Notes to Unaudited Consolidated Financial Statements
1. BASIS OF PRESENTATION
Overstock.com, Inc. is an online retailer and advancer of blockchain technology. As used herein, "Overstock," "the Company," "we," "our" and similar terms include Overstock.com, Inc. and its majority-owned subsidiaries, unless the context indicates otherwise.
We have prepared the accompanying unaudited consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC") regarding interim financial reporting. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States ("GAAP") have been omitted in accordance with the rules and regulations of the SEC. These financial statements should be read in conjunction with our audited annual consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2018. The accompanying unaudited consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, which are, in our opinion, necessary for a fair presentation of results for the interim periods presented. The results of operations for the three and nine months ended September 30, 2019 are not necessarily indicative of the results to be expected for any future period or the full fiscal year, due to seasonal and other factors.
In light of a shift in the long-term strategic focus of our organization to transition our retail business to concentrate on the retail partner portion of our business, we no longer consider the split of retail direct and retail partner as a distinct and relevant measure of our business. Accordingly, in the fourth quarter of 2018, revenues and cost of goods sold previously recorded in "Direct" and "Partner and Other" are now split between "Retail" and "Other" on the consolidated statements of operations. "Retail" includes retail revenue and costs of goods sold from both "Direct" and "Partner" transactions. Our revenues and costs of goods sold related to our Medici business remains in "Other". In addition, we have recast the prior period revenues and cost of goods sold to conform with current year presentation.
For purposes of comparability, we reclassified other certain immaterial amounts in the prior periods presented to conform with the current period presentation.
2. ACCOUNTING POLICIES
Principles of consolidation
The accompanying consolidated financial statements include our accounts and the accounts of our wholly-owned subsidiaries and other subsidiaries for which we exercise control. All intercompany account balances and transactions have been eliminated in consolidation. Included in our consolidated financial statements are the financial results of Bitsy, Inc. from the acquisition date of January 1, 2019, Verify Investor, LLC from the acquisition date of February 12, 2018, and Mac Warehouse, LLC from the acquisition date of June 25, 2018.
Use of estimates
The preparation of financial statements in conformity with GAAP requires estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent liabilities in our consolidated financial statements and accompanying notes. Estimates are used for, but not limited to, receivables valuation, revenue recognition, Club O and gift card breakage, sales returns, incentive discount offers, inventory valuation, depreciable lives of property and equipment and internally-developed software, goodwill valuation, intangible asset valuation, equity securities valuation, income taxes, stock-based compensation, performance-based compensation, self-funded health insurance liabilities and contingencies. Although these estimates are based on our best knowledge of current events and actions that we may undertake in the future, actual results may differ materially from these estimates.
Cash equivalents
We classify all highly liquid instruments, including instruments with a remaining maturity of three months or less at the time of purchase, as cash equivalents. Cash equivalents were $3.0 million and $3.1 million at September 30, 2019 and December 31, 2018, respectively.
Restricted cash
We consider cash that is legally restricted and cash that is held as compensating balances for credit arrangements, surety bonds, and self-funded health insurance as restricted cash.
Fair value of financial instruments
We account for our assets and liabilities using a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our market assumptions. These two types of inputs have created the fair-value hierarchy below. This hierarchy requires us to minimize the use of unobservable inputs and to use observable market data, if available, when determining fair value.
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|
•
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Level 1—Quoted prices for identical instruments in active markets;
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|
|
•
|
Level 2—Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets; and
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|
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•
|
Level 3—Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.
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Our assets and liabilities that are adjusted to fair value on a recurring basis are cash equivalents, certain equity securities, and deferred compensation liabilities, which fair values are determined using quoted market prices from daily exchange traded markets on the closing price as of the balance sheet date and are classified as Level 1. Our other financial instruments, including cash, restricted cash, accounts receivable, accounts payable, accrued liabilities, finance obligations, and debt are carried at cost, which approximates their fair value. Certain assets, including long-lived assets, certain equity securities, goodwill, cryptocurrencies, and other intangible assets, are measured at fair value on a nonrecurring basis; that is, the assets are not measured at fair value on an ongoing basis, but are subject to fair value adjustments using fair value measurements with unobservable inputs (level 3), apart from cryptocurrencies which use quoted prices from various digital currency exchanges with active markets, in certain circumstances (e.g., when there is evidence of impairment).
The following tables summarize our assets and liabilities measured at fair value on a recurring basis using the following levels of inputs as of September 30, 2019 and December 31, 2018, as indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
p
|
Fair Value Measurements at September 30, 2019:
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents - Money market mutual funds
|
$
|
3,008
|
|
|
$
|
3,008
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Equity securities, at fair value
|
818
|
|
|
818
|
|
|
—
|
|
|
—
|
|
Trading securities held in a "rabbi trust" (1)
|
103
|
|
|
103
|
|
|
—
|
|
|
—
|
|
Total assets
|
$
|
3,929
|
|
|
$
|
3,929
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Deferred compensation accrual "rabbi trust" (2)
|
$
|
103
|
|
|
$
|
103
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Total liabilities
|
$
|
103
|
|
|
$
|
103
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at December 31, 2018:
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents - Money market mutual funds
|
$
|
3,135
|
|
|
$
|
3,135
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Equity securities, at fair value
|
2,636
|
|
|
2,636
|
|
|
—
|
|
|
—
|
|
Trading securities held in a "rabbi trust" (1)
|
84
|
|
|
84
|
|
|
—
|
|
|
—
|
|
Total assets
|
$
|
5,855
|
|
|
$
|
5,855
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Deferred compensation accrual "rabbi trust" (2)
|
$
|
85
|
|
|
$
|
85
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Total liabilities
|
$
|
85
|
|
|
$
|
85
|
|
|
$
|
—
|
|
|
$
|
—
|
|
___________________________________________
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(1)
|
— Trading securities held in a rabbi trust are included in Prepaids and other current assets and Other long-term assets, net in the consolidated balance sheets.
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|
(2)
|
— Non-qualified deferred compensation in a rabbi trust is included in Accrued liabilities and Other long-term liabilities in the consolidated balance sheets.
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Accounts receivable, net
Accounts receivable consist primarily of carrier rebates, trade amounts due from customers in the United States, and uncleared credit card transactions at period end. Accounts receivable are recorded at invoiced amounts and do not bear interest. From time to time, we grant credit to some of our business customers on normal credit terms (typically 30 days). We maintain an allowance for doubtful accounts receivable based upon our business customers' financial condition and payment history, and our historical collection experience and expected collectability of accounts receivable. The allowance for doubtful accounts receivable was $2.4 million and $2.1 million at September 30, 2019 and December 31, 2018, respectively.
Concentration of credit risk
One bank held the majority of our cash and cash equivalents at September 30, 2019 and December 31, 2018. Our cash equivalents primarily consist of money market securities which are uninsured. We do not believe that, as a result of this concentration, we are subject to any unusual financial risk beyond the normal risk associated with commercial banking relationships.
Inventories, net
Inventories, net include merchandise purchased for resale, which are accounted for using a standard costing system which approximates the first-in-first-out ("FIFO") method of accounting, and are valued at the lower of cost and net realizable value. Inventory valuation requires us to make judgments, based on currently available information, about the likely method of disposition, such as through sales to individual customers, returns to product vendors, or liquidations, and expected recoverable values of each disposition category.
Prepaids and other current assets
Prepaids and other current assets represent expenses paid prior to receipt of the related goods or services, including advertising, license fees, maintenance, packaging, insurance, prepaid inventories, other miscellaneous costs, and cryptocurrency-denominated assets ("cryptocurrencies"). See Cryptocurrencies below.
Cryptocurrencies
We hold cryptocurrency-denominated assets ("cryptocurrencies") such as bitcoin and we include them in Prepaids and other current assets in our consolidated balance sheets. Our cryptocurrencies were $2.5 million and $2.4 million at September 30, 2019 and December 31, 2018, respectively, and are recorded at cost less impairment.
We recognize impairment on these assets caused by decreases in market value, determined by taking quoted prices from various digital currency exchanges with active markets, whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. See Fair value of financial instruments above. Such impairment in the value of our cryptocurrencies is recorded in General and administrative expense in our consolidated statements of operations. Impairments on cryptocurrencies were zero and $318,000 for the three and nine months ended September 30, 2019. There was $150,000 and $9.6 million impairment on cryptocurrencies during the three and nine months ended September 30, 2018.
Gains and losses realized upon sale of cryptocurrencies are also recorded in General and administrative expense in our consolidated statements of operations. We occasionally use our cryptocurrencies to purchase other cryptocurrencies. Gains and losses realized with these non-cash transactions are also recorded in General and administrative expense in our consolidated statements of operations. These non-cash transactions as well as gains (losses) from cryptocurrencies received through our tZERO security token offering are also presented as an adjustment to reconcile Net income (loss) to Net cash provided by (used in) operating activities in our consolidated statements of cash flows. Further, the proceeds from the sale of cryptocurrencies received through our tZERO security token offering are presented as a financing activity in our consolidated statements of cash flows due to its near immediate conversion into cash and its economic similarity to the receipt of cash proceeds under the tZERO security token offering. Realized gains on sale of cryptocurrencies were $183,000 and $311,000 for the three and nine months ended September 30, 2019. There were $64,000 and $8.4 million realized gains on sale of cryptocurrencies for the three and nine months ended September 30, 2018.
Property and equipment, net
Property and equipment are recorded at cost and stated net of depreciation and amortization. Upon sale or retirement of assets, cost and related accumulated depreciation and amortization are removed from the balance sheet and the resulting gain or loss is reflected in our consolidated statements of operations. Property and equipment are depreciated using the straight-line method over the estimated useful lives of the related assets or the term of the related finance lease, whichever is shorter, as follows:
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|
|
|
Life
(years)
|
Building
|
40
|
Land improvements
|
20
|
Building machinery and equipment
|
15-20
|
Furniture and equipment
|
5-7
|
Computer hardware
|
3-4
|
Computer software, including internal-use software and website development
|
2-4
|
Leasehold improvements are amortized over the shorter of the term of the related leases or estimated useful lives.
Included in property and equipment is the capitalized cost of internal-use software and website development, including software used to upgrade and enhance our Website and processes supporting our business. We capitalize costs incurred during the application development stage of internal-use software and amortize these costs over the estimated useful life. Costs incurred related to design or maintenance of internal-use software are expensed as incurred.
During the three months ended September 30, 2019 and 2018, we capitalized $3.3 million and $4.0 million, respectively, of costs associated with internal-use software and website development, both developed internally and acquired externally. Depreciation of costs for the same periods associated with internal-use software and website development was $3.2 million and $3.4 million, respectively. During the nine months ended September 30, 2019 and 2018, we capitalized $10.8 million and $14.7 million, respectively, of costs associated with internal-use software and website development, both developed internally and acquired externally. Depreciation of internal-use software and website development during the nine months ended September 30, 2019 and 2018 was $9.5 million and $10.0 million, respectively.
Depreciation expense is classified within the corresponding operating expense categories on our consolidated statements of operations as follows (in thousands):
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|
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|
|
|
|
|
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|
|
|
Three months ended
September 30,
|
|
Nine months ended
September 30,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Cost of goods sold - retail
|
$
|
170
|
|
|
$
|
85
|
|
|
$
|
516
|
|
|
$
|
252
|
|
Technology
|
5,042
|
|
|
5,330
|
|
|
15,109
|
|
|
16,103
|
|
General and administrative
|
1,261
|
|
|
1,038
|
|
|
3,762
|
|
|
3,082
|
|
Total depreciation
|
$
|
6,473
|
|
|
$
|
6,453
|
|
|
$
|
19,387
|
|
|
$
|
19,437
|
|
Total accumulated depreciation of property and equipment was $219.8 million and $204.9 million at September 30, 2019 and December 31, 2018, respectively.
Equity securities under ASC 321
At September 30, 2019, we held minority interests (less than 20%) in certain privately held entities accounted for under Accounting Standards Codification ("ASC") Topic 321, Investments - Equity Securities ("ASC 321"), which are included in Equity securities in our consolidated balance sheets. Dividends received are reported in earnings if and when received. We review our securities individually for impairment by evaluating if events or circumstances have occurred that may indicate the fair value of the investment is less than its carrying value. If such events or circumstances have occurred, we estimate the fair value of the investment and recognize an impairment loss in Other expense, net on our consolidated statements of operations equal to the difference between the fair value of the investment and its carrying value. In such cases, the estimated fair value of the investment is determined using unobservable inputs including assumptions by the investee's management including quantitative information such as lower valuations in recently completed or proposed financings. These inputs are classified as Level 3. Because several of these private companies are in the early startup or development stages, these entities are subject to potential changes in cash flows and valuation, as well as inability to raise additional capital which may be necessary for the liquidity needed to support their operations.
Certain of our equity securities lack readily determinable fair values and therefore the securities are measured at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or similar equity securities of the same issuer. The carrying amount of our equity securities without readily determinable fair values was approximately $11.9 million and $17.7 million at September 30, 2019 and December 31, 2018, respectively. Cumulative downward adjustments for price changes and impairments for our equity securities without readily determinable fair values were $11.6 million, and the cumulative upward adjustments for price changes to equity investments were $958,000 as of September 30, 2019. The impairments and downward adjustments for the period related to equity securities without readily determinable fair values at September 30, 2019 and 2018 is as follows (in thousands):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
September 30,
|
|
Nine months ended
September 30,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Impairments and downward adjustments of equity securities without readily determinable fair values
|
$
|
(2,750
|
)
|
|
$
|
(511
|
)
|
|
$
|
(5,708
|
)
|
|
$
|
(511
|
)
|
One of these equity securities, which had a carrying value of $818,000 at September 30, 2019 and $2.6 million at December 31, 2018, is carried at fair value based on Level 1 inputs. See Fair value of financial instruments above. The portion of unrealized gains and losses for the period related to equity securities with readily determinable fair value still held at September 30, 2019 and 2018 is calculated as follows (in thousands):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
September 30,
|
|
Nine months ended
September 30,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Net gains/(losses) recognized during the period on equity securities
|
$
|
(700
|
)
|
|
$
|
(72
|
)
|
|
$
|
(1,818
|
)
|
|
$
|
1,764
|
|
Less: Net gains recognized during the period on equity securities sold
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Unrealized gains/(losses) during the reporting period on equity securities still held
|
$
|
(700
|
)
|
|
$
|
(72
|
)
|
|
$
|
(1,818
|
)
|
|
$
|
1,764
|
|
Equity method securities under ASC 323
At September 30, 2019, we held minority interests in certain privately held entities accounted for as equity method securities under ASC Topic 323, Investments - Equity Method and Joint Ventures ("ASC 323"), which are included in Equity securities in our consolidated balance sheets. We can exercise significant influence, but not control, over these entities through either holding more than a 20% voting interest in the entity or through our representation on the entity's board of directors. For certain of these entities, we provide developer services. For the three and nine months ended September 30, 2019, we recognized $639,000 and $1.9 million of developer service revenue, respectively, in Other revenue on our consolidated statements of operations. For the three and nine months ended September 30, 2018, we recognized $467,000 and $1.5 million of developer service revenue, respectively, in Other revenue on our consolidated statements of operations.
The following table includes our equity method securities and related ownership interest as of September 30, 2019:
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|
|
|
Ownership
interest
|
Bitt Inc.
|
21%
|
Boston Security Token Exchange LLC
|
50%
|
Chainstone Labs, Inc.
|
29%
|
FinClusive Capital, Inc.
|
10%
|
GrainChain, Inc.
|
10%
|
Minds, Inc.
|
24%
|
SettleMint NV
|
30%
|
Spera, Inc.
|
19%
|
VinX Network Ltd.
|
25%
|
Voatz, Inc.
|
20%
|
The carrying amount of our equity method securities was approximately $29.0 million and $40.1 million at September 30, 2019 and December 31, 2018, respectively. The carrying value of our equity method securities exceeded the amount of underlying equity in net assets of our equity method securities and the difference was primarily related to goodwill and the fair value of intangible assets. The basis difference attributable to amortizable intangible assets is amortized over their estimated useful lives. We record our proportionate share of the net income or loss from our equity method securities and the amortization of the basis difference related to intangible assets in Other expense, net in our consolidated statements of operations with corresponding adjustments to their carrying value.
The following table summarizes the net losses recognized on equity method securities for the three and nine months ended September 30, 2019 and 2018 (in thousands):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
September 30,
|
|
Nine months ended
September 30,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Net loss recognized on our proportionate share of the net losses of our equity method securities and amortization of the basis difference
|
$
|
1,864
|
|
|
$
|
1,123
|
|
|
$
|
4,922
|
|
|
$
|
2,504
|
|
Impairments on equity method securities
|
—
|
|
|
—
|
|
|
1,256
|
|
|
—
|
|
Net loss recognized during the period on equity method securities sold
|
—
|
|
|
—
|
|
|
524
|
|
|
—
|
|
Noncontrolling interests in Controlled Subsidiaries
Our wholly-owned subsidiary, Medici Ventures, Inc. ("Medici Ventures"), holds a majority ownership interest in tZERO Group, Inc. ("tZERO"), formerly tØ.com, Inc., and Medici Land Governance Inc., a Delaware public benefit corporation ("MLG"). tZERO's subsidiaries include a financial technology company, two related registered broker dealers and a recently incorporated company which has applied to become a registered broker dealer, a digital wallet and exchange services company, and an accredited investor verification company. tZERO, MLG, and their consolidated subsidiaries are included in our consolidated financial statements. For controlled subsidiaries that are not wholly-owned, the noncontrolling interests are included in Net loss and Total equity. Intercompany transactions have been eliminated and the amounts of contributions and gains or losses that are attributable to the noncontrolling interests are disclosed in our consolidated financial statements.
Leases
We determine if an arrangement is a lease at inception. We account for lease agreements as either operating or finance leases depending on certain defined criteria. Operating leases are recognized in Operating lease right-of-use ("ROU") assets, Operating lease liabilities, current, and Operating lease liabilities, non-current on our consolidated balance sheets. Finance leases are included in Other long-term assets, net, Other current liabilities, and Other long-term liabilities on our consolidated balance sheets. Lease assets and liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. In certain of our lease agreements, we receive rent holidays and other incentives. We recognize lease costs on a straight-line basis over the lease term without regard to deferred payment terms, such as rent holidays, that defer the commencement date of required payments. Our lease terms may include options to extend or terminate the lease, and we adjust our measurement of the lease when it is reasonably certain that we will exercise that option. Lease payments used in measurement of the lease liability typically do not include executory costs, such as taxes, insurance, and maintenance, unless those costs can be reasonably estimated at lease commencement. Leasehold improvements are capitalized at cost and amortized over the lesser of their expected useful life or the life of the lease, without assuming renewal features, if any, are exercised. We do not separate lease and non-lease components for our leases.
Treasury stock
We account for treasury stock of our common shares under the cost method and include treasury stock as a component of stockholders' equity.
Goodwill
Goodwill represents the excess of the purchase price paid over the fair value of the net assets acquired in business combinations (see Note 3—Business Combinations for current period activity). Goodwill is not amortized but is tested for impairment at least annually or when we deem that a triggering event has occurred. When evaluating whether goodwill is impaired, we make a qualitative assessment to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the qualitative assessment determines that it is more likely than not that its fair value is less than its carrying amount, we compare the fair value of the reporting unit to which the goodwill is assigned to its carrying amount. If the carrying amount exceeds its fair value, an impairment loss is recognized in an amount equal to the excess of the carrying
amount over the fair value of the reporting unit, not to exceed the carrying amount of the goodwill. There were no impairments to goodwill recorded during the nine months ended September 30, 2019 and 2018.
The following table provides information about changes in the carrying amount of goodwill for the periods presented (in thousands):
|
|
|
|
|
|
Amount
|
Balances as of December 31, 2017 (1)
|
$
|
14,698
|
|
Goodwill acquired during year
|
8,197
|
|
Balances as of December 31, 2018 (2)
|
22,895
|
|
Goodwill acquired during year
|
1,685
|
|
Purchase price adjustment
|
2,540
|
|
Balances as of September 30, 2019 (3)
|
$
|
27,120
|
|
___________________________________________
(1), (2), (3) — Goodwill is net of an accumulated impairment loss of $3.3 million.
Intangible assets other than goodwill
We capitalize and amortize intangible assets other than goodwill over their estimated useful lives unless such lives are indefinite. Intangible assets other than goodwill acquired separately from third-parties are capitalized at cost while such assets acquired as part of a business combination are capitalized at their acquisition-date fair value. Definite lived intangible assets are amortized using the straight-line method of amortization over their useful lives, with the exception of certain intangibles (such as acquired technology, customer relationships, and trade names) which are amortized using an accelerated method of amortization based on cash flows. These definite lived intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that their carrying amount may not be recoverable as described below under Impairment of long-lived assets.
Intangible assets, net consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
September 30,
2019
|
|
December 31,
2018
|
Intangible assets subject to amortization, gross (1)
|
$
|
30,284
|
|
|
$
|
29,099
|
|
Less: accumulated amortization of intangible assets subject to amortization
|
(17,405
|
)
|
|
(15,729
|
)
|
Total intangible assets, net
|
$
|
12,879
|
|
|
$
|
13,370
|
|
___________________________________________
|
|
(1)
|
— At September 30, 2019, the weighted average remaining useful life for intangible assets subject to amortization was 5.66 years.
|
Amortization of intangible assets other than goodwill is classified within the corresponding operating expense categories in our consolidated statements of operations as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
September 30,
|
|
Nine months ended
September 30,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Technology
|
$
|
896
|
|
|
$
|
885
|
|
|
$
|
2,687
|
|
|
$
|
2,534
|
|
Sales and marketing
|
16
|
|
|
119
|
|
|
48
|
|
|
442
|
|
General and administrative
|
133
|
|
|
542
|
|
|
(526
|
)
|
|
620
|
|
Total amortization
|
$
|
1,045
|
|
|
$
|
1,546
|
|
|
$
|
2,209
|
|
|
$
|
3,596
|
|
General and administrative amortization above was net of reversals due to adjustments to the purchase price allocation for Mac Warehouse, as further described in Note 3—Business Combinations.
Estimated amortization expense for the next five years is: $1.1 million for the remainder of 2019, $3.7 million in 2020, $3.3 million in 2021, $2.1 million in 2022, $1.6 million in 2023, and $1.1 million thereafter.
Impairment of long-lived assets
We review property and equipment, right-of-use assets, and other long-lived assets, including intangible assets other than goodwill, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. See the Cryptocurrencies section above for our impairment policy over cryptocurrencies. Recoverability is measured by comparison of the assets' carrying amount to future undiscounted net cash flows the asset group is expected to generate. Cash flow forecasts are based on trends of historical performance and management's estimate of future performance, giving consideration to existing and anticipated competitive and economic conditions. If such asset group is considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds their fair values. During the three and nine months ended September 30, 2019, we realized a $1.4 million impairment loss included in General and administrative expense in our consolidated statements of operations related to certain patents held by our Medici Ventures segment. The estimated fair value of the patents were determined based on Level 3 inputs, which were unobservable (see Note 2—Accounting Policies, Fair value of financial instruments), including market participant assumptions for similar assets in an inactive market. There were no impairments to long-lived assets recorded during the three and nine months ended September 30, 2018.
Other long-term assets, net
Other long-term assets, net consist primarily of long-term prepaid expenses, deposits, and assets acquired under finance leases.
Revenue recognition
Revenue is recognized when, or as, control of a promised product or service transfers to a customer, in an amount that reflects the consideration to which the Company expects to be entitled in exchange for transferring those products or services. Revenue excludes taxes that have been assessed by governmental authorities and that are directly imposed on revenue-producing transactions between the Company and its customers, including sales and use taxes. Revenue recognition is evaluated through the following five-step process:
1) identification of the contract with a customer;
2) identification of the performance obligations in the contract;
3) determination of the transaction price;
4) allocation of the transaction price to the performance obligations in the contract; and
5) recognition of revenue when or as a performance obligation is satisfied.
Product Revenue
We derive our revenue primarily from our retail business through our Website but may also derive revenue from sales of merchandise through offline and other channels. Our Retail revenue is derived primarily from merchandise sold at a point in time and shipped to customers. Merchandise sales are fulfilled with inventory sourced through our partners or from our owned inventory, depending on the most efficient means of fulfilling the customer contract. The majority of our sales, however, are fulfilled from inventory sourced through our partners.
Revenue is recognized when control of the product passes to the customer, typically at the date of delivery of the merchandise to the customer or the date a service is provided, and is recognized in an amount that reflects the expected consideration to be received in exchange for such goods or services. As such, customer orders are recorded as deferred revenue prior to delivery of products or services ordered. 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, which are calculated using the following factors: (i) the type of shipping carrier (as carriers have different in-transit times); (ii) the fulfillment source (either our warehouses, those warehouses we control, or those of our partners); (iii) the delivery destination; and (iv) actual transit time experience, which shows that delivery date is typically one to eight business days from the date of shipment. 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.
Generally, we require authorization from credit card or other payment vendors whose services we offer to our customers (such as PayPal), or verification of receipt of payment, before we ship products to consumers or business purchasers. From time to time we grant credit to our business purchasers with normal credit terms (typically 30 days). We generally receive payments from our customers before our payments to our suppliers are due. We do not recognize assets associated with costs to obtain or fulfill a contract with a customer.
Shipping and handling is considered a fulfillment activity, as it takes place prior to the customer obtaining control of the merchandise, and fees charged to customers are included in net revenue upon completion of our performance obligation. We present revenue net of sales taxes, discounts, and expected refunds.
Our merchandise sales contracts include terms that could cause variability in the transaction price for items such as discounts, credits, or sales returns. Accordingly, the transaction price for product sales includes estimates of variable consideration to the extent it is probable that a significant reversal of revenue recognized will not occur. At the time of sale, we estimate a sales return liability for the variable consideration based on historical experience, which is recorded within Accrued liabilities in the consolidated balance sheet. We record an allowance for returns based on current period revenues and historical returns experience. We analyze actual historical returns, current economic trends and changes in order volume and acceptance of our products when evaluating the adequacy of the sales returns allowance in any accounting period.
We evaluate the criteria outlined in ASC 606-10-55, Principal versus Agent Considerations, in determining whether it is appropriate to record the gross amount of merchandise sales and related costs or the net amount earned as commissions. When we are the principal in a transaction and control the specific good or service before it is transferred to the customer, revenue is recorded gross; otherwise, revenue is recorded on a net basis. Through contractual terms with our partners, we have the ability to control the promised goods or services and as a result record the majority of our retail revenue on a gross basis.
Our Other revenue occurs primarily through our broker dealer subsidiaries in our tZERO segment. We evaluate the revenue recognition criteria above for our broker dealer subsidiaries and we recognize revenue based on the gross amount of consideration that we expect to receive on securities transactions (commission revenue) on a trade date basis.
Club O loyalty program
We have a customer loyalty program called Club O for which we sell annual memberships. For Club O memberships, we record membership fees as deferred revenue and we recognize revenue ratably over the membership period.
The Club O loyalty program allows members to earn Club O Reward dollars for qualifying purchases made on our Website. Customers may redeem Club O Reward dollars on future purchases made through our Website, which conveys a material right to the customer. As such, the initial transaction price giving rise to the reward dollar is allocated to each separate performance obligation based upon its relative standalone selling price. In determining the stand-alone selling price, we incorporate assumptions about the redemption rates of loyalty points. We recognize revenue for Club O Reward dollars when customers redeem such rewards as part of a purchase on our Website.
We record the standalone value of reward dollars earned in deferred revenue at the time the reward dollars are earned. Club O Reward dollars expire 90 days after the customer's Club O membership expires. We recognize estimated reward dollar breakage, to which we expect to be entitled, over the expected redemption period in proportion to actual redemptions by customers. Upon adoption of Topic 606, Revenue Contracts with Customers, on January 1, 2018, we began classifying the breakage income related to Club O Reward dollars and gift cards as a component of Retail revenue in our consolidated statements of operations rather than as a component of Other income (expense), net. Breakage included in revenue was $1.5 million and $1.3 million for the three months ended September 30, 2019 and 2018 and $3.5 million and $4.2 million for the nine months ended September 30, 2019 and 2018.
Our total deferred revenue related to the outstanding Club O Reward dollars was $6.6 million and $6.9 million at September 30, 2019 and December 31, 2018, respectively. The timing of revenue recognition of these reward dollars is driven by actual customer activities, such as redemptions and expirations.
Advertising Revenue
Advertising revenues are derived primarily from sponsored links and display advertisements that are placed on our Website, distributed via email, or sent out as direct mailers. Advertising revenue is recognized in Retail revenue when the advertising services are rendered. Advertising revenues were less than 2% of total net revenues for all periods presented.
Revenue Disaggregation
Disaggregation of revenue by major product line is included in Segment Information in Note 12—Business Segments.
Deferred Revenue
When the timing of our provision of goods or services is different from the timing of the payments made by our customers, we recognize a contract liability (customer payment precedes performance).
Customer orders are recorded as deferred revenue prior to delivery of products or services ordered. We record amounts received for Club O membership fees as deferred revenue and we recognize it ratably over the membership period. We record Club O Reward dollars earned from purchases as deferred revenue at the time they are earned based upon the relative standalone selling price of the Club O Reward dollar and we recognize it as Retail revenue in proportion to the estimated pattern of rights exercised by the customer. If reward dollars are not redeemed, we recognize Retail revenue upon expiration. In addition, we sell gift cards and record related deferred revenue at the time of the sale. We sell gift cards without expiration dates and we recognize revenue from a gift card upon redemption of the gift card. For the unredeemed portion of our gift cards and loyalty program rewards, we will recognize Retail revenue over the expected redemption period based upon the estimated pattern of rights exercised by the customer.
The following table provides information about deferred revenue from contracts with customers, including significant changes in deferred revenue balances during the periods presented (in thousands):
|
|
|
|
|
|
Amount
|
Deferred revenue at December 31, 2017
|
$
|
46,468
|
|
Increase due to deferral of revenue at period end
|
43,216
|
|
Decrease due to beginning contract liabilities recognized as revenue
|
(39,106
|
)
|
Deferred revenue at December 31, 2018
|
50,578
|
|
Increase due to deferral of revenue at period end
|
34,789
|
|
Decrease due to beginning contract liabilities recognized as revenue
|
(44,855
|
)
|
Deferred revenue at September 30, 2019
|
$
|
40,512
|
|
Sales returns allowance
We inspect returned items when they arrive at our processing facilities. We refund the full cost of the merchandise returned and all original shipping charges if the returned item is defective or we or our partners have made an error, such as shipping the wrong product. If the return is not a result of a product defect or a fulfillment error and the customer initiates a return of an unopened item within 30 days of delivery, for most products we refund the full cost of the merchandise minus the original shipping charge and actual return shipping fees. However, we reduce refunds for returns initiated more than 30 days after delivery or that are received at our returns processing facility more than 45 days after initial delivery. If our customer returns an item that has been opened or shows signs of wear, we issue a partial refund minus the original shipping charge and actual return shipping fees.
Revenue is recorded net of estimated returns. We record an allowance for returns based on current period revenues and historical returns experience. We analyze actual historical returns, current economic trends and changes in order volume and acceptance of our products when evaluating the adequacy of the sales returns allowance in any accounting period.
The following table provides additions to and deductions from the sales returns allowance (in thousands):
|
|
|
|
|
|
Amount
|
Allowance for returns at December 31, 2017
|
$
|
17,391
|
|
Additions to the allowance
|
174,864
|
|
Deductions from the allowance
|
(176,994
|
)
|
Allowance for returns at December 31, 2018
|
15,261
|
|
Additions to the allowance
|
87,620
|
|
Deductions from the allowance
|
(94,984
|
)
|
Allowance for returns at September 30, 2019
|
$
|
7,897
|
|
Cost of goods sold
Our Retail cost of goods sold includes product costs, warehousing costs, outbound shipping costs, handling and fulfillment costs, customer service costs, and credit card fees, and is recorded in the same period in which related revenues have been recorded. Our Other cost of goods sold primarily consists of exchange fees, clearing agent fees, and other exchange fees from our broker dealer subsidiaries in our tZERO segment. These fees are primarily for executing, processing, and settling trades on exchanges and other venues. These fees fluctuate based on changes in trade and share volumes, rate of clearance fees charged by clearing brokers, and exchanges (in thousands, except for percentages).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
September 30,
|
|
Nine months ended
September 30,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Total revenue, net
|
$
|
347,099
|
|
|
100
|
%
|
|
$
|
440,580
|
|
|
100
|
%
|
|
$
|
1,088,537
|
|
|
100
|
%
|
|
$
|
1,369,044
|
|
|
100
|
%
|
Cost of goods sold
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product costs and other cost of goods sold
|
261,670
|
|
|
75
|
%
|
|
334,156
|
|
|
76
|
%
|
|
822,390
|
|
|
76
|
%
|
|
1,039,518
|
|
|
76
|
%
|
Fulfillment and related costs
|
15,881
|
|
|
5
|
%
|
|
19,708
|
|
|
4
|
%
|
|
49,576
|
|
|
5
|
%
|
|
57,198
|
|
|
4
|
%
|
Total cost of goods sold
|
277,551
|
|
|
80
|
%
|
|
353,864
|
|
|
80
|
%
|
|
871,966
|
|
|
80
|
%
|
|
1,096,716
|
|
|
80
|
%
|
Gross profit
|
$
|
69,548
|
|
|
20
|
%
|
|
$
|
86,716
|
|
|
20
|
%
|
|
$
|
216,571
|
|
|
20
|
%
|
|
$
|
272,328
|
|
|
20
|
%
|
Advertising expense
We expense the costs of producing advertisements the first time the advertising takes place and expense the cost of communicating advertising in the period during which the advertising space or airtime is used. Internet advertising expenses are recognized as incurred based on the terms of the individual agreements, which are generally: 1) a commission for traffic driven to our Website that generates a sale or 2) a referral fee based on the number of clicks on keywords or links to our Website generated during a given period. Advertising expense is included in Sales and marketing expenses and totaled $29.7 million and $49.7 million during the three months ended September 30, 2019 and 2018, respectively. For the nine months ended September 30, 2019 and 2018, advertising expense totaled $88.1 million and $207.5 million, respectively. Prepaid advertising (included in Prepaids and other current assets in the accompanying consolidated balance sheets) was $677,000 and $961,000 at September 30, 2019 and December 31, 2018, respectively.
Stock-based compensation
We measure compensation expense for all outstanding unvested share-based awards at fair value on the date of grant and recognize compensation expense over the service period for awards at the greater of a straight-line basis or on an accelerated schedule when vesting of the share-based awards exceeds a straight-line basis. When an award is forfeited prior to the vesting date, we recognize an adjustment for the previously recognized expense in the period of the forfeiture. See Note 10—Stock-Based Awards.
Loss contingencies
In the normal course of business, we are involved in legal proceedings and other potential loss contingencies. We accrue a liability for such matters when it is probable that a loss has been incurred and the amount, or a range of amounts, can be reasonably estimated. When only a range of probable loss can be estimated, the most probable amount in the range is accrued. If no amount within this range is a better estimate than any other amount within the range, the minimum amount in the range is accrued. We expense legal fees as incurred (see Note 7—Commitments and Contingencies).
Income taxes
Our income tax provision for interim periods is determined using an estimate of our annual effective tax rate adjusted for discrete items, if any, for relevant interim periods. We update our estimate of the annual effective tax rate each quarter and make cumulative adjustments if our estimated annual effective tax rate changes.
Our quarterly tax provision and our quarterly estimate of our annual effective tax rate are subject to significant variations due to several factors including variability in predicting our pre-tax and taxable income and the mix of jurisdictions to which those items relate, relative changes in expenses or losses for which tax benefits are not recognized, how we do business, fluctuations in our stock price, and changes in law, regulations, and administrative practices. Our effective tax rate can be volatile based on the amount of pre-tax income. For example, the impact of discrete items on our effective tax rate is greater when pre-tax income is lower.
Each quarter we assess the recoverability of our deferred tax assets under ASC Topic 740. We assess the available positive and negative evidence to estimate whether we will generate sufficient future taxable income to use our existing deferred tax assets. We have limited carryback ability and do not have significant taxable temporary differences to recover our existing deferred tax assets, therefore we must rely on future taxable income, including tax planning strategies, to support their realizability. We have established a valuation allowance for our deferred tax assets not supported by carryback ability or taxable temporary differences, primarily due to uncertainty regarding our future taxable income. We have considered, among other things, the cumulative loss incurred over the three-year period ended September 30, 2019 as a significant piece of objective negative evidence. We intend to continue maintaining a valuation allowance on our net deferred tax assets until there is sufficient evidence to support the reversal of all or some portion of these allowances. The amount of the deferred tax asset considered realizable could be adjusted if objective negative evidence in the form of cumulative losses is no longer present and additional weight may be given to subjective evidence such as long-term projections for growth. We will continue to monitor the need for a valuation allowance against our remaining deferred tax assets on a quarterly basis.
We have indefinitely reinvested foreign earnings of $2.3 million at September 30, 2019. We would need to accrue and pay various taxes on this amount if repatriated. We do not intend to repatriate these earnings.
We are subject to taxation in the United States and several state and foreign jurisdictions. Tax years beginning in 2014 are subject to examination by taxing authorities, although net operating loss and credit carryforwards from all years are subject to examinations and adjustments for at least three years following the year in which the attributes are used. An audit by the Ireland Revenue Agency for the calendar year 2016 was finalized during 2019 with no assessment.
Net loss per share
Our Blockchain Voting Series A Preferred Stock, par value $0.0001 per share (the "Series A Preferred"), Digital Voting Series A-1 Preferred Stock, par value $0.0001 per share (the "Series A-1 Preferred"), and our Voting Series B Preferred Stock, par value $0.0001 per share (the "Series B Preferred" together with the Series A Preferred and Series A-1 Preferred, collectively, the "preferred shares") are considered participating securities, and as a result, net loss per share is calculated using the two-class method. Under this method, we give effect to preferred dividends and then allocate remaining net loss attributable to our stockholders to both common shares and participating securities (based on the percentages outstanding) in determining net loss per common share.
Basic net loss per common share is computed by dividing net loss attributable to common shares (after allocating between common shares and participating securities) by the weighted average number of common shares outstanding during the period.
Diluted net loss per share is computed by dividing net loss attributable to common shares (after allocating between common shares and participating securities) by the weighted average number of common and potential common shares outstanding during the period (after allocating total dilutive shares between our common shares outstanding and our preferred shares outstanding). Potential common shares, comprising incremental common shares issuable upon the exercise of stock options, warrants, and restricted stock awards are included in the calculation of diluted net loss per common share to the extent such shares are dilutive. Net loss attributable to common shares is adjusted for options and restricted stock awards issued by our subsidiaries when the effect of our subsidiary's diluted earnings per share is dilutive.
On July 30, 2019, we announced that our Board of Directors had declared a dividend (the "Dividend") payable in shares of our Series A-1 Preferred. The Dividend is payable at a ratio of 1:10, meaning that one share of Series A-1 will be issued for every ten shares of common stock, Series A-1 or Series B Preferred held by all holders of such shares as of the record date for the Dividend. As of September 30, 2019, the Dividend had not been distributed.
The following table sets forth the computation of basic and diluted net loss per common share for the periods indicated (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
September 30,
|
|
Nine months ended
September 30,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Net loss attributable to stockholders of Overstock.com, Inc.
|
$
|
(30,938
|
)
|
|
$
|
(47,923
|
)
|
|
$
|
(94,863
|
)
|
|
$
|
(163,743
|
)
|
Less: Preferred stock (Token) repurchase (gain)/loss
|
—
|
|
|
—
|
|
|
(425
|
)
|
|
—
|
|
Less: Preferred stock dividends - declared and accumulated
|
837
|
|
|
27
|
|
|
875
|
|
|
80
|
|
Undistributed loss
|
(31,775
|
)
|
|
(47,950
|
)
|
|
(95,313
|
)
|
|
(163,823
|
)
|
Less: Undistributed loss allocated to participating securities
|
(428
|
)
|
|
(1,055
|
)
|
|
(1,319
|
)
|
|
(3,728
|
)
|
Net loss attributable to common shares
|
$
|
(31,347
|
)
|
|
$
|
(46,895
|
)
|
|
$
|
(93,994
|
)
|
|
$
|
(160,095
|
)
|
Net loss per common share—basic:
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common shares—basic
|
$
|
(0.89
|
)
|
|
$
|
(1.55
|
)
|
|
$
|
(2.74
|
)
|
|
$
|
(5.47
|
)
|
Weighted average common shares outstanding—basic
|
35,241
|
|
|
30,279
|
|
|
34,289
|
|
|
29,256
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
Stock options and restricted stock awards
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Weighted average common shares outstanding—diluted
|
35,241
|
|
|
30,279
|
|
|
34,289
|
|
|
29,256
|
|
Net loss attributable to common shares—diluted
|
$
|
(0.89
|
)
|
|
$
|
(1.55
|
)
|
|
$
|
(2.74
|
)
|
|
$
|
(5.47
|
)
|
The following shares were excluded from the calculation of diluted shares outstanding as their effect would have been anti-dilutive (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
September 30,
|
|
Nine months ended
September 30,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Stock options and restricted stock units
|
1,088
|
|
|
498
|
|
|
1,088
|
|
|
578
|
|
Common shares issuable under stock warrant
|
—
|
|
|
—
|
|
|
—
|
|
|
28
|
|
Recently adopted accounting standards
In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-02, Leases (Topic 842), which requires lessees to recognize operating leases on-balance sheet and disclose key information about leasing arrangements. Topic 842 was subsequently amended by ASU No. 2018-01, Land Easement Practical Expedient for Transition to Topic 842; ASU No. 2018-10, Codification Improvements to Topic 842, Leases; and ASU No. 2018-11, Targeted Improvements. The new standard establishes a right-of-use model (ROU) that requires a lessee to recognize an ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement.
We adopted the new standard on January 1, 2019. A modified retrospective transition approach is required, applying the new standard to all leases existing at the date of initial application. An entity may choose to use either (1) its effective date or (2) the beginning of the earliest comparative period presented in the financial statements as its date of initial application. If an entity chooses the second option, the transition requirements for existing leases also apply to leases entered into between the date of initial application and the effective date. The entity must also recast its comparative period financial statements and provide the disclosures required by the new standard for the comparative periods. We adopted the new standard on January 1, 2019 and thus used the effective date as our date of initial application. Consequently, financial information has not been updated and the disclosures required under the new standard are not provided for dates and periods before January 1, 2019. Upon adoption we recognized cumulative operating lease liabilities of approximately $35.1 million and operating right-of-use assets of approximately $31.0 million which were reflected as non-cash items in the consolidated statement of cash flows. The difference of $4.2 million represented deferred rent for leases that existed as of the date of adoption, which was an offset to the opening balance of right-of-use assets.
The new standard provides a number of optional practical expedients in transition. We elected the "package of practical expedients", which permits us to not reassess under the new standard our prior conclusions about lease identification, lease classification, and initial direct costs as well as the practical expedient pertaining to land easements. We did not elect the use-of-hindsight practical expedient. The new standard also provides practical expedients for an entity's ongoing accounting. We elected the short-term lease recognition exemption for all leases that qualify. This means, for those leases that qualify, we did not recognize ROU assets or lease liabilities, and this includes not recognizing ROU assets or lease liabilities for existing short-term leases of those assets in transition. We also elected the practical expedient to not separate lease and non-lease components for all of our leases.
The standard had a material effect on our financial statements, primarily related to (1) the recognition of new ROU assets and lease liabilities on our balance sheet for our warehouse, office, data center, and equipment operating leases; and (2) providing significant new disclosures about our leasing activities. The additional operating liabilities on our consolidated balance sheets were recognized based on the present value of the remaining minimum rental payments under current leasing standards for our existing operating leases, discounted by our incremental borrowing rate for borrowings of a similar duration on a fully secured basis, with corresponding ROU assets of approximately the same amount.
In June 2018, the FASB issued ASU 2018-07, Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, which aligns the measurement and classification guidance for share-based payments to nonemployees with the guidance for share-based payments to employees, with certain exceptions. Under the guidance, the measurement of equity-classified nonemployee awards will be fixed at the grant date. We adopted the changes under the new standard on January 1, 2019 on a prospective basis. The implementation of ASU 2017-01 did not have a material impact on our consolidated financial statements and related disclosures.
Recently issued accounting standards
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which revises how entities account for credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. For public entities, ASU 2016-13 is required to be adopted for annual periods beginning after December 15, 2019, including interim periods within those fiscal years. Management is currently evaluating the impact of the adoption of this ASU on our consolidated financial statements and related disclosures.
3. BUSINESS COMBINATIONS
Bitsy, Inc.
Through a series of transactions in 2018, Medici Ventures acquired a 33% equity interest in Bitsy, Inc. ("Bitsy"), a U.S.-based startup cryptocurrency wallet and exchange services company that has built a regulatory-compliant bridge between traditional fiat currencies and cryptocurrencies, allowing customers the ability to store, purchase and sell cryptocurrencies. Bitsy was founded by Steve Hopkins, Medici Ventures' former chief operating officer and general counsel, and current president of tZERO, who held a significant equity interest in Bitsy. On December 21, 2018, tZERO entered into a stock purchase agreement with the owners of Bitsy to acquire the remaining 67% equity interest in Bitsy for $8.0 million with effective control of Bitsy transferring to tZERO effective January 1, 2019. In connection with the December 2018 stock purchase agreement, Medici Ventures transferred its 33% equity interest in Bitsy to tZERO for a $4.0 million convertible promissory note due December 31, 2020 and an assignment of certain intellectual property to Medici Ventures.
tZERO has expanded the wallet's capabilities and launched it as the tZERO Crypto wallet and exchange service. tZERO plans to offer these services as part of a suite of products that includes a digital wallet and exchange service between traditional fiat currencies and cryptocurrencies.
We estimated the fair value of the acquired assets based on Level 3 inputs, which were unobservable (see Note 2—Accounting Policies, Fair value of financial instruments). These inputs included our estimate of future revenues, operating margins, discount rates, and assumptions about the relative competitive environment. As of March 31, 2019, our determination and allocation of the purchase price to net tangible and intangible assets was based upon preliminary estimates. During the quarter ended June 30, 2019, we received the final valuation information and completed our determination and allocation of the purchase price and recognized adjustments to the provisional values as of June 30, 2019, which decreased Intangible assets by $650,000, increased Deferred tax liabilities by $943,000 and resulted in a corresponding increase to Goodwill of $1.7 million. We recognized an impairment of $1.3 million as a result of remeasuring to fair value our 33% equity interest in Bitsy held before the business combination which was based on Level 3 inputs (see Note 2—Accounting Policies, Fair value of financial instruments). The impairment is included in Other expense, net in our consolidated statement of operations for the nine months ended September 30, 2019.
The fair values of the assets acquired and liabilities assumed at the acquisition date are as follows (in thousands):
|
|
|
|
|
Purchase Price
|
Fair Value
|
Cash paid, net of cash acquired
|
$
|
3,115
|
|
Fair value of equity interest in Bitsy held before business combination
|
3,800
|
|
Less: Fair value of Overstock.com common stock held by Bitsy at acquisition date
|
(643
|
)
|
Less: Settlement of receivable due from tZERO at acquisition date
|
(10
|
)
|
Total transaction consideration, net of cash acquired
|
$
|
6,262
|
|
|
|
Allocation
|
|
Prepaids and other current assets
|
$
|
71
|
|
Property and equipment
|
16
|
|
Intangible assets
|
6,093
|
|
Goodwill
|
1,685
|
|
Deferred tax liability
|
(943
|
)
|
Other liabilities assumed
|
(660
|
)
|
Total net assets, net of cash acquired
|
$
|
6,262
|
|
The following table details the identifiable intangible assets acquired at their fair value and their corresponding useful lives at the acquisition date (in thousands):
|
|
|
|
|
|
|
Intangible Assets
|
Fair Value
|
|
Weighted Average Useful Life (years)
|
Patents
|
$
|
4,293
|
|
|
20
|
Technology
|
1,500
|
|
|
5
|
Licenses
|
300
|
|
|
1
|
Total acquired intangible assets as of the acquisition date
|
$
|
6,093
|
|
|
|
Acquired intangible assets primarily include patents, technology, and licenses. The acquired assets, liabilities, and associated operating results of Bitsy were consolidated into our financial statements at the acquisition date. The goodwill recognized arises from expected synergies with our tZERO operations that do not qualify for separate recognition as intangible assets and also the deferred tax liabilities arising from the business combination. None of the goodwill recognized is expected to be deductible for tax purposes. Pro forma results of operations have not been presented because the effects of this acquisition were not material to our consolidated results of operations.
Mac Warehouse, LLC
On June 25, 2018, we acquired 100% of the total equity interests of Mac Warehouse, LLC, an electronics retailer of refurbished Apple products, to complement our retail business. As of December 31, 2018, our determination and allocation of the purchase price to net tangible and intangible assets was based upon preliminary estimates. During the quarter ended March 31, 2019, we received the final valuation information and completed our determination and allocation of the purchase price and recognized adjustments to the provisional values as of March 31, 2019, which decreased the recognized Intangibles assets by $2.8 million, increased Accrued liabilities by $527,000, decreased Deferred tax liabilities by $837,000 and resulted in a corresponding increase to Goodwill of $2.5 million. Additionally, the change to the provisional amount resulted in a decrease in amortization expense and accumulated depreciation of $1.4 million, of which $981,000 relates to the year ended December 31, 2018, and a $459,000 increase in Other Income related to the Accrued Liabilities that were expensed in 2018. We estimated the fair value of the acquired assets and liabilities based on Level 3 inputs, which were unobservable (see Note 2—Accounting Policies, Fair value of financial instruments). These inputs included our estimate of future revenues, operating margins, discount rates, royalty rates, and assumptions about the relative competitive environment.
The fair values of the assets acquired and liabilities assumed at the acquisition date are as follows (in thousands):
|
|
|
|
|
Purchase Price
|
Fair Value
|
Cash paid, net of cash acquired
|
$
|
1,143
|
|
Allocation
|
|
Accounts receivable, net
|
$
|
399
|
|
Inventories, net
|
1,033
|
|
Prepaids and other current assets
|
29
|
|
Property and equipment
|
154
|
|
Intangible assets
|
653
|
|
Goodwill
|
3,376
|
|
Accounts payable and accrued liabilities
|
(1,432
|
)
|
Long-term debt, net
|
(3,069
|
)
|
Total net assets, net of cash acquired
|
$
|
1,143
|
|
4. ACCRUED LIABILITIES
Accrued liabilities consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
September 30,
2019
|
|
December 31,
2018
|
|
|
|
|
Accounts payable accruals
|
$
|
12,235
|
|
|
$
|
15,872
|
|
Accrued compensation and other related costs
|
14,854
|
|
|
12,099
|
|
Accrued loss contingencies
|
9,359
|
|
|
10,940
|
|
Allowance for returns
|
7,897
|
|
|
15,261
|
|
Sales and other taxes payable
|
9,813
|
|
|
9,923
|
|
Accrued marketing expenses
|
10,182
|
|
|
14,150
|
|
Accrued freight
|
7,743
|
|
|
5,343
|
|
Other accrued expenses
|
7,357
|
|
|
4,270
|
|
Total accrued liabilities
|
$
|
79,440
|
|
|
$
|
87,858
|
|
5. BORROWINGS
High Bench Senior Credit Agreement
On June 25, 2018, we became party to a senior credit agreement, as amended, with High Bench-Mac Warehouse-Senior Debt, LLC (the "High Bench Loan"), in connection with our acquisition of Mac Warehouse, LLC. Under the amended agreement, at the time of the acquisition, the loan carried an annual interest rate of 11.0%. During July 2019, we repaid the entire outstanding balance of the High Bench Loan effectively terminating the agreement.
Letters of credit
At September 30, 2019 and December 31, 2018, letters of credit totaling $205,000 and $280,000, respectively, were issued on our behalf collateralized by compensating cash balances held at a bank, which are included in Restricted cash in our consolidated balance sheets.
Commercial purchasing card agreement
We have a commercial purchasing card (the "Purchasing Card") agreement. We use the Purchasing Card for business purpose purchasing and must pay it in full each month. At September 30, 2019, $43,000 was outstanding and $957,000 was available under the Purchasing Card. At December 31, 2018, $48,000 was outstanding and $952,000 was available under the Purchasing Card.
6. LEASES
We have operating and finance leases for warehouses, office space, data centers, and certain equipment. Our leases have remaining lease terms of 1 year to 12 years, some of which may include options to extend the leases perpetually, and some of which may include options to terminate the leases within 1 year. We note our finance leases are immaterial to our financial statements as a whole and thus are not discussed below.
The following table provides a summary of leases by balance sheet location as of September 30, 2019 (in thousands):
|
|
|
|
|
|
September 30, 2019
|
Operating right-of-use assets
|
$
|
43,266
|
|
Operating lease liability - current
|
5,725
|
|
Operating lease liability - non-current
|
42,510
|
|
The components of lease expenses for the three and nine months ended September 30, 2019 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Three months ended
September 30, 2019
|
|
Nine months ended
September 30, 2019
|
Operating lease cost
|
$
|
2,685
|
|
|
$
|
7,556
|
|
Short-term lease cost
|
28
|
|
|
90
|
|
Variable lease cost
|
406
|
|
|
1,378
|
|
The following tables provides a summary of other information related to leases for the nine months ended September 30, 2019 (in thousands, apart from weighted-average lease term and weighted average discount rate):
|
|
|
|
|
|
Nine months ended
September 30, 2019
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
Operating cash flows used in operating leases
|
$
|
(6,629
|
)
|
Right-of-use assets obtained in exchange for new operating lease liabilities
|
$
|
17,238
|
|
Weighted-average remaining lease term - operating leases
|
6.82 years
|
|
Weighted-average discount rate - operating leases
|
8
|
%
|
Maturity of lease liabilities under our non-cancellable operating leases as of September 30, 2019, are as follows (in thousands):
|
|
|
|
|
|
Payments due by period
|
|
|
2019 (Remainder)
|
|
$
|
2,222
|
|
2020
|
|
9,377
|
|
2021
|
|
9,826
|
|
2022
|
|
9,820
|
|
2023
|
|
8,979
|
|
Thereafter
|
|
22,754
|
|
Total lease payments
|
|
62,978
|
|
Less interest
|
|
(14,743
|
)
|
Present value of lease liabilities
|
|
$
|
48,235
|
|
Information for our leases for the year ended December 31, 2018 under ASC Topic 840, Leases, follows for comparative purposes.
Minimum future payments under all operating leases as of December 31, 2018, were as follows (in thousands):
|
|
|
|
|
|
Payments due by period
|
|
|
2019
|
|
$
|
8,822
|
|
2020
|
|
7,414
|
|
2021
|
|
7,654
|
|
2022
|
|
7,579
|
|
2023
|
|
6,677
|
|
Thereafter
|
|
19,571
|
|
Total lease payments
|
|
$
|
57,717
|
|
Our subsidiary, tZERO, commenced a new lease subsequent to December 31, 2018. We have included the future lease payments associated with this lease in the table above.
7. COMMITMENTS AND CONTINGENCIES
Legal proceedings and contingencies
From time to time, we are involved in litigation concerning consumer protection, employment, intellectual property, claims under the securities laws, and other commercial matters related to the conduct and operation of our business and the sale of products on our Website. In connection with such litigation, we have been in the past and we may be in the future subject to significant damages. In some instances, other parties may have contractual indemnification obligations to us. However, such contractual obligations may prove unenforceable or non-collectible, and if we cannot enforce or collect on indemnification obligations, we may bear the full responsibility for damages, fees, and costs resulting from such litigation. We may also be subject to penalties and equitable remedies that could force us to alter important business practices. Such litigation could be costly and time consuming and could divert or distract our management and key personnel from our business operations. Due to the uncertainty of litigation and depending on the amount and the timing, an unfavorable resolution of some or all of such matters could materially affect our business, results of operations, financial position, or cash flows. The nature of the loss contingencies relating to claims that have been asserted against us are described below.
On September 23, 2009, SpeedTrack, Inc. sued us along with 27 other defendants in the United States District Court in the Northern District of California. We are alleged to have infringed a patent covering search and categorization software. We believe that certain third-party vendors of products and services sold to us are contractually obligated to indemnify us, and we have tendered defense of the case to an indemnitor who accepted the defense. On April 21, 2016, the court entered an order partially dismissing the claims against us. On May 4, 2016, the plaintiff filed an amended complaint, and we filed our answer. No estimate of the possible loss or range of loss can be made at this time. We intend to continue vigorously defending this action and pursuing our indemnification rights with our vendors.
In June 2013, William French ("French") and the State of Delaware ("Delaware") sued us, along with numerous other defendants, in the Superior Court of the State of Delaware for alleged violations of Delaware's unclaimed property laws. French and Delaware alleged that we knowingly refused to fulfill obligations under Delaware's Abandoned Property Law by failing to report and deliver unclaimed gift card funds to the State of Delaware, and knowingly made, used or caused to be made or used, false statements and records to conceal, avoid or decrease an obligation to pay or transmit money to Delaware in violation of the Delaware False Claims and Reporting Act.
On June 28, 2019, the court entered a judgment against us in the amount of approximately $7.3 million (for certain unredeemed gift card balances, treble damages, and penalties) as a result of a jury verdict which was returned September 20, 2018. On October 23, 2019, the court entered an award of attorneys’ fees and costs of $1.3 million and entered final judgment in the amount of $8.6 million. We have commenced an appeal and filed our appellate brief. Our estimated liability for these amounts was included in Accrued liabilities at September 30, 2019. The expense associated with these litigation charges was included in general and administrative expense in our consolidated statement of operations for the year ended December 31, 2018.
In February 2018, the Division of Enforcement of the SEC informed tZERO and subsequently informed us that it is conducting an investigation and requested that we and tZERO voluntarily provide certain information and documents related to tZERO and the tZERO security token offering in connection with its investigation. In December of 2018, we received a follow-
up request from the SEC relating to its investigation. On October 7, 2019, we received a subpoena from the SEC requesting documents related to the Dividend we announced to shareholders in June of 2019 and requesting 10b-5-1 plans of our officers and directors that were in effect during the period of January 1, 2018 through October 7, 2019. Under the umbrella of this investigation, we have received requests from the SEC regarding both the GSR transaction and our communications with our former chief executive officer and director, Patrick Byrne. We are in regular contact with the SEC and are cooperating fully with the SEC in connection with its investigation and information requests.
tZERO's broker-dealer subsidiaries are, and any broker-dealer subsidiaries that it acquires or forms in the future will be, subject to extensive regulatory requirements under federal and state laws and regulations and self-regulatory organization ("SRO") rules. Each of SpeedRoute LLC ("SpeedRoute") and PRO Securities is registered with the SEC as a broker-dealer under the Securities Exchange Act of 1934 ("Exchange Act") and in the states in which it conducts securities business and is a member of FINRA and other SROs (as applicable). In addition, PRO Securities owns and operates the PRO Securities ATS, which is registered with the SEC as an alternative trading system. Each of SpeedRoute and PRO Securities is subject to regulation, examination, investigation, and disciplinary action by the SEC, FINRA, and state securities regulators, as well as other governmental authorities and SROs with which it is registered or licensed or of which it is a member. Moreover, as a result of tZERO's projects seeking to apply distributed ledger technologies to the capital markets, tZERO's subsidiaries have been, and remain involved in, ongoing oral and written communications with regulatory authorities. As previously disclosed, tZERO's broker-dealer subsidiaries are currently undergoing various examinations, inquiries, and/or investigations undertaken by various regulatory authorities, which may result in financial and other settlements or penalties. Any significant failure by tZERO's broker-dealer subsidiaries to satisfy regulatory authorities that they are in compliance with all applicable rules and regulations could have a material adverse effect on tZERO and on us. In addition, a recently incorporated tZERO subsidiary has applied for regulatory approvals to operate as a broker-dealer in a variety of areas, including retail activities. The approval process will involve satisfying the regulatory authorities that the tZERO subsidiary can operate in the manner it proposes and, in addition, if approval is granted, the tZERO subsidiary will be subject to a number of legal and regulatory requirements, some of which will be new to tZERO’s broker-dealer subsidiaries.
tZERO’s subsidiary, Bitsy is registered as or is applying to become a money transmitter (or its equivalent) in many states and is subject to extensive regulatory requirements applicable to money services businesses, including the requirements of the Financial Crimes Enforcement Network of the U.S. Department of the Treasury ("FinCEN"), anti-money laundering requirements, know-your-customer requirements, record-keeping, reporting and capital and bonding requirements, and inspection by state and federal regulatory agencies. Compliance with these requirements requires the dedication of significant resources and any material failure by Bitsy to remain in compliance with these requirements could subject it to liability or limit the services it may offer.
On January 31, 2019, Yassen Traynor filed a putative class action lawsuit against us in the United States District Court, Southern District of New York, alleging that our website violated the Americans with Disabilities Act ("ADA") in addition to other New York specific laws, because it was not accessible to blind and visually impaired people. On October 23, 2019, the case was dismissed.
On September 27, 2019, a purported securities class action lawsuit was filed against us and our former chief executive officer and former chief financial officer in the United States District Court in the Central District of Utah, alleging violations under Section 10(b), Rule 10b-5, Section 20(a), Section 20(A) of the Exchange Act. On October 8, 2019, October 17, 2019, and October 31, 2019, three similar lawsuits were filed in the same court also naming the Company and the above referenced former executives as defendants, bringing similar claims under the Exchange Act, and seeking similar relief. No estimates of the possible losses or range of losses can be made at this time. We intend to vigorously defend these actions.
We establish liabilities when a particular contingency is probable and estimable. At September 30, 2019 and December 31, 2018, we have accrued $9.4 million and $10.3 million, respectively, which are included in Accrued liabilities in our consolidated balance sheets. It is reasonably possible that the actual losses may exceed our accrued liabilities.
8. INDEMNIFICATIONS AND GUARANTEES
During our normal course of business, we have made certain indemnities, commitments, and guarantees under which we may be required to make payments in relation to certain transactions. These indemnities include, but are not limited to, indemnities to various lessors in connection with facility leases for certain claims arising from such facility or lease, the environmental indemnity we entered into in favor of the lenders under our prior loan agreements, customary indemnification arrangements in underwriting agreements and similar agreements, and indemnities to our directors and officers to the maximum
extent permitted under the laws of the State of Delaware. The duration of these indemnities, commitments, and guarantees varies, and in certain cases, is indefinite. In addition, the majority of these indemnities, commitments, and guarantees do not provide for any limitation of the maximum potential future payments we could be obligated to make. As such, we are unable to estimate with any reasonableness our potential exposure under these items. We have not recorded any liability for these indemnities, commitments, and guarantees in the accompanying consolidated balance sheets. We do, however, accrue for losses for any known contingent liability, including those that may arise from indemnification provisions, when future payment is both probable and reasonably estimable.
9. STOCKHOLDERS' EQUITY
Common Stock
Each share of common stock has the right to one vote. The holders of common stock are also entitled to receive dividends declared by the Board of Directors out of funds legally available, subject to prior rights of holders of all classes of stock outstanding having priority rights as to dividends.
On July 30, 2019, we announced that our Board of Directors had declared the Dividend payable in shares of our Series A-1 Preferred Stock. Existing Series A-1 shares can currently only be traded on the PRO Securities ATS. On September 18, 2019, we announced our intent to register the Series A-1 Preferred to be issued pursuant to the Dividend under the Securities Act of 1933, and postponed the previously announced record and distribution dates for the Dividend. Accordingly, the Dividend has not been distributed as of September 30, 2019. On October 28, 2019, we announced that we would seek a shareholder vote at a shareholder special meeting to allow us to amend the certificates of designation for our preferred shares, removing certain restrictions and permitting us to reallocate the number of shares among the series of preferred shares, to facilitate issuance of the Dividend. On November 10, 2019, our Board of Directors approved December 18, 2019 as the record date for the shareholder vote and February 13, 2020 as the shareholder special meeting date.
Preferred Stock
On May 1, 2019, we informed holders of our Series A Preferred of an opportunity to exchange (the "Exchange") outstanding Series A Preferred for newly-issued shares of the Company's Series A-1 Preferred. On June 26, 2019, the Exchange was completed for participating stockholders. In connection with the Exchange, 122,526 shares of Series A Preferred were validly tendered and accepted for exchange by the Company and the Company issued 122,526 shares of Series A-1 Preferred in exchange therefore.
On June 26, 2019, in connection with the completion of the Exchange, 1,144 shares of Series A Preferred were converted into shares of Series B Preferred (such transaction, the "Conversion"). Following the Conversion, 2,895 shares of Series A Preferred remained outstanding as of June 30, 2019 and in July 2019, 2,020 of those remaining shares were exchanged for shares of Series A-1 Preferred and 875 of those remaining shares were converted into shares of Series B Preferred. Following that time, the Company eliminated the Series A Preferred by filing a Certificate of Elimination with the Delaware Secretary of State.
Except as required by law, the preferred shares are intended to have voting and dividend rights similar to those of one share of common stock. Preferred shares rank senior to common stock with respect to dividends. Holders of the preferred shares will be entitled to an annual cash dividend of $0.16 per share, in preference to any dividend payment to the holders of the common stock, out of funds of the Company legally available for payment of dividends and subject to declaration by our Board of Directors. Holders of the preferred shares are also entitled to participate in any cash dividends we pay to the holders of the common stock and are also entitled to participate in non-cash dividends we pay to holders of the common stock, subject to potentially different treatment if we effect a stock dividend, stock split, or combination of the common stock. There are no arrearages in cumulative preferred dividends. We declared and paid a cash dividend of $0.16 per share to the holders of our preferred stock during 2017 and 2018.
Neither the Series A Preferred, Series A-1 Preferred, nor Series B Preferred is required to be converted into or exchanged for shares of our common stock or any other entity; however, at our sole discretion, we may convert the Series A Preferred shares or Series A-1 Preferred shares into Series B Preferred shares at any time on a one-to-one basis. Until December 15, 2019, we may redeem, at our discretion, the Series A, Series A-1, and Series B Preferred shares for an amount equal to the highest of the following: (1) $15.68 plus any accrued but unpaid dividends, (2) 105% of the average trading price of our common stock during a five-trading-day period determined by the Company and (3) 105% of the average trading price of the
series of preferred shares during the same five-day-trading period. In the event of any liquidation, any amount available for distribution to stockholders after payment of all liabilities will be distributed proportionately, with each share of Series A Preferred, each share of Series A-1 Preferred, and each share of Series B Preferred being treated as though it were a share of our common stock.
JonesTrading Sales Agreement
In August 2018, we entered into a sales agreement with JonesTrading Institutional Services LLC ("JonesTrading"), under which we conducted "at the market" public offerings of our common stock from time to time. Under the sales agreement, JonesTrading, acting as our agent, sold 5,843,147 shares of our common stock resulting in $146.7 million in proceeds, net of $3.3 million of offering costs, including commissions paid to JonesTrading. Of the cumulative amount sold under the sales agreement, we sold shares of common stock for $52.1 million, net of offering expenses (including commissions) during the nine months ended September 30, 2019. The average gross price per share of stock sold pursuant to the sales agreement during the nine months ended September 30, 2019 was $17.84.
tZERO Tokens
On December 18, 2017, tZERO launched an offering (the "security token offering") of the right to acquire tZERO Preferred Equity Tokens (the "tZERO Security Token") through a Simple Agreement for Future Equity ("SAFE"). The security token offering closed on August 6, 2018 and funded through August 8, 2018, and on October 12, 2018 tZERO distributed the tZERO Security Tokens in settlement of the SAFEs. tZERO Security Token holders have the right to, prior to distributing earnings to tZERO common shareholders, a noncumulative dividend equal to 10% of tZERO's consolidated Adjusted Gross Revenue (as defined by the security token offering documents) for the most recently completed fiscal quarter, if declared by tZERO's Board of Directors, to be paid out of funds lawfully available on a quarterly basis. tZERO Security Token holders are not entitled to participate in any dividends paid to the holders of tZERO's common stock, have no rights to vote, and have no rights to the undistributed earnings of tZERO and are not entitled to any utility functionality as part of the tZERO Security Tokens. Any remaining undistributed earnings or losses of tZERO for a period shall be allocated to the noncontrolling interest held by the tZERO Security Token holders based on the contractual participation rights of the security to share in those earnings as if all the earnings for the period had been distributed and the effect will be reflected in determining net income/(loss) per share under the two-class method. In the event of any liquidation, dissolution or winding up of tZERO, the tZERO Security Token holders will be entitled to the limited preferential liquidation rights equal to USD $0.10 per token to the extent funds are available.
At December 31, 2018, cumulative proceeds since December 18, 2017 from the security token offering totaling $104.8 million, net of $22.0 million of withdrawals, were classified as a component of noncontrolling interest within our consolidated financial statements. As of December 31, 2018, tZERO incurred $21.5 million of offering costs associated with the security token offering that are classified as a reduction in proceeds within noncontrolling interest of our consolidated financial statements. During the nine months ended September 30, 2018, proceeds from the security token offering were $104.8 million, net of $22.0 million of withdrawals. During the nine months ended September 30, 2018, tZERO incurred offering costs of $21.3 million.
GSR Agreement
In August 2018, Overstock signed a Token Purchase Agreement with GSR Capital Ltd., a Cayman Islands exempted company ("GSR"). The Token Purchase Agreement sets forth the terms on which GSR had agreed to purchase, for $30 million, on May 6, 2019 or such other date as agreed by the parties, security tokens at a price of $6.67 per security token. On May 8, 2019, the parties executed an Investment Agreement to replace the Token Purchase Agreement under which GSR agreed to purchase 508,710 shares of tZERO common stock, representing approximately 0.5% of the issued and outstanding common stock of tZERO. In exchange, GSR agreed to transfer to tZERO a total $5.0 million in consideration, consisting of $1.0 million U.S. dollars, $1.0 million U.S. dollars' worth of Chinese Renminbi, and securities traded on the Hong Kong Stock Exchange with a market value on the date of the Investment Agreement of $3.0 million U.S. dollars. As of September 30, 2019, GSR had provided $2.0 million of U.S. dollars pursuant to the Investment Agreement and such amount is included in Accrued liabilities at September 30, 2019. On September 16, 2019, in recognition of GSR's remaining obligations under the Investment Agreement, tZERO and GSR entered into a Promissory Note under which GSR promised to pay the remaining $3.0 million in consideration due to tZERO under the Investment Agreement in the form of U.S. dollars in multiple installments by December 6, 2019.
Warrants
On November 8, 2017, we issued warrants to purchase up to a combined aggregate of 3,722,188 shares of our common stock to two purchasers in privately negotiated transactions, for an aggregate purchase price of $6.5 million, net of issuance costs. The exercise price for the warrants was $40.45 per share of common stock. On December 29, 2017, one of the warrant holders exercised its warrant in full and purchased a total of 2,472,188 shares of common stock for $100.0 million. On January 17, 2018, the other warrant holder exercised its warrant in full and purchased 1,250,000 shares of common stock for $50.6 million.
10. STOCK-BASED AWARDS
We have equity incentive plans that provide for the grant to employees and board members of stock-based awards, including stock options, and restricted stock. Employee accounting applies to awards granted by the Company or subsidiary in the company or subsidiary's shares only to its own employees, respectively. Stock-based compensation expense was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
September 30,
|
|
Nine months ended
September 30,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Overstock restricted stock awards
|
$
|
3,821
|
|
|
$
|
1,779
|
|
|
$
|
12,249
|
|
|
$
|
6,863
|
|
Medici Ventures stock options
|
329
|
|
|
138
|
|
|
862
|
|
|
273
|
|
tZERO equity awards
|
317
|
|
|
329
|
|
|
512
|
|
|
4,518
|
|
Total stock-based compensation expense
|
$
|
4,467
|
|
|
$
|
2,246
|
|
|
$
|
13,623
|
|
|
$
|
11,654
|
|
Overstock restricted stock awards
The Overstock.com, Inc. Amended and Restated 2005 Equity Incentive Plan provides for the grant of restricted stock units and other types of equity awards of the Company to our officers, board members and employees. These restricted stock awards generally vest over three years at 33.3% at the end of the first year, 33.3% at the end of the second year and 33.3% at the end of the third year, subject to the recipient's continuing service to us. In addition to our traditional equity awards, during the quarter ended March 31, 2019, we granted 502,765 restricted stock awards with a cumulative grant date fair value of $8.6 million which vest over a one-year period.
The cost of restricted stock units is determined using the fair value of our common stock on the date of the grant and compensation expense is either recognized on a straight-line basis over the vesting schedule or on an accelerated schedule when vesting of restricted stock awards exceeds a straight-line basis. The cumulative amount of compensation expense recognized at any point in time is at least equal to the portion of the grant date fair value of the award that is vested at that date.
The following table summarizes restricted stock award activity during the nine months ended September 30, 2019 (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
Nine months ended
September 30, 2019
|
|
Units
|
|
Weighted
Average
Grant Date
Fair Value
|
Outstanding—beginning of year
|
559
|
|
|
$
|
44.08
|
|
Granted at fair value
|
981
|
|
|
17.80
|
|
Vested
|
(259
|
)
|
|
35.28
|
|
Forfeited
|
(193
|
)
|
|
23.33
|
|
Outstanding—end of period
|
1,088
|
|
|
$
|
26.16
|
|
Medici Ventures stock options
The Medici Ventures, Inc. 2017 Stock Option Plan provides for the grant of options to employees and directors of and consultants to Medici Ventures to acquire up to approximately 9% of the authorized shares of Medici Ventures' common stock. Medici Ventures authorized 1.5 million shares, 900,000 of which are issued and outstanding to Overstock, and 130,000 of which are subject to the 2017 Stock Option Plan. The remaining 470,000 are authorized but unissued. During the nine months ended September 30, 2019, Medici Ventures granted 27,550 stock options with a cumulative grant date fair value of $2.4 million which vest over a three-year period.
tZERO equity awards
The tZERO.com 2017 Equity Incentive Plan provides for grant of options to employees and directors of and consultants to tZERO to acquire up to 5% of the authorized shares of tZERO's common stock. During the nine months ended September 30, 2019, tZERO granted awards to acquire 3,492,762 shares of its stock with a cumulative grant date fair value of $506,000 which will be expensed on a straight-line basis over the vesting period of three years. Additionally, during the nine months ended September 30, 2019, tZERO granted 245,500 restricted stock awards with a cumulative grant date fair value of $749,000 which will be expensed on a straight-line basis over a cliff vesting period of two years.
11. OTHER EXPENSE, NET
Other expense, net consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
September 30,
|
|
Nine months ended
September 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Equity method losses
|
|
$
|
(1,864
|
)
|
|
$
|
(1,123
|
)
|
|
$
|
(4,922
|
)
|
|
$
|
(2,504
|
)
|
Impairment of equity securities
|
|
(2,750
|
)
|
|
(511
|
)
|
|
(6,964
|
)
|
|
(511
|
)
|
Unrealized gain/(loss) on equity securities
|
|
(700
|
)
|
|
(72
|
)
|
|
(1,818
|
)
|
|
1,764
|
|
Allowance on notes receivable
|
|
—
|
|
|
—
|
|
|
(1,242
|
)
|
|
—
|
|
Gain/(loss) on sale of equity securities
|
|
—
|
|
|
—
|
|
|
(258
|
)
|
|
—
|
|
Other
|
|
533
|
|
|
(142
|
)
|
|
1,156
|
|
|
(238
|
)
|
Total other expense, net
|
|
$
|
(4,781
|
)
|
|
$
|
(1,848
|
)
|
|
$
|
(14,048
|
)
|
|
$
|
(1,489
|
)
|
12. BUSINESS SEGMENTS
Segment information has been prepared in accordance with ASC Topic 280 Segment Reporting. As described in Note 1—Basis of Presentation, we have recast our segment information to conform with current year presentation. We determined our segments based on how we manage our business. In the fourth quarter of 2018, we completed our review of our segment reporting and in light of a strategic shift in our Chief Operating Decision Maker's long-term strategic focus for our organization, we no longer consider the split of retail direct and retail partner as a distinct and relevant measure of our business. Accordingly, Direct and Partner are no longer considered separate reportable segments but are included under Retail in our Business Segment disclosures. Beginning in the first quarter of 2019, we began allocating corporate support costs (administrative functions such as finance, human resources, and legal) to our operating segments based on their estimated usage and based on how we manage our business. Comparative prior year information has not been recast and as a result our corporate support costs for those comparative prior periods remain allocated to our Retail segment. Our Medici business includes two reportable segments, tZERO and the unconsolidated financial information for Medici Ventures ("MVI"). MVI consists of the Medici business not associated with tZERO or MLG. We use pre-tax net income (loss) as the measure to determine our reportable segments. As a result, the MLG portion of our Medici Business is not significant as compared to our Retail, tZERO, and MVI segments. Our Other segment consists of MLG and our unallocated corporate support costs.
Our Retail segment primarily consists of amounts earned through e-commerce sales through our Website, excluding intercompany transactions eliminated in consolidation.
Our tZERO segment primarily consists of amounts earned through securities transactions through our broker-dealers and costs incurred to execute our tZERO business initiatives, excluding intercompany transactions eliminated in consolidation.
Our MVI segment primarily consists of costs incurred to develop and advance the concept of "Technology Stack for Civilization", excluding intercompany transactions eliminated in consolidation.
We do not allocate assets between our segments for our internal management purposes, and as such, they are not presented here. There were no significant inter-segment sales or transfers during the three and nine months ended September 30, 2019 and 2018.
The following table summarizes information about reportable segments for three and nine months ended September 30, 2019 and 2018 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
|
Retail
|
|
tZERO
|
|
MVI
|
|
Other
|
|
Total
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
Revenue, net
|
$
|
340,798
|
|
|
$
|
5,662
|
|
|
$
|
639
|
|
|
$
|
—
|
|
|
$
|
347,099
|
|
Cost of goods sold
|
272,545
|
|
|
4,367
|
|
|
639
|
|
|
—
|
|
|
277,551
|
|
Gross profit
|
68,253
|
|
|
1,295
|
|
|
—
|
|
|
—
|
|
|
69,548
|
|
Operating expenses (1)
|
77,641
|
|
|
14,114
|
|
|
4,427
|
|
|
3,496
|
|
|
99,678
|
|
Interest and other income (expense), net (2)
|
137
|
|
|
(475
|
)
|
|
(4,057
|
)
|
|
6
|
|
|
(4,389
|
)
|
Pre-tax loss
|
$
|
(9,251
|
)
|
|
$
|
(13,294
|
)
|
|
$
|
(8,484
|
)
|
|
$
|
(3,490
|
)
|
|
(34,519
|
)
|
Provision for income taxes
|
|
|
|
|
|
|
|
|
|
23
|
|
Net loss (3)
|
|
|
|
|
|
|
|
|
|
$
|
(34,542
|
)
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
Revenue, net
|
$
|
435,775
|
|
|
$
|
4,338
|
|
|
$
|
467
|
|
|
$
|
—
|
|
|
$
|
440,580
|
|
Cost of goods sold
|
350,651
|
|
|
2,746
|
|
|
467
|
|
|
—
|
|
|
353,864
|
|
Gross profit
|
85,124
|
|
|
1,592
|
|
|
—
|
|
|
—
|
|
|
86,716
|
|
Operating expenses
|
124,571
|
|
|
7,235
|
|
|
1,845
|
|
|
897
|
|
|
134,548
|
|
Interest and other income (expense), net (2)
|
(515
|
)
|
|
96
|
|
|
(1,147
|
)
|
|
—
|
|
|
(1,566
|
)
|
Pre-tax loss
|
$
|
(39,962
|
)
|
|
$
|
(5,547
|
)
|
|
$
|
(2,992
|
)
|
|
$
|
(897
|
)
|
|
(49,398
|
)
|
Benefit from income taxes
|
|
|
|
|
|
|
|
|
(141
|
)
|
Net loss (3)
|
|
|
|
|
|
|
|
|
$
|
(49,257
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30,
|
|
Retail
|
|
tZERO
|
|
MVI
|
|
Other
|
|
Total
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue, net
|
$
|
1,070,898
|
|
|
$
|
15,709
|
|
|
$
|
1,930
|
|
|
$
|
—
|
|
|
$
|
1,088,537
|
|
Cost of goods sold
|
858,169
|
|
|
11,867
|
|
|
1,930
|
|
|
—
|
|
|
871,966
|
|
Gross profit
|
212,729
|
|
|
3,842
|
|
|
—
|
|
|
—
|
|
|
216,571
|
|
Operating expenses (1)
|
244,571
|
|
|
41,410
|
|
|
11,583
|
|
|
10,933
|
|
|
308,497
|
|
Interest and other income (expense), net (2)
|
312
|
|
|
(1,098
|
)
|
|
(12,068
|
)
|
|
(1
|
)
|
|
(12,855
|
)
|
Pre-tax loss
|
$
|
(31,530
|
)
|
|
$
|
(38,666
|
)
|
|
$
|
(23,651
|
)
|
|
$
|
(10,934
|
)
|
|
(104,781
|
)
|
Provision for income taxes
|
|
|
|
|
|
|
|
|
|
|
279
|
|
Net loss (3)
|
|
|
|
|
|
|
|
|
|
|
$
|
(105,060
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue, net
|
$
|
1,353,454
|
|
|
$
|
14,080
|
|
|
$
|
1,510
|
|
|
$
|
—
|
|
|
$
|
1,369,044
|
|
Cost of goods sold
|
1,085,483
|
|
|
9,723
|
|
|
1,510
|
|
|
—
|
|
|
1,096,716
|
|
Gross profit
|
267,971
|
|
|
4,357
|
|
|
—
|
|
|
—
|
|
|
272,328
|
|
Operating expenses
|
399,540
|
|
|
33,119
|
|
|
6,445
|
|
|
1,986
|
|
|
441,090
|
|
Interest and other income (expense), net (2)
|
654
|
|
|
513
|
|
|
(2,479
|
)
|
|
—
|
|
|
(1,312
|
)
|
Pre-tax loss
|
$
|
(130,915
|
)
|
|
$
|
(28,249
|
)
|
|
$
|
(8,924
|
)
|
|
$
|
(1,986
|
)
|
|
(170,074
|
)
|
Benefit from income taxes
|
|
|
|
|
|
|
|
|
(445
|
)
|
Net loss (3)
|
|
|
|
|
|
|
|
|
$
|
(169,629
|
)
|
__________________________________________
|
|
(1)
|
— Corporate support costs for three months ended September 30, 2019 have been allocated $9.4 million, $1.3 million, $0.9 million, and $1.8 million to Retail, tZERO, MVI, and Other, respectively. Unallocated corporate support costs of $1.3 million are included in Other. Corporate support costs for the nine months ended September 30, 2019 have been allocated $31.5 million, $4.5 million, $3.1 million, and $5.8 million to Retail, tZERO, MVI, and Other, respectively. Unallocated corporate support costs of $4.5 million are included in Other.
|
|
|
(2)
|
— Excludes intercompany transactions eliminated in consolidation, which consist primarily of service fees and interest. The net amounts of these intercompany transactions were $739,000 and $539,000 for the three months ended September 30, 2019 and 2018 and $1.7 million and $3.0 million for the nine months ended September 30, 2019 and 2018.
|
|
|
(3)
|
— Net income (loss) presented for segment reporting purposes is before any adjustments attributable to noncontrolling interests.
|
For the three and nine months ended September 30, 2019 and 2018, substantially all of our revenues were attributable to customers in the United States. At September 30, 2019 and December 31, 2018, substantially all our property and equipment were located in the United States.
13. BROKER DEALERS
As part of our Medici blockchain and fintech technology initiatives, we hold a controlling interest in each of two broker dealers, SpeedRoute LLC ("SpeedRoute") and PRO Securities LLC ("Pro Securities"), which we acquired in January 2016.
SpeedRoute is an electronic, agency-only FINRA-registered broker dealer that provides connectivity for its customers to U.S. equity exchanges as well as off-exchange sources of liquidity such as dark pools. All of SpeedRoute's customers are registered broker dealers. SpeedRoute does not hold, own or sell securities.
PRO Securities is a FINRA-registered broker dealer that owns and operates the PRO Securities alternative trading system ("ATS"), which is registered with the SEC. An ATS is a trading system that is not regulated as an exchange but is a licensed venue for matching buy and sell orders. The PRO Securities ATS is a closed system available only to its broker dealer subscribers. PRO Securities does not accept orders from non-broker dealers, nor does it hold, own or sell securities.
SpeedRoute and PRO Securities are subject to the SEC's Uniform Net Capital Rule (SEC Rule 15c3-1), which requires the maintenance of minimum net capital and requires that the ratio of aggregate indebtedness to net capital, both as defined, shall not exceed 15 to 1 and that equity capital may not be withdrawn or cash dividends paid if the resulting net capital ratio would exceed 10 to 1. At September 30, 2019, SpeedRoute had net capital of $782,105, which was $652,732 in excess of its required net capital of $129,373 and SpeedRoute's net capital ratio was 2.48 to 1. At September 30, 2019, PRO Securities had net capital of $18,739 which was $13,739 in excess of its required net capital of $5,000 and PRO Securities net capital ratio was 1.22 to 1. At December 31, 2018, SpeedRoute had net capital of $1,251,579, which was $1,152,854 in excess of its required net capital of $98,725 and SpeedRoute's net capital ratio was 1.2 to 1. At December 31, 2018, PRO Securities had net capital of $13,958, which was $8,958 in excess of its required net capital of $5,000 and PRO Securities net capital ratio was 2 to 1.
SpeedRoute and PRO Securities did not have any securities owned or securities sold, not yet purchased at September 30, 2019 and December 31, 2018, respectively.
14. SUBSEQUENT EVENTS
On October 22, 2019 and November 1, 2019, we purchased additional minority interests in the equity securities of certain privately held entities for an aggregate of $9.0 million.