Overstock.com, Inc.
Q1 2018 Earnings Call Transcript

Published: 9 May 2018

[Operator:]

Good day, ladies and gentlemen, and welcome to the Q1 2018 Overstock.com, Incorporated Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] As a reminder, this conference call may be recorded. I would now like to introduce your host for today's conference, Mr. Greg Iverson, Chief Financial Officer. Mr. Iverson you may begin.

[Greg Iverson:]

Thank you, operator. Good afternoon and welcome to our first quarter 2018 earnings conference call. Joining me today are Dr. Patrick Byrne, Founder, CEO and President of Retail; Saum Noursalehi, CEO of tZERO; Jonathan Johnson, President of Medici Ventures; Seth Moore, Senior Vice President, Strategy; and J.P. Knab, Senior Vice President, Marketing. Let me remind you that the following discussion and our responses to your questions reflect management's views as of today, May 8, 2018, and may include forward-looking statements. Actual results may differ materially. Additional information about factors that could potentially impact our financial results is included in the Form 10-K filed for the year ended December 31, 2017 and in the press release and Form 10-Q filed today. Please review the safe harbor statement on Slide 2 of today's presentation. During this call, we'll discuss certain non-GAAP financial measures. The slides accompanying this webcast and our filings with the SEC, each posted on our Investor Relations website, contain additional disclosures regarding these non-GAAP measures, including reconciliations of these measures to the most comparable GAAP measures. Now, on personal note, while I only joined the Overstock team a few weeks ago, I couldn't be more excited about being part of this amazing organization. We've incredible talented team and I'm confident we're well positioned to capitalize on the great opportunities ahead both in our retail and blockchain businesses. With that, let me turn the call over to Patrick.

[Patrick Byrne:]

Thank you very much Greg and welcome. This is our agenda today. I do believe we're going to have - there are a fewer number of slides than the last couple of calls and we'll be able to get to more questions. The agenda will be walking through, I know tZERO is high in people's minds, retail and other Medici Ventures, financial results, strategic alternatives and Q&A. This slide that you see is a map of tZERO. What's in blue is the company we bought several years ago, SpeedRoute. It's an unusual broker dealer whose only other clients are other broker dealers, not retail investors. They route 2.5% to 3% of the orders in the United States National Market System and the equity markets, about 22 million per day. They're tied into the 13 lit exchanges dark pools et cetera. They came with an ATS. We applied three years ago to the SEC, so we're going to blockchain to file that. We got deemed approval. We did the - in April 2015, we did the world's first private blockchain security, then a public blockchain security OSTKP. We are in development of a Security Token Trading Platform. We're well ahead. I feel like in the last few months the world's gotten the joke. All the stuff you heard about last year, the ICOs, the utility token craze, I thought it was kind of widely a legal one that came out and surprised - I mean, 90% of them seemed to me like law. I mean they're raising money and they're screwing these security laws. So we think that that means that now that the SEC is finally bringing regulatory fee on these things, which - but they've been signaling since last July over the dove decision and then increasingly clear signals it seems to the marketplace that these utility tokens are actual securities, leading up to the Chairman, Clayton saying, couple of months ago something like, truth is every utility token I've ever seen with the security. That means that the world's going to need a trading system that can trade securities out there. We have - just that we have the techno - the combination of starting of these last two technology and as ATS and working for three years, we have what's needed. IF you go up on the tZERO website, you'll see a demonstration of the prototype where the world doesn't have the security tokens really to trade on the platform, so there is a bit of a chicken and an egg thing. Now, it's on there, I think that that's - I think that that's almost going to make an enormous difference. There is another side to this business, which we've mentioned before. And that is the Crypto Exchanges. The last I checked there was about $3 billion of institutional money trying to trade in the Crypto Exchanges. People don't want to get wallets inside if they run hedge funds. On the other hand $3 trillion of hedge fund money in the blue area. We have built a Fix protocol bridge from tZERO - from SpeedRoute system into these Crypto Exchanges and they're actually - one is - I mean the technology is done. As it is the case with a lot of things, we really need regulatory clarity on a couple of issues. The technology is not the problem, the regulatory is the problem, but we're working on that. Saum, do you want to add anything to that?

[Saum Noursalehi:]

No.

[Patrick Byrne:]

Next, accelerating tZERO. I've made a huge decision, we've posted Saum to New York. He's taken over, he's CEO of tZERO, and absolute justice involved out of the Executive Chairman. Saum is the best technology type of worker and more than that he's an extraordinarily effective executive. I described the reasons in the press release we put about him. But I think this is going to become an innovation game. I think that by putting Saum there - I mean he's extraordinarily able as an executive anyway, but in terms of managing innovation, Saum and I have a decade's history of working together on OLabs and other things that have our company and I don't think anyone at New York is going to be able to compete with what I know Saum has in mind. So with that let's go ahead. Saum?

[Saum Noursalehi:]

Yeah, so Patrick mentioned, we're in the process of building the security trading platform. All the trading technology is now in place. As he mentioned there is a demonstration of the prototype on tZERO.com. We're actively working on the custody wallet and token contract forcing to that [ph]. So that's the next step. We're making a great progress on it and you'll see more in the coming months. Next slide, now in addition, we're going to give some updates on some of the other products, specifically DLRs, Digital Locate Receipt. For the last six months we've been tuning and beta testing the product to a small audience on the demand side and we're leveraging stock process for that. While we enhance the product, we're also working with stock process to accumulate significant supply for the platform. In the coming quarter, we'll start licensing the software to clearing firms and we'll significantly increase the number of borrowers that are using the platform.

[Patrick Byrne:]

There is one interesting note that we should mention that our - the Digital Locate Receipts or DLRs have been in the past one day DLRs that locate the pre-borrow securities for one day. What we discovered was the market was less affected by that. They wanted both intraday token and they wanted tokens good for longer than one day. And they were - we've recently integrated new sources of supply and now have the technology to - we're now doing intraday token that just turned on recently. And do you want to comment on the longer term tokens or [indiscernible].

[Seth Moore:]

No, I think that's really the story, as variable term of tokens we think adds a lot value both for shorter term day traders as well as for people who want to hope they're short for a longer period of time, so they of predictability on cost.

[Patrick Byrne:]

So this is a big lift, I mean we're taking a product that - we've developed a product that is disrupted to - as I have said before is, it's a major source revenue on paper. I don't mean under - I don't mean to and just suggest there are [indiscernible] and people responding and people fighting and pushing back and you've heard about that. And definitely there's fine workers who're trying to push back in different annual base [ph]. We also have - it's a product development type, the product is just going to be improved and improved. In fact I know Saum will receive that beautifully.

[Saum Noursalehi:]

Now, next an update on our Security Token Offering. Patrick and team recently completed an Asia road show for this. Met with many key institutions, it was very well received and has generated a lot of interest. We have 110 million in executed phase and considerable demand that is working its way through the allocation and accreditation and all the Reg S compliance process. So that's all in the works, we also expect to execute significant number of order volume in the coming days as we wrap this up.

[Patrick Byrne:]

Yeah, here I've got to say how - from the center of the earth. I was over in India for a couple of weeks talking to people and everyone that came in said, I'm in for 30 million, actually came in for 30 million. We have a bigger part of the billion dollars here. What I learnt in the first round, more of the domestic round that it really is a matter of - the best part before [ph] I can up come with is milking peanut butter to milking [ph] stock. I mean peanut butter is there, but I mean all these people who're there are resorted to their stuff, they're bankers, they've had a team of people who're dealing with the KYC and now an accreditation and trade documents get translated into Chinese and Korean and Japanese. It's just a - we're now milking peanut butter to milking stock than all of that - they've at Asia, but those - amends to make on. Let's say, it's a matter of how much patients we have sitting milking. We're getting the bigger chunks with us.

[Seth Moore:]

And I can say, we've considerable amount in the domestic round. So we have more parallel processes to make sure our efforts in Japan do not hang up our efforts in Korea or so forth and the process is getting more efficient when practiced, we're pleased that we're developing a better pipeline in that sense.

[Patrick Byrne:]

And then lastly, the SEC. What are - one thing I want to say to be absolutely here is that we're under SEC investigation and what I've learnt is when you're under SEC investigation, the SEC wants you to say, we're under SEC investigation here in the whole stock [ph]. So having said that -

[Saum Noursalehi:]

Yeah, I would just add that our goal the whole time has been a regulated market, so we're cooperating and working.

[Patrick Byrne:]

Yeah, from the beginning we've gone to jump that issues on [indiscernible] that there's going to be still time really. We got a way where we can do all this [indiscernible] people, if we can have an early step. And my will says, there was something just reported, it was reported that we got peanuts, we will not get peanuts, it's reported that 100 million of the other people have peanut [indiscernible]. We didn't have a letter request from our cooperation and we're cooperating fully and I agree, cooperating with them and we've had happy days. So we're under SEC investigation and that's that. Okay, next slide. Retail Strategy, Seth, why don't we let you talk here.

[Seth Moore:]

Sure. So, on this slide, as we mentioned on our last call, for the first quarter we saw a transition to a high growth with long term free cash flow optimized strategy. We paired with our marketing increases to drive that growth. We also announced on the last call that we're making investments into our supply chain, loyalty program and AI driven automation, so that we can extract leverage on scale and leverage that growth to create more long term free cash flow. On the next slide, you'll see, we also showed on the last call that customers responded well and we've experienced nice return to customer growth that continued through the end of the quarter. I will call out that the Easter week landed in the first quarter of this year as opposed to Q2 of last year, because it's one of the worst sales weeks of the year, it had the effect of shifting revenue into Q2 this year. J.P., do you want to add some color on the customer response and marketing efforts?

[J.P. Knab:]

Yeah, as we discussed for the last quarter, we've been retuning our models and our leading indicators look strong along with the weekly new customer growth changes you see in the weekly chart, which is almost 40% change in growth rates in new customers. We're seeing over 100% increase in our email signups, was a key part of our strategy. These trend changes are being accomplished even with our organic search, still at historic low levels. But Google has announced that they're shifting focus on to mobile experience this year and we're well positioned for this shift. As Google makes mobile a ranking factor in July as announced that they'll be moving companies to mobile-first indexing throughout the year. In Google's own tools our mobile speed and mobile friendliness are very highly ranked by Google. We believe that these are - that potential organic search improvements from moving to mobile paired with improved revenue retention via the email signups and Club O growth will help marketing efficiencies in the second half of the year and continue to accelerate growth.

[Seth Moore:]

Great, so as we said on the last call, assurgent marketing expanded that's most inefficient when it's first made because the add test haven't been optimized and the new stronger customer cohorts had not yet began to repeat. Given that, we were encouraged to see a net 16 point swing in revenue growth from Q4 of 2017 because as these cohorts repeat and the marketing has yield efficiency gains you'll see that growth accelerate nicely in Q2 and Q3. I will also point out that with the return growth to our non-home categories, which run on more traditional marketplace models, GAAP net revenue reporting standards were massing a real level of sales on the platform and increased the occurrence of margin rates. And so to give a more accurate picture of those two trends, we began to break out traditional GMV going forward.

[Patrick Byrne:]

Yeah, other people use GMV and you can expect us to use it going forward. Thanks.

[Greg Iverson:]

And historically those two remain fairly closely in line as you can see from the graph, but as that has started to diverse, we thought it was worthwhile to report, to give the public more accurate picture. Now, on the next slide you'll see, in Q1 of 2017 we were really happy when we reported we did a new high watermark of 20% for our gross margins. Encouragingly the team leveraged the volume growth to grow margin by nearly 100 basis points even from that high watermark in 2017. As I said before, about 50 basis points of that growth is actually the result of our marketplace business and net revenue reporting standard, but then with an additional 50 basis points that was driven primarily by volume based efficiency improvements in our supply chain and operation based on the ability to do greater consolidation and operational efficiency improvement to our efforts there. By continuing to liberate these operations dollars, we anticipate being able to invest in price driven growth and expand margins going forward. So with that, I will turn it over to Greg to present the retail financial results.

[Greg Iverson:]

Thanks, Seth. First cover the highlights of our retail result for Q1 including our return to revenue in GMV growth and our 100 basis point increase in gross margin, so I'm going to limit my comments to our retail pretax loss versus the estimate we previously provided in our Q4 2017 earnings release. In summary, our pretax loss for the retail business in Q1 was $33.6 million, which is slightly better than the $35 million pretax loss to estimate we previously provided. I'm going to comment further on our consolidated financial results later in the call. But we'll hand it off to Jonathan turn out to provide an update on Medici.

[Jonathan Johnson:]

Thanks, Greg. So we go to the next Slide that shows Medici Ventures announce 13 portfolio companies. We've talked about tZERO and I want to just briefly focus on three others this quarter. First is Bitt, we're pleased with Bitt and the progress that Bitt is making, it entered into Memorandum of Understanding with the Eastern Caribbean Central Bank towards doing a pilot program to help that Central Bank issue Fiat currency digitally. It's also continuing its roll out of its mMoney wallet in Barbados and that roll out is going well. Second one I'd like to focus on is Voatz. Today is the congressional primary in the West Virginia and Voatz has been for the past several weeks doing a pilot program with two counties in West Virginia, so that those that overseas particularly military voters can vote in the congressional primary remotely using the Voatz blockchain based application. Assuming that this pilot program goes well in these two counties, Voatz and the state of West Virginia expect for voters though statewide for the general election in November. The last one I'll FinClusive, it's our newest portfolio company, so relatively modest investment FinClusive is working to brank 8% of the population in the U.S. and its unbanked and the 27% of the U.S. population that is under bank into the banking system by giving a digital identity that is good enough to clear anti-money laundering and know your customer loss, so that can and then get bank accounts. So the highlights this quarter. Q1 special items, we had some retails that added to nothing. Well, let me go to Medici first. We did have $8 million shift on some impairment of at cryptocurrency holdings. We have a window where we have our necessary token offering open for decision and during that window we stopped trends referring [ph] - it's a serial that we were getting in and Bitcoin into dollars that happened to be the ten days when everything really collapsed in that market and lost $8 million. You'll be happy to know we have since the end of the quarter, we have traded all way out of it and made back about 6 million. So it ended up being a net $2.5 million loss, I'm unhappy about this, but I know that's loss and we as of yesterday we had traded out of all that. I do not want to make one way directional bets any crypto fluctuation. In addition, let's see in the net - I mean the retail side, we wrote off to cut the cost of discontinued equity offering. So there is a lot of questions about it, all just yet to be concise. We when the stock was in the 60s decided, okay, let's go ahead and sell a couple few million shares and 60s and 70s. We made the decision it was there by the time we got our production a row in the 50's by the time we announced it announcing it was 44, it traded down to 36, so we pulled the offering and that's how that came about and at any individual step it reaches well. We one fold thinking that we might be able to see it clear something in the 50s and in fact that market just rated deteriorated several days this was out there in the marketplace and it got worse and worse, that's we called it. Seth?

[Seth Moore:]

Yeah we our intention was not to sell it anywhere near the valuations it was at. We believe our equity is more valuable than that, but we happened to choose sort of the worst two weeks in recent market history to have gone out with it and so it was an opportunistic financing as you'll see later we have lots of money on the balance sheet and so we're we look forward.

[Jonathan Johnson:]

And I would say there was ample demand. Ample demand given where the market was moving at a price where we thought it made sense for shareholders to delivered.

[Seth Moore:]

I should also mention something had come across our radar. An acquisition did come across our radar that was the better in March or in the last day of February, and it was the better part of $100 million and that was another reason that this was especially tempting thing to try to pull off again when the stock was 65s it looked one way and just didn't 38.

[Jonathan Johnson:]

Okay. Next Slide, 2018 full on results, our retail business loss that Greg will share.

[Greg Iverson:]

Yeah, I mean briefly that will cover a couple of things on our Medici and our consolidated financial results for the quarter that's on slide 17. So first our Medici business reported pre-tax loss 21.2 million and as Pat had mentioned that grew to 14.5 million in special items. In our Q4, 2017 earning release we provided an estimated Q1 Medici loss of 15 million. Our estimate guide line didn't include Medici's 8 million impairment in that cryptocurrency we recognized in the quarter. If you exclude the impairment, Medici loss was then slightly better our estimate and also as Pat mentioned maybe it's all looking at dollars to cryptocurrency [indiscernible] on Q2 will be realized and again a loss as much as the Q1 had. Turning briefly to cash flow and liquidity, our Q1 operating cash flow was a net use of cash of 10.2 million, which is significantly less than the 54.7 million in our pre-tax loss. We did have some time guidance that favorably impacted our Q1 cash flow results, but it's important to remember that the retail business cash flow from working capital is positive during periods of revenue growth that we experienced here in the first quarter. So I want' to conclude by talking briefly about one is can do by talking briefly about our liquidity. We ended the first quarter with about 260 million cash on balance sheet and the upcoming rates [ph] 50 million from a warrant exercised in the quarter and also 62 million in cash proceeds from tZERO security token offering and that's net of offering cost that we incurred. And so with the proceeds rates we've decided repay the 40 million term loan which is about a year before the [indiscernible] deal. So with that, I'll hand it back over to Seth, to provide an update on strategic alternatives.

[Seth Moore:]

Great, as we said in our third quarter 2017 earnings call, we were considering three big strategic alternatives and we hired Guggenheim partners to help us work through them. One was capitalized up from Medici, e.g. tZERO, we're doing that nearing completion via our security token offering. Second, capitalize with a large capital partner who's willing to think big. We have to be executed warrants from both Quantum and Passport that we think have been great partners and we're pleased with our progress and how we've been able to leverage that investment and then finally sell the retail business. The retail process and the review of strategic options with the retail business is ongoing. We continue to meet actively with interested acquisition candidates and those considerations are ongoing. Because of confidentiality we can't comment in a great deal of detail, aside to say that those process - that process is ongoing and we're pursuing the manner in which will best maximize value for shareholders.

[Patrick Byrne:]

I can make two comments on that. One is I was told at the beginning of this by Andy Taussig in Guggenheim when I was talking about schedules. He was giving me answers, but he was saying what you can learn Patrick is this is a soufflé and there's just not - it's about baking the perfect soufflé and there's nothing you can do to rush that and it's ready when it's ready. And I'm not to soufflé kind of guy but here it is -

[Seth Moore:]

Patrick prefers microwaves.

[Patrick Byrne:]

I prefer what - and six months later I'm telling, you can't microwave a soufflé. We - I can tell you this. I was open to the idea that these business belong together, the blockchain and the retail. I - and that - so that was a one pebble on the side of, maybe we shouldn't sell, that pebble's gone and I do not see any - there is - I don't see any reason these businesses should stay together at this point any serious reason. So I'm adamant that we go forward, but it is - and there's I forget how Seth - believe me everything Seth just said was carefully ordered by lawyers because we can't get tips one way or the other, but we are committed to - I'm committed to the point of view that the only logical place for the retail business is part of a brick-and-mortar, it should be hybridized with brick-and-mortar. And other means we're going to go buy brick-and-mortar or brick-and-mortar's going to buy us or there are other kinds of license to be add, but I've no interest in buying brick-and-mortar, none whatsoever I can promise you that's not going to happen, so that's what leaves one alternative and that's what I think the gods of economics want to see happen here is this should be part of a brick-and-mortar chain that maybe is not gotten its own digital efforts quite where they want them. So I'm absolutely committed to that. It just turns out to be - I hate giving this answer because –I get all the messages don't you see that these businesses should be separated, of course we see it, it's says easy - it's doing is a little bit of tougher. I mean it just takes time and it turns out there's no way to rush it and as I think we've mentioned there are - what you see in your press release Seth - but though various parties including late entrants where helping to catch up that's in the slides [ph].

[Seth Moore:]

The key is, the time line is the time line because we're trying to maximize your shareholder value and so be patient and know that we are ensuring we get you the most for your shareholder assets.

[Patrick Byrne:]

Yeah, we're all in the same - we're all leading the same [indiscernible], we're all in the same boat, so we want to get - we want to maximize the value of this and - but that just turns out to be a long process and it's not - I'm used to work with butter [ph], butter people call me up and they have a deal and it gives them a yes or no within 15 minutes, it's - this isn't like that, this is like dating and getting married or something, just a lot of fish in the ocean.

[Jonathan Johnson:]

Well, spoken mate, we're all bachelors.

[Patrick Byrne:]

Yeah, okay.

[Jonathan Johnson:]

We have had a number of questions that were emailed in prior to the call. Many of which have been addressed in the presentation Patrick, but all - we do want - I guess not been addressed that you may want to comment some more. Saum has been doing a wonderful job within retail, what is now the appropriate time to move Saum to tZERO?

[Patrick Byrne:]

Great question, fair question. Yeah, Saum has done a wonderful job. Saum is the proverbial level 5 leader. Jim Collins level 5, Homburg doesn't - yeah, anyway. He is just - we have a fantastic innovation. Partnership has evolved over the years but he doesn't need - anyway, he's ready to be CEO and tZERO needs him as CEO and I see tZERO is going to be - it's going to - its success is going to be driven by its technology and ability to innovate. Part of the thesis has always been that bringing some Silicon Valley techniques of agile and scrum and all kinds of things to the New York Sintec world might be a good thing. So and tZERO is an enormous opportunity, so we have to take it and I think that you were fine - we have some - there are some younger trees, shorter trees in the forest of retail that maybe with one less tall tree in the forest, those other trees will grow on expanding shelves. Anyway, we're super comfortable, I'll be back - I travelled 170 days last year and as of May 1, I have 120 days this year, I've been on the road 87. So really that's probably not different from recent years. I now plan on being back here with the retail team most of the time. There's a wonderful retail team has come together here. We're doing the stuff we dreamed of 15 years ago with machine learning and AI and it's working, it's great. So my life is going to get easier, I'm not backing away from tZERO, we have quite a tech element of tZERO's that's actually out here at Utah. But it's just going to be wonderful with Saum. Saum has made - he's made to order to run tZERO. I think that we become unbeatable frankly. It's we've done with Saum there.

[Seth Moore:]

And I would add to that, it's very complimentary. We have a very experienced team of sort of inter veteran employees that we received as part of the [indiscernible] and so Saum can help bring some of the Silicon Valley tech innovation talent to merge together with that traditional New York discipline and capability that I think we want done.

[Jonathan Johnson:]

Patrick, a question to you man, later this relates to this one and then note that you're taking over the position of President of Overstock Retails, something which you've had in the past, but not had recently. What are the additional duties and does it shift? Do you balance what you doing in tZERO and Overstock. Of course and there's a - there is closer relationship between those two companies?

[Patrick Byrne:]

Well, not between tZERO and retail. No, it's not about that. It's about - we will - we have - we have evolved over the last decade, especially a lot management process and E12 type of tools and stuff. My focus - so I'm back with retail because I - although it's going to be hard to fill Saum's shoes, maybe I haven't found this things that there was a P51 and now it's and F22, but I think it's got to fly basically the same. Actually I've been very convinced that for the last four years or so I've been travelling out at immense fraction of the time and doing a lot of blockchain stuff, so what it means to be back, I think that - I don't know, Seth, what does it mean that I'm going to be back? Are things going to run a little less smooth probably than with Saum?

[Seth Moore:]

It will definitely miss Saum, but it will be good having you back. Also we have a much stronger and deeper retail team that I think we ever had before. Particularly, our depth of talent in technology is far, far deeper than it has been historically in our technology leadership. And so the team that Saum built in the organization he created from tech standpoint runs much more efficiently and independently that it ever has in the past and he's done a great job of transitioning us to bottoms up management rather than top down management that has proven very effective and suits us very well in a growth environment.

[Greg Iverson:]

Yeah. Two things I would add. I think Patrick is actually downplaying it while he has been on the road quite a bit he's been very involved, we talk almost daily. So he's been heavily involved in decisions in the business I think he'll be great. And in addition to that the philosophy of shifting decision making as Seth mentioned to the knowledge frontier where we're led by just a series of pods that make decisions on their own, has been the goal of the company and I think we're finally there.

[Saum Noursalehi:]

Product management, we really shifted from conventional corporate hierarchy to product management. And we also have a plan that - and we told you exactly what our plan was, it's not my ideal plan. I don't like playing this game that everyone else on Wall Street is playing - has internet has done, but we have shifted to this and is seems to be executing perfectly and it's running ahead of schedule one and so forth so I'm not here.

[Jonathan Johnson:]

Patrick that brings to the next question, we were on the Slide where we'll get [ph], we saw a nice growth in our customers and we saw very nice quarter-over-quarter growth in GMV. Are you confident you can get later like domestic sales growth on an appropriate level spending and if so what?

[Patrick Byrne:]

Yeah, as I've said in the press release, I think that you will see us continue with nice acceleration trends for Q2 and Q3 and then it will be an area that I think of is relatively as a high growth company, relatively acceptable and then at that point we start fine tuning what we wanted of growth and looking at the losses we're trying to be confident that we're going to be significantly less than other people who have affected the strategy. So I am confident that you will see over the next two quarters continue to acceleration such as you have seen last quarter.

[Jonathan Johnson:]

Great, next question, talk about international sales [indiscernible]?

[Patrick Byrne:]

International sales have growing very quickly, but on the low base. We think there is enormous opportunity in Canada, Canada is growing very quickly, it's still is not enough to make a difference in the company, it should be 10%, it's not, it's more than 1%, but it's not 10%. So Canada especially - we've messed around with international for so many years pursuing opportunities in places like Malaysia where it was - at this point we're very heavily focused on the easiest countries to do. Canada we go - some interesting things have even turned on in the last couple weeks, we're about to turn on LTL shipping in Canada and free shipping in Canada, all within a week or two of coming live I believe. J.P. is that correct?

[J.P. Knab:]

That's correct and also the .ca site.

[Patrick Byrne:]

overstock.ca.

[Jonathan Johnson:]

Patrick, you talked about shipping in Canada there is a question about adding distribution centers in the U.S., should we still have distribution centers to increase the retail businesses two day shipping footprint?

[Patrick Byrne:]

Yes, the plan is to - for this year at a minimum add one additional distribution center and we think with that we can get 98% of orders within two day shipping, so we are going to scale that effort.

[J.P. Knab:]

And as we spoke of gross margin improvements and efficiency gains, yeah, that volumes is allowing us to pair into a much more efficient holistic logistics network. Our third party logistics services grew more than 50% in the first quarter and we shifted volume we make through those services and we think that will continue to accelerate in Q2 and Q3.

[Jonathan Johnson:]

There is question on online sales tax battle.

[Patrick Byrne:]

Take that JJ.

[Jonathan Johnson:]

Well we've been finding as battle for a long time and frankly winning it for a long time and we fight it for two reasons; one, we do - philosophically, we don't like states trying to reach across their borders and regulate people outside the states. And second, we don't have a physical footprint or as the court say nexus in the state, we don't have to call it sales tax and so we don't. Our case against South Dakota was heard in the U.S. Supreme Court last month and has won sat in the court room during oral arguments. I will say the tone and comments [ph] of the Justice's questions were encouraged. So we expect a decision in that case before the court goes on resets in July and we were hoping for the best.

[Patrick Byrne:]

And the best would be they would reaffirm court.

[Jonathan Johnson:]

Best would be they reaffirm the court. We have to status play [ph].

[Patrick Byrne:]

Which means - well, actually would not punch a hole in the laws of the state to try that most of us?

[Jonathan Johnson:]

You're correct Patrick. They would be - go along with the state with the same, but it would be stronger and our ability to fight the many states that they're trying to -

[Patrick Byrne:]

Egregiously.

[Jonathan Johnson:]

Egregiously reach across their borders and to find physical presence. We had an easier time beating to back.

[Patrick Byrne:]

We like the constitution and we would like - and what does the constitution say.

[Jonathan Johnson:]

The constitution says that Interstate commerce is to be regulated by Congress and that the various states, that's frankly one of the main reasons we had a constitutional convention because the Articles of Confederation were weaker.

[Patrick Byrne:]

And we're doing all kind of internal turf. The truth is the second best solution would be, if the Supreme Court says you Congress have to - if Congress passes a national law.

[Jonathan Johnson:]

And we continued the work frequently and regularly with congress to pass the law though will be favorable to Brick and Mortar, Brick and Click and [indiscernible].

[Patrick Byrne:]

With something that creates - something that creates a - the kinds of things that are issue in this and significant we're taking a minute. There are things of issue in the tax laws when the states do this that - for example, we want - if states want us online guys to collect their taxes for them. We would like the state to have to put the tax rate up in a database that we interrogate and use and if they make a mistake it's on them. You would think that would be kind of a very common sense thing that ask for, well, people's heads explodes when you ask that states and generally well -

[Jonathan Johnson:]

Was good for the goose, should be good for the gander.

[Patrick Byrne:]

Yeah, wonderful month which has some diligent remark where I come from as a two week back to school tax holiday on sweaters or something and they forget to update their database and we're using one rate for two weeks for that and when ordering in that place in Vermont, we'll multiply that by 10s of 1000s of towns and such across the country, you start having - people might have miss paid by a dollar or two here and a dollar or two - the next thing, if class action suits and people expecting billions of dollars. So we think the states, if they want us to do this, they should publish the rates and they should be certifying that these are the rates that we use and match that's true and believe it or not that's kind of one of the big hold ups which is hilarious.

[Jonathan Johnson:]

So [indiscernible]. Rob Hughes to be a long standing CFO, did a great job. He has moved over to DeSoto. Question why DeSoto [indiscernible]

[Patrick Byrne:]

DeSoto was a huge opportunity. DeSoto was a huge opportunity I believe. There is - I mean there's global interest in this and even since we have started there is all kinds of ways we see this can create value. We didn't really do it thinking - just by a way of example. There's over $100 trillion of non-mineral reserves in the world that really can't be gotten to because before a mining company can dig, mining company needs to raise capital and when it raises capital it needs to prove that as its digging or mining that it's not that the - what was that movie, that philosophical movie, the blue people, Avatar. That they are into - they're Avatar people, so that we can - we can solve problems like that and make sure that the wealth is enjoyed by the Avatar people living there. But there's trillions of dollars of value that will is locked up in so many different ways, mineral reserves as being one of them, we're hearing from global entities. I had a conversation a week ago with the head of a global entity that asked me how quickly can you bring this to our continent and do this and that. So there's lots, but this is a long term - to me this is a sleeper. And it will - it can change the world and make the world better. I think there's ways it's going to make money, but go head Seth.

[Seth Moore:]

Yeah, and also had Rob chose really DeSoto.

[Patrick Byrne:]

Yeah.

[Seth Moore:]

It was his choice to go there. He was really interested and when we have somebody who's great and talented and extremely confident like Rob Hughes, letting him do something they're passionate about is going to unlock much value in it. Yeah so

[Patrick Byrne:]

And he is very passionate about it. He's passionate. And so we got, so we got Greg and instead and it's going to be those are - here's this young guy, Warren Buffet says, it's tough to teach a young guy old tricks, but I'm sure Greg will do just - we conducted a long, long search and we have some real talent in our young CFO.

[Jonathan Johnson:]

We've found Patrick that you have been doing financially within our organization makes a big difference.

[Patrick Byrne:]

Yeah.

[Jonathan Johnson:]

Having Rob with DeSoto and having Greg at Overstock as it could make a big difference to both of them. We appreciate the explanation about the status of the ICO, it's on your Overstock of Medici still considering investing in the [indiscernible]?

[Patrick Byrne:]

Thank you. FTO is the correct term. ICO was sold 2017, but as security tokens has distinct from these utility tokens, 90% of which I think broke the law. We are going to have - we are thinking of –we're not stepping in the way of this security token. I think that we might do something intercompany at the end. I think we'll probably take a little bit of cash back that is owed us, not a lot amount, not a big amount, and - I don't think we're going to be investing any cash in the security token. But I forget there's some legal work I need to albeit. Do you have any comment on that Jonathan?

[Jonathan Johnson:]

No, we haven't made a decision, but it's not our plan to invest with more -

[Greg Iverson:]

Yeah. I would say we do something it will be a green shoe and it will be non-cash, but just be a rotator for debt that will be a relatively small amount. It won't be major I recon.

[Jonathan Johnson:]

tZERO is normally a security token platform, is there any concern that it will be up and running with no or very few security tokens?

[Patrick Byrne:]

Well, absolutely, because there are no security tokens out there to trade yet. I mean technically, technologically we could turn something on I think this week. But, the question is what token do you want trading on there, there is a -

[Seth Moore:]

Yeah, I think the first Reg D and Reg S tokens that were offered under SEC exemptions are now just beginning to come up on the end of their trading lock ups and so it's really in the coming month or two that the very first tokens are coming available to be listed at.

[Saum Noursalehi:]

That's several parties have reached out, both private and public that want to do their STO using our platform.

[Patrick Byrne:]

Well, 2000 companies have reached out, but in terms of folks we've had real conversations with and so forth.

[Seth Moore:]

And who are nearing the end of their lockup so that they are ready to be traded.

[Patrick Byrne:]

You're right, so when people sell under Reg D, which is a credit and there's a one year lock up. And when they sell under Reg S, there's a 90 day lock up I think that's it. So, the first ones are reaching the point where they'll come out of lock up and we developing - we'll be getting them up. There is one I got excited about this quarter, one investment in Elio cars coin - although the cars itself are exciting, we have a copy over here for the shareholder meeting tomorrow. To me the real - it takes people a bit to get the magic of security tokens and what's possible. What security tokens unlock is a way of - for people to cooperate far beyond what shares of stock have ever allowed. And in particular the ElioCoin token I think - so I'm hearing dozens of different ideas about how security tokens can be used to raise money and to fact revise capital markets around them. The ElioCoin token is really interesting to me for the following reason. They need to take $200 million to get their company launched. If Elio - if they went and saw a normal institutional investor or a VC or something they are trying to convince the fellows gives us $200 million. Investors have to decide how big is the market for this kind of ultra low price car, how big is share of the market can they sell out Elio again and then can you run the rest of the company. The - that's the decision tree that they've got to go down. The Elio car token - the coin is very anticipating - they've got like 65,000 pre-orders or something like that for the car, so they think they can bring something into the market and it will be a long line and people waiting for. There will be people willing to pay to advance themselves in line. One in eight cars, the way they said, look at the Elio documents to get the details. By the way this is the first securities token that's being brought to market under written by major by event John's Trading. So, what they anticipate is, and when there is line for these cars, there will be people who will pay to advance the landline. They were going to take one in eight cars that comes of the assembly line and take it away from the normal waiting line and put it in an auction at all. Actually auctions were $7,500, but you auction to get - the bidding is to get - the price is the same, but the bidding is to get to the front of that auction line. And the auction is going to be conducted in ElioCoins. So that's a mouthful. What all that means is, they have found a way now, to anticipate demand in the future that they can and people's willingness to pay in advance for themselves to line. Monetize it now, turn it into capital which to build the company. Why I find that so interesting is that question - the question of do they sell the car token? Turns it to be a very good proxy for the first two of those three questions I described a minute ago. The questions how big the market is there and can this guy capture shares that is pretty much the same question as can he sell these tokens? And for various detailed reasons if they think it's real. That means that this may be to a much more efficient way of allocating capital. And capital - I mean this innovation which is made possible by security tokens the way Elio has structured the coin could be adapted to building buildings, building public works, building highways, funding pharmaceutical research, all kinds of things. It's a really revolutionary idea, that if not it may flop, they may totally flop but if it works it means American entrepreneurs have a way to connect with capital. Not by going and praying to the gods on [indiscernible] but by creating theses coins and if they sell the coins then that's the same thing as saying there's a market there and they can get a share of the market. So, it may be a very efficient mechanism and retrieved by it for that reason. So, it's not however all that said, I think the Elio car is really cool, a safe $7500 car, that I think it's a good car. I know there are some sloth out there the guy, you know eight to nine years ago the factory closed down in Louisiana, a GM plant closed down and this entrepreneur with a 36 year Detroit engineer - somebody made a deal with the town and said give us a chance to get a car company there. And now the town is impatiently tapping their foot and saying well why reverse the car plan you know, that will reverse the car plant now, I don't have any car plants have been reopened in Louisiana since the great recession, but they are very impatient with this gets reopened and so you see that somebody sued him for this or that, it looked pretty trivial to me the law suits - I'm sorry the due diligence there is more focus involved, demonstrating is involved there's a bunch of due diligence on how these guys. It's not like the fellow is sitting at home counting is money. This is a classic American entrepreneur who's trying to get the company off the ground and this funding mechanism may prove to be really a cold fusion moment. It's a whole new away for entrepreneurs to think about their funding and so we'll see if it works, but as I do with all the teaser stuff. It's extremely risky, I mean we're creating a whole new financial market and ways of doing things. So just be aware, all the stuff is risky, some of it may flop, we have entrench contenders we have to compete with. So, I don't want people - I've tried to remember every time, remember we're trying to dislodging some deeply entrench competitors.

[Jonathan Johnson:]

I'm glad you talked Elio, there's another question on that. Approaching that the market had three four questions left, what are the questions on Elio, why did over stock make the investments rather than that [indiscernible]. May I address that Patrick?

[Jonathan Johnson:]

So, relative charter is really to invest in companies or advanced companies that are using blockchain technology. We are always using blockchain technology in coin off to strengthen that. It's operating its business, so in that respect it felt a better fit for Overstock.

[Jonathan Johnson:]

Next question is Joe Cammarata still affiliated with tZERO?

[Patrick Byrne:]

Joe is the Director tZERO and I thank him for his eight years of service putting SpeedRoute together and building that into what it was. He promised me that he would get at least two or three years to this and he completed his promise. But, yes he is affiliated, he is in the board and I anticipate he will be giving some small amount in the life going forward. Joe is real - I get repeatedly told around the country, no one in this country knows more about routing and exchange technology than Joe Cammarata. So he's been a - built a wonderful base for Saum to take in to the world of blockchain.

[Jonathan Johnson:]

Two more questions on tZERO, the investor appreciated uptake on the DLR and stock lending business. Wanted to know is it currently operational and are we receiving revenues from the DLR stock lending business? If so, are there any projections for the future?

[Patrick Byrne:]

It is operational in the set - there is a brokerage using it. I'm sorry you go ahead.

[Greg Iverson:]

Yeah, it is in production. We're doing production beta testing and especially - so there's more demand as I mentioned earlier than we went onboard, but we are going to scale that out in the coming quarter. With products in general, but especially in the Fintech space you don't want to immediately onboard a lot of clients while you are enhancing and improving the product. And so we've been very careful to make sure it's a solid product and it's no leaks and it does exactly what we wanted to.

[Seth Moore:]

Also to be clear, we are not a clearing firm, we don't hold to securities directly, we license software, the people to do. And so the expansion you'll see is additional software licensing to clearing firms to lend their securities. Sorry, I did miss a piece of that question. We do have some small amount of revenue coming from that data period, but that is from the limited production testing we've done in the one off agreement, you'll see those revenue is expand as we increased the licensing based on it.

[Patrick Byrne:]

Yeah we have some favorite - there are favorite clients of a broker dealer who are getting to use this and they are using it getting located just shooting into the market. Yeah we've learned a lot, product development is like this. Its real time, we've learned that what we brought to the market was not exactly the market wanted, they wanted the ability to interrogate, they wanted the ability to do it longer, hold and so there's been - the product is getting, is evolving in order to meet that demand.

[Jonathan Johnson:]

Last question, has to do with security token offering. It's kind of two pieces? How much of Overstock cash has been spent on marketing thinking about the security token offering? And what percentage of the tokens purchased till date been purchased by someone by Overstock or someone affiliated with Overstock versus non-affiliated?

[Patrick Byrne:]

No, Overstock hasn't purchased any and I haven't purchased any.

[Jonathan Johnson:]

No, no, [indiscernible].

[Patrick Byrne:]

No, these are all legitimate orders from the -

[Jonathan Johnson:]

Marketing, I don't think we've disclosed what the marketing is. But I think it's coming out of think tZERO?

[Patrick Byrne:]

Yeah, Overstock has spent nothing on this, tZERO has. It was my time; I've spent a lot of time in the last several months with this, but no, Overstock did not consider anything this quarter.

[Jonathan Johnson:]

Okay, Saum do you want to add anything else?

[Saum Noursalehi:]

No, just excited to be part of this world changing opportunity with tZERO.

[Patrick Byrne:]

Yeah, Saum is my first, second and third choice to do what has to be done in the next stage of tZERO's growth. I don't want to overstate, but I guess I mentioned in the Press Release something about Texas Gulf Sulphur, and that really was my concern. Last September my concern was we had all - look I've got - I'm just seeing, I am not all suggesting, I have no idea what the stock should do. I don't think it's my job to make the stock do one thing or another. It's odd that I have some of the conversations I am having with people where they see extraordinary values in tZERO. I mean, throw out numbers in the billions, they throw out numbers in the tens of billions and what they think this can be. And you maybe even - what they - the kinds of numbers we are hearing that people think it might be worth now or relatively soon. So, I think in terms of - if somebody sold their stock today or a year ago, somebody sold the stock and they didn't know that we got something we are working on in here that may actually be like cold fusion. I feel like some obligation to people like that not to convince anybody how much is worth, but just to let people know, we are working on things that there are powerful people in the world who think are going to be worth a fortune. So - but I am not trying to convince you of that, I feel just like I got to turn the cards up on the table. You folks should be looking at these, the values of business; you got to look hard at tZERO and try to come up with as well as the other blockchain investments as well as retail and come up with your own conclusion. But I felt an obligation to sort of set up a flair and get people to know that there are assets within our company that may end up being extraordinarily viable.

[Jonathan Johnson:]

Patrick, one more question came in, can we talk about the standards of security transaction losses? I will answer it if you will.

[Patrick Byrne:]

Please.

[Jonathan Johnson:]

Well, there have been two files that are basically kind of picking up to, that that will be put together we think some time by the end of - before the end of this quarter. We don't think the claims are valid and defend ourselves, security transactions do tend to happen whenever the stock goes down. When we read through the claims we think that the government frivolous I think is being generous.

[Patrick Byrne:]

Does it recall the frivolous statement? Yeah, I stopped reading in the Press Release when it said something about well bit coin went up and then bit coin went down and you didn't want us to come up down. We are not bit coin, there is unfortunately a 92 - last time I calculated there was a 92% correlation between bit coin price movements and Overstock over the last year. That's a huge mistake, anyone's betting on us as a proxy for bit coin, it's a big mistake. We carry a small amount of bit coin, we liquidated every once in a while and make couple of million bucks, we don't have it - this is a terrible bet as a proxy for bit coin.

[Jonathan Johnson:]

And we are bullish on blockchain technology.

[Patrick Byrne:]

Right, we don't have any opinion on what bit coin is going to do.

[Patrick Byrne:]

Okay, thank you nice working with smart owners. Sorry we do not yet have answers for you on a couple of things we are actively involved in. I would tell you more if I could, but I can tell you that the plan we told, we announced for retail business, we are executing. It's coming off just right and the key point is I think that you will continue to see nice acceleration for at least Q2 and Q3. Thank you very much.

[Seth Moore:]

Thank you.

[Operator:]

Ladies and gentlemen, thank you for participating on today's conference. This does conclude the program. You may all disconnect. Everyone have a wonderful day.