Notes to Unaudited Consolidated Financial Statements
1. DESCRIPTION OF BUSINESS
Overstock.com, Inc. is an online retailer and technology company. It is a leading e-commerce retailer offering customers a wide selection of quality brands for the home at low prices, including furniture, décor, area rugs, bedding and bath, home improvement, outdoor, and kitchen and dining items, among others. The online shopping site, which receives tens of millions of visits per month, provides customers access to millions of products from third-party partners. As used herein, "Overstock," "the Company," "we," "our" and similar terms include Overstock.com, Inc. and its wholly-owned subsidiaries, unless the context indicates otherwise. As used herein, the term "Website" refers to the Company's internet websites located at www.overstock.com, www.o.co, www.overstock.ca, and www.overstockgovernment.com.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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, 2020. 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, 2020, 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. The results of operations for the three and six months ended June 30, 2021 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.
On April 23, 2021, we entered into a Limited Partnership Agreement (the "Limited Partnership Agreement") with Pelion MV GP, L.L.C. ("Pelion"), in connection with the closing (the "Medici Closing") of the Transaction Agreement dated January 25, 2021 between the Company, Medici Ventures, Inc. ("Medici Ventures"), Pelion, and Pelion, Inc. (the "Transaction Agreement"). In connection with the execution of the Limited Partnership Agreement, Pelion acquired control over Medici Ventures and its blockchain assets. As a result of this transaction, we performed an assessment of control under the variable interest entity ("VIE") model and determined that effective as of the Medici Closing, we held a variable interest in both Medici Ventures and tZERO Group, Inc. ("tZERO") (collectively, the "Disposal Group"), both of which meet the definition of variable interest entities; however, we are not the primary beneficiary of either entity for purposes of consolidation. Accordingly, we deconsolidated the Disposal Group's consolidated net assets and noncontrolling interest from our consolidated financial statements and results beginning on April 23, 2021, the date that control ceased. The Disposal Group met the criteria to be reported as held for sale and discontinued operations as of March 31, 2021. As a result of closing the transaction during the second quarter of 2021, the Disposal Group's operating results for the periods prior to deconsolidation have been reflected in our consolidated statements of income as discontinued operations for all periods presented. Additionally, the related assets and liabilities of the Disposal Group associated with the prior periods are classified as discontinued operations in our consolidated balance sheets. The majority of the Disposal Group was previously included in the Medici Ventures and tZERO reportable segments, and the remainder was included in Other. Effective as of the first quarter of fiscal year 2021, the Company has one reportable segment: Retail. See Note 14—Business Segments for additional segment information.
Unless otherwise specified, disclosures in these consolidated financial statements reflect continuing operations only. Certain prior period data, primarily related to discontinued operations, have been reclassified in the consolidated financial statements and accompanying notes to conform to the current period presentation. See Note 3—Discontinued Operations for further information.
Principles of consolidation
The accompanying consolidated financial statements include our accounts and the accounts of our wholly-owned subsidiaries. All intercompany account balances and transactions have been eliminated in consolidation.
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 global novel coronavirus ("COVID-19") pandemic and various actions taken by governmental authorities, private business and other third parties in response to the pandemic, 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 and the post-pandemic economic recovery, how long these conditions will persist, ongoing developments related to the production, approval and distribution of vaccines, the emergence and spread of new variants of the virus (including variants that may be more contagious and/or impact the effectiveness of existing vaccines), and additional measures that may be introduced or reintroduced by governments or private parties or the 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.
Initial valuation of retained noncontrolling interest in former subsidiaries
We measure our retained noncontrolling interest in former subsidiaries at fair value at the date of deconsolidation. In the absence of quoted market prices (e.g., a privately held entity), the fair value is determined in good faith under our valuation policy and process using generally accepted valuation approaches. We utilize an independent third party valuation firm to assist us in determining the fair values of our retained noncontrolling interest in former subsidiaries using a combination of a market approach and income approach. The market approach relies upon a comparison with guideline public companies or guideline transactions and entails selecting relevant financial information of the subject company, and capitalizing those amounts using valuation multiples that are based on empirical market observations. The income approach relies upon an analysis of its projected economic earnings discounted to present value (discounted cash flows). The fair value determination of our retained noncontrolling interest required the use of significant unobservable inputs (Level 3 inputs) as shown in the table within Note 3—Discontinued Operations. Due to the inherent uncertainty of determining the fair value of Level 3 securities that do not have a readily available market value, the determination of fair value requires significant judgment or estimation and changes in the estimates and assumptions used in the valuation models could materially affect the determination of fair value for these assets. See Note 3—Discontinued Operations for further information.
Income taxes
We recognize deferred tax assets to the extent that we believe these assets are more likely than not to be realized. In evaluating our ability to recover our deferred tax assets within the jurisdiction from which they arise, we consider all available positive and negative evidence, including results of recent operations, projected future taxable income, scheduled reversals of our deferred tax liabilities, and tax planning strategies.
We record uncertain tax positions in accordance with ASC 740 on the basis of a two-step process whereby (1) we determine whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, we recognize the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority.
We recognize interest and penalties related to unrecognized tax benefits within the income tax expense line in the accompanying consolidated income statements. Accrued interest and penalties are included within the related tax liability line in our consolidated balance sheets.
Recently adopted 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. We adopted the changes under the new standard on January 1, 2021. The implementation of ASU 2019-12 did not have a material impact on our consolidated financial statements and 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. We adopted the changes under the new standard on January 1, 2021. The implementation of ASU 2020-01 did not have a material impact on our consolidated financial statements and disclosures.
In October 2020, the FASB issued ASU 2020-10, Codification Improvements, which amends and provides Codification improvements in order to either clarify the Codification or correct unintended application of guidance that are not expected to have a significant effect on current accounting practice or create a significant administrative cost to most entities. We adopted the changes under the new standard on January 1, 2021. The implementation of ASU 2020-10 did not have a material impact on our consolidated financial statements and disclosures.
3. DISCONTINUED OPERATIONS
On January 25, 2021, we entered into the Transaction Agreement with Medici Ventures, Pelion, and Pelion, Inc., pursuant to which the parties agreed, among other things, that: (i) Medici Ventures would convert to a Delaware limited partnership (the "Partnership"), (ii) pursuant to the terms and subject to the conditions of a Limited Partnership Agreement which was entered into on the date of the Medici Closing, Pelion would become the sole general partner of the Partnership, and we (along with any other stockholders of Medici Ventures at the time of the Medici Closing), would become the limited partners of the Partnership, (iii) prior to the Medici Closing, Overstock would convert the outstanding intercompany debt owed to us by Medici Ventures into shares of common stock in Medici Ventures; and (iv) prior to the Medici Closing, Overstock would convert the outstanding intercompany debt owed to us by tZERO into shares of common stock in tZERO, in each case, on the terms and subject to the conditions set forth in the Transaction Agreement and the relevant definitive agreements to be entered into in connection therewith. Pursuant to the terms of the Limited Partnership Agreement, we and any other partners subsequently admitted to the Partnership agreed to make a capital commitment of $45 million to the Partnership in proportion to our equity interest in the Partnership in order to fund the Partnership's capital needs. The capital commitments may be called in one or more cash installments as specified by the general partner upon ten business days' prior written notice. The term of the Partnership is eight years. The debt conversion outlined in (iii) and (iv) above was completed during the quarter ended March 31, 2021, following which Medici Ventures and Overstock held approximately 42% and 41%, respectively, of tZERO's outstanding common stock.
The Transaction Agreement represents a strategic shift for Overstock and a substantive change in the purpose and design of Medici Ventures and its interplay with Overstock’s overall business objectives. The Overstock board of directors has determined that it is in the best interest of Overstock and its shareholders to have the Overstock management team focus on Overstock’s core e-commerce home furnishings business and strategies. Accordingly, after six years of committed effort to advance blockchain technology, Overstock has determined that the Medici Ventures businesses will be better served under the management of Pelion, a professional asset manager with technology expertise in early-stage companies. From and after the Medici Closing, Pelion has sole authority and responsibility regarding investing decisions, appointing board members of the portfolio companies, and exercising all shareholder rights for assets held by the Partnership, with the intent of generating capital appreciation for the held entities and investment income for the partners.
On April 23, 2021, we entered into the Limited Partnership Agreement with Pelion, as part of the Medici Closing, pursuant to which Pelion became the sole general partner, holding a 1% equity interest in the Partnership, and Overstock became a limited partner, holding a 99% equity interest in the Partnership. The Partnership meets the definition of an investment company under ASC Subtopic 946 - Financial Services - Investment Companies. As a result of this transaction, we
performed an assessment of control under the VIE model and determined that upon closing of the transaction, we held a variable interest in both Medici Ventures and tZERO which meet the definition of variable interest entities; however, we are not the primary beneficiary of either entity for purposes of consolidation as we do not have the power (either explicit or implicit), through voting rights or similar rights, to direct the activities of the Partnership or tZERO that most significantly impact its economic performance. Pelion was not a related party at the time of the transaction and apart from their capacity as the general partner of the Partnership, we have no other relationship with them. We may not voluntarily withdraw from the Partnership without the consent of the general partner or upon certain limited events as outlined in the Limited Partnership Agreement. Any proceeds from the sales of assets by the Partnership will be allocated on an asset-by-asset basis to the partners of the Partnership in accordance with the Limited Partnership Agreement following such events.
At the transaction date, our retained equity interest in the Partnership and our direct minority interest in tZERO had a fair value of $288.8 million, inclusive of $3.4 million of capital calls funded at the transaction date. The fair value of these equity securities at the transaction date was estimated by taking the mid-point from a valuation range using a weighting of multiple valuation techniques on the underlying components of the equity securities to calculate a fair value for the whole, including discounted cash flow models and market transactional data, both of which incorporate significant unobservable inputs (Level 3). Approximately $149.9 million of the total $288.8 million Level 3 equity securities have been valued using unadjusted inputs that have not been internally developed by management, including third-party transactions and quotations. The significant unobservable inputs used in the $288.8 million fair value measurement of these Level 3 equity securities at the transaction date are summarized as follows:
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Valuation technique
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Unobservable inputs
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Range (1)
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Weighted average (2)
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Market approach
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Enterprise value to revenue multiple
|
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0.88x
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|
0.88x
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Discounted cash flows - exit multiple
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Discount rate
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9.0% - 35.0%
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32.4%
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Enterprise value to revenue multiple
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|
0.75x - 5.00x
|
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4.40x
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Projected terminal year
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2023 - 2027
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2025
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|
|
Annual revenue growth rate
|
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1.3% - 124.0%
|
|
109.4%
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Annual EBITDA % of revenues
|
|
5.2% - 41.2%
|
|
36.3%
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Discounted cash flows - perpetual growth
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|
Discount rate
|
|
30.0%
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|
30.0%
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Projected terminal year
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2028
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2028
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|
|
Perpetual revenue growth rate
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|
3.0%
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3.0%
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Annual revenue growth rate
|
|
25.7%
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25.7%
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Annual EBITDA % of revenues
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14.9%
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14.9%
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__________________________________________
(1) — The range for the Annual revenue growth rate and Annual EBITDA % of revenues are based on the weighted average metrics for the annual periods of the separate cash flow models for the respective component.
(2) — Unobservable inputs were weighted by the relative fair value based on the fair value of the underlying components subjected to the identified valuation technique. For projected terminal year, the amount represents the median of the inputs and is not a weighted average.
We recognized a $243.5 million gain upon deconsolidation of these entities which primarily relates to the remeasurement of our retained equity method interest in the Partnership and our direct minority interest in tZERO at fair value, which was included in our consolidated statements of income as part of Income (loss) from discontinued operations, net of income taxes. During the quarter ended June 30, 2021, we completed the entire funding of our $44.6 million capital commitment consistent with our proportional ownership interest
Our retained equity interest in these entities are classified as equity method securities as we can exercise significant influence, but not control, over these entities through holding more than a 20% interest in the entity. We will record our proportionate share of the Partnership's reported net income or loss, which reflects the fair value changes of the underlying investments of the Partnership, in Other income (expense), net in our consolidated statements of income with corresponding adjustments to the carrying value of the asset. There is no difference between the carrying amount of our investment in the Partnership and the amount of underlying equity we have in the Partnership's net assets. We have elected to apply the fair value option for valuing our retained direct minority interest in tZERO in future reporting periods as we determined that accounting for our direct equity interest in tZERO under the fair value option would approximate the same valuation approach used by the
Partnership for valuing our indirect interest in tZERO through the Partnership and would be the most meaningful and transparent option for evaluating our continued exposure to the economics of tZERO.
As of June 30, 2021, our 99% equity interest in the Partnership and the 40% direct minority interest in tZERO had a carrying value of $329.9 million which is included in Equity securities on our consolidated balance sheets, of which, $99.7 million is valued under the fair value option. This amount also constitutes our maximum exposure to loss as a result of our involvement in these entities as we have no additional financing obligations to these entities. There were no changes in the valuation of our equity interest in tZERO between the recognition date of April 23, 2021 and the period ended June 30, 2021. The operations of the Partnership post transaction date are not significant through the period ended June 30, 2021 and there were no equity method gains or losses associated with our equity interest in the Partnership through the period ended June 30, 2021.
Results of discontinued operations through the transaction date were as follows (in thousands):
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Three months ended
June 30,
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Six months ended
June 30,
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2021
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2020
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2021
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2020
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Revenue, net
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$
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1,802
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|
|
$
|
15,588
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|
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$
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17,394
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|
|
$
|
27,563
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|
|
Cost of goods sold
|
1,325
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|
|
13,618
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|
|
13,716
|
|
|
23,959
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|
|
Gross profit
|
477
|
|
|
1,970
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|
|
3,678
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|
|
3,604
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|
|
Operating expenses
|
|
|
|
|
|
|
|
|
Technology
|
577
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|
|
4,615
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|
|
7,133
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|
|
10,130
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Selling, general, and administrative
|
2,084
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|
|
7,109
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|
|
13,509
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|
|
16,067
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|
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Total operating expenses
|
2,661
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|
|
11,724
|
|
|
20,642
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|
|
26,197
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|
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Operating loss from discontinued operations
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(2,184)
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|
|
(9,754)
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|
|
(16,964)
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|
|
(22,593)
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|
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Interest income, net
|
5
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|
|
390
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|
|
192
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|
|
473
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|
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Other income (loss), net
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(398)
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|
|
(4,417)
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|
|
4,081
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|
|
2,553
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Gain on deconsolidation
|
243,541
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|
|
—
|
|
|
243,541
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|
|
—
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|
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Income (loss) from discontinued operations before income taxes
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240,964
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|
|
(13,781)
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|
|
230,850
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|
(19,567)
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Provision (benefit) for income taxes
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13,592
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|
|
(323)
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|
|
13,604
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|
|
(310)
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|
|
Net income (loss) from discontinued operations
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$
|
227,372
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|
|
$
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(13,458)
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|
|
$
|
217,246
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|
$
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(19,257)
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Less: Net loss attributable to noncontrolling interests from discontinued operations
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(134)
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|
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(1,975)
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(335)
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|
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(5,207)
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Net income (loss) from discontinued operations attributable to stockholders of Overstock.com, Inc.
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$
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227,506
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$
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(11,483)
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$
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217,581
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|
$
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(14,050)
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Assets and liabilities of discontinued operations were as follows (in thousands):
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June 30,
2021
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December 31,
2020
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Cash and cash equivalents
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$
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—
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|
$
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21,075
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Other current assets
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—
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13,054
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Total current assets of discontinued operations
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$
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—
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$
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34,129
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Property and equipment, net
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$
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—
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$
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8,783
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Intangible assets, net
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—
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|
|
13,852
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Goodwill
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—
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|
|
28,790
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Equity securities
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—
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|
|
45,878
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Operating lease right-of-use assets
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—
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|
|
7,226
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|
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Other long-term assets, net
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—
|
|
|
1,626
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|
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Total long-term assets of discontinued operations
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$
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—
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|
|
$
|
106,155
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|
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Accounts payable and accrued liabilities
|
$
|
—
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|
|
$
|
11,939
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|
|
|
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|
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|
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|
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Other current liabilities
|
—
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|
|
1,985
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|
|
Total current liabilities of discontinued operations
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$
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—
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|
|
$
|
13,924
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|
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|
|
|
|
|
|
|
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Operating lease liabilities, non-current
|
—
|
|
|
7,099
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|
|
Other long-term liabilities
|
—
|
|
|
586
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|
|
Total long-term liabilities of discontinued operations
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$
|
—
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|
|
$
|
7,685
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|
4. FAIR VALUE MEASUREMENT
The following tables summarize our assets and liabilities measured at fair value on a recurring basis using the following levels of inputs (in thousands):
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|
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Fair Value Measurements at June 30, 2021
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Total
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Level 1
|
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Level 2
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Level 3
|
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Assets:
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|
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|
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Equity securities, at fair value
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$
|
100,578
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|
|
$
|
855
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|
|
$
|
—
|
|
|
$
|
99,723
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|
|
|
|
|
|
|
|
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|
|
Trading securities held in a "rabbi trust" (1)
|
163
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|
|
163
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|
|
—
|
|
|
—
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|
|
Total assets
|
$
|
100,741
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|
|
$
|
1,018
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|
|
$
|
—
|
|
|
$
|
99,723
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|
|
Liabilities:
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|
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|
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|
|
Deferred compensation accrual "rabbi trust" (2)
|
$
|
184
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|
|
$
|
184
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|
|
$
|
—
|
|
|
$
|
—
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|
|
Total liabilities
|
$
|
184
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|
|
$
|
184
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|
|
$
|
—
|
|
|
$
|
—
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|
|
|
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|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at December 31, 2020
|
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities, at fair value
|
$
|
500
|
|
|
$
|
500
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Trading securities held in a "rabbi trust" (1)
|
108
|
|
|
108
|
|
|
—
|
|
|
—
|
|
|
Total assets
|
$
|
608
|
|
|
$
|
608
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred compensation accrual "rabbi trust" (2)
|
$
|
112
|
|
|
$
|
112
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Total liabilities
|
$
|
112
|
|
|
$
|
112
|
|
|
$
|
—
|
|
|
$
|
—
|
|
___________________________________________
(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.
5. PROPERTY AND EQUIPMENT, NET
Property and equipment, net consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
2021
|
|
December 31, 2020
|
|
Computer hardware and software, including internal-use software and website development
|
$
|
217,553
|
|
|
$
|
213,124
|
|
|
Building
|
69,245
|
|
|
69,245
|
|
|
Furniture and equipment
|
11,906
|
|
|
12,165
|
|
|
Land
|
12,781
|
|
|
12,781
|
|
|
Leasehold improvements
|
2,717
|
|
|
3,049
|
|
|
Building machinery and equipment
|
9,805
|
|
|
9,793
|
|
|
Land improvements
|
7,010
|
|
|
7,010
|
|
|
|
331,017
|
|
|
327,167
|
|
|
Less: accumulated depreciation
|
(221,324)
|
|
|
(213,400)
|
|
|
Total property and equipment, net
|
$
|
109,693
|
|
|
$
|
113,767
|
|
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
June 30,
|
|
Six months ended
June 30,
|
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
|
Capitalized internal-use software and website development
|
$
|
1,758
|
|
|
$
|
3,648
|
|
|
$
|
3,462
|
|
|
$
|
5,586
|
|
|
Depreciation of internal-use software and website development
|
1,774
|
|
|
2,470
|
|
|
3,582
|
|
|
4,856
|
|
Depreciation expense is classified within the corresponding operating expense categories on our consolidated statements of income as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
June 30,
|
|
Six months ended
June 30,
|
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
|
Cost of goods sold
|
$
|
147
|
|
|
$
|
177
|
|
|
$
|
301
|
|
|
$
|
367
|
|
|
Technology
|
3,594
|
|
|
3,596
|
|
|
7,469
|
|
|
7,337
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
1,040
|
|
|
1,607
|
|
|
2,134
|
|
|
3,211
|
|
|
Total depreciation
|
$
|
4,781
|
|
|
$
|
5,380
|
|
|
$
|
9,904
|
|
|
$
|
10,915
|
|
6. BORROWINGS
2020 loan agreements
In March 2020, we entered into two loan agreements. 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 June 30, 2021, the total outstanding debt on these loans was $42.9 million, net of $551,000 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 $3.3 million.
Further, Overstock serves 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 our ongoing compliance with our debt covenants.
7. LEASES
We have operating leases for warehouses, office space, and data centers. Our leases have remaining lease terms of one year to six years, some of which may include options to extend the leases perpetually, and some of which may include options to terminate the leases within one year.
The components of lease expenses were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
June 30,
|
|
Six months ended
June 30,
|
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
|
Operating lease cost
|
$
|
1,497
|
|
|
$
|
1,562
|
|
|
$
|
3,638
|
|
|
$
|
3,320
|
|
|
|
|
|
|
|
|
|
|
|
Variable lease cost
|
328
|
|
|
466
|
|
|
716
|
|
|
873
|
|
The following table provides a summary of other information related to leases (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended
June 30,
|
|
|
2021
|
|
2020
|
|
|
|
|
|
|
Cash payments included in operating cash flows from lease arrangements
|
$
|
3,760
|
|
$
|
4,050
|
|
Right-of-use assets obtained in exchange for new operating lease liabilities
|
—
|
|
1,726
|
|
Derecognition of right-of-use assets due to reassessment of lease term
|
527
|
|
666
|
|
|
|
|
|
|
|
|
|
|
The following table provides supplemental balance sheet information related to leases:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
2021
|
|
December 31,
2020
|
|
Weighted-average remaining lease term—operating leases
|
3.23 years
|
|
3.57 years
|
|
Weighted-average discount rate—operating leases
|
7
|
%
|
|
7
|
%
|
Maturity of lease liabilities under our non-cancellable operating leases as of June 30, 2021, are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Payments due by period
|
|
Amount
|
|
2021 (Remainder)
|
|
$
|
2,686
|
|
|
2022
|
|
5,678
|
|
|
2023
|
|
4,644
|
|
|
2024
|
|
2,779
|
|
|
2025
|
|
671
|
|
|
Thereafter
|
|
340
|
|
|
Total lease payments
|
|
16,798
|
|
|
Less interest
|
|
1,822
|
|
|
Present value of lease liabilities
|
|
$
|
14,976
|
|
8. 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. In June 2021, the United States District Court of Appeals for the Federal Circuit affirmed the lower court's judgment of non-infringement and issued a ruling in our favor and against the plaintiff.
As previously disclosed, 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 relating to GSR Capital Ltd., a Cayman Islands exempted company ("GSR"). On October 7, 2019, we received a subpoena from the SEC requesting documents and other information related to the Series A-1 preferred stock dividend to stockholders we announced in June 2019 (the "Dividend") (discussed below in Note 10—Stockholders' Equity) and requesting Rule 10b5-1 plans entered into by certain officers and directors that were in effect during the period of January 1, 2018 through October 7, 2019. In December 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. We received another subpoena from the SEC in December 2019 requesting our insider trading policies as well as certain employment and consulting agreements. We have also previously received requests from the SEC regarding GSR and our communications with our former Chief Executive Officer and Director Patrick Byrne, and the matters referenced in the December 2019 subpoenas. In May 2020, we received a subpoena from the SEC requesting additional information related to the ATS. In January 2021, we received a subpoena from the SEC requesting information regarding our Retail guidance in 2019 and
certain communications with current and former executives, board members, and investors. We are cooperating with the SEC's investigations, have provided all documents requested in the voluntary requests and the 2019 and 2020 subpoenas, and continue to provide documents requested in the 2021 subpoena.
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 Securities Exchange Act of 1934, as amended (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, 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. The United States District Court of Utah granted the plaintiffs' motion to amend their complaint on January 6, 2021 and the Tenth Circuit Court dismissed the plaintiffs' appeal on January 8, 2021. We filed a motion to dismiss plaintiffs' amended complaint on February 25, 2021. The court heard oral argument on our motion on June 18, 2021, but has not yet issued a ruling. No estimates of the possible losses or range of losses can be made at this time. We intend to vigorously defend this consolidated 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. We removed the case to United States District Court, Eastern District of Missouri on May 22, 2020, and on February 9, 2021, the case against us was dismissed. On March 1, 2021, a putative class action lawsuit was filed against us in the Circuit Court of the County of St. Louis, State of Missouri, alleging similar allegations to the April 23, 2020 putative class action lawsuit that was dismissed, that we over-collected taxes on products sold into the state of Missouri. We filed a motion to compel arbitration on April 15, 2021 which has not yet been decided. No estimates of the possible losses or range of losses 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 June 30, 2021 and December 31, 2020, we have accrued $1.1 million and $1.8 million, respectively, which are included in Accrued liabilities in our consolidated balance sheets. It is reasonably possible that the actual losses may exceed our accrued liabilities.
9. 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 building 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.
10. 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 4,085,445 as of March 31, 2020 and the number of shares distributed was 4,079,030 on May 19, 2020.
Preferred stock
Each share of our 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 or accumulated a cash dividend of $0.16 per share to the holders of our preferred stock during 2020 and 2021.
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 have the right to 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.
JonesTrading Sales Agreement
We entered into an Amended and Restated Capital on DemandTM Sales Agreement (the "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" sales 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 six months ended June 30, 2021, we did not sell any shares of our common stock pursuant to the Sales Agreement. For the six months ended June 30, 2020, we 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 June 30, 2021, we had $150.0 million available under our "at the market" sales program.
11. STOCK-BASED AWARDS
We have equity incentive plans that provide for the grant to employees and board members of stock-based awards, including restricted stock. Employee accounting applies to awards granted by the Company to its own employees. Stock-based compensation expense is classified within the corresponding operating expense categories on our consolidated statements of income as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
June 30,
|
|
Six months ended
June 30,
|
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
|
Cost of goods sold
|
$
|
20
|
|
|
$
|
49
|
|
|
$
|
31
|
|
|
$
|
103
|
|
|
Sales and marketing
|
338
|
|
|
309
|
|
|
595
|
|
|
697
|
|
|
Technology
|
866
|
|
|
283
|
|
|
1,523
|
|
|
1,041
|
|
|
General and administrative
|
1,578
|
|
|
1,311
|
|
|
2,958
|
|
|
2,792
|
|
|
Total stock-based compensation
|
$
|
2,802
|
|
|
$
|
1,952
|
|
|
$
|
5,107
|
|
|
$
|
4,633
|
|
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, 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 33.4% at the end of the third year, subject to the recipient's continuing service to us.
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 six months ended June 30, 2021 (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended
June 30, 2021
|
|
|
Units
|
|
Weighted
Average
Grant Date
Fair Value
|
|
Outstanding—beginning of year
|
639
|
|
|
$
|
17.98
|
|
|
Granted at fair value
|
297
|
|
|
87.92
|
|
|
Vested
|
(276)
|
|
|
24.48
|
|
|
Forfeited
|
(25)
|
|
|
34.41
|
|
|
Outstanding—end of period
|
635
|
|
|
$
|
47.26
|
|
12. REVENUE AND CONTRACT LIABILITY
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, 2019
|
$
|
41,116
|
|
|
Increase due to deferral of revenue at period end
|
66,070
|
|
|
Decrease due to beginning contract liabilities recognized as revenue
|
(35,021)
|
|
|
Unearned revenue at December 31, 2020
|
72,165
|
|
|
Increase due to deferral of revenue at period end
|
72,219
|
|
|
Decrease due to beginning contract liabilities recognized as revenue
|
(59,937)
|
|
|
Unearned revenue at June 30, 2021
|
$
|
84,447
|
|
Our total unearned revenue related to outstanding Club O Reward dollars was $10.0 million and $8.6 million at June 30, 2021 and December 31, 2020, respectively. Breakage income related to Club O Reward dollars and gift cards is recognized in Net revenue in our consolidated statements of income. Breakage included in revenue was $1.4 million and $1.3 million for the three months ended June 30, 2021 and 2020 and $2.8 million and $2.2 million for the six months ended June 30, 2021 and 2020. The timing of revenue recognition of these reward dollars is driven by actual customer activities, such as redemptions and expirations.
Sales returns allowance
The following table provides additions to and deductions from the sales returns allowance, which is included in our Accrued liabilities balance in our consolidated balance sheets (in thousands):
|
|
|
|
|
|
|
|
|
Amount
|
|
Allowance for returns at December 31, 2019
|
$
|
11,106
|
|
|
Additions to the allowance
|
204,810
|
|
|
Deductions from the allowance
|
(196,726)
|
|
|
Allowance for returns at December 31, 2020
|
19,190
|
|
|
Additions to the allowance
|
130,225
|
|
|
Deductions from the allowance
|
(126,170)
|
|
|
Allowance for returns at June 30, 2021
|
$
|
23,245
|
|
13. NET INCOME PER SHARE
Our Series A-1 preferred stock and Series B preferred stock (collectively, the "preferred shares") are considered participating securities, and as a result, net income per share is calculated using the two-class method. Under this method, we give effect to preferred dividends and then allocate remaining net income attributable to our stockholders to both common shares and participating securities (based on the percentages outstanding) in determining net income per common share.
Basic net income per common share is computed by dividing net income 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 per share is computed by dividing net income attributable to common shares (after allocating between participating securities and common shares) 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 per common share to the extent such shares are dilutive.
The following table sets forth the computation of basic and diluted net income per common share for the periods indicated (in thousands, except per share data):
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Three months ended
June 30,
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Six months ended
June 30,
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2021
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2020
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2021
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2020
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Numerator:
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Income from continuing operations
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$
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82,405
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$
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47,839
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$
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108,423
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$
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34,073
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Less: Preferred stock dividends—declared and accumulated
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182
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179
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365
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198
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Undistributed income from continuing operations
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82,223
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47,660
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108,058
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33,875
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Less: Undistributed income allocated to participating securities
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7,882
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2,686
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10,373
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1,174
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Net income from continuing operations attributable to common stockholders
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$
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74,341
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$
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44,974
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$
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97,685
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$
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32,701
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Income (loss) from discontinued operations
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$
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227,506
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$
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(11,483)
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$
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217,581
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$
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(14,050)
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Less: Undistributed income allocated to participating securities
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21,810
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(647)
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20,886
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(487)
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Net income (loss) from discontinued operations attributable to common stockholders
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205,696
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(10,836)
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196,695
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(13,563)
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Net income attributable to common stockholders
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$
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280,037
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$
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34,138
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$
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294,380
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$
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19,138
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Denominator:
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Weighted average shares of common stock outstanding—basic
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43,009
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40,329
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42,948
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40,243
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Effect of dilutive securities:
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Restricted stock awards
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305
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261
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369
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197
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Weighted average shares of common stock outstanding—diluted
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43,314
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40,590
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43,317
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40,440
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Net income from continuing operations per share of common stock:
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Basic
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$
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1.73
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$
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1.12
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$
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2.27
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$
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0.82
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Diluted
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$
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1.72
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$
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1.11
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$
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2.26
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$
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0.81
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Net income (loss) from discontinued operations per share of common stock:
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Basic
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$
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4.78
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$
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(0.27)
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$
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4.58
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$
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(0.34)
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Diluted
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$
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4.75
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$
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(0.27)
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$
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4.54
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$
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(0.34)
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Net income per share of common stock:
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Basic
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$
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6.51
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$
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0.85
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$
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6.85
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$
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0.48
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Diluted
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$
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6.47
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$
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0.84
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$
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6.80
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$
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0.47
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The following shares were excluded from the calculation of diluted shares outstanding as their effect would have been anti-dilutive (in thousands):
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Three months ended
June 30,
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Six months ended
June 30,
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2021
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2020
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2021
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2020
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Restricted stock units
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282
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168
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283
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451
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14. BUSINESS SEGMENTS
We evaluated our reportable segments in accordance with ASC Topic 280 Segment Reporting based on how we manage our business. At the conclusion of this evaluation, we concluded that we have one reportable segment, Retail, which primarily consists of amounts earned through e-commerce product sales through our Website. All corporate support costs (administrative functions such as finance, human resources, and legal) are allocated to our single reportable segment. The results of that segment are shown on our consolidated statements of income as continuing operations. As a result of the transactions discussed in Note 3—Discontinued Operations, our tZERO and Medici Ventures reportable segments became a part of the Disposal Group and discontinued operations.
For the three and six months ended June 30, 2021 and 2020, substantially all of our revenues were attributable to customers in the United States. At June 30, 2021 and December 31, 2020, substantially all our property and equipment were located in the United States.