Overstock.com Investor

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Overstock.com Reports Q4 and Fiscal Year 2017 Results

FY 2017 revenue of $1.7 billion (-3% growth) and pre-tax loss of ($47.7) million
Q4 2017 revenue of $456 million (-13% growth) and pre-tax loss of ($24.9) million

SALT LAKE CITY, March 15, 2018 (GLOBE NEWSWIRE) --  Overstock.com, Inc. (NASDAQ:OSTK) today reported financial results for the quarter and fiscal year ended December 31, 2017.

Dear Owners,

Your business has two sides: ecommerce and blockchain.

  • We announced on our last earnings call that we had engaged Guggenheim to consider strategic alternatives, one of them being a sale of our ecommerce assets. This work is ongoing and we will provide an update when appropriate. That said, our philosophy has always been to run every asset like we intend to own it forever and our strategy discussion will be framed in that mindset. Our ecommerce business had its second annual pre-tax loss ($25 million) in nine years faced with a competitor called Wayfair running a pre-tax loss of $244 million for 2017. In fact, in the last four years, while our retail business has had pre-tax income of $30 million, Wayfair has lost $663 million: this is creating no small amount of margin compression. Because I do not want to watch this play out over years, I believe it is time for us to respond in kind. Thus, I am announcing that we are for the first time adopting the classic internet "growth strategy" I have previously eschewed: high growth, negative GAAP net income, funded out of our negative cash conversion cycle. We have already turned on the jets, and will demonstrate this year that our growth engine is far more efficient.
  • Because of this change in strategy and recent losses, we have changed the treatment of our deferred tax assets. We are providing a full valuation allowance on our deferred tax assets, causing a $59 million non-cash tax charge in 2017. Additionally, the effect of Trump's Tax Cuts and Jobs Act has created another $25 million non-cash tax charge in 2017, primarily due to the reduction of the corporate tax rate.
  • Our blockchain enterprises under Medici are progressing nicely. We have a strong head start in a number of products under development. DeSoto, Bitt, and tZERO are most known, but there are some other developments within Medici that bear watching.

Our earnings call is going to be unusually robust and informative, geared for the analysts and shareholders trying to make sense out of a complex tale. We will also discuss our strategy. I strongly recommend anyone trying to understand this complex tale start by hitting this link to the recording of the call and slides which will be live two hours after the call's completion: https://www.overstock.com/2017-FY-earnings

Your humble servant,
Patrick M. Byrne

Key FY 2017 metrics (comparison to FY 2016):

  • Revenue: $1.745B vs. $1.800B (3% decrease);
  • Gross profit: $340.6M vs. $331.3M (3% increase);
  • Gross margin: 19.5% vs. 18.4% (111 basis point increase);
  • Sales and marketing expense: $180.6M vs. $147.9M (22% increase);
  • Contribution (non-GAAP measure): $162.7M vs. $200.3M (19% decrease);
  • G&A/Technology expense: $206.6M vs. $196.1M (5% increase);
  • Pre-tax income (loss): ($47.7M) vs. $20.5M ($68.3M decrease);
    • Pre-tax loss - OSTK retail (non-GAAP financial measure): ($25.4M)
    • Pre-tax loss - Medici (non-GAAP financial measure): ($22.3M)
  • Provision for income taxes: $64.2M vs. $9.3M ($54.9M increase including non-cash adjustments for the Tax Cuts and Jobs Act and other factors described below);
  • Net income (loss)*: ($109.9M) vs. $12.5M ($122.4M decrease);
  • Diluted net income (loss) per share: ($4.28)/share vs. $0.49/share ($4.77/share decrease).

Key Q4 2017 metrics (comparison to Q4 2016):

  • Revenue: $456.3M vs. $526.2M (13% decrease);
  • Gross profit: $85.8M vs. $98.0M (12% decrease);
  • Gross margin: 18.8% vs. 18.6% (18 basis point increase);
  • Sales and marketing expense: $54.5M vs. $48.4M (13% increase);
  • Contribution (non-GAAP measure): $32.1 vs. $54.2M (41% decrease);
  • G&A/Technology expense: $54.0M vs. $50.0M (8% increase);
  • Pre-tax income (loss): ($24.9M) vs. $3.9M ($28.8M decrease);
    • Pre-tax loss - OSTK retail (non-GAAP financial measure): ($17.6M)
    • Pre-tax loss - Medici (non-GAAP financial measure): ($7.3M)
  • Provision for income taxes: $71.9M vs. $1.1M ($70.8M increase including non-cash adjustments for the Tax Cuts and Jobs Act and other factors described below);
  • Net income (loss)*: ($95.7M) vs. $3.1M ($98.8M decrease);
  • Diluted net income (loss) per share: ($3.72)/share vs. $0.12/share ($3.84/share decrease).

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

We will hold a conference call and webcast to discuss our Q4 and fiscal year 2017 financial results on Thursday, March 15, 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 7786695 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/2017-FY-earnings. An audio replay of the webcast will be available via telephone starting at 7:30 p.m. ET on Thursday, March 15, 2018, through 6:30 p.m. ET on Thursday, March 29, 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 $456.3 million and $526.2 million for Q4 2017 and 2016, respectively, a 13% decrease. Total net revenue for FY 2017 and 2016 was $1.745 billion and $1.800 billion, respectively, a 3% decrease. Beginning in mid-2017 and continuing in the fourth quarter of 2017, we experienced difficulties which we believe were due in part to changes that Google, Inc. ("Google") has made in its natural search engine algorithms. It is taking us longer to analyze and to seek to adapt to the 2017 algorithm adjustments than it took us to respond to Google's changes in previous years. We have reorganized a large number of resources around addressing this challenge, as well as seeking to prevent it from occurring again. We have implemented a variety of innovations and technical improvements in this area and expect to continue to do so. This decrease to revenue was partially offset by efforts to increase revenue in other marketing channels such as sponsored search and email.

Gross profit - Gross profit was $85.8 million and $98.0 million for Q4 2017 and 2016, respectively, a 12% decrease, representing 18.8% and 18.6% gross margin for those respective periods. Gross profit for FY 2017 and 2016 was $340.6 million and $331.3 million, respectively, a 3% increase, representing 19.5% and 18.4% gross margin for those respective periods. The increase in gross margin was primarily due to a continued shift in sales mix into higher margin home and garden products and an increase in marketplace sales (which we recognize on a net basis), partially offset by increased promotional activities.

Sales and marketing expenses - Sales and marketing expenses totaled $54.5 million and $48.4 million for Q4 2017 and 2016, respectively, a 13% increase, representing 11.9% and 9.2% of total net revenue for those respective periods. Sales and marketing expenses totaled $180.6 million and $147.9 million for FY 2017 and 2016, respectively, a 22% increase, representing 10.4% and 8.2% of total net revenue for those respective periods. The increase in sales and marketing expenses as a percent of revenue was primarily due to increased spending in the sponsored search, display ads on social media, and television marketing channels, due in part to our seeking to increase revenue in these channels to offset the effects of the Google algorithm changes described above.

We are experiencing an increasingly competitive digital marketing landscape. We have competitors who are spending significant amounts on advertising bidding up the cost of certain marketing channels, such as paid keywords. While we may not choose to match their levels of spending, this has increased our marketing costs in recent quarters. We expect this trend to continue. However, we do have a number of important digital marketing initiatives that we are testing and implementing that we believe will improve our competitive position in this area.

Consolidated contribution (a non-GAAP financial measure) and contribution margin (a non-GAAP financial measure) - Contribution for Q4 2017 and 2016 was $32.1 million and $54.2 million, respectively, a 41% decrease, representing 7.0% and 10.3% of total net revenue for those respective periods. Contribution for FY 2017 and 2016 was $162.7 million and $200.3 million, respectively, a 19% decrease, representing 9.3% and 11.1% of total net revenue for those respective periods.

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 plus Club O Rewards and gift card breakage 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 and adding back the reductions in revenue that we recognized for Club O Rewards that have subsequently expired and for gift cards whose redemption is remote. 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. Management compensates for these limitations when using this measure by looking at other GAAP measures, such as operating income and net income. You should review our financial statements and publicly-filed reports in their entirety and not rely on any single financial measure. For additional information about our non-GAAP financial measures, including “retail pre-tax income (loss)” and “Medici pre-tax loss” please see the "Additional Non-GAAP Financial Measure Reconciliations" section below.

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

   
  Three months ended
  December 31,
  2017   2016
Total net revenue $ 456,290     100.0 %   $ 526,182     100.0 %
Cost of goods sold 370,492     81.2 %   428,178     81.4 %
Gross profit 85,798     18.8 %   98,004     18.6 %
Less: Sales and marketing expense 54,521     11.9 %   48,380     9.2 %
Plus: Club O Rewards and gift card breakage (included in Other income, net) 818     0.2 %   4,561     0.9 %
Contribution and contribution margin $ 32,095     7.0 %   $ 54,185     10.3 %
                           


  Year ended
  December 31,
  2017   2016
Total net revenue $ 1,744,756     100.0 %   $ 1,799,963     100.0 %
Cost of goods sold 1,404,205     80.5 %   1,468,614     81.6 %
Gross profit 340,551     19.5 %   331,349     18.4 %
Less: Sales and marketing expense 180,589     10.4 %   147,896     8.2 %
Plus: Club O Rewards and gift card breakage (included in Other income, net) 2,742     0.2 %   16,808     0.9 %
Contribution and contribution margin $ 162,704     9.3 %   $ 200,261     11.1 %
                           

Technology expenses - Technology expenses totaled $29.9 million and $28.5 million for Q4 2017 and 2016, respectively, a 5% increase, representing 6.6% and 5.4% of total revenue for those respective periods. The increase was primarily due to an increase in staff related costs of $1.4 million, an increase in technology licenses and maintenance costs of $1.0 million, partially offset by a decrease in depreciation of $962,000. Technology expenses totaled $115.9 million and $106.8 million for FY 2017 and 2016, respectively, a 9% increase, representing 6.6% and 5.9% of total revenue for those respective periods. The increase was primarily due to an increase in staff related costs of $4.9 million and an increase in technology licenses and maintenance costs of $4.0 million.

General and administrative ("G&A") expenses - G&A expenses totaled $24.1 million and $21.5 million for Q4 2017 and 2016, respectively, a 12% increase, representing 5.3% and 4.1% of total revenue for those respective periods. The increase was primarily due to an increase in staff related costs of $1.7 million, an increase in depreciation of $815,000, an increase in travel expenses of $334,000, and an increase in consulting and outside services expense of $282,000. These increases were partially offset by a decrease in legal fees of $1.2 million. G&A expenses totaled $90.7 million and $89.3 million for FY 2017 and 2016, respectively, representing 5.2% and 5.0% of total revenue for those respective periods. The increase was primarily due to an increase in staff related costs of $4.9 million, partially offset by a decrease in legal fees of $3.0 million and a decrease in bad debt expense of $1.1 million.

We continue to seek opportunities for growth, in our retail business and 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 may purchase interest in, or make acquisitions of other technologies and businesses. We anticipate that our initiatives may 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, our plans to increase our 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 (expense), net - Other income (expense), net totaled ($1.6) million and $4.8 million for Q4 2017 and 2016, respectively. The decrease is primarily due to a decrease in Club O Rewards breakage of $3.8 million due to discontinuing our Club O Silver rewards program in Q4 2016, an increase in early extinguishment of debt costs of $2.2 million from refinancing our headquarters loan in Q4 2017, and an increase in impairment charges of $1.0 million, partially offset by an increase in realized gains on sales of cryptocurrencies of $1.2 million. Other income, net totaled $1.2 million and $14.2 million for FY 2017 and 2016, respectively. The decrease is primarily due to a decrease in Club O Rewards breakage of $14.2 million due to discontinuing our Club O Silver rewards program in Q4 2016, an increase in impairment charges of $2.6 million, and an increase in early extinguishment of debt costs of $2.5 million, partially offset by an increase in realized gains on sales of cryptocurrencies and precious metals of $6.6 million.

Litigation settlement - In Q1 2016, we entered into a settlement agreement in our prime broker litigation which concluded the litigation in its entirety and we recognized settlement proceeds of $19.5 million. Related costs associated with the litigation and settlement of approximately $1.0 million were included in G&A expenses during Q1 2016.

Provision for income taxes - Provision for income taxes totaled $71.9 million and $1.1 million for Q4 2017 and 2016, respectively. Provision for income taxes totaled $64.2 million and $9.3 million for FY 2017 and 2016, respectively. On December 22, 2017, the President signed into law the Tax Cuts and Jobs Act. Among many other changes, the new law lowers the corporate tax rate from 35% to 21% for tax years beginning in 2018. Therefore, we re-valued our deferred tax assets in Q4 2017 due to the federal rate reduction, which resulted in an increase to our Q4 2017 income tax expense by $25.3 million. Additionally, each quarter we assess available positive and negative evidence to estimate whether we will generate sufficient future taxable income to use our existing deferred tax assets. Due to losses incurred in 2017 and the potential for future losses, we have recorded a full valuation allowance on our deferred tax assets, which further increased our 2017 income tax expense by $59.0 million.

Net cash provided by (used in) operating activities - Net cash provided by (used in) operating activities was ($35.3) million and $39.6 million for the twelve months ended December 31, 2017 and 2016, respectively. The $74.9 million decrease is primarily due to decreased revenue growth, contribution and income, and the timing of certain payments. Also, net cash provided by operating activities for the twelve months ended December 31, 2016 includes litigation settlement proceeds of $19.5 million.

Free cash flow (a non-GAAP financial measure) - Free cash flow totaled ($58.9) million and ($32.7) million for the twelve months ended December 31, 2017 and 2016, respectively. The $26.2 million decrease was due to a $74.9 million decrease in operating cash flow, partially offset by a $48.7 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 provided by (used in) 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 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):

 

  Year ended December 31,
  2017   2016
Net cash provided by (used in) operating activities $ (35,321)     $ 39,564  
Expenditures for fixed assets, including internal-use software and website development (23,586)     (72,281)  
Free cash flow $ (58,907)     $ (32,717)  
 

Cash and working capital - We had cash and cash equivalents of $203.2 million and $183.1 million and working capital of $50.5 million and ($4.8) million at December 31, 2017 and December 31, 2016, respectively. Cash at December 31, 2017 includes $100 million received from the exercise of a warrant in late December.

Preliminary Estimates for the Quarter ending March 31, 2018:

We have determined to switch to a growth strategy in our ecommerce business, which we believe will lead to higher revenue growth, but also incur significant losses in the process. In pursuit of this growth strategy, in Q1 2018 we have increased our sales and marketing expenditures substantially to increase revenue growth and to test new marketing initiatives. Largely as a result of this new strategy, we expect to incur a total pre-tax loss of approximately $50 million in Q1 2018 ($35 million ecommerce, $15 million Medici).

Our estimated results for the quarter ended March 31, 2018 are preliminary and subject to substantial uncertainty and numerous risks including those outlined in Item 1A of Part I, "Risk Factors" of our Form 10-K for the year ended December 31, 2017 which was filed with the Securities and Exchange Commission on March 15, 2018. We caution you that our estimates are forward-looking statements and are not guarantees of future performance or outcomes and that actual results may differ materially.

About Overstock.com
Overstock.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 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, Worldstock and OVillage 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 March 15, 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 mix of products we sell, the results of legal proceedings and claims and the amounts we spend relating to them, the extent to which we owe income taxes, competition, fluctuations in operating results, the potential effects on our financial results of new accounting standards we will be required to adopt no later than January 1, 2018, relating to revenue recognition, Google and other search engine companies changing their natural search engine algorithms periodically resulting in lower ranking of our products, any inability to raise capital if needed on acceptable terms, our efforts to expand both domestically and internationally, risks of inventory management and seasonality. Other risks and uncertainties include, among others, risks related to new products and services we may offer, and difficulties 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 which was filed with the Securities and Exchange Commission on March 15, 2018. Our Form 10-K and our other subsequent filings with the Securities and Exchange Commission identify important factors that could cause our actual results to differ materially from those contained in our projections, estimates and other forward-looking statements.

 
 
Overstock.com, Inc.
Consolidated Balance Sheets
(in thousands, unaudited)
 
  December 31,
 2017
  December 31,
 2016
Assets      
Current assets:      
Cash and cash equivalents $ 203,215     $ 183,098  
Restricted cash 455     430  
Accounts receivable, net 30,080     28,142  
Inventories, net 13,703     18,937  
Prepaid inventories, net 1,625     2,112  
Prepaids and other current assets 16,119     11,654  
Total current assets 265,197     244,373  
Fixed assets, net 129,343     134,552  
Precious metals     9,946  
Deferred tax assets, net     56,266  
Intangible assets, net 7,337     10,913  
Goodwill 14,698     14,698  
Other long-term assets, net 17,240     14,328  
Total assets $ 433,815     $ 485,076  
Liabilities and Stockholders’ Equity      
Current liabilities:      
Accounts payable $ 85,406     $ 106,337  
Accrued liabilities 82,611     96,216  
Deferred revenue 46,468     41,780  
Finance obligations, current     3,256  
Other current liabilities, net 178     1,627  
Total current liabilities 214,663     249,216  
Long-term debt, net     44,179  
Long-term debt, net - related party 39,909      
Finance obligations, non-current     11,831  
Other long-term liabilities 7,120     6,890  
Total liabilities 261,692     312,116  
Commitments and contingencies      
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 569      
Common stock, $0.0001 par value      
Authorized shares - 100,000      
Issued shares - 30,632 and 27,895      
Outstanding shares - 27,497 and 25,432 3     3  
Additional paid-in capital 494,732     383,348  
Accumulated deficit (254,692 )   (153,898 )
Accumulated other comprehensive loss (599 )   (1,540 )
Treasury stock:      
Shares at cost - 3,135 and 2,463 (63,816 )   (52,587 )
Equity attributable to stockholders of Overstock.com, Inc. 175,628     175,326  
Equity attributable to noncontrolling interests (3,505 )   (2,366 )
Total stockholders' equity 172,123     172,960  
Total liabilities and stockholders' equity $ 433,815     $ 485,076  
               

 

Overstock.com, Inc.
Consolidated Statements of Operations
(in thousands, except per share data)
(unaudited)
 
  Three months ended
 December 31,
  2017   2016
Revenue, net      
Direct $ 18,480     $ 25,677  
Partner and other 437,810     500,505  
Total net revenue 456,290     526,182  
Cost of goods sold      
Direct 18,898     23,812  
Partner and other 351,594     404,366  
Total cost of goods sold 370,492     428,178  
Gross profit 85,798     98,004  
Operating expenses:      
Sales and marketing 54,521     48,380  
Technology 29,896     28,511  
General and administrative 24,096     21,455  
Total operating expenses 108,513     98,346  
Operating loss (22,715 )   (342 )
Interest income 209     98  
Interest expense (798 )   (658 )
Other income (expense), net (1,573 )   4,782  
Income (loss) before income taxes (24,877 )   3,880  
Provision for income taxes 71,915     1,119  
Consolidated net income (loss) $ (96,792 )   $ 2,761  
Less: Net loss attributable to noncontrolling interests (1,102 )   (334 )
Net income (loss) attributable to stockholders of Overstock.com, Inc. $ (95,690 )   $ 3,095  
Net income (loss) per common share—basic:      
Net income (loss) attributable to common shares—basic $ (3.72 )   $ 0.12  
Weighted average common shares outstanding—basic 25,103     25,391  
Net income (loss) per common share—diluted:      
Net income (loss) attributable to common shares—diluted $ (3.72 )   $ 0.12  
Weighted average common shares outstanding—diluted 25,103     25,540  
           
           


Overstock.com, Inc.
Consolidated Statements of Operations
(in thousands, except per share data)
(unaudited)
 
  Year ended
 December 31,
  2017   2016
Revenue, net      
Direct $ 83,052     $ 101,578  
Partner and other 1,661,704     1,698,385  
Total net revenue 1,744,756     1,799,963  
Cost of goods sold      
Direct 80,585     96,271  
Partner and other 1,323,620     1,372,343  
Total cost of goods sold 1,404,205     1,468,614  
Gross profit 340,551     331,349  
Operating expenses:      
Sales and marketing 180,589     147,896  
Technology 115,878     106,760  
General and administrative 90,718     89,298  
Litigation settlement     (19,520 )
Total operating expenses 387,185     324,434  
Operating income (loss) (46,634 )   6,915  
Interest income 659     326  
Interest expense (2,937 )   (877 )
Other income, net 1,178     14,181  
Income (loss) before income taxes (47,734 )   20,545  
Provision for income taxes 64,188     9,297  
Consolidated net income (loss) $ (111,922 )   $ 11,248  
Less: Net loss attributable to noncontrolling interests (2,044 )   (1,274 )
Net income (loss) attributable to stockholders of Overstock.com, Inc. $ (109,878 )   $ 12,522  
Net income (loss) per common share—basic:      
Net income (loss) attributable to common shares—basic $ (4.28 )   $ 0.49  
Weighted average common shares outstanding—basic 25,044     25,342  
Net income (loss) per common share—diluted:      
Net income (loss) attributable to common shares—diluted $ (4.28 )   $ 0.49  
Weighted average common shares outstanding—diluted 25,044     25,426  


 
 
Overstock.com, Inc.
Consolidated Statements of Cash Flows
(in thousands, unaudited)
  Year ended December 31,
  2017   2016
Cash flows from operating activities:      
Consolidated net income (loss) $ (111,922 )   $ 11,248  
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:      
Depreciation of fixed assets 28,848     27,283  
Amortization of intangible assets 3,999     3,968  
Stock-based compensation to employees and directors 4,077     4,891  
Deferred income taxes, net 65,199     7,719  
Gain on investment in precious metals (1,971 )   (201 )
Gain on sale of cryptocurrencies (1,995 )    
Impairment of cost method investments 5,487     2,850  
Early termination costs of long term debts 2,464      
Other 876     356  
Changes in operating assets and liabilities, net of acquisitions:      
Restricted cash (100 )    
Accounts receivable, net (1,938 )   (10,006 )
Inventories, net 5,234     1,105  
Prepaid inventories, net 487     (801 )
Prepaids and other current assets (3,286 )   2,389  
Other long-term assets, net (2,307 )   (786 )
Accounts payable (20,995 )   (18,823 )
Accrued liabilities (12,311 )   16,936  
Deferred revenue 4,688     (9,164 )
Other long-term liabilities 145     600  
Net cash provided by (used in) operating activities (35,321 )   39,564  
Cash flows from investing activities:      
Proceeds from sale of precious metals 11,917     1,610  
Investment in precious metals     (1,633 )
Equity method investment (3,000 )    
Disbursements for note receivable (750 )   (3,668 )
Cost method investments (2,188 )   (4,750 )
Acquisitions of businesses, net of cash acquired     1,248  
Expenditures for fixed assets, including internal-use software and website development (23,586 )   (72,281 )
Other (353 )   27  
Net cash used in investing activities (17,960 )   (79,447 )
Cash flows from financing activities:      
Payments on capital lease obligations (83 )    
Paydown on direct financing arrangement     (54 )
Payments on finance obligations (15,316 )   (1,906 )
Payments on interest swap (1,535 )   (563 )
Proceeds from finance obligations     11,399  
Payments on long-term debt (45,766 )    
Proceeds from long-term debt 40,000     36,273  
Payments of preferred dividends
(109 )    
Change in restricted cash 75      
Proceeds from issuance of stock warrants 6,462      
Proceeds from exercise of stock options 664     819  
Proceeds from rights offering, net of offering costs     7,591  
Proceeds from exercise of stock warrants 100,000      
Proceeds from security token offering 905      
Purchase of treasury stock (11,229 )   (840 )
Payment of debt issuance costs (670 )    
Net cash provided by financing activities 73,398     52,719  
Net increase in cash and cash equivalents 20,117     12,836  
Cash and cash equivalents, beginning of period 183,098     170,262  
Cash and cash equivalents, end of period $ 203,215     $ 183,098  
 
 

Additional Non-GAAP Financial Measure Reconciliations

As described in further detail above, 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 plus Club O Rewards and gift card breakage and reflects an additional way of viewing our results. Contribution margin is contribution as a percentage of total net revenue.

OSTK 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 about the results of our separate businesses. 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 Direct and Partner Retail and Medici businesses. 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.

Contribution, contribution margin, OSTK 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 our contribution and contribution margin by Retail Total (which consists of Direct and Partner) and Other (which consists of Medici) are set forth below (in thousands):

   
  Three months ended, December 31
  Direct Partner Retail Total
(Direct and
Partner)
  Other   Consolidated
2017              
Total net revenue $ 18,480   $ 433,516   $ 451,996     $ 4,294     $ 456,290  
Cost of goods sold 18,898   348,663   367,561     2,931     370,492  
Gross profit $ (418 ) $ 84,853   $ 84,435     $ 1,363     $ 85,798  
Less: Sales and marketing expense     54,237     284     54,521  
Plus: Club O Rewards and gift card breakage (included in Other income, net)     818         818  
Contribution     $ 31,016     $ 1,079     $ 32,095  
Contribution margin     6.9 %   25.1 %   7.0 %
               
2016              
Total net revenue $ 25,677   $ 495,836   $ 521,513     $ 4,669     $ 526,182  
Cost of goods sold 23,812   400,913   424,725     3,453     428,178  
Gross profit $ 1,865   $ 94,923   $ 96,788     $ 1,216     $ 98,004  
Less: Sales and marketing expense     48,271     109     48,380  
Plus: Club O Rewards and gift card breakage (included in Other income, net)     4,561         4,561  
Contribution     $ 53,078     $ 1,107     $ 54,185  
Contribution margin     10.2 %   23.7 %   10.3 %


   
   
  Year ended, December 31
  Direct Partner Retail Total
(Direct and
Partner)
  Other   Consolidated
2017              
Total net revenue $ 83,052   $ 1,645,052   $ 1,728,104     $ 16,652     $ 1,744,756  
Cost of goods sold 80,585   1,311,973   1,392,558     11,647     1,404,205  
Gross profit $ 2,467   $ 333,079   $ 335,546     $ 5,005     $ 340,551  
Less: Sales and marketing expense     179,549     1,040     180,589  
Plus: Club O Rewards and gift card breakage (included in Other income, net)     2,742         2,742  
Contribution     $ 158,739     $ 3,965     $ 162,704  
Contribution margin     9.2 %   23.8 %   9.3 %
               
2016              
Total net revenue $ 101,578   $ 1,683,204   $ 1,784,782     $ 15,181     $ 1,799,963  
Cost of goods sold 96,271   1,362,140   1,458,411     10,203     1,468,614  
Gross profit $ 5,307   $ 321,064   $ 326,371     $ 4,978     $ 331,349  
Less: Sales and marketing expense     147,368     528     147,896  
Plus: Club O Rewards and gift card breakage (included in Other income, net)     16,808         16,808  
Contribution     $ 195,811     $ 4,450     $ 200,261  
Contribution margin     11.0 %   29.3 %   11.1 %
                     

Our calculations of OSTK 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, December 31
  Direct Partner Retail Total
(Direct and
Partner)
  Other   Consolidated
2017              
Total net revenue $ 18,480   $ 433,516   $ 451,996     $ 4,294     $ 456,290  
Cost of goods sold 18,898   348,663   367,561     2,931     370,492  
Gross profit $ (418 ) $ 84,853   $ 84,435     $ 1,363     $ 85,798  
Operating expenses     101,193     7,320     108,513  
Interest and other expense, net     (810 )   (1,352 )   (2,162 )
Pre-tax loss     (17,568 )   (7,309 )   (24,877 )
Provision for income taxes     69,408     2,507     71,915  
Net loss     $ (86,976 )   $ (9,816 )   $ (96,792 )
               
2016              
Total net revenue $ 25,677   $ 495,836   $ 521,513     $ 4,669     $ 526,182  
Cost of goods sold 23,812   400,913   424,725     3,453     428,178  
Gross profit $ 1,865   $ 94,923   $ 96,788     $ 1,216     $ 98,004  
Operating expenses     94,167     4,179     98,346  
Interest and other income, net     4,222         4,222  
Pre-tax income (loss)     6,843     (2,963 )   3,880  
Provision (benefit) for income taxes     2,171     (1,052 )   1,119  
Net income (loss)     $ 4,672     $ (1,911 )   $ 2,761  


   
   
  Year ended, December 31
  Direct Partner Retail Total
(Direct and
Partner)
  Other   Consolidated
2017              
Total net revenue $ 83,052   $ 1,645,052   $ 1,728,104     $ 16,652     $ 1,744,756  
Cost of goods sold 80,585   1,311,973   1,392,558     11,647     1,404,205  
Gross profit $ 2,467   $ 333,079   $ 335,546     $ 5,005     $ 340,551  
Operating expenses     365,648     21,537     387,185  
Interest and other income (expense), net     4,680     (5,780 )   (1,100 )
Pre-tax loss     (25,422 )   (22,312 )   (47,734 )
Provision (benefit) for income taxes     66,128     (1,940 )   64,188  
Net loss     $ (91,550 )   $ (20,372 )   $ (111,922 )
               
2016              
Total net revenue $ 101,578   $ 1,683,204   $ 1,784,782     $ 15,181     $ 1,799,963  
Cost of goods sold 96,271   1,362,140   1,458,411     10,203     1,468,614  
Gross profit $ 5,307   $ 321,064   $ 326,371     $ 4,978     $ 331,349  
Operating expenses     307,669     16,765     324,434  
Interest and other income, net     13,630         13,630  
Pre-tax income (loss)     32,332     (11,787 )   20,545  
Provision (benefit) for income taxes     13,797     (4,500 )   9,297  
Net income (loss)     $ 18,535     $ (7,287 )   $ 11,248  


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