Document


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 8-K

CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934

March 13, 2020
Date of Report (date of earliest event reported)
Overstock.com, Inc.
(Exact name of Registrant as specified in its charter)
Delaware
 
000-49799
 
87-0634302
(State or other jurisdiction of
 
(Commission File Number)
 
(I.R.S. Employer
incorporation or organization)
 
 
 
Identification Number)

799 W. Coliseum Way
Midvale, Utah 84047
(Address of principal executive offices)
 
(801) 947-3100
(Registrant’s telephone number, including area code)

(Former name or former address, if changed since last report)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
o
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
 
 
o
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
 
 
o
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
 
 
o
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $0.0001 par value per share
OSTK
NASDAQ Global Market

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).

Emerging growth company o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
 

1



Item 2.02. Results of Operations and Financial Condition

On March 13, 2020, Overstock.com, Inc. (the “Company”) issued a press release announcing the Company’s financial results for the three months and twelve months ended December 31, 2019. A copy of the press release is furnished as Exhibit 99.1.

The information in this Current Report on Form 8-K and in the exhibit is being furnished and shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities of that Section, nor shall it be incorporated by reference into any filing under the Securities Act of 1933, as amended, except as may expressly be set forth in any such filing by specific reference.

Item 9.01. Financial Statements and Exhibits

(d)    Exhibits.
    
The following exhibit is furnished with this report:
    
99.1 Press release issued March 13, 2020.

This press release and the March 13, 2020 conference call and webcast to discuss our financial results may contain forward-looking statements within the meaning of the federal securities laws. 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 results of our ongoing review of strategic initiatives, adverse tax, regulatory or legal developments, competition, and any inability to raise capital or borrow funds in a timely manner or on acceptable terms. Other risks and uncertainties include, among others, the inherent risks associated with the businesses that Medici Ventures and tZERO are pursuing, including whether tZERO's joint venture with Box Digital Markets, LLC will be able to achieve its objectives and the timing for doing such, the effects of the departure of key business personnel, 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, and difficulties we may have with our search engine optimization results. More information about factors that could potentially affect our financial results is included in our Form 10-K for the year ended December 31, 2019, which was filed with the Securities and Exchange Commission on March 13, 2020, and in our subsequent filings with the Securities and Exchange Commission. The Form 10-K 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.


2



SIGNATURE
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
 
 
 
OVERSTOCK.COM, INC.
 
 
 
 
By:
/s/ JONATHAN E. JOHNSON III
 
 
Jonathan E. Johnson III
 
 
Chief Executive Officer
 
Date:
March 13, 2020


3
Exhibit


https://cdn.kscope.io/d4852b64314c7ab9d6de44f33d548fe4-overstocklogoa09.jpg

Public Relations:
pr@overstock.com

Investor Relations:
ir@overstock.com


Overstock.com Reports Q4 2019 Results
Consolidated revenue of $370.9 million and net loss of $27.0 million

SALT LAKE CITY - March 13, 2020 - Overstock.com, Inc. (NASDAQ:OSTK), a tech-driven online retailer and advancer of blockchain technology, today reported financial results for the quarter ended December 31, 2019.

Key metrics (Q4 2019 vs. Q4 2018):
Revenue: $370.9M vs. $452.5M (18% decrease);
Gross profit: $76.5M vs. $81.6M (6% decrease);
Gross margin: 20.6% vs. 18.0% (261 basis point increase);
Sales and marketing expense: $40.9M vs. $47.5M (14% decrease);
G&A/Technology expense: $67.2M vs. $82.5M (19% decrease);
Pre-tax loss: $29.8M vs. $49.9M ($20.1M improvement);
Pre-tax loss - Retail: $12.3M
Pre-tax loss - tZERO: $8.8M
Pre-tax loss - MVI: $5.2M
Pre-tax loss - Other: $3.5M
Net loss*: $27.0M vs. $42.3M ($15.3M improvement);
Diluted net loss per share: $0.73/share vs. $1.39/share ($0.66/share improvement);
Adjusted EBITDA (non-GAAP financial measure): ($19.0M) vs. ($27.5M) ($8.6M improvement);
Adjusted EBITDA - Retail: ($2.2M)
Adjusted EBITDA - tZERO: ($10.6M)
Adjusted EBITDA - MVI: ($2.7M)
Adjusted EBITDA - Other: ($3.4M)

*Net loss refers to Net loss attributable to stockholders of Overstock.com, Inc.

"The results of our fourth quarter and fiscal year were in line with our previously revised guidance," said Overstock CEO Jonathan Johnson. "Our retail business performed well despite a competitive holiday shopping season, and we continue to make progress toward our goal of realizing sustainable, profitable growth. Having achieved stability and identified key areas in which to focus our efforts, we are now moving into a phase of disciplined execution against our retail strategy. tZERO has also made impressive progress on its platform and we look forward to the issuance of our digital dividend and the increased platform activity we believe will result. Our other Medici Ventures companies continue to make progress as well, and I'll discuss those achievements in more detail during our call. I will also discuss the status of our dividend and provide other important corporate updates. As we look ahead in 2020, we are as optimistic as ever and confident about our ability for the company to continue to be the innovative leader in the e-commerce space that we've been known for throughout the years."


1



The company will hold a conference call and webcast to discuss its Q4 and full-year 2019 financial results on Friday, March 13, 2020, at 8:30 a.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 3978098 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. An audio replay of the webcast will be available via telephone starting at 11:30 a.m. ET on Friday, March 13, 2020, through 11:30 a.m. ET on Friday, March 27, 2020. 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 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 in assessing the company and its financial results.

Total net revenue - Total net revenue was $370.9 million and $452.5 million for Q4 2019 and 2018, respectively, an 18% decrease. This decrease was primarily due to decreased retail product sales that resulted primarily from a reduction in sales and marketing activities, which was part of our ongoing effort to return to retail profitability. In January 2018, we shifted our retail strategy to aggressively pursue revenue growth and new customers with a large increase in sales and marketing expenses. We discontinued this strategy in August 2018 and have returned to a more disciplined approach to marketing, but we continued to see revenue benefits from this strategy in Q4 2018. In addition, we have seen our revenues negatively impacted due to increased tariffs on goods manufactured in China, search traffic taking longer than expected to translate into purchasing customers, waning consumer confidence decreasing conversion on high dollar purchases industry-wide, and other more general decreases in conversion.

Gross profit - Gross profit was $76.5 million and $81.6 million for Q4 2019 and 2018, respectively, a 6% decrease, representing 20.6% and 18.0% gross margin for those respective periods. The decrease in gross profit was primarily due to the decrease in net revenue in the retail business described above, partially offset by an increase in gross margin. The increase in gross margin was primarily due to a decrease in product costs resulting from a continued shift in product sales mix into higher margin products, reduced shipping costs due to renegotiated rates with our freight carriers, and a higher proportion of our revenue coming from marketplace sales, which we recognize on a net basis.

Sales and marketing expenses - Sales and marketing expenses totaled $40.9 million and $47.5 million for Q4 2019 and 2018, respectively, a 14% decrease, representing 11.0% and 10.5% of total net revenue for those respective periods. This decrease in sales and marketing expenses was primarily due to our return to our historical focus on operational efficiency. As part of this effort, we reduced spending in the sponsored search and direct mail marketing channels.


2



Technology expenses - Technology expenses totaled $34.0 million and $34.6 million for Q4 2019 and 2018, respectively, a 2% decrease, representing 9.2% and 7.6% of total revenue for those respective periods. The decrease was primarily due to a $1.3 million decrease in technology licenses and maintenance costs, a $402,000 decrease in consulting costs, and a $293,000 decrease in depreciation costs. These decreases were partially offset by a $1.7 million increase in technology staff-related costs.

General and administrative ("G&A") expenses - G&A expenses totaled $33.2 million and $47.9 million for Q4 2019 and 2018, respectively, a 31% decrease, representing 9.0% and 10.6% of total revenue for those respective periods. The decrease was primarily due to a $10.7 million decrease in intangible asset impairments and asset disposal losses, a $1.5 million decrease in administrative staff-related costs, and a $1.3 million decrease in consulting expenses.

Other income (expense), net - Other income (expense), net totaled $1.5 million and ($2.0) million for Q4 2019 and 2018, respectively. The increase was due to a $3.5 million increase in non-cash gains on equity holdings and other assets.

Net cash used in operating activities - Net cash used in operating activities was $81.6 million and $138.9 million for the twelve months ended December 31, 2019 and 2018, respectively. The $57.3 million improvement was primarily due to decreased losses largely due to our change in retail strategy, as described above.

Free cash flow (a non-GAAP financial measure) - Free cash flow totaled ($103.4) million and ($167.6) million for the twelve months ended December 31, 2019 and 2018, respectively. The $64.2 million improvement was due to a $57.3 million improvement in operating cash flow and a $6.9 million decrease in capital expenditures.

Cash - We had cash and cash equivalents of $112.3 million and $141.5 million at December 31, 2019 and December 31, 2018, respectively. The decrease was primarily due to funding of operating losses, partially offset by $83.0 million in net proceeds received from at-the-market stock offerings during 2019.

Non-GAAP Financial Presentation
We are providing certain non-GAAP financial measures in this release because we believe that these figures are helpful in allowing investors to more accurately assess the ongoing nature of our operations and measure our performance more consistently across periods. The presentation of this additional non-GAAP financial information is not intended to be considered in isolation or as a substitute for the financial information prepared and presented in accordance with GAAP. The tables at the end of this release provide reconciliations of these non-GAAP items to the most nearly equivalent GAAP measures, our rationale and a discussion of the limitations of these non-GAAP measures.


About Overstock.com
Overstock.com, Inc Common Shares (NASDAQ:OSTK) / Digital Voting Series A-1 Preferred Stock (Medici Ventures’ tZERO platform:OSTKO) / Series B Preferred (OTCQX:OSTBP) is an online retailer and technology company based in Salt Lake City, Utah. Its leading e-commerce website sells a broad range of new home products at low prices, including furniture, décor, rugs, bedding, home improvement, and more. The online shopping site, which is visited by nearly 40 million customers a month, also features a marketplace providing customers access to millions of products from third-party sellers. Overstock was the first major retailer to accept cryptocurrency in 2014, and in the same year founded Medici Ventures, its wholly-owned subsidiary dedicated to the development and acceleration of blockchain technologies to democratize capital, eliminate middlemen, and re-humanize commerce. Overstock regularly posts information about the Company and other related matters on the Newsroom and Investor Relations pages on its website, Overstock.com. O, Overstock.com, O.com, Club O, Main Street Revolution, and Worldstock are registered 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.

#####


3



This press release and the March 13, 2020 conference call and webcast to discuss our financial results may contain forward-looking statements within the meaning of the federal securities laws. 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 results of our ongoing review of strategic initiatives, adverse tax, regulatory or legal developments, competition, and any inability to raise capital or borrow funds in a timely manner or on acceptable terms. Other risks and uncertainties include, among others, the inherent risks associated with the businesses that Medici Ventures and tZERO are pursuing, including whether tZERO's joint venture with Box Digital Markets, LLC will be able to achieve its objectives and the timing for doing such, the effects of the departure of key business personnel, 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, and difficulties we may have with our search engine optimization results. More information about factors that could potentially affect our financial results is included in our Form 10-K for the year ended December 31, 2019, which was filed with the Securities and Exchange Commission on March 13, 2020, and in our subsequent filings with the Securities and Exchange Commission. The Form 10-K 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.

4



Overstock.com, Inc.
Consolidated Balance Sheets
(in thousands)
 
December 31,
2019
 
December 31,
2018
Assets
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
112,266

 
$
141,512

Restricted cash
2,632

 
1,302

Marketable securities at fair value
10,308

 

Accounts receivable, net
24,728

 
35,930

Notes receivable, current
3,111

 
359

Inventories, net
5,840

 
14,108

Prepaids and other current assets
18,478

 
22,056

Total current assets
177,363

 
215,267

Property and equipment, net
130,028

 
134,687

Intangible assets, net
11,756

 
13,370

Goodwill
27,120

 
22,895

Equity securities
42,043

 
60,427

Operating lease right-of-use assets
25,384

 

Other long-term assets, net
4,033

 
14,573

Total assets
$
417,727

 
$
461,219

Liabilities and Stockholders’ Equity
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
75,416

 
$
102,574

Accrued liabilities
88,197

 
87,858

Deferred revenue
41,821

 
50,578

Operating lease liabilities, current
6,603

 

Other current liabilities
3,962

 
476

Total current liabilities
215,999

 
241,486

Long-term debt, net

 
3,069

Operating lease liabilities, non-current
21,554

 

Other long-term liabilities
2,319

 
5,958

Total liabilities
239,872

 
250,513

Commitments and contingencies
 
 
 
Stockholders' equity:
 

 
 

Preferred stock, $0.0001 par value, authorized shares - 5,000
 
 
 
Series A, issued and outstanding - 0 and 127

 

Series A-1, issued and outstanding - 4,210 and 0 (including 4,085 shares declared as a stock dividend, not yet distributed)

 

Series B, issued and outstanding - 357 and 355

 

Common stock, $0.0001 par value, authorized shares - 100,000
 

 
 

Issued shares - 42,790 and 35,346
 

 
 

Outstanding shares - 39,464 and 32,146
4

 
3

Additional paid-in capital
764,845

 
657,981

Accumulated deficit
(580,390
)
 
(458,897
)
Accumulated other comprehensive loss
(568
)
 
(584
)
Treasury stock at cost - 3,326 and 3,200
(68,807
)
 
(66,757
)
Equity attributable to stockholders of Overstock.com, Inc.
115,084

 
131,746

Equity attributable to noncontrolling interests
62,771


78,960

Total stockholders' equity
177,855

 
210,706

Total liabilities and stockholders' equity
$
417,727

 
$
461,219


5



Overstock.com, Inc.
Consolidated Statements of Operations
(in thousands, except per share data)
 
Three months ended December 31,
 
2019
 
2018
Revenue, net
 
 
 
Retail
$
364,076

 
$
446,733

Other
6,805

 
5,815

Total net revenue
370,881

 
452,548

Cost of goods sold
 
 
 
Retail
288,856

 
366,712

Other
5,503

 
4,256

Total cost of goods sold
294,359

 
370,968

Gross profit
76,522

 
81,580

Operating expenses:
 
 
 
Sales and marketing
40,868

 
47,537

Technology
33,970

 
34,557

General and administrative
33,247

 
47,930

Total operating expenses
108,085

 
130,024

Operating loss
(31,563
)
 
(48,444
)
Interest income
315

 
661

Interest expense
(53
)
 
(98
)
Other income (expense), net
1,547

 
(1,999
)
Loss before income taxes
(29,754
)
 
(49,880
)
Benefit for income taxes
(94
)
 
(1,939
)
Net loss
$
(29,660
)
 
$
(47,941
)
Less: Net loss attributable to noncontrolling interests
(2,682
)
 
(5,614
)
Net loss attributable to stockholders of Overstock.com, Inc.
$
(26,978
)
 
$
(42,327
)
Net loss per common share—basic:
 
 
 
Net loss attributable to common shares—basic
$
(0.73
)
 
$
(1.39
)
Weighted average common shares outstanding—basic
36,573

 
32,112

Net loss per common share—diluted:
 
 
 
Net loss attributable to common shares—diluted
$
(0.73
)
 
$
(1.39
)
Weighted average common shares outstanding—diluted
36,573

 
32,112



6



Overstock.com, Inc.
Consolidated Statements of Operations
(in thousands, except per share data)
 
Year ended December 31,
 
2019
 
2018
Revenue, net
 
 
 
Retail
$
1,434,974

 
$
1,800,187

Other
24,444

 
21,405

Total net revenue
1,459,418

 
1,821,592

Cost of goods sold
 
 
 
Retail
1,147,025

 
1,452,195

Other
19,300

 
15,489

Total cost of goods sold
1,166,325

 
1,467,684

Gross profit
293,093

 
353,908

Operating expenses:
 
 
 
Sales and marketing
143,120

 
274,479

Technology
135,338

 
132,154

General and administrative
138,124

 
164,481

Total operating expenses
416,582

 
571,114

Operating loss
(123,489
)
 
(217,206
)
Interest income
1,797

 
2,208

Interest expense
(342
)
 
(1,468
)
Other expense, net
(12,501
)
 
(3,488
)
Loss before income taxes
(134,535
)
 
(219,954
)
Provision (benefit) for income taxes
185

 
(2,384
)
Net loss
$
(134,720
)
 
$
(217,570
)
Less: Net loss attributable to noncontrolling interests
(12,879
)
 
(11,500
)
Net loss attributable to stockholders of Overstock.com, Inc.
$
(121,841
)
 
$
(206,070
)
Net loss per common share—basic:
 
 
 
Net loss attributable to common shares—basic
$
(3.46
)
 
$
(6.83
)
Weighted average common shares outstanding—basic
34,865

 
29,976

Net loss per common share—diluted:
 
 
 
Net loss attributable to common shares—diluted
$
(3.46
)
 
$
(6.83
)
Weighted average common shares outstanding—diluted
34,865

 
29,976


7




Overstock.com, Inc.
Consolidated Statements of Cash Flows
(in thousands)
 
Year ended December 31,
 
2019
 
2018
Cash flows from operating activities:
 

 
 

Consolidated net loss
$
(134,720
)
 
$
(217,570
)
Adjustments to reconcile consolidated net loss to net cash used in operating activities:
 

 
 

Depreciation of property and equipment
26,262

 
26,411

Amortization of intangible assets
4,769

 
5,286

Non-cash operating lease cost
6,676

 

Stock-based compensation to employees and directors
18,229

 
14,356

Deferred income taxes, net
(69
)
 
(2,386
)
Gain on sale of cryptocurrencies
(569
)
 
(8,370
)
Impairment of cryptocurrencies
334

 
10,463

Impairment of equity securities
7,090

 
536

Losses on equity method securities
7,734

 
3,869

Loss on disposal of business and other asset abandonments

 
3,565

Impairments on intangible assets
1,406

 
6,000

Other non-cash adjustments
(2,037
)
 
(583
)
Changes in operating assets and liabilities, net of acquisitions:
 
 
 
Accounts receivable, net
13,385

 
(5,558
)
Inventories, net
8,268

 
628

Prepaids and other current assets
5,956

 
(3,622
)
Other long-term assets, net
(660
)
 
(2,870
)
Accounts payable
(27,158
)
 
16,499

Accrued liabilities
(281
)
 
5,661

Deferred revenue
(8,757
)
 
9,150

Operating lease liabilities
(8,013
)
 

Other long-term liabilities
543

 
(399
)
Net cash used in operating activities
(81,612
)
 
(138,934
)
Cash flows from investing activities:
 

 
 

Purchase of intangible assets

 
(9,597
)
Purchase of equity securities
(12,641
)
 
(48,731
)
Proceeds from sale of equity securities and marketable securities
7,339

 

Disbursement for notes receivable
(4,715
)
 
(3,059
)
Acquisitions of businesses, net of cash acquired
4,886

 
(12,912
)
Deposit on purchase of a business

 
(8,000
)
Expenditures for property and equipment
(21,774
)
 
(28,680
)
Other investing activities, net
53

 
56

Net cash used in investing activities
(26,852
)
 
(110,923
)
 
Continued on the following page
 

8



Overstock.com, Inc.
Consolidated Statements of Cash Flows
(in thousands)
 
Year ended December 31,
 
2019
 
2018
Cash flows from financing activities:
 

 
 

Payment on long-term debt
(3,141
)
 
(40,000
)
Proceeds under short-term contract financing
4,858

 

Payments under short-term contract financing
(1,353
)


Payments of preferred dividends
(77
)
 
(77
)
Proceeds from issuance and exercise of stock warrants

 
50,588

Proceeds from security token offering, net of offering costs and withdrawals

 
82,354

Proceeds from sale of common stock, net of offering costs
82,954

 
94,554

Paid in capital for noncontrolling interest

 
6,700

Payments of taxes withheld upon vesting of restricted stock
(1,407
)
 
(4,622
)
Other financing activities, net
(1,286
)
 
(496
)
Net cash provided by financing activities
80,548

 
189,001

Net decrease in cash and cash equivalents
(27,916
)
 
(60,856
)
Cash, cash equivalents and restricted cash, beginning of year
142,814

 
203,670

Cash, cash equivalents and restricted cash, end of year
$
114,898

 
$
142,814

 
 
 
 
Supplemental disclosures of cash flow information:
 
 
 
Cash paid during the period:
 
 
 
Interest paid, net of amounts capitalized
$
264

 
$
1,319

Income taxes refunded, net
(1,259
)
 
(726
)
Non-cash investing and financing activities:
 
 
 
Property and equipment financed through accounts payable and accrued liabilities
$
350

 
$
139

Proceeds from sale of common stock included in accounts receivable
2,848

 

Acquisition of assets through stock issuance

 
4,430

Common stock repurchased through business combination
643

 

Receivables converted to equity securities
2,887

 
200

Deposit applied to business combination purchase price
7,347

 

Equity method security applied to business combination purchase price
3,800

 

Recognition of right-of-use assets upon adoption of ASC 842
30,968

 



9



Segment Financial Information

Segment information has been prepared in accordance with ASC Topic 280 Segment Reporting. We determined our segments based on how we manage our business. Beginning in the first quarter of 2019, we began allocating corporate support costs (administrative functions such as finance, human resources, and legal) to our operating segments based on their estimated usage and based on how we manage our business. Comparative prior year information has not been recast and as a result our corporate support costs for those comparative prior periods remain allocated to our Retail segment. Our Medici business includes two reportable segments, tZERO and the unconsolidated financial information for Medici Ventures ("MVI"). The MVI segment consists of the Medici business not associated with tZERO or Medici Land Governance ("MLG"). We use pre-tax net income (loss) as the measure to determine our reportable segments. As a result, the MLG portion of our Medici business is not significant as compared to our Retail, tZERO, and MVI segments.

Our Retail segment primarily consists of amounts earned through e-commerce sales through our Website, excluding intercompany transactions eliminated in consolidation.

Our tZERO segment primarily consists of amounts earned through securities transaction through our broker-dealers and costs incurred to execute our tZERO business initiatives, excluding intercompany transactions eliminated in consolidation.

Our MVI segment primarily consists of costs incurred to create or foster a set of products and solutions that leverage blockchain technology to generate efficiencies and increase security and control, excluding intercompany transactions eliminated in consolidation.

Our Other segment consists of MLG and our unallocated corporate support costs.

The following table summarizes information about reportable segments and includes a reconciliation to consolidated net loss (in thousands):

10




 
Three months ended December 31,
 
Retail
 
tZERO
 
MVI
 
Other
 
Total
2019
 
 
 
 
 
 
 
 
 

Total net revenue
$
364,076

 
$
5,873

 
$
819

 
$
113

 
$
370,881

Cost of goods sold
288,856

 
4,684

 
819

 

 
294,359

Gross profit
75,220

 
1,189

 

 
113

 
76,522

Operating expenses (1)
87,801

 
13,501

 
3,195

 
3,588

 
108,085

Interest and other income (expense), net (2)
247

 
3,540

 
(1,971
)
 
(7
)
 
1,809

Pre-tax loss
$
(12,334
)
 
$
(8,772
)
 
$
(5,166
)
 
$
(3,482
)
 
(29,754
)
Benefit for income taxes

 

 

 

 
(94
)
Net loss (3)

 

 

 

 
$
(29,660
)
 

 
 
 
 
 

 

2018
 
 
 
 
 
 
 
 
 
Total net revenue
$
446,733

 
$
4,963

 
$
852

 
$

 
$
452,548

Cost of goods sold
366,712

 
3,404

 
852

 

 
370,968

Gross profit
80,021

 
1,559

 

 

 
81,580

Operating expenses
106,573

 
13,885

 
1,872

 
7,694

 
130,024

Interest and other expense, net (2)
(1,130
)
 
(280
)
 
(19
)
 
(7
)
 
(1,436
)
Pre-tax loss
$
(27,682
)
 
$
(12,606
)
 
$
(1,891
)
 
$
(7,701
)
 
(49,880
)
Benefit for income taxes

 

 

 

 
(1,939
)
Net loss (3)

 

 

 

 
$
(47,941
)

 
Year ended December 31,
 
Retail
 
tZERO
 
MVI
 
Other
 
Total
2019
 
 
 
 
 
 
 
 
 

Total net revenue
$
1,434,974

 
$
21,582

 
$
2,749

 
$
113

 
$
1,459,418

Cost of goods sold
1,147,025

 
16,551

 
2,749

 

 
1,166,325

Gross profit
287,949

 
5,031

 

 
113

 
293,093

Operating expenses (1)
332,372

 
54,911

 
14,778

 
14,521

 
416,582

Interest and other income (expense), net (2)
559

 
2,442

 
(14,039
)
 
(8
)
 
(11,046
)
Pre-tax loss
$
(43,864
)
 
$
(47,438
)
 
$
(28,817
)
 
$
(14,416
)
 
(134,535
)
Provision for income taxes

 

 

 

 
185

Net loss (3)

 

 

 

 
$
(134,720
)
 

 
 
 
 
 
 
 

2018
 
 
 
 
 
 
 
 
 
Total net revenue
$
1,800,187

 
$
19,043

 
$
2,362

 
$

 
$
1,821,592

Cost of goods sold
1,452,195

 
13,127

 
2,362

 

 
1,467,684

Gross profit
347,992

 
5,916

 

 

 
353,908

Operating expenses
506,113

 
47,006

 
8,316

 
9,679

 
571,114

Interest and other income (expense), net (2)
(476
)
 
233

 
(2,498
)
 
(7
)
 
(2,748
)
Pre-tax loss
$
(158,597
)
 
$
(40,857
)
 
$
(10,814
)
 
$
(9,686
)
 
(219,954
)
Benefit for income taxes

 

 

 

 
(2,384
)
Net loss (3)

 

 

 

 
$
(217,570
)
__________________________________________
(1)
Corporate support costs for the three months ended December 31, 2019 have been allocated $10.5 million, $1.5 million, $1.1 million, and $2.0 million to Retail, tZERO, MVI, and Other, respectively. Unallocated corporate support costs of $1.5 million are included in Other. Corporate support costs for the year ended December 31, 2019 have been allocated $42.0 million, $6.0 million, $4.2 million, and $7.8 million to Retail, tZERO, MVI, and Other, respectively. Unallocated corporate support costs of $6.0 million are included in Other.

11



(2)
Excludes intercompany transactions eliminated in consolidation, which consist primarily of service fees and interest. The net amounts of these intercompany transactions were $934,000 and $432,000 for the three-month periods ended December 31, 2019 and 2018, respectively, and $2.7 million and $3.5 million for the years ended December 31, 2019 and 2018, respectively.
(3)
Net loss presented for segment reporting purposes is before any adjustments attributable to noncontrolling interests.



12



Non-GAAP Financial Measure Reconciliations

Adjusted EBITDA

Adjusted EBITDA is a non-GAAP financial measure that is calculated as net income (loss) before depreciation and amortization, stock-based compensation, interest and other income (expense), provision (benefit) for income taxes, and special items. We have included Adjusted EBITDA in this earnings release because it reflects an additional way of viewing the operating performance at both the consolidated and segment level that is used internally in analyzing our financial results and we believe it is useful to investors as a supplement to GAAP measures in evaluating our ongoing operational performance. In particular, the exclusion of certain expenses in calculating Adjusted EBITDA facilitates operating performance comparisons on a period-to-period basis. Exclusion of items in the non-GAAP presentation should not be construed as an inference that these items are unusual, infrequent or non-recurring. We have provided a reconciliation below of our segment and consolidated Adjusted EBITDA to net income (loss), the most directly comparable GAAP financial measure.

Adjusted EBITDA is 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. Adjusted EBITDA has limitations such as: 
    
Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and Adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements;
Adjusted EBITDA does not reflect stock-based compensation and related taxes;
Adjusted EBITDA does not reflect adjustments related to the carrying values of our equity interests in unconsolidated entities;
Adjusted EBITDA does not reflect interest expenses associated with our borrowings;
Adjusted EBITDA does not reflect income tax payments that may represent a reduction in cash available to us;
Adjusted EBITDA does not reflect changes in our working capital; and
Other companies, including companies in our industry, may calculate Adjusted EBITDA differently, which reduces its usefulness as a comparative measure.

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


13



 
 Three months ended December 31,
 
2019
 
2018
Adjusted EBITDA
 
 
 
Retail
$
(2,194
)
 
$
(16,856
)
tZERO
(10,628
)
 
(7,256
)
MVI
(2,695
)
 
(1,714
)
Other
(3,442
)
 
(1,687
)
Adjusted EBITDA
(18,959
)
 
(27,513
)
Less: Special items (see table below)

 
9,565

Less: Depreciation and amortization
7,998

 
8,664

Less: Stock-based compensation
4,606

 
2,702

Less: Interest income, net
(262
)
 
(563
)
Less: Other (income) expense, net (1)
(1,547
)
 
1,999

Less: Provision (benefit) for income taxes
(94
)
 
(1,939
)
Net loss
$
(29,660
)
 
$
(47,941
)
 
 
 
 
Special items:
 
 
 
Impairments on intangible assets
$

 
$
6,000

Losses on the disposal of various businesses

 
3,565

 
$

 
$
9,565


 
Year ended December 31,
 
2019
 
2018
Adjusted EBITDA
 
 
 
Retail
$
(3,648
)
 
$
(111,537
)
tZERO
(43,797
)
 
(25,271
)
MVI
(11,981
)
 
(7,296
)
Other
(14,298
)
 
(3,647
)
Adjusted EBITDA
(73,724
)
 
(147,751
)
Less: Special items (see table below)
1,942

 
23,402

Less: Depreciation and amortization
29,594

 
31,697

Less: Stock-based compensation
18,229

 
14,356

Less: Interest income, net
(1,455
)
 
(740
)
Less: Other expense, net (1)
12,501

 
3,488

Less: Provision (benefit) for income taxes
185

 
(2,384
)
Net loss
$
(134,720
)
 
$
(217,570
)
 
 
 
 
Special items:
 
 
 
Impairments on intangible assets
$
1,406

 
$
6,000

Losses on the disposal of various businesses

 
3,565

Cryptocurrency impairments and gains on sale, net

 
443

Severance
1,757

 
1,600

Special legal expenses (2)
(1,221
)
 
11,794

 
$
1,942

 
$
23,402

 ___________________________________________
(1)
Other expense, net for the three months ended December 31, 2019 includes $1.5 million of non-cash gains on equity holdings and other assets. Other expense, net for the year ended December 31, 2019 includes $12.5 million of non-cash losses on equity holdings and other assets.
(2)
Special legal expenses include charges and credits associated with our gift card escheatment case in Delaware and legal fees associated with pursuing our strategic alternatives.

14



Free Cash Flow

Free cash flow is a non-GAAP financial measure that 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 below to "Net cash used in operating activities," the nearest GAAP financial measure, is net cash used in operating activities reduced by "Expenditures for property and equipment." We believe that net cash used in 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. We believe free cash flow is a useful measure to evaluate our business since purchases of property and equipment 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 purchases of property and equipment. Free cash flow measures have limitations as they omit certain components of the overall consolidated statement of cash flows and do not represent the residual cash flow available for discretionary expenditures. Free cash flow should not be considered a substitute for net income or cash flow data prepared in accordance with GAAP and may not be comparable to similarly titled measures used by other companies. Therefore, we believe it is important to view free cash flow as a complement to our entire consolidated statements of cash flows as reconciled below (in thousands):

 
Year ended December 31,
 
2019
 
2018
Net cash used in operating activities
$
(81,612
)

$
(138,934
)
Expenditures for property and equipment
(21,774
)

(28,680
)
Free cash flow
$
(103,386
)
 
$
(167,614
)

Contribution and Contribution Margin

Contribution and contribution margin (non-GAAP financial measures, which we reconcile to "Gross Profit" in our consolidated statement of operations) consist of gross profit less sales and marketing expense and reflects an additional way of viewing our results. Contribution margin is contribution as a percentage of total net revenue. We believe contribution and contribution margin provide management and users of the financial statements information about our ability to cover our operating costs, such as technology and general and administrative expenses, while reflecting the selling costs we incurred to generate our revenues. Contribution and contribution margin 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. The material limitation associated with the use of contribution is that it is an incomplete measure of profitability as it does not include all operating expenses or all non-operating income and expenses. You should review our financial statements and publicly-filed reports in their entirety and not rely on any single financial measure.

15



Our calculation of our contribution and contribution margin is set forth below (in thousands):

 
Three months ended December 31,
 
Retail
 
Other (1)
 
Total
2019
 
 
 
 
 
Total net revenue
$
364,076

 
$
6,805

 
$
370,881

Cost of goods sold
288,856

 
5,503

 
294,359

Gross profit
75,220

 
1,302

 
76,522

Less: Sales and marketing expense
39,946

 
922

 
40,868

Contribution
$
35,274

 
$
380

 
$
35,654

Contribution margin
9.7
%
 
5.6
%
 
9.6
%
 
 
 
 
 
 
2018
 
 
 
 
 

Total net revenue
$
446,733

 
$
5,815

 
$
452,548

Cost of goods sold
366,712

 
4,256

 
370,968

Gross profit
80,021

 
1,559

 
81,580

Less: Sales and marketing expense
47,142

 
395

 
47,537

Contribution
$
32,879

 
$
1,164

 
$
34,043

Contribution margin
7.4
%
 
20.0
%
 
7.5
%

 
Year ended December 31,
 
Retail
 
Other (1)
 
Total
2019
 
 
 
 
 
Total net revenue
$
1,434,974

 
$
24,444

 
$
1,459,418

Cost of goods sold
1,147,025

 
19,300

 
1,166,325

Gross profit
287,949

 
5,144

 
293,093

Less: Sales and marketing expense
140,377

 
2,743

 
143,120

Contribution
$
147,572

 
$
2,401

 
$
149,973

Contribution margin
10.3
%
 
9.8
%
 
10.3
%
 
 
 
 
 
 
2018
 
 
 
 
 
Total net revenue
$
1,800,187

 
$
21,405

 
$
1,821,592

Cost of goods sold
1,452,195

 
15,489

 
1,467,684

Gross profit
347,992

 
5,916

 
353,908

Less: Sales and marketing expense
269,988

 
4,491

 
274,479

Contribution
$
78,004

 
$
1,425

 
$
79,429

Contribution margin
4.3
%
 
6.7
%
 
4.4
%
__________________________________________
(1)
Other includes our tZERO, MVI, and Other segments.


16