Overstock.com 2015 Annual Report Download - page 70

For further details on Contribution and Contribution Margin, see the calculation of these non-GAAP financial measures below (in thousands):





Total net revenue
$ 1,657,838
$ 1,497,103
$ 1,304,217
Cost of goods sold
1,353,184
1,218,044
1,056,557
Gross profit
304,654
279,059
247,660
Less: Sales and marketing expense
124,468
109,461
91,609
Plus: Club O Rewards and gift card breakage (included in Other income)
$ 5,911
$ 2,439
$ 1,187
Contribution
$ 186,097
$ 172,037
$ 157,238
Contribution margin
11.2%
11.5%
12.1%

Free cash flow (a non-GAAP financial measure) reflects an additional way of viewing our cash flows and liquidity that, when viewed with our GAAP
results, provides a more complete understanding of factors and trends affecting our cash flows and liquidity. Free cash flow, which we reconcile to “Net cash
provided by (used in) operating activities,” is net cash provided by operating activities reduced by “Expenditures for fixed assets, including internal-use
software and website development.” We believe that net cash provided by operating activities is an important measure, since it includes both the cash impact
of the continuing operations of the business and changes in the balance sheet that impact cash. However, we believe free cash flow is a useful measure to
evaluate our business since purchases of fixed assets are a necessary component of ongoing operations and free cash flow measures the amount of cash we
have available for mandatory debt service and financing obligations, changes in our capital structure, and future investments after purchases of fixed assets.
Therefore, we believe it is important to view free cash flow as a complement to our entire consolidated statements of cash flows as calculated below (in
thousands):





Net cash provided by operating activities
$ 54,516
$ 80,834
$ 83,645
Expenditures for fixed assets, including internal-use software and website
development
(59,513)
(41,346)
(18,067)
Free cash flow
$ (4,997)
$ 39,488
$ 65,578

Other than the interest rate swaps described below and elsewhere in this Annual Report on Form 10-K, we do not use derivative financial instruments
in our investment portfolio, and we have no foreign exchange contracts. Our financial instruments consist of cash and cash equivalents, trade accounts and
contracts receivable, accounts payable and long-term obligations. We consider investments in highly-liquid instruments with a remaining maturity of
90 days or less at the date of purchase to be cash equivalents.
In connection with the syndicated senior secured credit facility described above, we entered into interest rate swap transactions. The swaps have an
effective date of September 1, 2015 and a maturity date of October 1, 2023. The combined notional amount changes monthly and began at approximately
$3.6 million on September 1, 2015. The notional amount increases to a maximum of approximately $45.8 million on October 1, 2016, and decreases
thereafter to approximately $38.2 million on October 1, 2023. The swaps effectively fix our effective interest rate on the approximate amounts expected to be
outstanding from time to time on the Real Estate Loan at an annual rate of approximately 4.6%. At December 31, 2015 we had $9.5 million outstanding
under the Real Estate Loan, and the notional amount of the swaps was $20.5 million.
We carry our interest rate swaps at fair value on our consolidated balance sheets. At December 31, 2015 our swaps are included in Other current and
Other long-term liabilities in the amount of approximately $721,000 and $1.7 million, respectively. The change in fair value of our swaps for the year ended
December 31, 2015 was a loss of $1.4 million. The fair
69