Quarterly Report (10-q)

Date : 11/12/2019 @ 1:03PM
Source : Edgar (US Regulatory)
Stock : Overstock com Inc (OSTK)
Quote : 7.2  -0.16 (-2.17%) @ 5:00AM
After Hours
Last Trade
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Quarterly Report (10-q)


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2019
 
Or 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from   to                        
Commission file number: 000-49799
OVERSTOCKLOGOA09.JPG
OVERSTOCK.COM, INC.
(Exact name of registrant as specified in its charter) 
Delaware
 
87-0634302
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification Number)
799 West Coliseum Way, Midvale, Utah
 
84047
(Address of principal executive offices)
 
(Zip Code)
(801) 947-3100
(Registrant's telephone number, including area code)
 

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading Symbol(s)
 
Name of each exchange on which registered
Common Stock, $0.0001 par value
 
OSTK
 
NASDAQ Global Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý   No o
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ý   No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer o
 
Accelerated filer x
Non-accelerated filer o
 
Smaller reporting company o
Emerging growth company o
 
 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o  No ý

35,249,070 shares of the Registrant's common stock, par value $0.0001, outstanding on November 6, 2019





OVERSTOCK.COM, INC.
FORM 10-Q
For the Quarterly Period Ended September 30, 2019

TABLE OF CONTENTS
 
 
 
Page
 
 
 
Item 1.
3
 
3
 
4
 
5
 
6
 
8
 
10
 
 
 
Item 2.
37
 
 
 
Item 3.
57
 
 
 
Item 4.
58
 
 
 
 
 
 
Item 1.
59
 
 
 
Item 1A.
59
 
 
 
Item 2.
67
 
 
 
Item 3.
67
 
 
 
Item 4.
67
 
 
 
Item 5.
67
 
 
 
Item 6.
67
 
 
 
68

2


PART I. FINANCIAL INFORMATION
 
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)

Overstock.com, Inc.
Consolidated Balance Sheets (Unaudited)
(in thousands, except per share data)
 
September 30,
2019
 
December 31,
2018
Assets
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
83,546

 
$
141,512

Restricted cash
2,251

 
1,302

Accounts receivable, net
22,407

 
35,930

Inventories, net
7,244

 
14,108

Prepaids and other current assets
18,233

 
22,415

Total current assets
133,681

 
215,267

Property and equipment, net
132,696

 
134,687

Intangible assets, net
12,879

 
13,370

Goodwill
27,120

 
22,895

Equity securities
41,713

 
60,427

Operating lease right-of-use assets
43,266

 

Other long-term assets, net
8,446

 
14,573

Total assets
$
399,801

 
$
461,219

Liabilities and Stockholders' Equity
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
60,557

 
$
102,574

Accrued liabilities
79,440

 
87,858

Deferred revenue
40,512

 
50,578

Operating lease liabilities, current
5,725

 

Other current liabilities
489

 
476

Total current liabilities
186,723

 
241,486

Long-term debt, net

 
3,069

Operating lease liabilities, non-current
42,510

 

Other long-term liabilities
1,616

 
5,958

Total liabilities
230,849

 
250,513

Commitments and contingencies (Note 7)


 


Stockholders' equity:
 

 
 

Preferred stock, $0.0001 par value, authorized shares - 5,000
 

 
 

Series A, issued and outstanding - 0 and 127

 

Series A-1, issued and outstanding - 3,702 and 0 (including 3,577 shares declared as a stock dividend, not yet distributed)

 

Series B, issued and outstanding - 357 and 355

 

Common stock, $0.0001 par value, authorized shares - 100,000
 

 
 

Issued shares - 38,565 and 35,346
 

 
 

Outstanding shares - 35,242 and 32,146
3

 
3

Additional paid-in capital
726,132

 
657,981

Accumulated deficit
(553,335
)
 
(458,897
)
Accumulated other comprehensive loss
(572
)
 
(584
)
Treasury stock at cost - 3,323 and 3,200
(68,773
)
 
(66,757
)
Equity attributable to stockholders of Overstock.com, Inc.
103,455

 
131,746

Equity attributable to noncontrolling interests
65,497

 
78,960

Total stockholders' equity
168,952

 
210,706

Total liabilities and stockholders' equity
$
399,801

 
$
461,219


See accompanying notes to unaudited consolidated financial statements.

3


Overstock.com, Inc.
Consolidated Statements of Operations (Unaudited)
(in thousands, except per share data)
 
 
Three months ended
September 30,
 
Nine months ended
September 30,
 
2019
 
2018
 
2019
 
2018
Revenue, net
 

 
 

 
 

 
 

Retail
$
340,798

 
$
435,775

 
$
1,070,898

 
$
1,353,454

Other
6,301

 
4,805

 
17,639

 
15,590

Total net revenue
347,099

 
440,580

 
1,088,537

 
1,369,044

Cost of goods sold
 

 
 

 
 

 
 

Retail(1)
272,545

 
350,651

 
858,169

 
1,085,483

Other
5,006

 
3,213

 
13,797

 
11,233

Total cost of goods sold
277,551

 
353,864

 
871,966

 
1,096,716

Gross profit
69,548

 
86,716

 
216,571

 
272,328

Operating expenses:
 

 
 

 
 

 
 

Sales and marketing(1)
34,215

 
55,312

 
102,252

 
226,942

Technology(1)
32,782

 
33,880

 
101,368

 
97,597

General and administrative(1)
32,681

 
45,356

 
104,877

 
116,551

Total operating expenses
99,678

 
134,548

 
308,497

 
441,090

Operating loss
(30,130
)
 
(47,832
)
 
(91,926
)
 
(168,762
)
Interest income
449

 
383

 
1,482

 
1,547

Interest expense
(57
)
 
(101
)
 
(289
)
 
(1,370
)
Other expense, net
(4,781
)
 
(1,848
)
 
(14,048
)
 
(1,489
)
Loss before income taxes
(34,519
)
 
(49,398
)
 
(104,781
)
 
(170,074
)
Provision (benefit) from income taxes
23

 
(141
)
 
279

 
(445
)
Net loss
$
(34,542
)
 
$
(49,257
)
 
$
(105,060
)
 
$
(169,629
)
Less: Net loss attributable to noncontrolling interests
(3,604
)
 
(1,334
)
 
(10,197
)
 
(5,886
)
Net loss attributable to stockholders of Overstock.com, Inc.
$
(30,938
)
 
$
(47,923
)
 
$
(94,863
)
 
$
(163,743
)
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

Net loss per common share—diluted:
 

 
 

 
 

 
 

Net loss attributable to common shares—diluted
$
(0.89
)
 
$
(1.55
)
 
$
(2.74
)
 
$
(5.47
)
Weighted average common shares outstanding—diluted
35,241

 
30,279

 
34,289

 
29,256

________________________________________
(1) Includes stock-based compensation as follows (Note 10):
 

 
 

 
 

 
 

 Cost of goods sold — retail
$
55

 
$
41

 
$
156

 
$
152

 Sales and marketing
486

 
277

 
1,460

 
1,465

 Technology
1,428

 
583

 
4,325

 
1,725

 General and administrative
2,498

 
1,345

 
7,682

 
8,312

 Total
$
4,467

 
$
2,246

 
$
13,623

 
$
11,654


See accompanying notes to unaudited consolidated financial statements.

4


Overstock.com, Inc.
Consolidated Statements of Comprehensive Loss (Unaudited)
(in thousands)
 
 
Three months ended
September 30,
 
Nine months ended
September 30,
 
2019
 
2018
 
2019
 
2018
Net loss
$
(34,542
)
 
$
(49,257
)
 
$
(105,060
)
 
$
(169,629
)
Other comprehensive income:
 
 
 
 
 
 
 
Unrealized gain on cash flow hedges, net of expense for taxes of $0, and $0
4

 
4

 
12

 
12

Other comprehensive income
4

 
4

 
12

 
12

Comprehensive loss
$
(34,538
)
 
$
(49,253
)
 
$
(105,048
)
 
$
(169,617
)
Less: Comprehensive loss attributable to noncontrolling interests
(3,604
)
 
(1,334
)
 
(10,197
)
 
(5,886
)
Comprehensive loss attributable to stockholders of Overstock.com, Inc.
$
(30,934
)
 
$
(47,919
)
 
$
(94,851
)
 
$
(163,731
)

See accompanying notes to unaudited consolidated financial statements.


5


Overstock.com, Inc.
Consolidated Statements of Changes in Stockholders' Equity (Unaudited)
(in thousands)
 
Three months ended September 30,
 
Nine months ended September 30,

2019
 
2018
 
2019

2018
Equity attributable to stockholders of Overstock.com, Inc.
 
 
 
 
 

 
 
Number of common shares issued
 
 
 
 
 
 
 
Balance at beginning of period
38,561

 
32,203

 
35,346

 
30,632

Common stock issued upon vesting of restricted stock
4

 
5

 
259

 
226

Common stock issued for asset purchase

 
47

 

 
147

Exercise of stock warrants

 

 

 
1,250

Common stock sold through ATM offering

 
2,883

 
2,960

 
2,883

Balance at end of period
38,565

 
35,138

 
38,565

 
35,138

Number of treasury stock shares
 
 
 
 
 
 
 
Balance at beginning of period
3,322

 
3,196

 
3,200

 
3,135

Common stock repurchased through business combination

 

 
47

 

Tax withholding upon vesting of restricted stock
1

 
1

 
76

 
62

Balance at end of period
3,323

 
3,197

 
3,323

 
3,197

Total number of outstanding shares
35,242

 
31,941

 
35,242

 
31,941

Common stock
$
3

 
$
3

 
$
3

 
$
3

Number of Series A preferred shares issued and outstanding
 
 
 
 
 
 
 
Balance at beginning of period
3

 
127

 
127

 
127

Exchange of shares to Series A-1
(2
)
 

 
(125
)
 

Conversion of shares to Series B
(1
)
 

 
(2
)
 

Balance at end of period

 
127

 

 
127

Number of Series A-1 preferred shares issued and outstanding
 
 
 
 
 
 
 
Balance at beginning of period
123

 

 

 

Exchange of shares from Series A
2

 

 
125

 

Dividend declared, not yet distributed
3,577

 

 
3,577

 

Balance at end of period
3,702

 

 
3,702

 

Number of Series B preferred shares issued and outstanding
 
 
 
 
 
 
 
Balance at beginning of period
356

 
555

 
355

 
555

Conversion of shares from Series A
1

 

 
2

 

Balance at end of period
357

 
555

 
357

 
555

Preferred stock
$

 
$

 
$

 
$

Additional paid-in capital
 
 
 
 
 
 
 
Balance at beginning of period
$
719,010

 
$
553,112

 
$
657,981

 
$
494,732

Stock-based compensation to employees and directors
4,467

 
2,246

 
13,623

 
7,614

Common stock issued for asset purchase

 
1,500

 

 
4,430

Issuance and exercise of stock warrants

 

 

 
50,587

Common stock sold through ATM offering, net

 
94,624

 
52,112

 
94,624

Other
2,655

 

 
2,416

 
(505
)
Balance at end of period
$
726,132

 
$
651,482

 
$
726,132

 
$
651,482

 
Continued on the following page

6


Overstock.com, Inc.
Consolidated Statements of Changes in Stockholders' Equity (Unaudited)
(in thousands)

 
Three months ended September 30,
 
Nine months ended September 30,
 
2019
 
2018
 
2019
 
2018
Accumulated deficit
 
 
 
 
 
 
 
Balance at beginning of period
$
(522,397
)
 
$
(365,472
)
 
$
(458,897
)
 
$
(254,692
)
Cumulative effect of change in accounting principle

 

 

 
5,040

Net loss attributable to stockholders of Overstock.com, Inc.
(30,938
)
 
(47,923
)
 
(94,863
)
 
(163,743
)
Other

 

 
425

 

Balance at end of period
$
(553,335
)
 
$
(413,395
)
 
$
(553,335
)
 
$
(413,395
)
Accumulated other comprehensive loss
 
 
 
 
 
 
 
Balance at beginning of period
$
(576
)
 
$
(591
)
 
$
(584
)
 
$
(599
)
Net other comprehensive income
4

 
4

 
12

 
12

Balance at end of period
$
(572
)
 
$
(587
)
 
$
(572
)
 
$
(587
)
Treasury stock
 
 
 
 
 
 
 
Balance at beginning of period
$
(68,746
)
 
$
(66,662
)
 
$
(66,757
)
 
$
(63,816
)
Common stock repurchased through business combination

 

 
(643
)
 

Tax withholding upon vesting of restricted stock
(27
)
 
(47
)
 
(1,373
)
 
(2,893
)
Balance at end of period
(68,773
)
 
(66,709
)
 
(68,773
)
 
(66,709
)
Total equity attributable to stockholders of Overstock.com, Inc.
$
103,455

 
$
170,794

 
$
103,455

 
$
170,794

 
 
 
 
 
 
 
 
Equity attributable to noncontrolling interests
 
 
 
 
 
 
 
Balance at beginning of period
$
71,786

 
$
77,718

 
$
78,960

 
$
(3,505
)
Proceeds from security token offering, net

 
4,167

 

 
82,610

Stock-based compensation to employees and directors

 

 

 
4,040

Tax withholding upon vesting of restricted stock

 

 

 
(1,681
)
Net loss attributable to noncontrolling interests
(3,604
)
 
(1,334
)
 
(10,197
)
 
(5,886
)
Fair value of noncontrolling interest at acquisition

 

 

 
4,468

Paid in capital for noncontrolling interest

 
6,700

 

 
6,700

Other
(2,685
)
 

 
(3,266
)
 
505

Total equity attributable to noncontrolling interests
$
65,497

 
$
87,251

 
$
65,497

 
$
87,251

 
 
 
 
 
 
 
 
Total stockholders' equity
$
168,952

 
$
258,045

 
$
168,952

 
$
258,045


See accompanying notes to unaudited consolidated financial statements.

7


Overstock.com, Inc.
Consolidated Statements of Cash Flows (Unaudited)
(in thousands)
 
Nine months ended
September 30,
 
2019
 
2018
Cash flows from operating activities:
 

 
 

Net loss
$
(105,060
)
 
$
(169,629
)
Adjustments to reconcile net loss to net cash used in operating activities:
 

 
 

Depreciation of property and equipment
19,387

 
19,437

Amortization of intangible assets
3,646

 
3,596

Non-cash operating lease cost
4,940

 

Stock-based compensation to employees and directors
13,623

 
11,654

Deferred income taxes, net
(26
)
 
(383
)
Gain on sale of cryptocurrencies
(311
)
 
(8,412
)
Impairment of cryptocurrencies
318

 
9,641

Impairment of equity securities
6,964

 
511

Losses on equity method securities
4,922

 
2,504

Impairments on intangible assets
1,406

 

Other non-cash adjustments
1,997

 
(1,480
)
Changes in operating assets and liabilities, net of acquisitions:
 

 
 

Accounts receivable, net
12,858

 
(73
)
Inventories, net
6,864

 
(1,833
)
Prepaids and other current assets
5,473

 
(4,806
)
Other long-term assets, net
(1,046
)
 
(4,120
)
Accounts payable
(42,110
)
 
7,143

Accrued liabilities
(8,683
)
 
18,044

Deferred revenue
(10,066
)
 
(1,511
)
Operating lease liabilities
(4,086
)
 

Other long-term liabilities
(205
)
 
(583
)
Net cash used in operating activities
(89,195
)

(120,300
)
Cash flows from investing activities:
 

 
 

Purchase of intangible assets

 
(9,583
)
Purchase of equity securities
(5,106
)
 
(43,670
)
Proceeds from sale of equity securities
7,082

 

Disbursement of notes receivable
(3,250
)
 
(2,700
)
Acquisitions of businesses, net of cash acquired
4,886

 
(12,912
)
Expenditures for property and equipment
(17,902
)
 
(20,677
)
Other investing activities, net
31

 
34

Net cash used in investing activities
(14,259
)
 
(89,508
)


Continued on the following page
 

8


Overstock.com, Inc.
Consolidated Statements of Cash Flows (Unaudited)
(in thousands)
 
Nine months ended September 30,
 
2019
 
2018
Cash flows from financing activities:
 

 
 

Payments on long-term debt
(3,141
)
 
(40,000
)
Proceeds from issuance and exercise of stock warrants

 
50,587

Proceeds from security token offering, net of offering costs and withdrawals

 
82,610

Proceeds from sale of common stock, net of offering costs
52,112

 
94,624

Paid in capital for noncontrolling interest

 
6,700

Payments of taxes withheld upon vesting of restricted stock
(1,373
)
 
(4,574
)
Other financing activities, net
(1,161
)
 
(372
)
Net cash provided by financing activities
46,437

 
189,575

Net decrease in cash, cash equivalents and restricted cash
(57,017
)
 
(20,233
)
Cash, cash equivalents and restricted cash, beginning of period
142,814

 
203,670

Cash, cash equivalents and restricted cash, end of period
$
85,797

 
$
183,437

 
 
 
 
Supplemental disclosures of cash flow information:
 
 
 
Cash paid during the period:
 
 
 
Interest paid, net of amounts capitalized
$
218

 
$
1,232

Income taxes paid (refunded), net
(469
)
 
59

Non-cash investing and financing activities:
 

 
 

Property and equipment financed through accounts payable and accrued liabilities
$
227

 
$
731

Acquisition of assets through stock issuance

 
4,430

Common stock repurchased through business combination
643

 

Receivables converted to equity security
1,024

 
200

Deposit applied to business combination purchase price
7,347

 

Equity method security applied to business combination purchase price
3,800

 

Recognition of right-of-use assets upon adoption of ASC 842
30,968

 


See accompanying notes to unaudited consolidated financial statements.


9


Overstock.com, Inc.
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.

10


 
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.

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 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

 
$

 
$



11


 
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

 
$

 
$

 ___________________________________________
(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.
(2)
— Non-qualified deferred compensation in a rabbi trust is included in Accrued liabilities and Other long-term liabilities in the consolidated balance sheets.

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.


12


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: 
 
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.


13


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,
 
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):
 
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
)


14


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):
 
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:
 
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.


15


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):
 
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

16


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.

17



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.


18


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.


19


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.


20


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.


21


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.


22


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.


23


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.


24


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



25


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

            

26


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.


27


6. LEASES

We have operating and finance leases for warehouses, office space, data centers, and certain equ