NEIGHBORHOOD INTELLIGENCE, INC. (BBBY) FY 2023 MD&A

ITEM 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis contains forward-looking statements relating to future events or our future financial or operating performance that involve risks and uncertainties, as set forth above under "Special Cautionary Note Regarding Forward Looking Statements." or in Item 1A under the heading "Risk Factors" or included elsewhere in this Annual Report on Form 10-K. In addition, our future results may be significantly different from our historical results.

Overview

Beyond is dedicated to providing, through our Bed Bath & Beyond brand and other brands, an extensive array of furniture and home furnishings and related services, tailored especially for our target customers—consumers who seek comprehensive support throughout their shopping journey, aspiring to discover quality, stylish products at competitive prices that align with their budget requirements. We anticipate a continued shift of the furniture and home furnishings market away from traditional brick-and-mortar stores and toward online sales as consumers increasingly embrace the convenience of online shopping.

We regularly refresh our product assortment to reflect the evolving preferences of our customers and stay aligned with current trends. Our range of products includes furniture, bedding and bath essentials, patio and outdoor gear, area rugs, tabletop and cookware, décor, storage and organization solutions, small appliances, home improvement items, and more. In addition, we seek to provide customers with relevant home financial products and services. Leveraging an asset-light supply chain, we offer direct shipping to customers from both our suppliers and warehouses.

Key drivers fueling our growth strategy include expanding our home assortment, including products and services, enhancing the findability of our products for customers, boosting mobile app adoption to drive higher customer retention and brand loyalty, optimizing marketing efforts to elevate consumer's consideration of our brands for shopping, expanding our customer base in Canada, and growing market share by fortifying our brand pillars of "Selection," "Findability," "Value," and "Support." For a comprehensive overview of our business, refer to Item 1—"Business—Our Business."

We acquired the Bed Bath & Beyond brand and certain related intellectual property in July 2023. In November 2023, we changed our corporate name from Overstock.com, Inc. to Beyond, Inc., and transferred the principal listing of our common stock from the Nasdaq Global Market to the New York Stock Exchange.

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Executive Commentary

This executive commentary is intended to provide investors with a view of our business through the eyes of our management. As an executive commentary, it necessarily focuses on selected aspects of our business. This executive commentary is intended as a supplement to, but not a substitute for, the more detailed discussion of our business included elsewhere herein. Investors are cautioned to read our entire "Management's Discussion and Analysis of Financial Condition and Results of Operations," and our interim and audited financial statements, and the discussion of our business and risk factors and other information included elsewhere or incorporated in this report. This executive commentary includes forward-looking statements, and investors are cautioned to read "Special Cautionary Note Regarding Forward-Looking Statements."

Our consolidated cash and cash equivalents balance decreased from $371.3 million as of December 31, 2022 to $302.6 million as of December 31, 2023, a decrease of $68.7 million, primarily as the result of purchases of intangible assets of $25.8 million relating to our acquisition of the Bed Bath & Beyond brand, expenditures of property and equipment of $19.2 million, and net cash outflows from operating activities of $18.6 million during the year ended December 31, 2023.

Revenue decreased 19% in 2023 compared to 2022. This decrease was primarily due to a decrease in average order value of 16% and a 4% decrease in the number of customer orders delivered. The decrease in average order value was largely driven by orders mixing into categories with lower average unit retail price. The decrease in orders delivered was largely driven by the impact of macroeconomic factors and uncertainty impacting consumer sentiment, a shift in consumer spending preferences, and our strategy to exit non-home categories, partially offset by an increase in orders delivered following the launch of the Bed Bath & Beyond brand in August.

Gross profit decreased 29% in 2023 compared to 2022 primarily due to lower sales and a decrease in gross margin. Gross margin decreased to 20.1% in 2023, compared to 23.0% in 2022, primarily due to increased promotional discounting and carrier costs. The decrease was partially offset by operational efficiencies.

Sales and marketing expenses as a percentage of revenue increased to 14.4% in 2023 compared to 11.2% in 2022, primarily due to increased performance marketing expense, partially offset by lower brand advertising.

Technology expenses decreased $4.0 million in 2023 compared to 2022, primarily due to a reduction in staff-related expenses.

General and administrative expenses increased $10.7 million in 2023 compared to 2022, primarily due to increased legal fees, Bed Bath & Beyond brand integration expenses, and severance.

Additional commentary related to macroeconomic trends

We continue to monitor recent macroeconomic trends, including, but not limited to, geopolitical events, fluctuating interest rates, and inflation. These events have and may continue to negatively impact consumer confidence and consumer spending which have and may continue to adversely affect our business and our results of operations. Due to the uncertain and constantly evolving nature and volatility created by these disruptions to global economic activities, we cannot currently predict the long-term impact of these events on our operations and financial results. Nevertheless, as of December 31, 2023, the challenges arising from these events have not adversely affected our liquidity or capacity to service our debt, nor have these conditions required us to reduce our capital expenditures.

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Liquidity and Capital Resources

Overview

We believe that our cash and cash equivalents currently on hand and expected cash flows from future operations will be sufficient to continue operations for at least the next twelve months. We continue to monitor, evaluate, and manage our operating plans, forecasts, and liquidity considering the most recent developments driven by macroeconomic conditions, such as supply chain challenges, inflation, rising interest rates, and geopolitical events. We proactively seek opportunities to improve the efficiency of our operations and have in the past and may in the future take steps to realize internal cost savings, including aligning our staffing needs, creating a more variable cost structure to better support our current and expected future levels of operations and process streamlining.

We periodically evaluate opportunities to repurchase our equity securities, obtain credit facilities, or issue additional debt or equity securities, which may impact our future operations and liquidity. In addition, we may, from time to time, consider the investment in, or acquisition of, complementary businesses, products, services, or technologies to expand our business, any of which might affect our liquidity requirements or cause us to issue additional debt or equity securities that would be dilutive to shareholders.

Current sources of liquidity

Our principal sources of liquidity are existing cash and cash equivalents, and accounts receivable, net. At December 31, 2023, we had cash and cash equivalents of $302.6 million and accounts receivable, net of $19.4 million.

Cash flow information is as follows (in thousands):

Operating activities

Cash received from customers generally corresponds to our net revenue as our customers primarily use credit cards to buy from us, causing our receivables from these sales transactions to settle quickly. We have payment terms with our partners that generally extend beyond the amount of time necessary to collect proceeds from our customers.

The $18.6 million of net cash used by operating activities during the year ended December 31, 2023 was primarily due to loss from continuing operations, adjusted for non-cash items, of $60.1 million, offset by cash provided by changes in operating assets and liabilities of $41.5 million.

The $12.5 million of net cash used by operating activities during the year ended December 31, 2022 was primarily due to income from continuing operations, adjusted for non-cash items, of $67.8 million, offset by cash used by changes in operating assets and liabilities of $80.3 million.

Investing activities

The $44.6 million of net cash used in investing activities during the year ended December 31, 2023 was primarily due to purchases of intangible assets of $25.8 million related to Bed Bath & Beyond and expenditures for property and equipment of $19.2 million.

The $33.0 million of net cash used in investing activities during the year ended December 31, 2022 was primarily due to purchases of equity securities of $18.9 million and expenditures for property and equipment of $14.9 million.

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Financing activities

The $5.5 million of net cash used in financing activities during the year ended December 31, 2023 was primarily due to payments of taxes withheld upon vesting of employee stock awards of $3.8 million and payments on long-term debt of $3.6 million.

The $86.3 million of net cash used in financing activities during the year ended December 31, 2022 was primarily due to repurchases of our common stock and Series A-1 preferred stock under the Repurchase Program of $80.1 million, payments of taxes withheld upon vesting of employee stock awards of $3.7 million, and payments on long-term debt of $3.4 million.

Contractual Obligations and Commitments

The following table summarizes our contractual obligations as of December 31, 2023 and the effect such obligations and commitments are expected to have on our liquidity and cash flow in future periods (in thousands):

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(1)    Represents the future minimum lease payments under non-cancellable operating leases. For information regarding our operating lease obligations, see Item 8 of Part II, "Financial Statements and Supplementary Data"—Note 14—Leases contained in the "Notes to Consolidated Financial Statements" of this Annual Report on Form 10-K.

(2)    Represents future interest and principal payments on our financing agreements. For information regarding our financing agreements, see Item 8 of Part II, "Financial Statements and Supplementary Data"—Note 13—Borrowings contained in the "Notes to Consolidated Financial Statements" of this Annual Report on Form 10-K.

Tax contingencies

We are involved in various tax matters, the outcomes of which are uncertain. As of December 31, 2023, and 2022, tax contingencies were $3.7 million and $3.5 million, respectively, which are included in our reconciliation of unrecognized tax benefits (see Item 8 of Part II, "Financial Statements and Supplementary Data"—Note 24—Income Taxes contained in the "Notes to Consolidated Financial Statements" of this Annual Report on Form 10-K). Changes in federal, foreign, state, and local tax laws may increase our tax contingencies. The timing of the resolution of income tax contingencies is highly uncertain, and the amounts ultimately paid, if any, upon resolution of issues raised by the taxing authorities may differ from the amounts accrued. It is reasonably possible that within the next 12 months we will receive additional assessments by various tax authorities. These assessments may or may not result in changes to our contingencies related to positions on prior years' tax filings.

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Results of Operations

Our Annual Report on Form 10-K for the year ended December 31, 2022, filed February 24, 2023, includes a discussion and analysis of our year-over-year changes, financial condition, and results of operations for the years ended December 31, 2022 and 2021 in Item 7 of Part II, "Management's Discussion and Analysis of Financial Condition and Results of Operations."

Net revenue, costs of goods sold, gross profit and gross margin

The following table summarizes our net revenue, costs of goods sold, gross profit and gross margin for the years ended December 31, 2023 and 2022 (in thousands):

The 19% decrease in net revenue for the year ended December 31, 2023, as compared to the same period in 2022, was primarily due to a decrease in average order value of 16% and a 4% decrease in the number of customer orders delivered. The decrease in average order value was largely driven by orders mixing into categories with lower average unit retail price. The decrease in orders delivered was largely driven by the impact of macroeconomic factors and uncertainty impacting consumer sentiment, a shift in consumer spending preferences, and our strategy to exit non-home categories, partially offset by an increase in orders delivered following the launch of the Bed Bath & Beyond brand in August.

We cannot estimate the impact that macroeconomic conditions, such as supply chain challenges, inflation, rising interest rates, or geopolitical events will have on consumer sentiment and our business in the future due to the unpredictable nature of the ultimate development and duration of these conditions.

International net revenues were less than 3% of total net revenues for 2023 and 2022.

Estimate of unearned product revenue on undelivered product

Our revenue related to merchandise sales is recognized upon delivery to our customers. As we ship high volumes of packages through multiple carriers, it is not practical for us to track the actual delivery date of each shipment. Therefore, we use estimates to determine which shipments are delivered and, therefore, recognized as revenue at the end of the period. Our delivery date estimates are based on average shipping transit times. We review and update our estimates on a quarterly basis based on our actual transit time experience. However, actual shipping times may differ from our estimates, which can be further impacted by uncertainty, volatility, and any disruption to our carriers caused by certain macroeconomic conditions, such as supply chain challenges, inflation, rising interest rates, or geopolitical events.

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The following table shows the effect that hypothetical changes in the estimate of average shipping transit times would have on the reported amount of revenue and income before taxes (in thousands):

Gross profit and gross margin

Our overall gross margins fluctuate based on competitive pricing; inventory management decisions; sales coupons and promotions, including our loyalty program; product mix of sales; advertising revenue and our marketing allowance program; and operational and fulfillment costs. Merchant fees, customer service, and other include merchant processing fees associated with customer payments made by credit cards and other payment methods and other variable fees, customer service costs, costs incurred to operate and staff our warehouses, including rent and depreciation expense associated with these facilities, costs to receive, inspect, pick, and prepare customer order for delivery, and direct and indirect labor costs including payroll, payroll-related benefits, and stock-based compensation, all of which we include as costs in calculating gross margin. Merchant fees, customer service, and other as a percentage of sales may vary due to several factors, such as our ability to effectively manage merchant fees, customer service costs, and warehouse costs. We believe that some companies in our industry, including some of our competitors, account for merchant fees, customer service, and other costs within operating expenses, and therefore exclude merchant fees, customer service, and other costs from gross margin. As a result, our gross margin may not be directly comparable to others in our industry.

Gross margins for the past eight quarterly periods and years ending December 31, 2023 and 2022 were:

Gross profit for the year ended December 31, 2023 decreased 29% compared to the same period in 2022, primarily due to lower sales and a decrease in gross margin. Gross margin decreased to 20.1% for the year ended December 31, 2023, compared to 23.0% for the same period in 2022, primarily due to increased promotional discounting and carrier costs. The decrease was partially offset by operational efficiencies.

Operating expenses

Sales and marketing expenses

We use a variety of online advertising channels to attract new and repeat customers, including search engine marketing, personalized emails, mobile app, loyalty program, affiliate marketing, display banners, and social media. We also build our brand awareness through linear and streaming TV.

Costs associated with our loyalty program, discounted shipping, and other promotions, such as coupons, are not included in sales and marketing expense. Rather, they are accounted for as a reduction in revenue as they reduce the amount of consideration we expect to receive in exchange for goods or services and therefore affect net revenues and gross margin. We consider discounted shipping and other promotions, such as our policy for free shipping on certain orders, as an effective marketing tool.

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The following table summarizes our sales and marketing expenses for the years ended December 31, 2023 and 2022 (in thousands):

The 320 basis point increase in sales and marketing expenses as a percent of net revenues for the year ended December 31, 2023, as compared to the same period in 2022, was primarily due to increased performance marketing expense, partially offset by lower brand advertising.

Technology expenses

We seek to deploy our capital resources efficiently in technology to support operations including private and public cloud, web services, customer support solutions, and product search, and in technology to enhance the customer experience, including machine learning algorithms, improving our process efficiency, modernizing and expanding our systems, and supporting and expanding our logistics infrastructure. We expect to continue to incur technology expenses to support these efforts and these expenditures may continue to be material.

The frequency and variety of cyberattacks on our Website, enterprise systems, services, and on third parties we use to support our technology continues to increase. The impact of such attacks, their costs, and the costs we incur to protect ourselves against future attacks, have not been material to date. However, we consider the risk introduced by cyberattacks to be serious and will continue to incur costs related to efforts to protect ourselves against them.

The following table summarizes our technology expenses for the years ended December 31, 2023 and 2022 (in thousands):

The $4.0 million decrease in technology expenses for the year ended December 31, 2023, as compared to the same period in 2022, was primarily due to a reduction in staff-related expenses.

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General and administrative expenses

The following table summarizes our general and administrative expenses for the years ended December 31, 2023 and 2022 (in thousands):

The $10.7 million increase in general and administrative expenses for the year ended December 31, 2023, as compared to the same period in 2022, was primarily due to increased legal fees, Bed Bath & Beyond brand integration expenses, and severance.

Non-operating income (expense)

Interest income (expense), net

The $9.0 million increase in interest income (expense), net for the year ended December 31, 2023, as compared to the same period in 2022, was primarily due to increased interest income on our cash equivalents.

Other income (expense), net

The $96.2 million decrease in other income (expense), net for the year ended December 31, 2023, as compared to the same period in 2022, was primarily due to a $76.5 million increase in loss recognized from our equity method securities and a $25.9 million write-down of assets held for sale, partially offset by a $6.4 million realized gain on the disposal of cryptocurrencies.

Income taxes

Our effective tax rate for the years ended December 31, 2023 and 2022 was (15.7)% and (4.1%), respectively. Our effective tax rate is affected by recurring items such as research tax credits and non-recurring items such as changes in valuation allowances. In addition, relative changes in expenses or losses for which tax benefits are limited or not recognized, fluctuations in our stock price, changes in laws, regulations, and administrative practices can impact our rate. Our effective tax rate is also affected to a lesser extent by tax rates in foreign jurisdictions and the relative amount of income we earn in those jurisdictions, which we expect to be fairly consistent in the near term. Our effective tax rate differs from the statutory federal income tax rate of 21% primarily due to the impacts of changes in the valuation allowance against our deferred tax assets, net of deferred tax liabilities.

The OECD has issued Pillar Two model rules introducing a new global minimum tax of 15% intended to be effective on January 1, 2024. While the U.S. has not yet adopted the Pillar Two rules, various other governments around the world are enacting such legislation. As currently designed, we expect Pillar Two will ultimately apply to us. Considering we do not currently have material operations in jurisdictions with tax rates lower than the Pillar Two minimum, these rules are not expected to materially increase our global tax costs based on how we currently do business. There remains uncertainty as to the final Pillar Two model rules. We will continue to monitor U.S. and global legislative action related to Pillar Two for potential impacts.

As we repatriate foreign earnings for use in the United States, the distributions will generally be exempt from federal and foreign income taxes but may be subject to certain state taxes. As of December 31, 2023, the cumulative amount of foreign earnings considered permanently reinvested upon which taxes have not been provided, and the corresponding unrecognized deferred tax liability, was not material.

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Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles ("GAAP") requires estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities in the consolidated financial statements and accompanying notes. The SEC has defined a company's critical accounting policies as the ones that are most important to the portrayal of the company's financial condition and results of operations, and which require the company to make its most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Based on this definition, we have identified the critical accounting policies, estimates and judgments addressed below. We also have other key accounting policies, which involve the use of estimates, judgments, and assumptions that are significant to understanding our results. For additional information, see Item 8 of Part II, "Financial Statements and Supplementary Data"—Note 2—Accounting Policies and Supplemental Disclosures. We believe that our estimates, assumptions, and judgments are reasonable. We evaluate our estimates and assumptions on an ongoing basis. Actual results may differ significantly from these estimates. Our critical accounting policies are as follows:

•valuation of certain equity method securities carried at fair value.

Valuation of certain equity method securities carried at fair value

We measured certain equity method securities at fair value at the reporting date. In the absence of quoted market prices (e.g., a privately held entity), the fair value was determined in good faith under our valuation policy and process using generally accepted valuation approaches. We utilized an independent third party valuation firm to assist us in determining the fair value of our direct minority interest in tZERO using a market approach. The market approach relied upon market transaction valuations of the subject company, adjusted for changes in enterprise value for guideline public companies. The fair value determination of our direct minority interest in tZERO required the use of significant unobservable inputs (Level 3 inputs) as shown in the table within Note 2—Accounting Policies and Supplemental Disclosures, Equity securities accounted for under the equity method under ASC 323. Due to the inherent uncertainty of determining the fair value of Level 3 securities that do not have a readily available market value, the determination of fair value required significant judgment or estimation and changes in the estimates and assumptions used in the valuation models could materially affect the determination of fair value for these assets.

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