Ladies and gentlemen, thank you for standing by, and welcome to the Third Quarter 2019 Overstock.com Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Robert Hughes, Acting CFO. Please go ahead, sir.

Thank you. Good morning, and welcome to our third quarter 2019 earnings conference call. Joining me today are Jonathan Johnson, CEO of Overstock and President of Medici Ventures; Saum Noursalehi, CEO of tZERO; and Dave Nielsen, President of Overstock Retail. Let me remind you that the following discussion and our responses to your questions reflect management's views as of today, November 12, 2019, 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 press release and Form 10-Q filed this morning. Please review the forward-looking statements disclosure 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. Jonathan, with that, let me turn the call over to you.

Thank you, Rob. Good morning. I'm excited to be talking with our owners and other stakeholders. With our company recently celebrating its 20th birthday and the change in leadership, it's an especially relevant moment to take an objective look at where the company offers real value and where it needs to be upgraded to maintain its competitive position. Overstock.com is the premier destination for customers shopping online for online deals and home goods. Medici Ventures is a one of a kind collection of the industry-transforming blockchain companies. Those core propositions remain unchanged. We are focused on maximizing the value experience and profitability of the retail business, something Dave and I will discuss today. And we are focused on assisting the Medici Ventures family of companies get their products in production and improve those products' value to customers, something that Saum and I will discuss. One of the things I've asked each of our executives to do is to narrow focus onto what matters most. All the retail initiatives are now focused on delivering home goods shoppers excellent deals with quick, enjoyable shopping and post-purchase experience. Medici Ventures is spending its time and resources on those companies getting products in production in what we think are the most transformative blockchain markets. We will discuss some of this narrowed focus today and then provide more details on this narrowed focus on our future earnings calls as we make progress in these areas. Let's go to Slide 4. Let me briefly review the agenda for today's call. We'll begin with a discussion of the status of the OSTKO digital dividend. We'll then discuss tZERO, some of the other companies in the Medici Ventures family and Overstock Retail. After highlighting some of our patent activities, we'll give a brief regulatory update. We'll then take…

Thank you, Jonathan. tZERO's business is transitioning from build to growth, and we are more focused as an organization than ever before and continue to make progress against our core objectives. tZERO is strongly positioned heading into 2020, the year we believe will be an inflection point for the company and the adoption of digital securities. Before I jump into the business update, I want to reiterate tZERO's value proposition as well as the overall business opportunity. Go to Slide 11. In the near future, the way in which we trade anything of value is going digital, and we stand to benefit from this opportunity. Slide 12. What is tZERO's role in this? tZERO represents the next-generation capital markets platform, which allows assets to be digitized in the form of security tokens and provides a compliant way for these tokens to be traded. It is worth reminding everyone that this platform is live and trading securities today. Slide 13. Some of the advantages of security tokens include democratized access and increased liquidity for traditionally exclusive assets, and this includes investment funds for commercial real estate; reducing settlement times from 2 to 3 business days to near instant; and automating regulatory compliance through the use of smart contract technology. Slide 14. According to Finoa, the World Economic Forum, Deloitte and McKinsey, the global market value of digital assets is expected to double in 2020 from -- to $1 trillion and rise to $4 trillion by 2022. This is an 8x increase from where we are today. These are of course estimates. However, the key takeaway is the opportunity is quite large. On the right, you'll see some of the applications of this technology, which range from equities, debt, real estate funds to fine art, sports teams and even athletes and artists.…

Thanks, Saum. It's great to see the steady progress tZERO is making under your leadership and that of the upgraded tZERO executive team. I love the focus, and I've never been more confident in tZERO. And I'm excited to see how the OSTKO dividend enhances the liquidity on the tZERO trading platform. I hope our shareholders understand the importance of the OSTKO dividend. Next slide. Next, I'll highlight 4 Keiretsu companies that have made significant strides recently. Slide 25. Evernym is the only new addition to the Keiretsu since we last spoke, and it is one we have been actively pursuing. We believe identity is a key thread in what Medici Ventures is building. Evernym is world-class, having launched the Sovrin Foundation and assisted the Worldwide Web Consortium in creating the gold standard in self-sovereign identity. The promise of self-sovereign identity is that the subject of identity data, namely you, should be the sole owner of that identity data. Given breaches, leaks and unauthorized selling of identity data since the birth of the Internet, we believe self-sovereign identity is the next killer app of blockchain. While it's hard to place an exact value on the identity management as an industry, its value is clearly marked in the success of companies like Okta and arguably the identity management space's largest player, Facebook, which allows you to log on to many sites using your Facebook credentials. It's great to welcome Evernym to the Keiretsu, and I look forward to its contribution to our blockchain technology stack. Slide 26. Let's talk GrainChain. Luis Macias and his team continue to bring Internet of Things triggered smart contracts to the world, this time in Honduras with the coffee supply chain. I expect the growth of GrainChain to continue in Central and South America as there…

Thank you, Jonathan. Next slide. As we told you in our updated retail guidance, the third quarter was trending towards flat adjusted EBITDA, and the results came in right where we expected it. While we had planned for a higher contribution, the team did an admirable job of managing expenses in line with contribution. Let me point out, this is also a significant year-over-year Q3 improvement. Next slide. As we shared in our updated retail guidance, we missed our target contribution number as a result of some headwinds in the market at large and because of some disruptions in the freight side of our supply chain. We have some additional data around these headwinds further on in the presentation, and we'll elaborate on the challenges we faced in the third quarter. Before we do, I'd like to size up our market for you. Next slide. As we mentioned last quarter, Overstock retail is an exciting market that, while it is facing some headwinds at the moment, had a great deal of promise for long-term growth and profitability. The home furnishings market is a $300 billion highly fragmented market with a relatively small online penetration when compared to other product categories. At a 19% penetration level, we can be fairly confident that the online segment of this market is going to experience elevated levels of growth for the foreseeable future. We also know that with less than 35% of the market consolidated in the top 5 players, differences in consumer preference will keep the market relatively fragmented with lots of room for profit enhancing differentiation. Next slide. The primary reason for the home goods market being so fragmented is that customers have highly differentiated preferences in how they shop. The home experiences that delight some will actively turn away others. We've…

Thanks, Dave. I too am confident about the opportunities for Overstock retail. The team and the innovative tech it's building to improve experience for deal-conscious customers is going to position us very well. Something I'd like to highlight briefly this quarter that may not be well-known by our shareholders is the patent activity throughout the organization. Let me start by saying each business in the organization manages its own patent protection activities and philosophy. When you look at the combined patent activity, it should give our shareholders a glimpse into the impressive innovation taking place across the organization. Slide 48. This first slide shows the patent activity of our Overstock retail business. Under the patents pending grouping, you can see the total number of U.S. patent applications filed by Overstock Retail. The issued or allowed grouping speaks for itself. Overstock Retail has had real success receiving patents around e-commerce and online advertising among other innovative ideas. And the international grouping shows the number of filings outside the United States regardless of status. Slide 49, please. This slide shows the patent activity for Medici Ventures and tZERO. The activity in this area is exciting because many of these patent applications pertain to novel applications of blockchain technology for capital markets and include an issued patent covering a bridge between legacy Wall Street systems and new technology. The reason there are so many more pending patents than issued patents is that blockchain is still such a new area of innovation. You can also see the heavier emphasis on international filings. Remember, these companies are targeting both domestic and international markets. Next slide. This third slide shows the activity of the Keiretsu companies, including the patent activity in the previous 2 slides plus all but 2 of the other Keiretsu companies. There's a…

Sure. As I stated, our business development team is in conversations with over 160 issuers from a variety of sectors. 10-plus of these are in due diligence, 3 to 5 of which are in the final stages. And we hope to have them trading either by the end of the year, which was my original target, or in the first quarter.

Okay. Dave, there's one that's come in about Retail and Wayfair. On the Wayfair earnings call, Wayfair indicated it was being negatively impacted by tariffs. The tariffs are causing the price of merchandise on its platform to fluctuate, which lengthens the buying cycle. Is Overstock experiencing the same kind of thing?

Yes. As mentioned on the -- during the call today, our products that received tariff increases decreased in revenue by 12.2% post-tariff cost increases. It's important to note that all -- not all of our Chinese manufactured products received cost increases. And we've diversified our sourcing over the last several years, bringing down the total assortment product in China from nearly 85% after the 2008 recession to about 50% now. And our suppliers continue accelerating this transition to Vietnam and other markets, but tariffs will continue to cause near-term pain.

Okay. Thank you. Another question: for the Medici holdings, what is our percent ownership and how much capital have we invested in each one? We get this question often. Many of the Keiretsu companies ask that we not disclose our percent ownership interest in them. Even with this request, as a public company we must disclose that information for some. You can find the information on tZERO and MLG in our consolidated financial statements and information on most of the other companies in the 10-Q on Page 15. For those not covered in those 2 locations, we generally own less than 6% of the companies. Another question about Medici: As you've suggested recently, your primary focus is on existing holdings. Do you still feel that way? Or do you see additional opportunities to add more companies to the portfolio? As I mentioned in the -- as we went through the slides, the current holdings will be our primary focus for the time being, but we've always got our eyes peeled and our ears to the ground for something world changing. Future funding is more likely to be follow-on funding to companies already in the Keiretsu, like we did with PeerNova in October. Couple questions on the dividend. In fact, we've received a lot of questions about the status of the digital dividend and when it will happen. I think we've gone into great detail on Slides 5 through 7. But I will add, again, that our team has been talking with regulators who have been helpful in guiding us. Assuming we're successful in getting shareholder approval to amend the Series A certificate of designation, it feels like we've now crossed all Ts and dotted all Is. Another question about the dividend: Someone asks, with all the counterfeit shares in existence,…

Sure. This is something we are interested in, but not right now. We get a lot of synergies by being owned by Overstock. This includes leveraging talent, which -- we get talent from Overstock. When we no longer need it, we can shift that talent back to Overstock. We're also working closely with Overstock on the digital dividend, which Jonathan described, and we really see that as a model for many other companies that are interested in digital -- going digital. We're also drawing capital from Overstock if necessary. So at this time, it just doesn't make sense to spin out. But we are going to look for the right moment to do that.

Yes, the synergies are real, all the way down to Saum and I sharing an office when Saum's in Salt Lake. Speaking of the retail business and its potential sale, we've been asked: can you provide an update on where things stand on the potential sale of the retail business? There is nothing new to report. When there is, we'll let the market know. Another question on retail: eBay and Etsy are suggesting changes to online sales tax legislation following last year's Supreme Court rulings are negatively impacting their performance. How, if at all, is it affecting Overstock sales? I've been intimately involved in the sales tax matters for years. And we haven't seen any real negative impact, likely for 2 reasons. First, our model is different than that of eBay and Etsy because we are not an open marketplace for small and individual sellers. And second, we were proactive in preparing for the potential Supreme Court ruling and were thus able to implement, quickly, sales tax collection and remittance without much work that eBay and Etsy are likely having to do now. The states aggressively go after small sellers to collect sales tax. Got a question come in about our CFO. It says, why did your last CFO leave? And where are you in your efforts to find a long-term replacement? Mr. Iverson gave his notice at 6:10 p.m. on the day he left, effective immediately. He didn't provide a reason. He did assure our outside auditors that he had no concerns with the company's financial statements or accounting practices. The search for a replacement is progressing nicely. We've engaged the executive search firm Spencer Stuart, and it's compiled a nice slate of interesting candidates that I anticipate we will begin interviewing soon. In the meantime, it's great to…

Yes, we expect little impact from the shortened holiday period in 2019. There really isn't any hard evidence that fewer shopping days hurts holiday sales. Some folks will point to 2013, which was the last time we had this type of calendar set-up as evidence that fewer shopping days will be a drag on sales. However, there are a number of factors as to why 2013's poor performance was what it was: payroll tax hikes that year, the SNAP reduction hurting lower income consumers. Previous short holiday season before that was 2008, which is when the world started to collapse from the financial crisis that hit in September of 2008. So anyone pointing to the calendar as a driver for weak sales in 2013 or 2018 (sic) [ 2008 ] is really ignoring a number of other large factors.

Good points. Saum, how will tZERO be able to execute its plans, particularly with such high regulatory oversight?

If it were easy, everyone would be doing it, so it is challenging. But with that said, we're working very closely with regulators to implement the next evolution of capital markets. This will require providing essentially all the traditional investor protections that exist today while also offering the disruptive benefits of distributed ledger and smart contract technology.

Thanks. A question on free cash flow: are you still on track to once again be able to use free cash flow generated from your e-commerce business to fund your blockchain-related efforts? Well, that remains the goal, and we still believe it is an achievable goal. But the Q3 headwinds we discussed earlier have set that back a bit. As you will recall, we were well on the path to profitability in 2008, got set back by the recession, but still got to profitability in 2009. We think we can do it again. Question from a shareholder, Michael: How much effort is going into ending this SEC investigation? As I mentioned in our regulatory update, we are fully cooperative with the SEC. We answer any inquiry it makes as quickly as we can. I would say outside the legal group, this takes very little time from anyone else at the company. Another question: We have multiple investments in voting-related efforts. What are they? And what do you see as the long-term opportunities for them? We have 3 companies in the voting space: Voatz, Votem and, to some extent, SettleMint. I've discussed during the slides the real progress that Voatz is making. I think there will be a day soon, sooner than people think, when everyone will be able to use their mobile devices to vote in a safe, secure and auditable way. No more waiting in lines. No more hanging chads. No more not knowing if your vote was really counted. Voting as we do today will feel as outmoded as sending a fax. Some still will, but not many. That's the future in voting that I see. Any thoughts on the revenue model for MLG? Yes. MLG is still young in developing its business model. That said, MLG is…

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.