Notes to Unaudited Consolidated Financial Statements
1. DESCRIPTION OF BUSINESS
Overstock.com, Inc. is an online retailer business and advocate 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.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND SUPPLEMENTAL DISCLOSURES
Basis of Presentation
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, 2019. There have been no significant changes to our significant accounting policies disclosed in Note 2—Accounting Policies, included in Part II, Item 8, Financial Statements and Supplementary Data, of our Annual Report on Form 10-K for the year ended December 31, 2019, except as disclosed below.
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. For purposes of comparability, we reclassified other certain immaterial amounts in the prior periods presented to conform with the current period presentation. The results of operations for the three and nine months ended September 30, 2020 are not necessarily indicative of the results to be expected for any future period or the full fiscal year, due to seasonality and other factors.
Principles of consolidation
The accompanying consolidated financial statements include our accounts and the accounts of our wholly-owned subsidiaries and other subsidiaries over which we exercise control. All intercompany account balances and transactions have been eliminated in consolidation.
In February 2020, Medici Land Governance, Inc. ("MLG"), an indirect majority-owned subsidiary, consummated the sale of shares of its common stock to an unrelated third party. Upon completion of the transaction, our indirect ownership in MLG was reduced from 57% to 35% of MLG's issued and outstanding shares of common stock. As a result of our loss of a controlling financial interest in MLG under the voting interest model, we performed an assessment of control under the variable interest entity ("VIE") model and determined MLG does not meet the qualifications of a VIE for purposes of consolidation. Accordingly, we deconsolidated MLG's consolidated net assets and noncontrolling interest from our consolidated financial statements and results beginning on February 22, 2020, the date that control ceased. The amount of gain recognized on the deconsolidation was $10.7 million, which is included in our consolidated statements of operations in Other income (expense), net. The gain primarily relates to the remeasurement of our retained equity interest in MLG at fair value, which was determined based on the same price per share MLG provided for the sale of common stock to the third-party and price per share we received in settling a portion of our intercompany debt for additional shares in MLG. Post deconsolidation, MLG became one of our equity method investees for which we perform services. See Note 6—Equity Securities for additional information.
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, vendor incentive discount offers, inventory valuation, depreciable lives and valuation 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. Our estimates involving, among other items, forecasted revenues, sales volume, pricing, cost and availability of inventory, consumer demand and spending habits, the continued operations of our supply chain and logistics network, and the overall impact of social distancing on our workforce are even more difficult to estimate as a result of uncertainties associated with the scope and duration of the pandemic and various actions taken by governmental authorities, private business and other third parties in response to the global novel coronavirus ("COVID-19") pandemic, the ultimate geographic spread of the virus, the ongoing economic effect of the pandemic and the post-pandemic economic recovery. Although these estimates are based on our best knowledge of current events and actions that we may undertake in the future, the variability of these factors depends on a number of conditions, including uncertainty associated with the COVID-19 pandemic, how long these conditions will persist, what additional measures may be introduced or reintroduced by governments or private parties or what effect any such additional measures may have on our business and thus our accounting estimates may change from period to period. To the extent there are differences between these estimates and actual results, our consolidated financial statements may be materially affected.
Supplemental cash flow information
The following table shows supplemental cash flow information (in thousands):
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30,
|
|
2020
|
|
2019
|
Non-cash investing and financing activities:
|
|
|
|
Recognition of right-of-use assets upon adoption of ASC 842
|
$
|
—
|
|
|
$
|
30,968
|
|
Deposit applied to business combination purchase price
|
—
|
|
|
7,347
|
|
Recognition of right-of-use assets obtained in exchange for new operating lease liabilities
|
5,132
|
|
|
17,238
|
|
Recently adopted 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. Topic 326 was subsequently amended by ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments and ASU 2019-11, Codification Improvements to Topic 326, Financial Instruments—Credit Losses. Under the guidance, the measurement of credit losses will be based on a current expected credit losses methodology. We adopted the changes under the new standard on January 1, 2020. We utilized a prospective transition approach for our debt securities for which other-than-temporary impairment had been recognized prior to January 1, 2020. As a result, the amortized cost basis remains the same before and after the effective date of ASU 2016-13. The implementation of ASU 2016-13 did not have a material impact on our consolidated financial statements and disclosures. We will continue to actively monitor the impact of the COVID-19 pandemic on expected credit losses.
Recently issued accounting standards
In December 2019, the FASB issued ASU 2019-12, Income Taxes ("Topic 740")—Simplifying the Accounting for Income Taxes, which removes certain exceptions to the general principles in Topic 740 and amends existing guidance to improve consistent application. For public entities, ASU 2019-12 is required to be adopted for annual periods beginning after December 15, 2020, including interim periods within those fiscal years. Early adoption is permitted. Management is currently evaluating the impact of the adoption of this ASU on our consolidated financial statements and related disclosures.
In January 2020, the FASB issued ASU 2020-01, Investments—Equity Securities (Topic 321), Investments—Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815): Clarifying the Interactions between Topic 321, Topic 323, and Topic 815, which clarifies the interaction of the accounting for equity securities under Topic 321, the accounting for equity method investments in Topic 323, and the accounting for certain forward contracts and purchased options in Topic 815. For public entities, ASU 2020-01 is required to be adopted for annual periods beginning after December 15, 2020, including interim periods within those fiscal years. Early adoption is permitted. Management is currently evaluating the impact of the adoption of this ASU on our consolidated financial statements and related disclosures.
3. FAIR VALUE MEASUREMENT
Our financial assets and liabilities are initially measured at fair value, which is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). To increase the comparability of fair value measures, the following hierarchy prioritizes the inputs to valuation methodologies used to measure fair value:
|
|
•
|
Level 1—Quoted prices for identical instruments in active markets;
|
|
|
•
|
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
|
|
|
•
|
Level 3—Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.
|
Our assets and liabilities that are adjusted to fair value on a recurring basis are cash equivalents, certain equity and marketable 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, 2020 and December 31, 2019, as indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at September 30, 2020:
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents - Money market mutual funds
|
$
|
566
|
|
|
$
|
566
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Equity securities, at fair value
|
455
|
|
|
455
|
|
|
—
|
|
|
—
|
|
Marketable securities, at fair value
|
1,355
|
|
|
1,355
|
|
|
—
|
|
|
—
|
|
Trading securities held in a "rabbi trust" (1)
|
121
|
|
|
121
|
|
|
—
|
|
|
—
|
|
Total assets
|
$
|
2,497
|
|
|
$
|
2,497
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Deferred compensation accrual "rabbi trust" (2)
|
$
|
138
|
|
|
$
|
138
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Total liabilities
|
$
|
138
|
|
|
$
|
138
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at December 31, 2019:
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents - Money market mutual funds
|
$
|
2,799
|
|
|
$
|
2,799
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Equity securities, at fair value
|
823
|
|
|
823
|
|
|
—
|
|
|
—
|
|
Marketable securities, at fair value
|
10,308
|
|
|
10,308
|
|
|
—
|
|
|
—
|
|
Trading securities held in a "rabbi trust" (1)
|
116
|
|
|
116
|
|
|
—
|
|
|
—
|
|
Total assets
|
$
|
14,046
|
|
|
$
|
14,046
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Deferred compensation accrual "rabbi trust" (2)
|
$
|
116
|
|
|
$
|
116
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Total liabilities
|
$
|
116
|
|
|
$
|
116
|
|
|
$
|
—
|
|
|
$
|
—
|
|
___________________________________________
|
|
(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.
|
4. PROPERTY AND EQUIPMENT, NET
Property and equipment, net consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2020
|
|
December 31, 2019
|
|
|
Computer hardware and software
|
$
|
234,782
|
|
|
$
|
223,309
|
|
|
Building
|
69,245
|
|
|
69,266
|
|
|
Furniture and equipment
|
16,440
|
|
|
17,739
|
|
|
Land
|
12,781
|
|
|
12,781
|
|
|
Leasehold improvements
|
5,400
|
|
|
11,921
|
|
|
Building machinery and equipment
|
9,785
|
|
|
9,796
|
|
|
Land improvements
|
7,004
|
|
|
7,003
|
|
|
|
355,437
|
|
|
351,815
|
|
|
Less: accumulated depreciation
|
(230,295
|
)
|
|
(221,787
|
)
|
|
Total property and equipment, net
|
$
|
125,142
|
|
|
$
|
130,028
|
|
Capitalized costs associated with internal-use software and website development, both developed internally and acquired externally, and depreciation of costs for the same periods associated with internal-use software and website development consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
September 30,
|
|
Nine months ended
September 30,
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Capitalized internal-use software and website development
|
$
|
4,005
|
|
|
$
|
3,248
|
|
|
$
|
11,595
|
|
|
$
|
10,798
|
|
Depreciation of internal-use software and website development
|
$
|
3,721
|
|
|
$
|
3,162
|
|
|
$
|
10,644
|
|
|
$
|
9,523
|
|
Property and equipment depreciation expense is classified within the corresponding operating expense categories on our consolidated statements of operations as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
September 30,
|
|
Nine months ended
September 30,
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Cost of goods sold - retail
|
$
|
159
|
|
|
$
|
170
|
|
|
$
|
526
|
|
|
$
|
516
|
|
Technology
|
4,965
|
|
|
5,042
|
|
|
14,504
|
|
|
15,109
|
|
General and administrative
|
1,557
|
|
|
1,261
|
|
|
4,927
|
|
|
3,762
|
|
Total depreciation
|
$
|
6,681
|
|
|
$
|
6,473
|
|
|
$
|
19,957
|
|
|
$
|
19,387
|
|
5. INTANGIBLE ASSETS
Intangible assets, net consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
September 30,
2020
|
|
December 31,
2019
|
Intangible assets subject to amortization, gross
|
$
|
30,267
|
|
|
$
|
30,284
|
|
Less: accumulated amortization of intangible assets subject to amortization
|
(21,258
|
)
|
|
(18,528
|
)
|
Total intangible assets, net
|
$
|
9,009
|
|
|
$
|
11,756
|
|
Amortization of intangible assets 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,
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Technology
|
$
|
846
|
|
|
$
|
896
|
|
|
$
|
2,539
|
|
|
$
|
2,687
|
|
Sales and marketing
|
10
|
|
|
16
|
|
|
31
|
|
|
48
|
|
General and administrative
|
55
|
|
|
133
|
|
|
182
|
|
|
(526
|
)
|
Total amortization
|
$
|
911
|
|
|
$
|
1,045
|
|
|
$
|
2,752
|
|
|
$
|
2,209
|
|
In connection with our 2018 acquisition of Mac Warehouse, we received the final valuation information and completed our determination and allocation of the purchase price during the quarter ended March 31, 2019 and recognized adjustments to the provisional values as of March 31, 2019, which among other items decreased the recognized Intangible assets and resulted in a reversal of previously recognized amortization expense of $1.4 million during the quarter ended March 31, 2019.
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 3—Fair Value Measurement), including market participant assumptions for similar assets in an inactive market.
6. EQUITY SECURITIES
Equity securities under ASC 321
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 $3.9 million and $3.9 million at September 30, 2020 and December 31, 2019, respectively. Cumulative downward adjustments for price changes and impairments for our equity securities without readily determinable fair values were $6.2 million, and the cumulative upward adjustments for price changes to equity investments were $958,000 as of September 30, 2020. The impairments and downward adjustments for the period related to equity securities without readily determinable fair values at September 30, 2020 and 2019 is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
September 30,
|
|
Nine months ended
September 30,
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Impairments and downward adjustments of equity securities without readily determinable fair values
|
$
|
—
|
|
|
$
|
(2,750
|
)
|
|
$
|
—
|
|
|
$
|
(5,708
|
)
|
Certain of these equity securities and our marketable securities, which had a carrying value of $1.8 million at September 30, 2020 and $11.1 million at December 31, 2019, are carried at fair value based on Level 1 inputs. See Note 3—Fair Value Measurement. The portion of unrealized gains and losses for the period related to equity securities with readily determinable fair value still held at September 30, 2020 and 2019 is calculated as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
September 30,
|
|
Nine months ended
September 30,
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Net losses recognized during the period on equity securities and marketable securities
|
$
|
(813
|
)
|
|
$
|
(700
|
)
|
|
$
|
(3,268
|
)
|
|
$
|
(1,818
|
)
|
Less: Net gains recognized during the period on equity securities and marketable securities sold
|
—
|
|
|
—
|
|
|
2,161
|
|
|
—
|
|
Unrealized losses during the reporting period on equity securities and marketable securities still held
|
$
|
(813
|
)
|
|
$
|
(700
|
)
|
|
$
|
(5,429
|
)
|
|
$
|
(1,818
|
)
|
Equity method securities under ASC 323
Our equity method securities include equity securities in which 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. The following table includes our equity method securities and ownership interest as of September 30, 2020:
|
|
|
|
Ownership interest
|
Bitt Inc.
|
21%
|
Boston Security Token Exchange LLC
|
50%
|
Chainstone Labs, Inc.
|
29%
|
FinClusive Capital, Inc.
|
12%
|
GrainChain, Inc.
|
18%
|
Medici Land Governance, Inc.
|
35%
|
Minds, Inc.
|
23%
|
PeerNova, Inc.
|
11%
|
SettleMint NV
|
29%
|
Spera, Inc.
|
19%
|
VinX Network Ltd.
|
29%
|
Voatz, Inc.
|
20%
|
The carrying amount of our equity method securities was approximately $44.6 million and $37.3 million at September 30, 2020 and December 31, 2019, respectively.
The following table summarizes the net losses recognized on equity method securities included in Other expense, net in our consolidated statements of operations (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
September 30,
|
|
Nine months ended
September 30,
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Net loss recognized on our proportionate share of the net losses of our equity method securities and amortization of the basis difference
|
$
|
5,896
|
|
|
$
|
1,864
|
|
|
$
|
11,909
|
|
|
$
|
4,922
|
|
Impairments on equity method securities
|
813
|
|
|
—
|
|
|
813
|
|
|
1,256
|
|
Net loss recognized during the period on equity method securities sold
|
—
|
|
|
—
|
|
|
—
|
|
|
524
|
|
For the three and nine months ended September 30, 2020, we recognized $2.6 million and $6.7 million, respectively, of revenue in Other Revenue on our consolidated statements of operations for developer and other secondment services provided to certain of these entities that are accounted for under the equity method. For the three and nine months ended September 30, 2019, we recognized $639,000 and $1.9 million, respectively, of revenue in Other Revenue on our consolidated statements of operations for developer and other secondment services provided to certain of these entities that are accounted for under the equity method.
We are party to notes receivable agreements with certain of these equity method entities. The carrying amount of these notes receivables, including accrued interest, was $5.7 million and $4.6 million at September 30, 2020 and December 31, 2019, respectively, which are included in Other long-term assets, net in the consolidated balance sheets.
7. ACCRUED LIABILITIES
Accrued liabilities consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
September 30,
2020
|
|
December 31,
2019
|
|
|
|
|
Accrued compensation and other related costs
|
$
|
38,364
|
|
|
$
|
13,012
|
|
Accounts payable accruals
|
27,198
|
|
|
15,692
|
|
Accrued marketing expenses
|
21,057
|
|
|
13,063
|
|
Allowance for returns
|
17,916
|
|
|
11,107
|
|
Sales and other taxes payable
|
15,623
|
|
|
10,105
|
|
Accrued freight
|
12,773
|
|
|
5,954
|
|
Other accrued expenses
|
10,157
|
|
|
9,714
|
|
Accrued loss contingencies
|
2,580
|
|
|
9,550
|
|
Total accrued liabilities
|
$
|
145,668
|
|
|
$
|
88,197
|
|
8. BORROWINGS
Loan Core Capital Funding Corporation LLC loan agreements
In March 2020, we entered into two loan agreements with Loan Core Capital Funding Corporation LLC. The loan agreements provide a $34.5 million Senior Note, carrying interest at an annual rate of 4.242%, and a $13.0 million Mezzanine Note, carrying interest at an annual rate of 5.002%. The loans carry a blended annual interest rate of 4.45%. The Senior Note is for a 10-year term (stated maturity date is March 6, 2030) and requires interest only payments, with the principal amount and any then unpaid interest due and payable at the end of the 10-year term. The Mezzanine Note has a stated 10-year term, though the agreement requires principal and interest payments monthly over approximately a 46-month payment period. Our debt issuance costs and debt discount are amortized using the straight-line basis which approximates the effective interest method.
As of September 30, 2020, the total outstanding debt on these loans was $45.3 million, net of $624,000 in capitalized debt issuance costs, and the total amount of the current portion of these loans included in Other current liabilities on our consolidated balance sheets was $3.2 million.
Further, the Company will serve as a guarantor under the Senior Note (the "Senior Note Guaranty") and the Mezzanine Note (the "Mezzanine Note Guaranty"). Both loans include certain financial and non-financial covenants and are secured by our corporate headquarters and the related land and rank senior to stockholders. Overstock has agreed under the Senior Note Guaranty to, among other things, maintain, until all of the obligations guaranteed by Overstock under the Senior Note Guaranty have been paid in full, (i) a net worth in excess of $30 million and minimum liquid assets of $3 million for so long as the Mezzanine Note is outstanding, and (ii) a net worth in excess of $15 million and minimum liquid assets of $1 million from and after the date the Mezzanine Note has been paid in full. Overstock has also agreed under the Mezzanine Note Guaranty to, among other things, maintain a net worth in excess of $30 million and minimum liquid assets of $3 million until all obligations guaranteed by Overstock under the Mezzanine Note Guaranty have been paid in full.
We are in compliance with our debt covenants and continue to monitor the most recent developments regarding the COVID-19 pandemic and potential impact to our ongoing compliance with our debt covenants.
9. LEASES
We have operating leases for warehouses, office space, and data centers. Our leases have remaining lease terms of 1 year to 11 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.
The following table provides a summary of leases by balance sheet location (in thousands):
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
|
December 31, 2019
|
Operating right-of-use assets
|
$
|
25,402
|
|
|
$
|
25,384
|
|
Operating lease liabilities, current
|
5,959
|
|
|
6,603
|
|
Operating lease liabilities, non-current
|
21,640
|
|
|
21,554
|
|
The components of lease expenses were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
September 30,
|
|
Nine months ended
September 30,
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Operating lease cost
|
$
|
1,829
|
|
|
$
|
2,685
|
|
|
$
|
5,897
|
|
|
$
|
7,556
|
|
Short-term lease cost
|
6
|
|
|
28
|
|
|
25
|
|
|
90
|
|
Variable lease cost
|
336
|
|
|
406
|
|
|
1,224
|
|
|
1,378
|
|
The following table provides a summary of other information related to leases (in thousands):
|
|
|
|
|
|
|
|
|
|
Nine months ended
September 30,
|
|
2020
|
|
2019
|
Cash payments included in operating cash flows from lease arrangements
|
$
|
6,417
|
|
|
$
|
6,629
|
|
Right-of-use assets obtained in exchange for new operating lease liabilities
|
$
|
5,132
|
|
|
$
|
17,238
|
|
The following table provides supplemental balance sheet information related to leases:
|
|
|
|
|
|
|
|
September 30,
2020
|
|
December 31,
2019
|
Weighted-average remaining lease term - operating leases
|
5.63 years
|
|
|
5.86 years
|
|
Weighted-average discount rate - operating leases
|
7
|
%
|
|
8
|
%
|
Maturity of lease liabilities under our non-cancellable operating leases as of September 30, 2020, are as follows (in thousands):
|
|
|
|
|
|
Payments due by period
|
|
Amount
|
2020 (Remainder)
|
|
$
|
2,375
|
|
2021
|
|
7,230
|
|
2022
|
|
7,102
|
|
2023
|
|
5,716
|
|
2024
|
|
3,894
|
|
Thereafter
|
|
7,628
|
|
Total lease payments
|
|
33,945
|
|
Less interest
|
|
6,346
|
|
Present value of lease liabilities
|
|
$
|
27,599
|
|
10. 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.
In September 2009, SpeedTrack, Inc. sued us along with 27 other defendants in the United States District Court in the Northern District of California, alleging that we 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. In April 2016, the court entered an order partially dismissing the claims against us. In May 2016, the plaintiff filed an amended complaint and we filed an answer. In March 2020, the court entered a judgment of non-infringement in our favor and against the plaintiff. In June 2020, the plaintiff filed an appeal to the United States District Court of Appeals for the Federal Circuit. No estimate of the possible loss or range of loss can be made. We intend to vigorously defend this appeal.
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 2018, we received a follow-up request from the SEC relating to its investigation. As previously disclosed, on October 7, 2019, we received a subpoena from the SEC requesting documents related to the digital dividend of our Series A-1 preferred stock we announced to stockholders in June 2019 (discussed below in Note 12—Stockholders' Equity) and requesting Rule 10b5-1 plans of our officers and directors that were in effect during the period of January 1, 2018 through October 7, 2019. On December 9, 2019, we received a subpoena from the SEC requesting documents related to the GSR transaction and the alternative trading system run by tZERO ATS, LLC. On December 19, 2019, we received a subpoena from the SEC requesting our insider trading policies as well as certain employment and consulting agreements. We also previously received requests from the SEC regarding our communications with our former chief executive officer and director, Patrick Byrne, and the matters referenced in the December 2019 subpoenas. On May 27, 2020, we received a subpoena from the SEC requesting further information regarding the alternative trading system run by tZERO's ATS, LLC. We have responded to all subpoenas and requests for information and will continue to cooperate fully with the SEC in connection with its investigations and information requests.
tZERO's broker-dealer subsidiaries are subject to extensive regulatory requirements under federal and state laws and regulations and self-regulatory organization ("SRO") rules. Each of SpeedRoute LLC ("SpeedRoute"), tZERO Markets, LLC ("tZERO Markets") and tZERO ATS, LLC is registered with the SEC as a broker-dealer under the Securities Exchange Act of 1934 (the "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, tZERO ATS, LLC owns and operates an alternative trading system. Each of SpeedRoute, tZERO Markets and tZERO ATS, LLC 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.
tZERO's subsidiary, tZERO Crypto, Inc., 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 tZERO Crypto, Inc. to remain in compliance with the applicable regulatory requirements could subject it to liability or limit the services it may offer.
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 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, October 31, 2019, and November 20, 2019, four 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. These cases were consolidated into a single lawsuit in December 2019. The Court appointed The Mangrove Partners Master Fund Ltd. as lead plaintiff in January 2020. In March 2020, an amended consolidated complaint was filed against us, our president of retail, our former chief executive officer, and our former chief financial officer. We filed a motion to dismiss and on September 28, 2020, the court granted our motion and entered judgment in our favor. The plaintiffs filed a motion to amend their complaint on October 23, 2020 and filed a notice of appeal on October 26, 2020. No estimates of the possible losses or range of losses can be made at this time. We intend to vigorously defend this action.
On November 22, 2019, a shareholder derivative suit was filed against us and certain past and present directors and officers of the Company in the United States District Court for the District of Delaware, with allegations that include: (i) breach of fiduciary duties, (ii) unjust enrichment, (iii) insider selling and misappropriation of the Company's information, and (iv) contribution under Sections 10(b) and 21D of the Exchange Act. On December 17, 2019, a similar lawsuit was filed in the same court, naming the same defendants, bringing similar claims, and seeking similar relief. These cases were consolidated into a single lawsuit in January 2020. In March 2020, the court entered a stay on litigation, pending the outcome of the securities class action motion to dismiss. No estimates of the possible losses or range of losses can be made at this time. We intend to vigorously defend these actions.
On April 23, 2020, a putative class action lawsuit was filed against us in the Circuit Court of the County of St. Louis, State of Missouri, alleging that we over-collected taxes on products sold into the state of Missouri. No estimate of the possible loss or range of loss can be made at this time. We intend to vigorously defend this action.
We establish liabilities when a particular contingency is probable and estimable. At September 30, 2020 and December 31, 2019, we have accrued $2.6 million and $9.6 million, respectively, which are included in Accrued liabilities in our consolidated balance sheets. The decrease in our estimated liability for these amounts included in Accrued liabilities was primarily attributable to the reversal of a legal settlement accrual due to a ruling in our favor during the second quarter of 2020. It is reasonably possible that the actual losses may exceed our accrued liabilities.
11. 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 we entered into in favor of Loan Core Capital Funding Corporation LLC under our loan agreements, 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.
12. 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 May 19, 2020, we completed the distribution of our announced digital dividend (the "Dividend") payable in shares of our Series A-1 preferred stock. The Dividend was paid out at a ratio of 1:10, so that one share of Series A-1 preferred stock was issued for every ten shares of OSTK common stock, for every ten shares of Series A-1 preferred stock, and for every ten shares of Series B preferred stock held by all holders of such shares as of April 27, 2020, the record date for the Dividend. The number of shares of Series A-1 preferred stock declared as a stock dividend was 4,085 as of December 31, 2019 and the number of shares distributed was 4,079 on May 19, 2020.
Preferred stock
Each share of our Series A preferred stock, Series A-1 preferred stock, and our Series B preferred stock (collectively, the "preferred shares"), except as required by law, 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 are 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 2018 and 2019.
Neither the Series A-1 preferred stock nor Series B preferred stock 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-1 preferred stock into Series B preferred stock at any time on a one-to-one basis. 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-1 preferred stock and each share of Series B preferred stock being treated as though it were a share of our common stock. If we are party to any merger or consolidation in which our common stock is changed into or exchanged for stock or other securities of any other person (or the Company) or cash or any other property (or a right to receive the foregoing), we will use all commercially reasonable efforts to cause each outstanding share of the preferred stock to be treated as if such share were an additional outstanding share of common stock in connection with any such transaction. Neither the Series A-1 preferred stock nor the Series B preferred stock is registered under the Exchange Act.
Common Stock Offering
We completed a public offering of our common stock on August 14, 2020 and issued 2,415,000 shares of our common stock pursuant to an underwriting agreement, dated August 11, 2020, for proceeds totaling $192.7 million, net of $11.4 million in offering costs.
JonesTrading Sales Agreement
We entered into an Amended and Restated Capital on DemandTM Sales agreement dated June 26, 2020 with JonesTrading Institutional Services LLC ("JonesTrading") and D.A. Davidson & Co. ("D.A. Davidson"), under which we may conduct "at the market" public offerings of our common stock. Under the sales agreement, JonesTrading and D.A. Davidson, acting as our agents, may offer our common stock in the market on a daily basis or otherwise as we request from time to time. We have no obligation to sell additional shares under the sales agreement, but we may do so from time to time. For the nine months ended September 30, 2020, we did not sell any shares of our common stock pursuant to the sales agreement but have received $2.8 million of proceeds that was included in Accounts receivable, net on our consolidated balance sheet at December 31, 2019 for the sale of an aggregate of 415,904 shares of our common stock under the prior iteration of the agreement that were executed in late December 2019. As of September 30, 2020, we had $150.0 million available under our "at the market" sales program.
GSR Agreement
On April 1, 2020, tZERO issued 508,710 shares of tZERO common stock, representing approximately 0.5% of the issued and outstanding common stock of tZERO, to GSR Capital Ltd., a Cayman Islands exempted company ("GSR") in exchange for $5.0 million in consideration in full satisfaction of the Investment Agreement dated May 8, 2019. GSR's installment payments towards the Investment Agreement were included in Accrued liabilities on our consolidated balance sheet prior to the closing of the transaction.
13. 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 of the Company or subsidiary's shares only to its own employees, respectively. Stock-based compensation expense is classified within the corresponding operating expense categories on our consolidated statements of operations as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
September 30,
|
|
Nine months ended
September 30,
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Cost of goods sold — retail
|
$
|
50
|
|
|
$
|
55
|
|
|
$
|
153
|
|
|
$
|
156
|
|
Sales and marketing
|
(76
|
)
|
|
486
|
|
|
621
|
|
|
1,460
|
|
Technology
|
460
|
|
|
1,428
|
|
|
1,822
|
|
|
4,325
|
|
General and administrative
|
2,189
|
|
|
2,498
|
|
|
5,760
|
|
|
7,682
|
|
Total stock-based compensation
|
$
|
2,623
|
|
|
$
|
4,467
|
|
|
$
|
8,356
|
|
|
$
|
13,623
|
|
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.
Overstock restricted stock awards
The Overstock.com, Inc. Amended and Restated 2005 Equity Incentive Plan (the "Plan") provides for the grant of incentive stock options to employees and directors of the Company and non-qualified stock options to consultants, as well as restricted stock units and other types of equity awards of the Company. 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 vested 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, 2020 (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
Nine months ended
September 30, 2020
|
|
Units
|
|
Weighted
Average
Grant Date
Fair Value
|
Outstanding—beginning of year
|
1,051
|
|
|
$
|
26.22
|
|
Granted at fair value
|
478
|
|
|
9.82
|
|
Vested
|
(696
|
)
|
|
23.50
|
|
Forfeited
|
(156
|
)
|
|
24.72
|
|
Outstanding—end of period
|
677
|
|
|
$
|
17.78
|
|
Medici Ventures stock options
The Medici Ventures, Inc. ("Medici Ventures") 2017 Stock Option Plan, as amended, 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. Options vested under this plan expire at the end of ten years. During the nine months ended September 30, 2020, Medici Ventures granted 13,650 stock options with a cumulative grant date fair value of $282,000 which vest over a three-year period.
tZERO equity awards
The tZERO Group, Inc. 2017 Equity Incentive Plan, as amended, provides for grants of equity awards 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, 2020, tZERO granted 60,000 stock option awards with a cumulative grant date fair value of $46,000. In June 2020, tZERO completed the restructuring of its outstanding equity awards through the amendment and cancellation of each of its outstanding stock option awards in favor of the issuance of restricted stock unit awards, with each participant under its plan receiving one restricted stock unit for each stock option canceled. In addition to the original service-based vesting condition (generally three years), the restricted stock unit awards include an added performance-based vesting condition that a liquidity event must occur in order for the restricted stock unit awards to vest. The exchange was accounted for as a Type II modification with an incremental fair value of $6.9 million for the modified awards which will be expensed for the fully vested portion of the grant once the performance-based vesting condition becomes probable and the remaining fair value of the grant will be expensed on a straight-line basis over the remaining vesting period. As such, no incremental compensation cost was recognized on the modification date. The original grant date fair value of the stock option awards exchanged for restricted stock unit awards will continue to be expensed on a straight-line basis over their remaining vesting period. During the nine months ended September 30, 2020, tZERO granted 11,528,016 restricted stock awards, including 7,851,016 restricted stock unit awards related to the exchange of stock option unit awards for restricted stock awards. The incremental restricted stock unit awards granted that were not part of the exchange totaled 3,677,000 and had a cumulative grant date fair value of $3.5 million which will be expensed for the fully service-based vested portion of the grant once the performance-based vesting condition becomes probable and the remaining fair value of the grant will be expensed on a straight-line basis over the remaining service-based vesting period.
14. REVENUE AND CONTRACT LIABILITY
Revenue Disaggregation
Disaggregation of revenue by major product line is included in Segment Information in Note 17—Business Segments.
Unearned Revenue
The following table provides information about unearned revenue from contracts with customers, including significant changes in unearned revenue balances during the periods presented (in thousands):
|
|
|
|
|
|
Amount
|
Unearned revenue at December 31, 2018
|
$
|
50,578
|
|
Increase due to deferral of revenue at period end
|
36,622
|
|
Decrease due to beginning contract liabilities recognized as revenue
|
(45,379
|
)
|
Unearned revenue at December 31, 2019
|
41,821
|
|
Increase due to deferral of revenue at period end
|
71,200
|
|
Decrease due to beginning contract liabilities recognized as revenue
|
(34,264
|
)
|
Unearned revenue at September 30, 2020
|
$
|
78,757
|
|
Our total unearned revenue related to outstanding Club O Reward dollars was $8.6 million and $6.7 million at September 30, 2020 and December 31, 2019, respectively. Breakage income related to Club O Reward dollars and gift cards is recognized as a component of Retail revenue in our consolidated statements of operations. The timing of revenue recognition of these reward dollars is driven by actual customer activities, such as redemptions and expirations.
Breakage included in revenue was $1.6 million and $1.5 million for the three months ended September 30, 2020 and 2019 and $3.8 million and $3.5 million for the nine months ended September 30, 2020 and 2019.
Sales returns allowance
The following table provides additions to and deductions from the sales returns allowance (in thousands):
|
|
|
|
|
|
Amount
|
Allowance for returns at December 31, 2018
|
$
|
15,261
|
|
Additions to the allowance
|
117,040
|
|
Deductions from the allowance
|
(121,194
|
)
|
Allowance for returns at December 31, 2019
|
11,107
|
|
Additions to the allowance
|
143,746
|
|
Deductions from the allowance
|
(136,937
|
)
|
Allowance for returns at September 30, 2020
|
$
|
17,916
|
|
15. OTHER EXPENSE, NET
Other expense, net consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
September 30,
|
|
Nine months ended
September 30,
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Gain on deconsolidation of net assets of Medici Land Governance, Inc.
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
10,741
|
|
|
$
|
—
|
|
Impairment of equity securities
|
(813
|
)
|
|
(2,750
|
)
|
|
(813
|
)
|
|
(6,964
|
)
|
Loss on equity securities and marketable securities
|
(813
|
)
|
|
(700
|
)
|
|
(3,268
|
)
|
|
(2,076
|
)
|
Equity method losses
|
(5,896
|
)
|
|
(1,864
|
)
|
|
(11,909
|
)
|
|
(4,922
|
)
|
Other
|
(4
|
)
|
|
533
|
|
|
235
|
|
|
(86
|
)
|
Total other expense, net
|
$
|
(7,526
|
)
|
|
$
|
(4,781
|
)
|
|
$
|
(5,014
|
)
|
|
$
|
(14,048
|
)
|
16. NET INCOME (LOSS) PER SHARE
Our Series A preferred stock, Series A-1 preferred stock, and Series B preferred stock (collectively, the "preferred shares") are considered participating securities, and as a result, net income (loss) per share is calculated using the two-class method. Under this method, we give effect to preferred dividends and then allocate remaining net income (loss) attributable to our stockholders to both common shares and participating securities (based on the percentages outstanding) in determining net income (loss) per common share.
Basic net income (loss) per common share is computed by dividing net income (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 income (loss) per share is computed by dividing net income (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 income (loss) per common share to the extent such shares are dilutive. Net income (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.
The following table sets forth the computation of basic and diluted net income (loss) per common share for the periods indicated (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
September 30,
|
|
Nine months ended
September 30,
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Numerator:
|
|
|
|
|
|
|
|
Net income (loss) attributable to stockholders of Overstock.com, Inc.
|
$
|
23,391
|
|
|
$
|
(30,938
|
)
|
|
$
|
43,414
|
|
|
$
|
(94,863
|
)
|
Less: Preferred stock TZROP repurchase loss
|
—
|
|
|
—
|
|
|
—
|
|
|
(425
|
)
|
Less: Preferred stock dividends - declared and accumulated
|
179
|
|
|
837
|
|
|
376
|
|
|
875
|
|
Undistributed income (loss)
|
23,212
|
|
|
(31,775
|
)
|
|
43,038
|
|
|
(95,313
|
)
|
Less: Undistributed income (loss) allocated to participating securities
|
2,293
|
|
|
(428
|
)
|
|
2,482
|
|
|
(1,319
|
)
|
Net income (loss) attributable to common stockholders
|
$
|
20,919
|
|
|
$
|
(31,347
|
)
|
|
$
|
40,556
|
|
|
$
|
(93,994
|
)
|
Denominator:
|
|
|
|
|
|
|
|
Weighted average shares of common stock outstanding—basic
|
41,595
|
|
|
35,241
|
|
|
40,697
|
|
|
34,289
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
Stock options and restricted stock awards
|
607
|
|
|
—
|
|
|
333
|
|
|
—
|
|
Weighted average shares of common stock outstanding—diluted
|
42,202
|
|
|
35,241
|
|
|
41,030
|
|
|
34,289
|
|
Net income (loss) per share of common stock:
|
|
|
|
|
|
|
|
Basic
|
$
|
0.50
|
|
|
$
|
(0.89
|
)
|
|
$
|
1.00
|
|
|
$
|
(2.74
|
)
|
Diluted
|
$
|
0.50
|
|
|
$
|
(0.89
|
)
|
|
$
|
0.99
|
|
|
$
|
(2.74
|
)
|
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,
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Stock options and restricted stock units
|
4
|
|
|
1,088
|
|
|
302
|
|
|
1,088
|
|
17. BUSINESS SEGMENTS
Segment information has been prepared in accordance with ASC Topic 280 Segment Reporting. We determined our segments based on how we manage our business. We allocate 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. We use income (loss) before income taxes as the measure to determine our reportable segments.
Our Retail segment primarily consists of amounts earned through e-commerce product 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 create or foster a set of products and solutions that leverage blockchain technology to generate efficiencies and increase security and control through our Medici Ventures business initiatives, excluding intercompany transactions eliminated in consolidation.
Other consists of our unallocated corporate support costs and Medici Land Governance. We deconsolidated Medici Land Governance consolidated net assets and noncontrolling interest from our consolidated financial statements beginning on February 22, 2020, the date that control ceased.
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, 2020 and 2019.
The following table summarizes information about reportable segments and a reconciliation to consolidated net income (loss) (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
|
Retail
|
|
tZERO
|
|
MVI
|
|
Other
|
|
Total
|
2020
|
|
|
|
|
|
|
|
|
|
Net revenue
|
$
|
717,695
|
|
|
$
|
11,151
|
|
|
$
|
2,805
|
|
|
$
|
—
|
|
|
$
|
731,651
|
|
Cost of goods sold
|
548,982
|
|
|
9,098
|
|
|
2,803
|
|
|
—
|
|
|
560,883
|
|
Gross profit
|
168,713
|
|
|
2,053
|
|
|
2
|
|
|
—
|
|
|
170,768
|
|
Operating expenses
|
125,458
|
|
|
10,613
|
|
|
2,923
|
|
|
2,225
|
|
|
141,219
|
|
Interest and other expense, net (1)
|
(205
|
)
|
|
(3,848
|
)
|
|
(3,650
|
)
|
|
—
|
|
|
(7,703
|
)
|
Income (loss) before income taxes
|
$
|
43,050
|
|
|
$
|
(12,408
|
)
|
|
$
|
(6,571
|
)
|
|
$
|
(2,225
|
)
|
|
21,846
|
|
Provision for income taxes
|
|
|
|
|
|
|
|
|
620
|
|
Net income (2)
|
|
|
|
|
|
|
|
|
$
|
21,226
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
$
|
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
|
77,641
|
|
|
14,114
|
|
|
4,427
|
|
|
3,496
|
|
|
99,678
|
|
Interest and other income (expense), net (1)
|
137
|
|
|
(475
|
)
|
|
(4,057
|
)
|
|
6
|
|
|
(4,389
|
)
|
Loss before income taxes
|
$
|
(9,251
|
)
|
|
$
|
(13,294
|
)
|
|
$
|
(8,484
|
)
|
|
$
|
(3,490
|
)
|
|
(34,519
|
)
|
Provision for income taxes
|
|
|
|
|
|
|
|
|
23
|
|
Net loss (2)
|
|
|
|
|
|
|
|
|
$
|
(34,542
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30,
|
|
Retail
|
|
tZERO
|
|
MVI
|
|
Other
|
|
Total
|
2020
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
$
|
1,824,249
|
|
|
$
|
34,127
|
|
|
$
|
7,230
|
|
|
$
|
162
|
|
|
$
|
1,865,768
|
|
Cost of goods sold
|
1,403,418
|
|
|
28,634
|
|
|
7,226
|
|
|
—
|
|
|
1,439,278
|
|
Gross profit
|
420,831
|
|
|
5,493
|
|
|
4
|
|
|
162
|
|
|
426,490
|
|
Operating expenses
|
333,284
|
|
|
34,087
|
|
|
8,374
|
|
|
8,297
|
|
|
384,042
|
|
Interest and other income (expense), net (1)
|
(621
|
)
|
|
(6,898
|
)
|
|
2,423
|
|
|
3
|
|
|
(5,093
|
)
|
Income (loss) before income taxes
|
$
|
86,926
|
|
|
$
|
(35,492
|
)
|
|
$
|
(5,947
|
)
|
|
$
|
(8,132
|
)
|
|
37,355
|
|
Provision for income taxes
|
|
|
|
|
|
|
|
|
1,313
|
|
Net income (2)
|
|
|
|
|
|
|
|
|
$
|
36,042
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
$
|
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
|
244,571
|
|
|
41,410
|
|
|
11,583
|
|
|
10,933
|
|
|
308,497
|
|
Interest and other income (expense), net (1)
|
312
|
|
|
(1,098
|
)
|
|
(12,068
|
)
|
|
(1
|
)
|
|
(12,855
|
)
|
Loss before income taxes
|
$
|
(31,530
|
)
|
|
$
|
(38,666
|
)
|
|
$
|
(23,651
|
)
|
|
$
|
(10,934
|
)
|
|
(104,781
|
)
|
Provision for income taxes
|
|
|
|
|
|
|
|
|
279
|
|
Net loss (2)
|
|
|
|
|
|
|
|
|
$
|
(105,060
|
)
|
__________________________________________
|
|
(1)
|
— Excludes intercompany transactions eliminated in consolidation, which consist primarily of service fees and interest. The net amounts of these intercompany transactions were $1.3 million and $739,000 for the three months ended September 30, 2020 and 2019, and $3.6 million and $1.7 million for the nine months ended September 30, 2020 and 2019.
|
|
|
(2)
|
— Net income (loss) presented for segment reporting purposes is before any adjustments attributable to noncontrolling interests.
|
Upon deconsolidation of MLG, we recognized our retained equity interest in MLG as an equity method security held by our MVI segment which resulted in a $10.7 million gain included in Interest and other income (expense), net in the table above for our MVI segment for the nine months ended September 30, 2020. See Note 2—Summary of Significant Accounting Policies and Supplemental Disclosures, Principles of consolidation, for additional details on the gain recognized.
For the three and nine months ended September 30, 2020 and 2019, substantially all of our revenues were attributable to customers in the United States. At September 30, 2020 and December 31, 2019, substantially all our property and equipment were located in the United States.
18. BROKER DEALERS
tZERO wholly owns three broker-dealers, SpeedRoute and tZERO ATS, LLC, which were acquired in January 2016, and tZERO Markets, LLC, whose broker-dealer registration with the SEC became effective in August 2020.
SpeedRoute is an electronic, agency-only, FINRA-member broker-dealer that provides connectivity for its customers to U.S. equity exchanges as well as off-exchange sources of liquidity such as alternate trading systems. All of SpeedRoute's customers are registered broker-dealers. SpeedRoute does not hold, own, or sell securities.
tZERO ATS, LLC is a FINRA-member broker-dealer that owns and operates an alternative trading system (the "tZERO ATS") and is a wholly-owned subsidiary of tZERO. The tZERO ATS is a closed trading system available only to broker-dealer subscribers. The tZERO ATS does not accept orders from non-broker-dealers, nor does it hold, own or sell securities. The tZERO ATS currently supports the trading of three digital securities, the Series A-1 preferred stock, TZROP, and Aspen Digital, Inc.'s depository receipts for its common stock ("ASPD") and, in the future, is expected to support digital securities from other issuers.
tZERO Markets, LLC is a FINRA-member broker-dealer that provides online brokerage services, supporting the trading of digital securities on the tZERO ATS. It launched its web application and began to open individual retail accounts in October 2020. tZERO Markets is also approved to act as a placement agent or underwriter in certain securities offerings but has not yet launched these business lines.
Each of tZERO's broker-dealers 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. The following table summarizes the net capital ratio (in thousands, apart from the net capital ratio):
|
|
|
|
|
|
|
|
|
|
September 30,
2020
|
|
December 31,
2019
|
SpeedRoute
|
|
|
|
Net capital
|
$
|
1,725
|
|
|
$
|
850
|
|
Required net capital
|
229
|
|
|
145
|
|
Net capital, in excess of required
|
$
|
1,496
|
|
|
$
|
705
|
|
Net capital ratio
|
1.99
|
|
|
2.56
|
|
|
|
|
|
tZERO ATS, LLC
|
|
|
|
Net capital
|
$
|
863
|
|
|
$
|
110
|
|
Required net capital
|
5
|
|
|
5
|
|
Net capital, in excess of required
|
$
|
858
|
|
|
$
|
105
|
|
Net capital ratio
|
0.03
|
|
|
0.27
|
|
|
|
|
|
tZERO Markets, LLC
|
|
|
|
Net capital
|
$
|
2,418
|
|
|
$
|
—
|
|
Required net capital
|
50
|
|
|
—
|
|
Net capital, in excess of required
|
$
|
2,368
|
|
|
$
|
—
|
|
Net capital ratio
|
0.04
|
|
|
—
|
|
Each of tZERO's broker-dealers did not have any securities owned or securities sold, not yet purchased at September 30, 2020 and December 31, 2019, respectively.
19. SUBSEQUENT EVENTS
In October 2020, Medici Ventures entered into a Subscription Agreement (the "Agreement") with the owners of Bitt Inc. ("Bitt") to acquire a majority equity interest in Bitt for $8.0 million and to convert all outstanding convertible notes, bridge loans, and receivables held by Medici Ventures into equity shares of Bitt. The transaction outlined in the Agreement transfers effective control of Bitt to Medici Ventures, bringing our total equity ownership in Bitt to over 80%. Our purchase accounting has not yet been finalized for the transaction, as we are still finalizing our valuation of assets acquired and liabilities assumed.