Beyond(US:BYON)2020-03-13 12:12Part I Business Overstock.com, Inc. operates as an online retailer and a developer of blockchain technology, with segments in Retail and Medici Introduction Overstock operates a dual business model, combining online retail with blockchain technology development through its Medici initiatives - The company operates a dual business model: an established online retail business and a developing blockchain technology business2324 - The online retail business offers products like furniture, home decor, and housewares via websites such as www.overstock.com[23](index=23&type=chunk) - The Medici business initiatives, conducted through Medici Ventures and its subsidiary tZERO, focus on creating blockchain-based products and solutions for areas like identity management, capital markets, and supply chains24 Our Retail Business The retail business, generating nearly all revenue, offers 2.7 million products, primarily home goods, relying on 3,560 third-party partners - The retail business has generated nearly all of the company's net revenues for the last three fiscal years26 - As of December 31, 2019, the company offered 2.7 million products (7.8 million SKUs), with a focus on furniture and home goods26 - The business model relies on a network of approximately 3,560 third-party partners who sell on the website, with Overstock providing services like order fulfillment and customer service28 - Competition in the e-commerce space is intense, with key factors including price, product quality, shopping convenience, and brand recognition37 Our Medici Business The Medici business, in a start-up phase, develops blockchain solutions through Medici Ventures and tZERO, focusing on digital securities - Medici business initiatives began in late 2014 and are pursued through Medici Ventures and its majority-owned subsidiary tZERO. They remain in the start-up phase with no significant revenues from blockchain technology to date42 - Medici Ventures' strategy is to foster blockchain solutions in six key areas: identity management, property rights, central banking, capital markets, supply chains, and voting systems43 - tZERO's primary focus is the development and adoption of digital securities, which are conventional securities with a digital "courtesy carbon copy" of the share registry viewable on a blockchain4445 - tZERO's businesses include broker-dealer subsidiaries (tZERO ATS, LLC and SpeedRoute), a cryptocurrency wallet and exchange (tZERO Crypto), and a planned retail brokerage (tZERO Markets)48 Legal, Regulatory, and Corporate Information The company is subject to extensive U.S. and foreign regulations across its retail and blockchain businesses, employing approximately 1,613 full-time staff - The company is subject to extensive government regulation covering e-commerce, taxation, data protection, and consumer protection for its retail business58 - The Medici and tZERO businesses face complex regulations related to money services, securities laws, broker-dealers, and anti-money laundering. The regulatory landscape for blockchain is still evolving and uncertain60 - tZERO's subsidiary, tZERO ATS, LLC, operates an Alternative Trading System (ATS) subject to Regulation ATS, and its joint venture for the Boston Security Token Exchange (BSTX) is seeking SEC approval6263 - As of December 31, 2019, the company had approximately 1,613 full-time employees64 Risk Factors The company faces significant risks from lawsuits, financial losses, intense competition, and the uncertain regulatory landscape of blockchain technology Risks Relating to Our Company and Strategic Initiatives The company faces shareholder lawsuits, SEC investigations, a history of significant losses, negative working capital, and uncertainties from strategic initiatives - The company and its former/current officers are defendants in shareholder class action and derivative lawsuits and are subject to ongoing SEC investigations, which could result in significant legal expenses and penalties828586 - The company has a history of significant losses, with an accumulated deficit of $580.4 million and net cash used in operations of $81.6 million in 2019. Its ability to continue business depends on achieving profitability or raising additional capital9394 - Net working capital was negative $38.6 million at December 31, 2019, indicating potential liquidity challenges95 - The company is exploring strategic initiatives, including potential equity or debt financings. Previous efforts to sell the retail business could have adverse effects if pursued again, fundamentally changing the company's structure and risk profile116118119 Risks Relating to our tZERO Initiatives tZERO faces substantial risks due to its limited operating history, lack of significant revenue, regulatory hurdles, and reliance on limited market adoption - tZERO has a limited operating history and has not generated significant revenue from its blockchain applications, making it difficult to evaluate its future prospects133134 - Only two digital securities (the company's Series A-1 Preferred and TZROP) trade on the tZERO ATS, and no other trading venue currently licenses the tZERO Technology Stack, indicating significant market adoption risk136137 - tZERO's subsidiaries (tZERO ATS, SpeedRoute, and the planned tZERO Markets) are subject to extensive and evolving broker-dealer regulations, and ongoing SEC and FINRA investigations could result in penalties143144149150 - The Boston Security Token Exchange (BSTX) joint venture requires SEC approval to operate, which is not guaranteed154 - A significant portion of tZERO's current revenue comes from a small number of major customers of its subsidiaries, SpeedRoute and tZERO ATS, LLC, creating concentration risk176177178 Risks Related to Digital Securities and Blockchain Technology The uncertain regulatory framework, potential lack of adoption, and high volatility of digital assets pose significant risks to tZERO's blockchain business - The application of existing laws to blockchain technology is unclear and evolving, which may limit the extent to which blockchain can be used to enhance securities and could render the issuance of digital securities impermissible189190191 - There is no guarantee that digital securities will be widely adopted by issuers or investors, or that there will be sufficient public interest to support a robust market197 - The growth of the blockchain industry is subject to high uncertainty, depending on factors like regulation, security flaws (e.g., '51%' attacks), and public acceptance204205 - Extreme price volatility of digital assets like Bitcoin could negatively impact market perception of all blockchain-related technologies, including the digital securities tZERO supports207208 Risks Relating to our Retail Business The retail business faces high dependence on internet infrastructure, search engine algorithms, intense competition, economic downturns, and supply chain disruptions - The business is completely dependent on its internet infrastructure and transaction-processing systems, which are vulnerable to interruptions and cyber-attacks211216 - Reliance on search engines, particularly Google, for customer traffic is a significant risk, as algorithm changes have previously and could in the future lower search rankings and increase marketing costs212213 - The online retail market is intensely competitive, with pressure from online and traditional retailers, many of whom have greater resources and brand recognition219220 - Tariffs on goods from China and the spread of illnesses like COVID-19 pose significant risks by increasing product prices and creating supply chain challenges221222 - A significant portion of sales comes from home and garden products, making the business sensitive to downturns in the U.S. housing market and overall consumer spending225226 Risks Relating to our Securities The company's securities face volatility, short-selling risks, trading restrictions on preferred stock, uncertain tax treatment, and anti-takeover provisions - The trading prices of the company's securities are volatile and may be adversely affected by short-selling activities, disclosures about strategic initiatives, and market perceptions of cryptocurrencies like Bitcoin251253254 - The Series A-1 Preferred stock can only be sold on the tZERO ATS, which has limited liquidity and currently only one subscribing broker-dealer, creating significant trading risk271272 - The company's obligation to pay dividends on its preferred stock is limited and subject to board declaration; failure to pay may not have a legal effect on the company, though it could affect the stock's trading price309310 - Anti-takeover provisions in the company's charter and Delaware law could delay or prevent a change in control, potentially limiting shareholder opportunities for a premium265266267 Properties As of March 6, 2020, the company owned and leased approximately 1.75 million square feet of facilities globally for various operations - Owned and Leased Facilities (Square feet in thousands) | | United States | International | Total | |---|---|---|---| | Owned facilities | 236 | — | 236 | | Leased facilities | 1,494 | 21 | 1,515 | | Total facilities | 1,730 | 21 | 1,751 | Legal Proceedings The company is involved in various legal proceedings concerning consumer protection, intellectual property, and securities laws, which could result in significant costs - The company is involved in ongoing litigation related to consumer protection, employment, intellectual property, and securities laws321 - An unfavorable resolution in these matters could materially affect the business, results of operations, financial position, or cash flows321 Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Overstock's common stock trades on Nasdaq, with no cash dividends anticipated, while preferred stocks have dividend preference and specific trading venues - The company's common stock is traded on the Nasdaq Global Market under the symbol OSTK325 - No cash dividends have ever been declared on common stock, and none are anticipated in the foreseeable future326 - A stock dividend of Series A-1 Preferred stock was declared but has been postponed and not yet distributed as of the filing date326 - The company has two classes of preferred stock outstanding: Series A-1, which trades exclusively on the tZERO ATS, and Series B, which trades on the OTCQX market. Both have dividend preference over common stock334335 Selected Financial Data The company's financial performance from 2015 to 2019 shows increasing net losses and negative working capital in recent years - Selected Consolidated Financial Data (2015-2019, in thousands, except per share data) | | 2019 | 2018 | 2017 | 2016 | 2015 | |---|---|---|---|---|---| | Total net revenue | $1,459,418 | $1,821,592 | $1,744,756 | $1,799,963 | $1,657,838 | | Gross profit | $293,093 | $353,908 | $340,551 | $331,349 | $304,654 | | Operating income (loss) | $(123,489) | $(217,206) | $(46,634) | $6,915 | $(534) | | Consolidated net income (loss) | $(134,720) | $(217,570) | $(111,922) | $11,248 | $1,220 | | Net income (loss) per share—diluted | $(3.46) | $(6.83) | $(4.28) | $0.49 | $0.10 | | Total assets | $417,727 | $461,219 | $433,815 | $485,076 | $428,389 | | Working capital | $(38,636) | $(26,219) | $50,534 | $(4,843) | $(10,308) | | Stockholders' equity | $177,855 | $210,706 | $172,123 | $172,960 | $149,361 | Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's dual strategy, a 20% revenue decrease in 2019, improved gross margin, reduced operating expenses, and tightened liquidity Strategies The company pursues a dual strategy, focusing on retail improvements and accelerating blockchain adoption through Medici Ventures and tZERO - Retail Strategy: Focus on improving the mobile experience, clarifying pricing and discounting, enhancing real-time SKU profitability analysis, and expanding partner-sponsored marketing351352353355 - Medici Ventures Strategy: Support existing portfolio (keiretsu) companies to reach profitability, educate the public on blockchain, and seek opportunistic partnerships356357358 - tZERO Strategy: Commercialize the tZERO Technology Stack, operate the tZERO ATS for digital securities, develop the BSTX joint venture, and launch new services including tZERO Markets (retail brokerage) and tZERO Crypto (wallet/exchange)359360361362 Critical Accounting Policies and Estimates Critical accounting policies involve significant judgment, particularly in revenue recognition based on estimated shipping times and the classification of tZERO digital securities - Revenue is recognized when control passes to the customer, typically at delivery. The company uses estimates based on historical data for average shipping transit times to determine when delivery occurs370371373 - Sensitivity of Revenue to Shipping Time Estimates (FY 2019) | Change in Estimate of Average Transit Times (Days) | (Decrease) / Increase in Revenue | (Decrease) / Increase in Income Before Tax | |---|---|---| | +2 | $(8,167,000) | $(1,364,000) | | +1 | $(1,977,000) | $(333,000) | | -1 | $3,332,000 | $506,000 | | -2 | $6,520,000 | $1,031,000 | - The tZERO digital securities (TZROP) issued in its offering were accounted for as a form of preferred stock and classified as a component of noncontrolling interest in the consolidated financial statements377 Results of Operations (2019 vs 2018) In 2019, total net revenue decreased by 19.9% to $1.46 billion, driven by reduced retail marketing, leading to a $134.7 million net loss - Revenue Comparison (2019 vs 2018, in thousands) | Revenue, net | 2019 | 2018 | $ Change | % Change | |---|---|---|---|---| | Retail | $1,434,974 | $1,800,187 | $(365,213) | (20.3)% | | Other | $24,444 | $21,405 | $3,039 | 14.2% | | Total revenue, net | $1,459,418 | $1,821,592 | $(362,174) | (19.9)% | - Gross Profit Comparison (2019 vs 2018, in thousands) | | 2019 | 2018 | $ Change | % Change | |---|---|---|---|---| | Total gross profit | $293,093 | $353,908 | $(60,815) | (17.2)% | | Gross Margin | 20.1% | 19.4% | | | - Operating Expenses Comparison (2019 vs 2018, in thousands) | Expense | 2019 | 2018 | $ Change | % Change | |---|---|---|---|---| | Sales and marketing | $143,120 | $274,479 | $(131,359) | (47.9)% | | Technology | $135,338 | $132,154 | $3,184 | 2.4% | | General and administrative | $138,124 | $164,481 | $(26,357) | (16.0)% | Liquidity and Capital Resources Liquidity tightened in 2019 with cash decreasing to $112.3 million due to operating outflows, partially offset by stock offerings and new loan agreements - Cash and cash equivalents decreased from $141.5 million at YE 2018 to $112.3 million at YE 2019385 - Cash Flow Summary (in thousands) | | 2019 | 2018 | |---|---|---| | Cash used in Operating activities | $(81,612) | $(138,934) | | Cash used in Investing activities | $(26,852) | $(110,923) | | Cash provided by Financing activities | $80,548 | $189,001 | - The company raised $85.8 million in proceeds ($83.0 million net of costs and commissions) from its "at the market" common stock sales agreement with JonesTrading during 2019385423 - Subsequent to year-end, in March 2020, the company entered into two loan agreements totaling $47.5 million, secured by its corporate headquarters447694 Quantitative and Qualitative Disclosures About Market Risk The company is exposed to market risks from interest rates, cryptocurrency holdings, and equity securities, but does not use derivatives to hedge these risks - A 100 basis point change in interest rates would have an estimated $1.1 million impact on earnings or loss from cash and cash equivalents454 - The company held $2.6 million in cryptocurrency-denominated assets at year-end 2019. A 100 basis point change in market value would have an estimated impact of $26,000456 - The company held $52.4 million in equity and marketable securities as of December 31, 2019, down from $60.4 million in 2018. These are subject to market price volatility and impairment risk, particularly for investments in private companies457 Financial Statements and Supplementary Data This section presents the audited consolidated financial statements for 2019, including balance sheets, income statements, cash flows, and detailed notes Report of Independent Registered Public Accounting Firm KPMG LLP issued an unqualified opinion on Overstock.com, Inc.'s 2019 and 2018 consolidated financial statements, noting adoption of new accounting standards - The auditor, KPMG LLP, issued an unqualified opinion, stating the financial statements are fairly presented in conformity with U.S. GAAP463 - The report notes changes in accounting principles due to the adoption of ASU No. 2016-02 for Leases (Topic 842) and ASU No. 2014-09 for Revenue (Topic 606)465466 Consolidated Financial Statements The 2019 consolidated financial statements show declining assets, a $134.7 million net loss, and a growing accumulated deficit - Consolidated Balance Sheet Highlights (as of Dec 31, in thousands) | | 2019 | 2018 | |---|---|---| | Total Assets | $417,727 | $461,219 | | Total Liabilities | $239,872 | $250,513 | | Total Stockholders' Equity | $177,855 | $210,706 | | Accumulated Deficit | $(580,390) | $(458,897) | - Consolidated Statement of Operations Highlights (Year Ended Dec 31, in thousands) | | 2019 | 2018 | 2017 | |---|---|---|---| | Total net revenue | $1,459,418 | $1,821,592 | $1,744,756 | | Operating loss | $(123,489) | $(217,206) | $(46,634) | | Consolidated net loss | $(134,720) | $(217,570) | $(111,922) | | Net loss per share—diluted | $(3.46) | $(6.83) | $(4.28) | Notes to Consolidated Financial Statements The notes detail accounting policies, business acquisitions, segment performance, and significant legal contingencies, including SEC investigations and shareholder lawsuits - Note 2: The company adopted new accounting standards for Revenue (ASC 606) in 2018 and Leases (ASC 842) in 2019, with the lease standard resulting in the recognition of $31.0 million in right-of-use assets and $35.1 million in lease liabilities upon adoption585588 - Note 3: Details the acquisition of tZERO Crypto, effective Jan 1, 2019, for a total consideration of $6.3 million, and Mac Warehouse in June 2018597601602 - Note 12: Discloses ongoing legal proceedings, including a $7.3 million judgment in the Delaware unclaimed property case (under appeal), SEC investigations into tZERO and the company's stock dividend, and multiple shareholder class action and derivative lawsuits622623628629 - Note 21: The company reports three main segments: Retail, tZERO, and MVI (Medici Ventures Inc.). For 2019, the Retail segment had a pre-tax loss of $43.9 million, tZERO had a pre-tax loss of $47.4 million, and MVI had a pre-tax loss of $28.8 million679682 Controls and Procedures Management and the independent auditor concluded that the company's disclosure controls and internal control over financial reporting were effective as of December 31, 2019 - The principal executive officer and principal financial officer concluded that the company's disclosure controls and procedures were effective as of December 31, 2019702 - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2019, based on the COSO framework708 - KPMG LLP, the independent registered public accounting firm, audited and issued an unqualified opinion on the effectiveness of the company's internal control over financial reporting as of December 31, 2019710712 Part III Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the 2020 proxy statement, with a Code of Business Conduct and Ethics in place - Information required by this item is largely incorporated by reference from the forthcoming 2020 proxy statement721 - The company has adopted a Code of Business Conduct and Ethics, which is available upon request and will be disclosed on its website722 Executive Compensation Executive compensation information is incorporated by reference from the company's 2020 annual meeting proxy statement - All information for this item is incorporated by reference from the 2020 proxy statement723 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Security ownership details are incorporated by reference, with 1.051 million RSUs outstanding and 1.0 million shares available for future grants under the 2005 Equity Incentive Plan - Restricted Stock Unit Activity (in thousands of units) | | 2019 | 2018 | 2017 | |---|---|---|---| | Outstanding—beginning of year | 559 | 540 | 560 | | Granted | 982 | 387 | 310 | | Vested | (270) | (234) | (212) | | Forfeited | (220) | (134) | (118) | | Outstanding—end of year | 1,051 | 559 | 540 | - As of December 31, 2019, 1.0 million shares remained available for future grants under the 2005 Equity Incentive Plan728 Certain Relationships and Related Transactions, and Director Independence Information on related party transactions and director independence is incorporated by reference from the 2020 proxy statement - All information for this item is incorporated by reference from the 2020 proxy statement729 Principal Accounting Fees and Services Information regarding principal accounting fees and services is incorporated by reference from the 2020 proxy statement - All information for this item is incorporated by reference from the 2020 proxy statement730 Part IV Exhibits, Financial Statement Schedules This section lists all financial statements, schedules, and exhibits filed as part of the Annual Report on Form 10-K - This section provides a comprehensive list of all documents filed with the Form 10-K, including financial statements, schedules, and exhibits733734