination among projects so that valuable innovation and
best practices emerge. The blockchain development center that
Jonathan has overseen is one of the most exciting assets we have
created.
Finally, the astute analyst will note that Overstock Retail has
grown slightly chubby on payroll. This has been deliberate. We are
ready to move close to 10% of our corporate payroll from Retail
into Medici and some of its blockchain subsidiaries (primarily,
tZERO). We are putting reasonable constraints on this reallocation
so as not to impact Overstock Retail operations (e.g. no more than
one person from any one team within Retail). The influx of talent
into our blockchain assets will provide them a huge advantage and
will be a good investment into this enormous opportunity.
III. Overstock Retail
Since May 2017, Overstock Retail has had one great problem to
overcome: our SEO began a large decline. For years we excelled in
this area, with a quite healthy portion of our traffic and revenue
coming from Google natural search, but starting last May that
number began eroding steadily. This has changed the profitability
of our firm tremendously, both from the direct economics of the
lost traffic and because that source of traffic is the precursor to
many other marketing channels and points of contact with customers.
It was a haymaker of a punch. I am proud of our teams for, first,
being able to roll with that haymaker, and second, to have
accelerated 25% in revenue in two quarters even while suffering
such a remarkable drag.
To achieve this acceleration, we made significant investments in
pricing, marketing G&A, but most significantly, an enormous
advertising push to find new campaigns and audiences across the
digital landscape. These tests are often structurally unprofitable
to run, but some percentage of the campaigns tested can be
leveraged to bring in profitable incremental business when the
tests are completed. In the second quarter we gunned the throttle
on that testing more than we ever have or (I expect) ever will
again. As we started ending tests in the month of July, we found we
are able to make significant reductions to previous marketing
levels with relatively modest impact to growth. We believe with the
benefit of the learnings of these tests, our non-SEO business is
significantly stronger than it was at the end of 2017, and this
will be manifested as we reduce our spend in Q3 and Q4.
Since last year, we have completed about five years’ worth of
SEO projects, which have seen moderate success in that they have
arrested decay and, recently, have modestly improved our numbers.
As mentioned in the introduction, the growth we have attained this
quarter has been costly ($57 million in Q2). Given that SEO is not
yet where we want it to be, and more generally, pricing in the
digital marketing landscape has become decreasingly attractive, it
does not make sense for us to continue a growth strategy, as SEO is
by far a more efficient and valuable channel for growth. With the
exception of Q1 and Q2, chasing growth at the expense of
unsustainable losses has been something that Overstock has avoided
for its entire 18-year history.
However, this Q2 marketing including a massive dose of one-time
experimentation (from which we mapped and quantified with nice
clean data) will have both direct and interrelated effects across
much of the digital marketing landscape. We have already pulled
significantly back on expensive acceleration and are focusing on
optimizing channels with our new learnings. This will dramatically
reduce cash-burn and benefit both Overstock Retail and Medici
Ventures, to which we can allocate resources not being spent on
unsustainable growth channels.
Given this set of facts, the smart choice is clearly to minimize
dilution to our ownership of those emerging assets. The way to do
this is to switch to a strategy for Retail that deemphasizes growth
and instead emphasizes sharply reduced cash-burn. We have already
switched to this strategy, and I expect to see a dramatic narrowing
of our losses in Q3 and again in Q4.
Looking ahead, I see four major catalysts possible for Overstock
Retail:
- Quick SEO Recovery: A new set of executives
has been recruited and promoted among our executive team to tackle
this challenge. It is proving healthy to have new sets of eyes look
at our SEO, and I am encouraged by their progress so
far.
- Customer Lifetime Value Improvement: We are
receiving the benefit of one of the world’s leading strategic
consulting firms in this area. They have been superb.
- Crypto-Retail Synergies: Between now and the
end of the year we are introducing some leading edge crypto
products that may find their place to our retail site. It is not
out of the question that they will significantly boost organic
traffic to Overstock’s retail site.
- Retail Sale: As we have stated publicly
several times, we are considering all strategic options. We have an
amply-resourced and highly motivated team pursuing these
discussions. Discussions with potential buyers have progressed
since our last call and based on those discussions, we believe more
modest growth and optimized cash flow is also the preferable path
to complete a sale.
So, that is our business and our options, laid out as clearly
and honestly as I would have hoped for, were I still writing
analyst reports for Sandy Gottesman. It is going to take some study
and judgment to unscramble the value here.
But if that were not difficult enough, I will add one last
significant twist: that point I made above about having new fresh
eyes look at some thorny problems was no lip service. Remember my
claim is that ultimately, these last quarters of pain have had one
root cause, the collapse of SEO. A corollary of that is that if we
can fix that one problem, the swing it would create in our results
is something only a devout student of digital marketing would
appreciate. Towards that end, we have had a fresh crew studying the
problem for several months. After a tremendous focused effort, our
fresh eyes have come up with a way to make significant improvements
in our website’s customer experience. The recent changes and code
roll were (for us anyway) semi-massive.
Has it worked? Have our Google rankings started to respond? The
data is still quite early, but yes, deep down, a heartbeat appears
to have flickered to life. I will be releasing that data during our
earnings webcast.
So, tune into our webcast, and make the call for yourself. I
look forward to helping investors understand the facts clearly.
Until then, I remain,
Your humble servant,Patrick M. Byrne
Key Q2 2018 metrics (comparison to Q2 2017):
- Revenue: $483.1M vs. $432.0M (12% increase);
- Gross profit: $91.7M vs. $84.2M (9% increase);
- Gross margin: 19.0% vs. 19.5% (49 basis point decrease);
- Sales and marketing expense: $94.4M vs. $43.3M (118%
increase);
- G&A/Technology expense: $63.9M vs. $50.6M (26%
increase);
- Pre-tax loss: ($65.9M) vs. ($9.7M) ($56.2M increase);
- Pre-tax loss - Overstock retail (non-GAAP financial measure):
($57.4M)
- Pre-tax loss - Medici (non-GAAP financial measure):
($8.6M)
- Net loss*: ($64.9M) vs. ($7.5M) ($57.4M increase);
- Diluted net loss per share: ($2.20)/share vs. ($0.29)/share
($1.91/share increase);
*Net loss refers to Net loss attributable to stockholders of
Overstock.com, Inc.
We will hold a conference call and webcast to discuss our Q2
2018 financial results Thursday, August 9, 2018, at 4:30 p.m.
ET.
Webcast information
To access the live webcast and presentation slides, go to
http://investors.overstock.com. To listen to the conference call
via telephone, dial (877) 673-5346 and enter conference ID 6285767
when prompted. Participants outside the U.S. or Canada who do not
have Internet access should dial +1 (724) 498-4326 then enter the
conference ID provided above.
A replay of the conference call will be available at
http://investors.overstock.com starting two hours after the
live call has ended, or on Overstock's YouTube channel, accessible
at https://www.overstock.com/2018-Q2-earnings. An audio replay of
the webcast will be available via telephone starting at 7:30 p.m.
ET on Thursday, August 9, 2018, through 7:30 p.m. ET on Thursday,
August 23, 2018. To listen to the recorded webcast by phone, dial
(855) 859-2056 then enter the conference ID provided above. Outside
the U.S. or Canada dial +1 (404) 537-3406 and enter the conference
ID provided above.
Please email all questions in advance of the call to
ir@overstock.com.
Key financial and operating metrics:
Investors should review our financial statements and
publicly-filed reports in their entirety and not rely on any single
financial measure.
Total net revenue - Total net revenue was $483.1 million and
$432.0 million for Q2 2018 and 2017, respectively, a 12% increase.
This growth was primarily driven by increased marketing expenses as
we more aggressively pursued revenue growth and new customers. Our
increased marketing expenses resulted in a 9% increase in orders in
Q2 2018, and we had a 7% increase in average order size (excluding
promotional activities) primarily due to a continued sales mix
shift into home and garden products. These increases were partially
offset by increased promotional activities, including coupons and
site sales (which we recognize as a reduction of revenue) due to
our driving a higher proportion of our sales using such promotions,
and an increase in marketplace sales (for which we record only our
commission as revenue). We continue to face challenges in our
natural search marketing, which have significantly limited our
efforts to grow revenue efficiently.
Gross profit - Gross profit was $91.7 million and $84.2 million
for Q2 2018 and 2017, respectively, a 9% increase, representing
19.0% and 19.5% gross margin for those respective periods. The
decrease in gross margin was primarily due to increased promotional
activities, partially offset by a continued shift in sales mix into
higher margin home and garden products and an increase in
marketplace sales (for which we record only our commission as
revenue).
Sales and marketing expenses - Sales and marketing expenses
totaled $94.4 million and $43.3 million for Q2 2018 and 2017,
respectively, a 118% increase, and representing 19.5% and 10.0% of
total net revenue for those respective periods. This significant
increase in sales and marketing expenses was primarily due to our
effort to aggressively pursue increased revenue and new customers
through increased spending in the sponsored search, television, and
display ads on social media marketing channels, as well as
increased staff-related costs.
Technology expenses - Technology expenses totaled
$32.4 million and $28.2 million for Q2 2018 and 2017,
respectively, a 15% increase, and representing 6.7% and 6.5% of
total revenue for those respective periods. The increase was
primarily due to an increase in staff-related costs of $3.8 million
and an increase in technology licenses and maintenance costs of
$1.5 million, partially offset by a decrease in depreciation of
$891,000.
General and administrative ("G&A") expenses - G&A
expenses totaled $31.4 million and $22.4 million for Q2 2018
and 2017, respectively, a 41% increase, and representing 6.5% and
5.2% of total revenue for those respective periods. The increase
was primarily due to a $5.0 million increase in legal fees
primarily in tZERO related to the SEC investigation, a $4.8 million
increase in consulting and outside services, a $3.5 million
increase in staff-related costs, and a $1.2 million increase in
travel expenses. These increases were partially offset by a $6.8
million realized gain on the sale of cryptocurrencies on which we
recognized a large impairment loss in Q1 2018.
We continue to seek opportunities for growth in our retail
business, through our Medici blockchain and financial technology
initiatives, and through other means. As a result of these
initiatives, we will continue to incur additional expenses and
expect to purchase interests in, or make acquisitions of, other
technologies and businesses. We anticipate that our initiatives
will cause us to incur losses in the foreseeable future. These
losses, additional expenses, acquisitions or purchases may be
material, and, coupled with existing marketing expense trends,
increased marketing and branding expenditures, and strategic
changes in our retail business, may lead to increased consolidated
losses in some periods, and to reduced liquidity. Additionally, we
may recognize additional impairment charges from our ownership
interest in other entities.
Other income, net - Other income, net totaled $368,000 and
$593,000 for Q2 2018 and 2017, respectively. The decrease is
primarily due to a $1.0 million equity method loss, a $560,000
decrease in Club O and gift card breakage which we began
recognizing as a component of revenue in 2018 following the
adoption of ASC 606, and $283,000 in debt retirement costs related
to our building loan repayment. These decreases to other income,
net were largely offset by $1.8 million in unrealized gains on
investments in equity securities.
Net cash (used in) provided by operating activities - Net cash
(used in) provided by operating activities was ($59.5) million and
$20.3 million for the twelve months ended June 30, 2018 and 2017,
respectively. The $79.8 million decrease is primarily due to
increased losses.
Free cash flow (a non-GAAP financial measure) - Free cash flow
totaled ($79.4) million and ($25.6) million for the twelve months
ended June 30, 2018 and 2017, respectively. The $53.8 million
decrease was due to a $79.8 million decrease in operating cash
flow, partially offset by a $26.0 million decrease in capital
expenditures including costs related to the development of our new
corporate headquarters.
Free cash flow reflects an additional way of viewing our cash
flows and liquidity that, when viewed with our GAAP results,
provides a more complete understanding of factors and trends
affecting our cash flows and liquidity. Free cash flow, which we
reconcile to “net cash (used in) provided by operating activities,”
is cash flow from operations, reduced by “expenditures for fixed
assets, including internal-use software and website development.”
We believe that cash flows from operating activities is an
important measure since it includes both the cash impact of the
continuing operations of the business and changes in the balance
sheet that impact cash. Also, we believe free cash flow is a useful
measure to evaluate our business since purchases of fixed assets,
including internal-use software and website development, are a
necessary component of ongoing operations and free cash flow
measures the amount of cash we have available for mandatory debt
service and financing obligations, changes in our capital
structure, and future investments, after we have paid our operating
expenses. Therefore, we believe it is important to view free cash
flow as a complement to our entire consolidated statements of cash
flows.
Our calculation of free cash flow is set forth below (in
thousands):
|
|
Six months ended June 30, |
|
Twelve months ended June
30, |
|
|
2018 |
|
2017 |
|
2018 |
|
2017 |
Net cash (used in)
provided by operating activities |
|
$ |
(70,579 |
) |
|
$ |
(46,257 |
) |
|
$ |
(59,543 |
) |
|
$ |
20,262 |
|
Expenditures for fixed
assets, including internal-use software and website
development |
|
(12,749 |
) |
|
(16,450 |
) |
|
(19,885 |
) |
|
(45,883 |
) |
Free cash flow |
|
$ |
(83,328 |
) |
|
$ |
(62,707 |
) |
|
$ |
(79,428 |
) |
|
$ |
(25,621 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash - We had cash and cash equivalents of $152.2 million and
$203.2 million at June 30, 2018 and December 31, 2017,
respectively. The decrease is primarily due to operating losses,
cash used for acquisitions and other investments, and the repayment
of our building loan, partially offset by proceeds received from
our tZERO security token offering and the exercise of a stock
warrant in Q1 2018.
About Overstock.comOverstock.com, Inc. Common
Shares (NASDAQ:OSTK) / Series A Preferred (Medici Ventures’ tZERO
platform:OSTKP) / Series B Preferred (OTCQX:OSTBP) is an online
retailer based in Salt Lake City, Utah that sells a broad range of
products at low prices, including furniture, décor, rugs, bedding,
and home improvement. In addition to home goods, Overstock.com
offers a variety of products including jewelry, electronics,
apparel, and more, as well as a marketplace providing customers
access to hundreds of thousands of products from third-party
sellers. Additional stores include Pet Adoptions and
Worldstock.com, dedicated to selling artisan-crafted products from
around the world. Forbes ranked Overstock in its list of the Top
100 Most Trustworthy Companies in 2014. Overstock regularly posts
information about the company and other related matters under
Investor Relations on its website.
O, Overstock.com, O.com, O.co, Club O, Main Street
Revolution, and Worldstock are registered trademarks of
Overstock.com, Inc. O.biz and Space Shift are also
trademarks of Overstock.com, Inc. Other service marks,
trademarks and trade names which may be referred to herein are
the property of their respective owners.
This press release and the August 9, 2018 conference call and
webcast to discuss our financial results may contain
forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange
Act of 1934. Such forward-looking statements include all statements
other than statements of historical fact, including forecasts of
trends. These forward-looking statements are inherently difficult
to predict. Actual results could differ materially for a variety of
reasons, including the amount and timing of our capital
expenditures, the significant increases in our marketing
expenditures in the first half of 2018 and the subsequent reduction
of those expenditures, the results of our ongoing review of
strategic initiatives including the possible sale of our e-commerce
business, adverse tax, regulatory or legal developments,
competition, and any inability to raise capital or borrow funds on
acceptable terms. Other risks and uncertainties include, among
others, the risks of the businesses Medici Ventures and tZERO are
pursuing, including whether tZERO's joint venture with Box Digital
Markets, LLC, will be able to achieve its objectives, the effects
of key business personnel moving from our retail business to our
Medici Ventures, Inc. and tZERO businesses, our continually
evolving business model, and difficulties we may have with our
infrastructure, our fulfillment partners or our payment processors,
including cyber-attacks or data breaches affecting us or any of
them. More information about factors that could potentially affect
our financial results is included in our Form 10-K for the year
ended December 31, 2017, our Form 10-Q for the quarter ended March
31, 2018, and our Form 10-Q for the quarter ended June 30, 2018,
which were filed with the Securities and Exchange Commission on
March 15, 2018, May 8, 2018, and August 9, 2018, respectively, and
in our subsequent filings with the Securities and Exchange
Commission. The Form 10-K, 10-Q's, and our subsequent filings with
the Securities and Exchange Commission identify important factors
that could cause our actual results to differ materially from those
contained in or contemplated by our projections, estimates and
other forward-looking statements. Average order size is measured at
the time of order, before promotional discounts and shipping
revenue.
|
Overstock.com, Inc. |
Consolidated Balance Sheets
(Unaudited) |
(in thousands) |
|
|
June 30, 2018 |
|
December 31, 2017 |
Assets |
|
|
|
Current
assets: |
|
|
|
Cash and
cash equivalents |
$ |
152,228 |
|
|
$ |
203,215 |
|
Restricted cash |
468 |
|
|
455 |
|
Accounts
receivable, net |
28,597 |
|
|
30,080 |
|
Inventories, net |
15,355 |
|
|
13,703 |
|
Prepaid
inventories, net |
1,071 |
|
|
1,625 |
|
Prepaids
and other current assets |
25,419 |
|
|
16,119 |
|
Total
current assets |
223,138 |
|
|
265,197 |
|
Fixed assets,
net |
131,923 |
|
|
129,343 |
|
Intangible
assets, net |
26,343 |
|
|
7,337 |
|
Goodwill |
22,058 |
|
|
14,698 |
|
Equity
Investments |
43,543 |
|
|
13,024 |
|
Other
long-term assets, net |
5,888 |
|
|
4,216 |
|
Total
assets |
$ |
452,893 |
|
|
$ |
433,815 |
|
Liabilities and Stockholders’ Equity |
|
|
|
Current
liabilities: |
|
|
|
Accounts
payable |
$ |
92,712 |
|
|
$ |
85,406 |
|
Accrued
liabilities |
109,732 |
|
|
82,611 |
|
Deferred
revenue |
42,644 |
|
|
46,468 |
|
Other
current liabilities, net |
468 |
|
|
178 |
|
Total
current liabilities |
245,556 |
|
|
214,663 |
|
Long-term
debt, net |
3,069 |
|
|
— |
|
Long-term
debt, net - related party |
— |
|
|
39,909 |
|
Other
long-term liabilities |
6,160 |
|
|
7,120 |
|
Total
liabilities |
254,785 |
|
|
261,692 |
|
Stockholders’
equity: |
|
|
|
Preferred
stock, $0.0001 par value, authorized shares - 5,000 |
|
|
|
Series A,
issued and outstanding - 127 and 127 |
— |
|
|
— |
|
Series B,
issued and outstanding - 555 and 555 |
— |
|
|
— |
|
Common
stock, $0.0001 par value |
|
|
|
Authorized shares - 100,000 |
|
|
|
Issued
shares - 32,203 and 30,632 |
|
|
|
Outstanding shares - 29,007 and 27,497 |
3 |
|
|
3 |
|
Additional paid-in capital |
553,112 |
|
|
494,732 |
|
Accumulated deficit |
(365,472 |
) |
|
(254,692 |
) |
Accumulated other comprehensive loss |
(591 |
) |
|
(599 |
) |
Treasury
stock: |
|
|
|
Shares at
cost - 3,196 and 3,135 |
(66,662 |
) |
|
(63,816 |
) |
Equity
attributable to stockholders of Overstock.com, Inc. |
120,390 |
|
|
175,628 |
|
Equity
attributable to noncontrolling interests |
77,718 |
|
|
(3,505 |
) |
Total equity |
198,108 |
|
|
172,123 |
|
Total liabilities and stockholders’ equity |
$ |
452,893 |
|
|
$ |
433,815 |
|
|
|
|
|
|
|
|
|
|
Overstock.com, Inc. |
Consolidated Statements of Operations
(Unaudited) |
(in thousands, except per share
data) |
|
|
Three months ended June 30, |
|
Six months ended June 30, |
|
2018 |
|
2017 |
|
2018 |
|
2017 |
Revenue,
net |
|
|
|
|
|
|
|
Direct |
$ |
14,715 |
|
|
$ |
22,099 |
|
|
$ |
30,985 |
|
|
$ |
44,927 |
|
Partner
and other |
468,418 |
|
|
409,925 |
|
|
897,479 |
|
|
819,532 |
|
Total net
revenue |
483,133 |
|
|
432,024 |
|
|
928,464 |
|
|
864,459 |
|
Cost of goods
sold |
|
|
|
|
|
|
|
Direct |
14,672 |
|
|
21,147 |
|
|
29,444 |
|
|
42,110 |
|
Partner
and other |
376,718 |
|
|
326,706 |
|
|
713,408 |
|
|
651,271 |
|
Total
cost of goods sold |
391,390 |
|
|
347,853 |
|
|
742,852 |
|
|
693,381 |
|
Gross
profit |
91,743 |
|
|
84,171 |
|
|
185,612 |
|
|
171,078 |
|
Operating
expenses: |
|
|
|
|
|
|
|
Sales and
marketing |
94,416 |
|
|
43,297 |
|
|
171,630 |
|
|
80,915 |
|
Technology |
32,423 |
|
|
28,244 |
|
|
63,717 |
|
|
57,236 |
|
General
and administrative |
31,440 |
|
|
22,361 |
|
|
71,195 |
|
|
44,971 |
|
Total
operating expenses |
158,279 |
|
|
93,902 |
|
|
306,542 |
|
|
183,122 |
|
Operating
loss |
(66,536 |
) |
|
(9,731 |
) |
|
(120,930 |
) |
|
(12,044 |
) |
Interest
income |
620 |
|
|
136 |
|
|
1,164 |
|
|
261 |
|
Interest
expense |
(395 |
) |
|
(716 |
) |
|
(1,269 |
) |
|
(1,426 |
) |
Other
expense, net |
368 |
|
|
593 |
|
|
359 |
|
|
(3,131 |
) |
Loss
before income taxes |
(65,943 |
) |
|
(9,718 |
) |
|
(120,676 |
) |
|
(16,340 |
) |
Benefit from
income taxes |
(27 |
) |
|
(1,975 |
) |
|
(304 |
) |
|
(2,315 |
) |
Net loss |
$ |
(65,916 |
) |
|
$ |
(7,743 |
) |
|
$ |
(120,372 |
) |
|
$ |
(14,025 |
) |
Less: Net
loss attributable to noncontrolling interests |
(1,005 |
) |
|
(244 |
) |
|
(4,552 |
) |
|
(623 |
) |
Net loss
attributable to stockholders of Overstock.com, Inc. |
$ |
(64,911 |
) |
|
$ |
(7,499 |
) |
|
$ |
(115,820 |
) |
|
$ |
(13,402 |
) |
Net loss per
common share—basic: |
|
|
|
|
|
|
|
Net loss
attributable to common shares—basic |
$ |
(2.20 |
) |
|
$ |
(0.29 |
) |
|
$ |
(3.94 |
) |
|
$ |
(0.52 |
) |
Weighted
average common shares outstanding—basic |
28,903 |
|
|
24,996 |
|
|
28,736 |
|
|
25,035 |
|
Net loss per
common share—diluted: |
|
|
|
|
|
|
|
Net loss
attributable to common shares—diluted |
$ |
(2.20 |
) |
|
$ |
(0.29 |
) |
|
$ |
(3.94 |
) |
|
$ |
(0.52 |
) |
Weighted
average common shares outstanding—diluted |
28,903 |
|
|
24,996 |
|
|
28,736 |
|
|
25,035 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Overstock.com, Inc. |
Consolidated Statements of Cash Flows
(Unaudited) |
(in thousands) |
|
|
Six months ended June 30, |
|
Twelve months ended June
30, |
|
2018 |
|
2017 |
|
2018 |
|
2017 |
Cash flows from operating activities: |
|
|
|
|
|
|
|
Consolidated net loss |
$ |
(120,372 |
) |
|
$ |
(14,025 |
) |
|
$ |
(218,269 |
) |
|
$ |
(14,656 |
) |
Adjustments to reconcile net loss to net cash (used in) provided by
operating activities: |
|
|
|
|
|
|
|
Depreciation of fixed assets |
12,983 |
|
|
14,909 |
|
|
26,922 |
|
|
29,896 |
|
Amortization of intangible assets |
2,051 |
|
|
1,891 |
|
|
4,159 |
|
|
3,637 |
|
Stock-based compensation to employees and directors |
9,408 |
|
|
1,985 |
|
|
11,500 |
|
|
4,161 |
|
Deferred
income taxes, net |
(298 |
) |
|
(2,796 |
) |
|
67,697 |
|
|
(2,445 |
) |
Gain on
investment in precious metals |
— |
|
|
— |
|
|
(1,971 |
) |
|
(201 |
) |
Impairment of cryptocurrencies |
9,491 |
|
|
— |
|
|
9,491 |
|
|
— |
|
Gain on
sale of cryptocurrencies |
(8,348 |
) |
|
— |
|
|
(10,343 |
) |
|
— |
|
Impairment of equity investment |
— |
|
|
4,500 |
|
|
987 |
|
|
7,350 |
|
Early
extinguishment costs of long term debts |
283 |
|
|
— |
|
|
2,747 |
|
|
— |
|
Other |
(609 |
) |
|
65 |
|
|
202 |
|
|
423 |
|
Changes
in operating assets and liabilities, net of acquisitions: |
|
|
|
|
|
|
|
Accounts
receivable, net |
1,882 |
|
|
7,391 |
|
|
(7,447 |
) |
|
(1,446 |
) |
Inventories, net |
120 |
|
|
3,785 |
|
|
1,569 |
|
|
2,366 |
|
Prepaid
inventories, net |
554 |
|
|
897 |
|
|
144 |
|
|
3 |
|
Prepaids
and other current assets |
(8,234 |
) |
|
(9,213 |
) |
|
(2,307 |
) |
|
(3,809 |
) |
Other
long-term assets, net |
(3,827 |
) |
|
(147 |
) |
|
(5,987 |
) |
|
(729 |
) |
Accounts
payable |
6,686 |
|
|
(30,601 |
) |
|
16,292 |
|
|
(3,127 |
) |
Accrued
liabilities |
26,911 |
|
|
(22,391 |
) |
|
36,991 |
|
|
3,578 |
|
Deferred
revenue |
1,216 |
|
|
(2,643 |
) |
|
8,547 |
|
|
(4,933 |
) |
Other
long-term liabilities |
(476 |
) |
|
136 |
|
|
(467 |
) |
|
194 |
|
Net cash (used in) provided by operating activities |
(70,579 |
) |
|
(46,257 |
) |
|
(59,543 |
) |
|
20,262 |
|
Cash
flows from investing activities: |
|
|
|
|
|
|
|
Purchase
of intangible assets |
(9,241 |
) |
|
— |
|
|
(9,664 |
) |
|
— |
|
Proceeds
from sale of precious metals |
— |
|
|
— |
|
|
11,917 |
|
|
1,610 |
|
Investment in precious metals |
— |
|
|
— |
|
|
— |
|
|
(1,633 |
) |
Disbursement of note receivable |
(200 |
) |
|
(250 |
) |
|
(700 |
) |
|
(868 |
) |
Investments in equity securities |
(29,570 |
) |
|
(3,188 |
) |
|
(31,570 |
) |
|
(3,938 |
) |
Acquisitions of businesses, net of cash acquired |
(12,912 |
) |
|
— |
|
|
(12,912 |
) |
|
28 |
|
Expenditures for fixed assets, including internal-use software and
website development |
(12,749 |
) |
|
(16,450 |
) |
|
(19,885 |
) |
|
(45,883 |
) |
Other |
22 |
|
|
(115 |
) |
|
207 |
|
|
(118 |
) |
Net cash
used in investing activities |
(64,650 |
) |
|
(20,003 |
) |
|
(62,607 |
) |
|
(50,802 |
) |
Cash
flows from financing activities: |
|
|
|
|
|
|
|
Payments
on capital lease obligations |
(248 |
) |
|
— |
|
|
(331 |
) |
|
— |
|
Payments
on interest swap |
— |
|
|
— |
|
|
(1,535 |
) |
|
(224 |
) |
Proceeds
from finance obligations |
— |
|
|
— |
|
|
— |
|
|
5,325 |
|
Payments
on finance obligations |
— |
|
|
(1,622 |
) |
|
(13,694 |
) |
|
(2,731 |
) |
Proceeds
from long-term debt |
— |
|
|
— |
|
|
40,000 |
|
|
12,621 |
|
Payments
on long-term debt |
(40,000 |
) |
|
(469 |
) |
|
(85,297 |
) |
|
(469 |
) |
Payments
of preferred dividends |
— |
|
|
— |
|
|
(109 |
) |
|
— |
|
Proceeds
from exercise of stock options |
— |
|
|
654 |
|
|
10 |
|
|
1,473 |
|
Proceeds
from rights offering, net of offering costs |
— |
|
|
— |
|
|
— |
|
|
7,591 |
|
Proceeds
from issuance and exercise of stock warrants |
50,587 |
|
|
— |
|
|
157,049 |
|
|
— |
|
Proceeds
from security token offering, net of offering costs |
78,442 |
|
|
— |
|
|
79,347 |
|
|
— |
|
Purchase
of treasury stock |
— |
|
|
(10,000 |
) |
|
— |
|
|
(10,000 |
) |
Payments
of taxes withheld upon vesting of restricted stock |
(4,526 |
) |
|
(1,085 |
) |
|
(4,670 |
) |
|
(1,323 |
) |
Payment
of debt issuance costs |
— |
|
|
(251 |
) |
|
(419 |
) |
|
(251 |
) |
Net cash
provided by (used in) financing activities |
84,255 |
|
|
(12,773 |
) |
|
170,351 |
|
|
12,012 |
|
Net increase
(decrease) in cash, cash equivalents and restricted cash |
(50,974 |
) |
|
(79,033 |
) |
|
48,201 |
|
|
(18,528 |
) |
Cash, cash
equivalents and restricted cash, beginning of period |
203,670 |
|
|
183,528 |
|
|
104,495 |
|
|
123,023 |
|
Cash, cash
equivalents and restricted cash, end of period |
$ |
152,696 |
|
|
$ |
104,495 |
|
|
$ |
152,696 |
|
|
$ |
104,495 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Overstock.com, Inc. |
Consolidated Statements of Cash Flows
(Unaudited) |
(Continued) |
(in thousands) |
|
|
Six months ended June 30, |
|
Twelve months ended June
30, |
|
2018 |
|
2017 |
|
2018 |
|
2017 |
Supplemental disclosures of cash flow
information: |
|
|
|
|
|
|
|
Cash
paid during the period: |
|
|
|
|
|
|
|
Interest
paid, net of amounts capitalized |
$ |
1,113 |
|
|
$ |
1,308 |
|
|
$ |
2,745 |
|
|
$ |
2,238 |
|
Income
taxes paid, net of refunds |
7 |
|
|
183 |
|
|
311 |
|
|
977 |
|
Non-cash investing and financing activities: |
|
|
|
|
|
|
|
Fixed
assets, including internal-use software and website development,
costs financed through accounts payable and accrued
liabilities |
$ |
735 |
|
|
$ |
690 |
|
|
$ |
735 |
|
|
$ |
690 |
|
Equipment
acquired under capital lease obligations |
— |
|
|
— |
|
|
1,421 |
|
|
— |
|
Capitalized interest cost |
— |
|
|
— |
|
|
— |
|
|
27 |
|
Change in
fair value of cash flow hedge |
— |
|
|
(100 |
) |
|
(1,638 |
) |
|
(3,044 |
) |
Note
receivable converted to equity investment |
200 |
|
|
869 |
|
|
699 |
|
|
3,719 |
|
Acquisition of businesses through stock issuance |
2,930 |
|
|
— |
|
|
2,930 |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional Non-GAAP Financial Measure
Reconciliations
Retail and Medici pre-tax income or loss (non-GAAP financial
measures - which we reconcile to Consolidated pre-tax income or
loss) consist of income or loss before taxes of our Retail and
Medici businesses, excluding intercompany transactions eliminated
in consolidation. We believe these measures provide management and
users of the financial statements useful information, because they
provide financial results for our separate businesses which are
distinct in nature. The material limitation associated with these
measures is that they are an incomplete measure of our consolidated
operations.
We determined our segments based on how we manage our business,
which, in our view, consists primarily of our Retail and Medici
businesses. Our Retail business consists of our Direct and Partner
reportable segments. We use gross profit as the measure to
determine our reportable segments because there is not discrete
financial information available below gross profit for our Direct
and Partner segments. As a result, our Medici business is not
significant as compared to our Direct and Partner segments. Our
Other segment consists of Medici. We do not allocate assets between
our segments for our internal management purposes.
Retail pre-tax income or loss and Medici pre-tax income or loss
are used in addition to and in conjunction with results presented
in accordance with GAAP and should not be relied upon to the
exclusion of GAAP financial measures. You should review our
financial statements and publicly-filed reports in their entirety
and not rely on any single financial measure.
Our calculations of Retail Total (which consists of Direct and
Partner) and Other (which consists of Medici) pre-tax income or
loss are set forth below excluding intercompany transactions
eliminated in consolidation (in thousands):
|
Three months ended June
30, |
|
Direct |
|
Partner |
|
Retail Total |
|
Other |
|
Total |
2018 |
|
|
|
|
|
|
|
|
|
Revenue, net |
$ |
14,715 |
|
|
$ |
462,968 |
|
|
$ |
477,683 |
|
|
$ |
5,450 |
|
|
$ |
483,133 |
|
Cost of goods sold |
14,672 |
|
|
372,580 |
|
|
387,252 |
|
|
4,138 |
|
|
391,390 |
|
Gross profit |
$ |
43 |
|
|
$ |
90,388 |
|
|
$ |
90,431 |
|
|
$ |
1,312 |
|
|
$ |
91,743 |
|
Operating expenses |
|
|
|
|
149,437 |
|
|
8,842 |
|
|
158,279 |
|
Interest and other
income (expense), net |
|
|
|
|
1,624 |
|
|
(1,031 |
) |
|
593 |
|
Pre-tax loss |
|
|
|
|
(57,382 |
) |
|
(8,561 |
) |
|
(65,943 |
) |
Provision for (benefit
from) income taxes |
|
|
|
|
(40 |
) |
|
13 |
|
|
(27 |
) |
Net loss |
|
|
|
|
$ |
(57,342 |
) |
|
$ |
(8,574 |
) |
|
$ |
(65,916 |
) |
|
|
|
|
|
|
|
|
|
|
2017 |
|
|
|
|
|
|
|
|
|
Revenue, net |
$ |
22,099 |
|
|
$ |
405,856 |
|
|
$ |
427,955 |
|
|
$ |
4,069 |
|
|
$ |
432,024 |
|
Cost of goods sold |
21,147 |
|
|
323,892 |
|
|
345,039 |
|
|
2,814 |
|
|
347,853 |
|
Gross profit |
$ |
952 |
|
|
$ |
81,964 |
|
|
$ |
82,916 |
|
|
$ |
1,255 |
|
|
$ |
84,171 |
|
Operating expenses |
|
|
|
|
89,325 |
|
|
4,577 |
|
|
93,902 |
|
Interest and other
income, net |
|
|
|
|
13 |
|
|
— |
|
|
13 |
|
Pre-tax loss |
|
|
|
|
(6,396 |
) |
|
(3,322 |
) |
|
(9,718 |
) |
Benefit from income
taxes |
|
|
|
|
(176 |
) |
|
(1,799 |
) |
|
(1,975 |
) |
Net loss |
|
|
|
|
$ |
(6,220 |
) |
|
$ |
(1,523 |
) |
|
$ |
(7,743 |
) |
|
Six months ended June 30, |
|
Direct |
|
Partner |
|
Retail Total |
|
Other |
|
Total |
2018 |
|
|
|
|
|
|
|
|
|
Revenue, net |
$ |
30,985 |
|
|
$ |
886,694 |
|
|
$ |
917,679 |
|
|
$ |
10,785 |
|
|
$ |
928,464 |
|
Cost of goods sold |
29,444 |
|
|
705,388 |
|
|
734,832 |
|
|
8,020 |
|
|
742,852 |
|
Gross profit |
$ |
1,541 |
|
|
$ |
181,306 |
|
|
$ |
182,847 |
|
|
$ |
2,765 |
|
|
$ |
185,612 |
|
Operating expenses |
|
|
|
|
274,969 |
|
|
31,573 |
|
|
306,542 |
|
Interest and other
income (expense), net |
|
|
|
|
1,169 |
|
|
(915 |
) |
|
254 |
|
Pre-tax loss |
|
|
|
|
(90,953 |
) |
|
(29,723 |
) |
|
(120,676 |
) |
Benefit from income
taxes |
|
|
|
|
(128 |
) |
|
(176 |
) |
|
(304 |
) |
Net loss |
|
|
|
|
$ |
(90,825 |
) |
|
$ |
(29,547 |
) |
|
$ |
(120,372 |
) |
|
|
|
|
|
|
|
|
|
|
2017 |
|
|
|
|
|
|
|
|
|
Revenue, net |
$ |
44,927 |
|
|
$ |
811,117 |
|
|
$ |
856,044 |
|
|
$ |
8,415 |
|
|
$ |
864,459 |
|
Cost of goods sold |
42,110 |
|
|
645,189 |
|
|
687,299 |
|
|
6,082 |
|
|
693,381 |
|
Gross profit |
$ |
2,817 |
|
|
$ |
165,928 |
|
|
$ |
168,745 |
|
|
$ |
2,333 |
|
|
$ |
171,078 |
|
Operating expenses |
|
|
|
|
173,863 |
|
|
9,259 |
|
|
183,122 |
|
Interest and other
income (expense), net |
|
|
|
|
115 |
|
|
(4,411 |
) |
|
(4,296 |
) |
Pre-tax loss |
|
|
|
|
(5,003 |
) |
|
(11,337 |
) |
|
(16,340 |
) |
Provision for (benefit
from) income taxes |
|
|
|
|
713 |
|
|
(3,028 |
) |
|
(2,315 |
) |
Net loss |
|
|
|
|
$ |
(5,716 |
) |
|
$ |
(8,309 |
) |
|
$ |
(14,025 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Media Contact:Overstock.com Public Relations+1
(801) 947-3564pr@overstock.com
Investor Contact:Overstock.com Investor
Relations+1 (801) 947-5374ir@overstock.com
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