Company Quick10K Filing
Quick10K
Overstock.com
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$13.43 32 $433
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2019-05-13 Officers, Exhibits
8-K 2019-05-09 Earnings, Exhibits
8-K 2019-05-09 Shareholder Vote
8-K 2019-05-08 Regulation FD
8-K 2019-05-07 Officers, Regulation FD, Exhibits
8-K 2019-04-30 Officers, Exhibits
8-K 2019-04-18 Regulation FD, Exhibits
8-K 2019-04-16 Officers, Exhibits
8-K 2019-03-18 Earnings, Exhibits
8-K 2019-02-13 Officers
8-K 2018-12-21 Enter Agreement, Exhibits
8-K 2018-12-16 Regulation FD, Exhibits
8-K 2018-11-08 Earnings, Exhibits
8-K 2018-09-21 Enter Agreement, Exhibits
8-K 2018-09-10 Regulation FD
8-K 2018-08-09 Earnings, Exhibits
8-K 2018-08-09 Enter Agreement, Exhibits
8-K 2018-07-26 Officers
8-K 2018-06-29 Regulation FD, Exhibits
8-K 2018-06-28 Enter Agreement, Leave Agreement, Exhibits
8-K 2018-05-22 Regulation FD, Exhibits
8-K 2018-05-21 Enter Agreement, Officers, Exhibits
8-K 2018-05-09 Shareholder Vote
8-K 2018-05-04 Officers, Other Events, Exhibits
8-K 2018-04-02 Officers, Exhibits
8-K 2018-03-29 Enter Agreement, Exhibits
8-K 2018-03-15 Earnings, Exhibits
8-K 2018-03-01 Regulation FD, Exhibits
8-K 2018-02-07 Enter Agreement, Exhibits
8-K 2018-01-26 Officers
8-K 2018-01-17 Other Events
8-K 2018-01-05 Other Events
8-K 2017-12-29 Other Events
8-K 2017-12-27 Enter Agreement, Officers
DE Deere 49,520
SBS Companhia De Saneamento Basico Do Estado De Sao Paulo-Sabesp 8,280
SY So-Young International 1,900
TCPC Blackrock Tcp Capital 861
NSSC Napco Security Technologies 516
BSVN Bank7 179
CCM Concord Medical Services Holdings 113
CRT Cross Timbers Royalty Trust 74
NURO Neurometrix 6
ACEF Managed Futures Premier Energy Fund 0
OSTK 2019-03-31
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II. Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
EX-31.1 ostk-20190331xexx311.htm
EX-31.2 ostk-20190331xexx312.htm
EX-32.1 ostk-20190331xexx321.htm
EX-32.2 ostk-20190331xexx322.htm

Overstock.com Earnings 2019-03-31

OSTK 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 ostk-20190331x10q.htm 10-Q Document

 
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 March 31, 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
overstocklogoa07.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)
 
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

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
35,275,785 shares of the Registrant's common stock, par value $0.0001, outstanding on May 3, 2019





OVERSTOCK.COM, INC.
FORM 10-Q
For the Quarterly Period Ended March 31, 2019

TABLE OF CONTENTS
 
 
 
Page
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 

2


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

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

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
119,632

 
$
141,512

Restricted cash
2,483

 
1,302

Accounts receivable, net
30,819

 
35,930

Inventories, net
13,554

 
14,108

Prepaids and other current assets
18,465

 
22,415

Total current assets
184,953

 
215,267

Property and equipment, net
131,656

 
134,687

Intangible assets, net
17,243

 
13,370

Goodwill
25,434

 
22,895

Equity securities
48,466

 
60,427

Operating lease right-of-use assets
37,262

 

Other long-term assets, net
7,875

 
14,573

Total assets
$
452,889

 
$
461,219

Liabilities and Stockholders' Equity
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
74,658

 
$
102,574

Accrued liabilities
81,224

 
87,858

Deferred revenue
39,938

 
50,578

Operating lease liabilities, current
5,726

 

Other current liabilities
482

 
476

Total current liabilities
202,028

 
241,486

Long-term debt, net
3,098

 
3,069

Operating lease liabilities, non-current
36,108

 

Other long-term liabilities
2,093

 
5,958

Total liabilities
243,327

 
250,513

Commitments and contingencies (Note 7)


 


Stockholders' equity:
 

 
 

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

 
 

Series A, issued and outstanding - 127 and 127

 

Series B, issued and outstanding - 355 and 355

 

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

 
 

Issued shares - 37,802 and 35,346
 

 
 

Outstanding shares - 34,483 and 32,146
3

 
3

Additional paid-in capital
701,877

 
657,981

Accumulated deficit
(497,716
)
 
(458,897
)
Accumulated other comprehensive loss
(580
)
 
(584
)
Treasury stock at cost - 3,319 and 3,200
(68,753
)
 
(66,757
)
Equity attributable to stockholders of Overstock.com, Inc.
134,831

 
131,746

Equity attributable to noncontrolling interests
74,731

 
78,960

Total stockholders' equity
209,562

 
210,706

Total liabilities and stockholders' equity
$
452,889

 
$
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
March 31,
 
2019
 
2018
Revenue, net
 

 
 

Retail
$
362,625

 
$
439,996

Other
5,104

 
5,335

Total net revenue
367,729

 
445,331

Cost of goods sold
 

 
 

Retail(1)
290,640

 
347,580

Other
3,965

 
3,882

Total cost of goods sold
294,605

 
351,462

Gross profit
73,124

 
93,869

Operating expenses:
 

 
 

Sales and marketing(1)
33,477

 
77,214

Technology(1)
35,433

 
31,294

General and administrative(1)
40,232

 
39,755

Total operating expenses
109,142

 
148,263

Operating loss
(36,018
)
 
(54,394
)
Interest income
403

 
544

Interest expense
(127
)
 
(874
)
Other income (expense), net
(6,272
)
 
(9
)
Loss before income taxes
(42,014
)
 
(54,733
)
Provision (benefit) from income taxes
878

 
(277
)
Net loss
$
(42,892
)
 
$
(54,456
)
Less: Net loss attributable to noncontrolling interests
(3,648
)
 
(3,547
)
Net loss attributable to stockholders of Overstock.com, Inc.
$
(39,244
)
 
$
(50,909
)
Net loss per common share—basic:
 

 
 

Net loss attributable to common shares—basic
$
(1.18
)
 
$
(1.74
)
Weighted average common shares outstanding—basic
32,370

 
28,566

Net loss per common share—diluted:
 

 
 

Net loss attributable to common shares—diluted
$
(1.18
)
 
$
(1.74
)
Weighted average common shares outstanding—diluted
32,370

 
28,566

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

 
 

 Cost of goods sold — retail
$
47

 
$
70

 Sales and marketing
441

 
873

 Technology
1,227

 
521

 General and administrative
2,270

 
4,971

 Total
$
3,985

 
$
6,435


See accompanying notes to unaudited consolidated financial statements.

4


Overstock.com, Inc.
Consolidated Statements of Comprehensive Loss (Unaudited)
(in thousands)
 
 
Three months ended
March 31,
 
2019
 
2018
Net loss
$
(42,892
)
 
$
(54,456
)
Other comprehensive loss:
 
 
 
Unrealized gain on cash flow hedges, net of expense for taxes of $0, and $0
4

 
4

Other comprehensive income
4

 
4

Comprehensive loss
$
(42,888
)
 
$
(54,452
)
Less: Comprehensive loss attributable to noncontrolling interests
(3,648
)
 
(3,547
)
Comprehensive loss attributable to stockholders of Overstock.com, Inc.
$
(39,240
)
 
$
(50,905
)

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
March 31,
 
2019
 
2018
Equity attributable to stockholders of Overstock.com, Inc.
 

 
 
Number of common shares issued
 
 
 
Balance at beginning of period
35,346

 
30,632

Common stock issued upon vesting of restricted stock
242

 
166

Exercise of stock warrants

 
1,250

Common stock sold through ATM offering
2,214

 

Balance at end of period
37,802

 
32,048

 
 
 
 
Number of treasury stock shares
 
 
 
Balance at beginning of period
3,200

 
3,135

Common stock repurchased through business combination
47

 

Tax withholding upon vesting of restricted stock
72

 
47

Balance at end of period
3,319

 
3,182

Total number of outstanding shares
34,483

 
28,866

 
 
 
 
Common stock
$
3

 
$
3

 
 
 
 
Number of Series A preferred shares issued and outstanding
127

 
127

 
 
 
 
Number of Series B preferred shares issued and outstanding
355

 
555

 
 
 
 
Preferred stock
$

 
$

 
 
 
 
Additional paid-in capital
 
 
 
Balance at beginning of period
$
657,981

 
$
494,732

Stock-based compensation to employees and directors
3,985

 
2,395

Exercise of stock warrants

 
50,562

Common stock sold through ATM offering, net
39,914

 

Other
(3
)
 
(505
)
Balance at end of period
$
701,877

 
$
547,184

 
 
 
 
Accumulated deficit
 
 
 
Balance at beginning of period
$
(458,897
)
 
$
(254,692
)
Cumulative effect of change in accounting principle

 
5,040

Net loss attributable to stockholders of Overstock.com, Inc.
(39,244
)
 
(50,909
)
Other
425

 

Balance at end of period
$
(497,716
)
 
$
(300,561
)
 
 
 
 
Accumulated other comprehensive loss
 
 
 
Balance at beginning of period
$
(584
)
 
$
(599
)
Net other comprehensive income
4

 
4

Balance at end of period
$
(580
)
 
$
(595
)
 
 
 
 
Treasury stock
 
 
 
Balance at beginning of period
$
(66,757
)
 
$
(63,816
)
Common stock repurchased through business combination
(643
)
 

Tax withholding upon vesting of restricted stock
(1,353
)
 
(2,354
)
Balance at end of period
(68,753
)
 
(66,170
)
Total equity attributable to stockholders of Overstock.com, Inc.
$
134,831

 
$
179,861


Continued on the following page

6


Overstock.com, Inc.
Consolidated Statements of Changes in Stockholders' Equity (Unaudited)
(in thousands)
 
Three months ended
March 31,
 
2019
 
2018
Total equity attributable to stockholders of Overstock.com, Inc.
$
134,831

 
$
179,861

 
 
 
 
Equity attributable to noncontrolling interests
 
 
 
Balance at beginning of period
$
78,960

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

 
75,951

Stock-based compensation to employees and directors

 
4,040

Tax withholding upon vesting of restricted stock

 
(1,680
)
Net loss attributable to noncontrolling interests
(3,648
)
 
(3,547
)
Fair value of noncontrolling interest at acquisition

 
4,468

Other
(581
)
 
505

Total equity attributable to noncontrolling interests
$
74,731

 
$
76,232

 
 
 
 
Total stockholders' equity
$
209,562

 
$
256,093


See accompanying notes to unaudited consolidated financial statements.

7


Overstock.com, Inc.
Consolidated Statements of Cash Flows (Unaudited)
(in thousands)
 
Three months ended
March 31,
 
2019
 
2018
Cash flows from operating activities:
 

 
 

Net loss
$
(42,892
)
 
$
(54,456
)
Adjustments to reconcile net loss to net cash used in operating activities:
 

 
 

Depreciation of property and equipment
6,575

 
6,581

Amortization of intangible assets
1,481

 
918

Amortization of right-of-use assets
1,667

 

Stock-based compensation to employees and directors
3,985

 
6,435

Deferred income taxes, net
895

 
(267
)
Purchase price allocation adjustments
(1,988
)
 

(Gain)/loss on sale of cryptocurrencies
9

 
(1,529
)
Impairment of cryptocurrencies
318

 
8,793

Loss on sale of equity securities
977

 

Impairment of and loss on equity securities, net
4,601

 

Allowance on notes receivable
1,237

 

Other
1,014

 
185

Changes in operating assets and liabilities, net of acquisitions:
 

 
 

Accounts receivable, net
14,068

 
8,282

Inventories, net
554

 
1,232

Prepaids and other current assets
3,106

 
2,238

Other long-term assets, net
(189
)
 
(2,261
)
Accounts payable
(28,023
)
 
4,325

Accrued liabilities
(6,962
)
 
9,274

Deferred revenue
(10,640
)
 
284

Operating lease liabilities
(1,249
)
 

Other long-term liabilities
27

 
(216
)
Net cash used in operating activities
(51,429
)
 
(10,182
)
Cash flows from investing activities:
 

 
 

Purchase of intangible assets

 
(9,181
)
Purchase of equity securities
(2,500
)
 
(16,970
)
Proceeds from sale of equity securities
5,535

 

Disbursement of notes receivable
(2,000
)
 

Acquisitions of businesses, net of cash acquired
4,885

 
(11,769
)
Expenditures for property and equipment, including internal-use software and website development
(4,144
)
 
(4,029
)
Other
(2
)
 
(1
)
Net cash provided by (used in) investing activities
1,774

 
(41,950
)
Cash flows from financing activities:
 

 
 

Payments on finance/capital lease obligations
(126
)
 
(123
)
Proceeds from issuance and exercise of stock warrants

 
50,562

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

 
62,073

Proceeds from sale of common stock, net of offering costs
30,957

 

Payments of taxes withheld upon vesting of restricted stock
(1,353
)
 
(4,034
)
Other
(522
)
 

Net cash provided by financing activities
28,956

 
108,478

Net increase (decrease) in cash, cash equivalents and restricted cash
(20,699
)
 
56,346

Cash, cash equivalents and restricted cash, beginning of period
142,814

 
203,670

Cash, cash equivalents and restricted cash, end of period
$
122,115

 
$
260,016


Continued on the following page
Overstock.com, Inc.
Consolidated Statements of Cash Flows (Unaudited)
(in thousands)
 
Three months ended
March 31,
 
2019
 
2018
Supplemental disclosures of cash flow information:
 

 
 

Cash paid during the period:
 

 
 

Interest paid, net of amounts capitalized
$
86

 
$
789

Income taxes paid, net
130

 
7

Non-cash investing and financing activities:
 

 
 

Property and equipment, including internal-use software and website development costs, financed through accounts payable and accrued liabilities
$
304

 
$
965

Common stock repurchased through business combination
643

 

Note receivable converted to equity security
359

 
200

Cryptocurrency received in security token offering

 
13,878

Proceeds from sale of common stock included in accounts receivable
8,957

 

Deposit applied to business combination purchase price
7,347

 

Equity method security applied to business combination purchase price
3,707

 

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

 


See accompanying notes to unaudited consolidated financial statements.


8


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 months ended March 31, 2019 are not necessarily indicative of the results to be expected for any future period or the full fiscal year.

In the fourth quarter of 2018, we completed our annual review of our segment reporting and in light of a strategic shift in our Chief Operating Decision Maker's long-term strategic focus for our organization of transitioning our retail business to focus on the retail partner portion of our business which has resulted in the retail direct portion of our business becoming less significant, we no longer consider the split of retail direct and retail partner as a distinct and relevant measure of our business. Accordingly, 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. Direct and Partner are no longer considered separate reportable segments in our Business Segment disclosures. In addition, tZERO has been identified as a reportable segment separate from Other due to its operating activities exceeding quantitative thresholds for separate reporting.

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 generally accepted accounting principles 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.


9


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 March 31, 2019 and December 31, 2018, respectively.
 
Restricted cash
 
We consider cash that is legally restricted and cash that is held as compensating balances for credit arrangements, surety bonds, and self-funded health insurance as restricted cash.
 
Fair value of financial instruments

We account for our assets and liabilities using a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our market assumptions. These two types of inputs have created the fair-value hierarchy below. This hierarchy requires us to minimize the use of unobservable inputs and to use observable market data, if available, when determining fair value.

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 March 31, 2019 and December 31, 2018, as indicated (in thousands):
p
Fair Value Measurements at March 31, 2019:
 
Total
 
Level 1
 
Level 2
 
Level 3
Assets:
 

 
 

 
 

 
 

Cash equivalents - Money market mutual funds
$
2,975

 
$
2,975

 
$

 
$

Equity securities, at fair value
2,018

 
2,018

 

 

Trading securities held in a "rabbi trust" (1)
95

 
95

 

 

Total assets
$
5,088

 
$
5,088

 
$

 
$

Liabilities:
 

 
 

 
 

 
 

Deferred compensation accrual "rabbi trust" (2)
$
96

 
$
96

 
$

 
$

Total liabilities
$
96

 
$
96

 
$

 
$



10


 
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 March 31, 2019 and December 31, 2018, respectively.

Concentration of credit risk
 
One bank held the majority of our cash and cash equivalents at March 31, 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 $2.1 million and $2.4 million at March 31, 2019 and December 31, 2018, respectively, and are recorded at cost less impairment.

We recognize impairment on these assets caused by decreases in market value, determined by taking quoted prices from various digital currency exchanges with active markets, whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. See Fair value of financial instruments above. Such impairment in the

11


value of our cryptocurrencies is recorded in General and administrative expense in our consolidated statements of operations. Impairments on cryptocurrencies were $318,000 for the three months ended March 31, 2019. There was $8.8 million impairment on cryptocurrencies during the three months ended March 31, 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 $9,000 for the three months ended March 31, 2019. There were $1.5 million realized gains on sale of cryptocurrencies during the three months ended March 31, 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 March 31, 2019 and 2018, we capitalized $3.5 million and $2.4 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 three months ended March 31, 2019 and 2018 was $3.2 million and $3.4 million, respectively.

Depreciation expense is classified within the corresponding operating expense categories on our consolidated statements of operations as follows (in thousands): 
 
Three months ended
March 31,
 
2019
 
2018
Cost of goods sold - direct
$
175

 
$
83

Technology
5,175

 
5,478

General and administrative
1,225

 
1,020

Total depreciation, including internal-use software and website development
$
6,575

 
$
6,581



12


Total accumulated depreciation of property and equipment was $209.0 million and $204.9 million at March 31, 2019 and December 31, 2018, respectively.

Equity securities under ASC 321

At March 31, 2019, we held minority interests (less than 20%) in thirteen 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. One of these equity securities, which had a carrying value of $2.0 million at March 31, 2019, is carried at fair value based on Level 1 inputs. See Fair value of financial instruments above. The remaining 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. 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 equal to the difference between the fair value of the investment and its carrying value, which are recorded as unrealized gains or losses on our investments in Other income (expense), net on our consolidated statements of operations. 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.

The carrying amount of our investments under ASC 321 was approximately $16.5 million and $20.3 million at March 31, 2019 and December 31, 2018, respectively.

The portion of unrealized gains and losses for the period related to equity securities still held at March 31, 2019 and 2018 is calculated as follows:
 
Three months ended
March 31,
 
2019
 
2018
Net (gain)/loss recognized during the period on equity securities
$
4,030

 
$
(453
)
Less: Net loss recognized during the period on equity securities sold
(453
)
 

Unrealized (gain)/loss recognized during the reporting period on equity securities still held
$
3,577

 
$
(453
)

Equity method securities under ASC 323

At March 31, 2019, we held minority interests in eight 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 private companies investees through either holding more than a 20% voting interest in the entity or through our representation on the entity's board of directors.


13


The following table includes our equity method securities and related ownership interest as of March 31, 2019:
 
Ownership
interest
Bitt Inc.
21%
Boston Security Token Exchange LLC
50%
Chainstone Labs, Inc.
29%
GrainChain, Inc.
10%
Minds, Inc.
24%
SettleMint NV
30%
Spera, Inc.
19%
VinX Network Ltd.
21%
Voatz, Inc.
21%

The carrying amount of our equity method securities was approximately $32.0 million and $40.1 million at March 31, 2019 and December 31, 2018, respectively. The carrying value of our equity method securities exceeded the amount of underlying equity in net assets of the investees 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 of the investee and the amortization of the basis difference related to intangible assets in Other income (expense), net in our consolidated statements of operations with corresponding adjustments to the carrying value of the investment.

The following table summarizes the net losses recognized on equity method securities for the three months ended March 31, 2019 and 2018:
 
Three months ended
March 31,
 
2019
 
2018
Net loss recognized on our proportionate share of the net losses of our equity method investees and amortization of the basis difference
$
1,025

 
$
350

Net loss recognized during the period on equity method securities sold
524

 


Noncontrolling interests

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 includes a financial technology company, two related registered broker dealers, 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.


14


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 when it is reasonably certain that we will exercise that option. 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. Goodwill is not amortized but is tested for impairment at least annually or when we deem that a triggering event has occurred. When evaluating whether goodwill is impaired, we make a qualitative assessment to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the qualitative assessment determines that it is more likely than not that its fair value is less than its carrying amount, we compare the fair value of the reporting unit to which the goodwill is assigned to its carrying amount. If the carrying amount exceeds its fair value, an impairment loss is recognized in an amount equal to the excess of the carrying amount over the fair value of the reporting unit, not to exceed the carrying amount of the goodwill. There were no impairments to goodwill recorded during the three months ended March 31, 2019 and 2018.

For three months ended March 31, 2019, we recognized $2.5 million in goodwill related to a business acquisition as described in Note 3—Business Combinations.

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. Indefinite-lived intangible assets are tested for impairment annually or more frequently when events or circumstances indicate that the carrying value more likely than not exceeds its fair value. In addition, we routinely evaluate the remaining useful life of intangible assets not being amortized to determine whether events or circumstances continue to support an indefinite useful life, including any legal, regulatory, contractual, competitive, economic, or other factors that may limit their useful lives. 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.


15


Intangible assets, net consist of the following (in thousands):
 
March 31,
2019
 
December 31,
2018
Intangible assets subject to amortization, gross (1)
$
32,993

 
$
29,099

Less: accumulated amortization of intangible assets subject to amortization
(15,750
)
 
(15,729
)
Total intangible assets, net
$
17,243

 
$
13,370

___________________________________________
(1)
 — At March 31, 2019, the weighted average remaining useful life for intangible assets subject to amortization, excluding fully amortized intangible assets, was 6.12 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
March 31,
 
2019
 
2018
Technology
$
853

 
$
755

Sales and marketing
16

 
119

General and administrative
(830
)
 
44

Total amortization
$
39

 
$
918


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: $3.1 million for the remainder of 2019, $3.2 million in 2020, $2.9 million in 2021, $1.6 million in 2022, $1.1 million in 2023, and $695,000 thereafter.

Impairment of long-lived assets
 
We review property and equipment, right-of-use assets, and other long-lived assets, including intangible assets other than goodwill, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. See the Cryptocurrencies section above for our impairment policy over cryptocurrencies. Recoverability is measured by comparison of the assets' carrying amount to future undiscounted net cash flows the asset group is expected to generate. Cash flow forecasts are based on trends of historical performance and management's estimate of future performance, giving consideration to existing and anticipated competitive and economic conditions. If such asset group is considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds their fair values. There were no impairments to long-lived assets recorded during the three months ended March 31, 2019 and 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;

16


4) allocation of the transaction price to the performance obligations in the contract; and
5) recognition of revenue when or as a performance obligation is satisfied.

Product Revenue
    
We derive our revenue primarily from our retail business through our Website, but may also derive revenue from sales of merchandise through offline and other channels. Our Retail revenue is derived primarily from merchandise sold at a point in time and shipped to customers. Merchandise sales are fulfilled with inventory sourced through our partners or from our owned inventory, depending on the most efficient means of fulfilling the customer contract. The majority of our sales, however, are fulfilled from inventory sourced through our partners.

Revenue is recognized when control of the product passes to the customer, typically at the date of delivery of the merchandise to the customer or the date a service is provided, and is recognized in an amount that reflects the expected consideration to be received in exchange for such goods or services. As such, customer orders are recorded as deferred revenue prior to delivery of products or services ordered. As we ship high volumes of packages through multiple carriers, it is not practical for us to track the actual delivery date of each shipment. Therefore, we use estimates to determine which shipments are delivered and, therefore, recognized as revenue at the end of the period. Our delivery date estimates are based on average shipping transit times, which are calculated using the following factors: (i) the type of shipping carrier (as carriers have different in-transit times); (ii) the fulfillment source (either our warehouses, those warehouses we control, or those of our partners); (iii) the delivery destination; and (iv) actual transit time experience, which shows that delivery date is typically one to eight business days from the date of shipment. We review and update our estimates on a quarterly basis based on our actual transit time experience. However, actual shipping times may differ from our estimates.

Generally, we require authorization from credit card or other payment vendors whose services we offer to our customers (such as PayPal), or verification of receipt of payment, before we ship products to consumers or business purchasers. From time to time we grant credit to our business purchasers with normal credit terms (typically 30 days). We generally receive payments from our customers before our payments to our suppliers are due. We do not recognize assets associated with costs to obtain or fulfill a contract with a customer.

Shipping and handling is considered a fulfillment activity, as it takes place prior to the customer obtaining control of the merchandise, and fees charged to customers are included in net revenue upon completion of our performance obligation. We present revenue net of sales taxes, discounts, and expected refunds.

Our merchandise sales contracts include terms that could cause variability in the transaction price for items such as discounts, credits, or sales returns. Accordingly, the transaction price for product sales includes estimates of variable consideration to the extent it is probable that a significant reversal of revenue recognized will not occur. At the time of sale, we estimate a sales return liability for the variable consideration based on historical experience, which is recorded within Accrued liabilities in the consolidated balance sheet. We record an allowance for returns based on current period revenues and historical returns experience. We analyze actual historical returns, current economic trends and changes in order volume and acceptance of our products when evaluating the adequacy of the sales returns allowance in any accounting period.

We evaluate the criteria outlined in ASC 606-10-55, Principal versus Agent Considerations, in determining whether it is appropriate to record the gross amount of merchandise sales and related costs or the net amount earned as commissions. When we are the principal in a transaction and control the specific good or service before it is transferred to the customer, revenue is recorded gross; otherwise, revenue is recorded on a net basis. Through contractual terms with our partners, we have the ability to control the promised goods or services and as a result record the majority of our retail revenue on a gross basis.

Our Other revenue occurs primarily through our broker dealer subsidiaries in our tZERO segment. We evaluate the revenue recognition criteria above for our broker dealer subsidiaries and we recognize revenue based on the gross amount of consideration that we expect to receive on securities transactions (commission revenue) on a trade date basis.

Club O loyalty program
 
We have a customer loyalty program called Club O Gold for which we sell annual memberships. For Club O Gold memberships, we record membership fees as deferred revenue and we recognize revenue ratably over the membership period.


17


The Club O Gold 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 Gold 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 $1.1 million and $1.7 million for the three months ended March 31, 2019 and 2018, respectively.

Our total deferred revenue related to the outstanding Club O Reward dollars was $6.7 million and $6.9 million at March 31, 2019 and December 31, 2018, respectively. The timing of revenue recognition of these reward dollars is driven by actual customer activities, such as redemptions and expirations.

Advertising Revenue

Advertising revenues are derived primarily from sponsored links and display advertisements that are placed on our Website, distributed via email, or sent out as direct mailers. Advertising revenue is recognized in Retail revenue when the advertising services are rendered. Advertising revenues were less than 2% of total net revenues for all periods presented.

Revenue Disaggregation

Disaggregation of revenue by major product line is included in Segment Information in Note 12—Business Segments.

Deferred Revenue

When the timing of our provision of goods or services is different from the timing of the payments made by our customers, we recognize a contract liability (customer payment precedes performance).

Customer orders are recorded as deferred revenue prior to delivery of products or services ordered. We record amounts received for Club O Gold 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
23,742

Decrease due to beginning contract liabilities recognized as revenue
(34,382
)
Deferred revenue at March 31, 2019
$
39,938


18



Sales returns allowance
 
We inspect returned items when they arrive at our processing facilities. We refund the full cost of the merchandise returned and all original shipping charges if the returned item is defective or we or our partners have made an error, such as shipping the wrong product. If the return is not a result of a product defect or a fulfillment error and the customer initiates a return of an unopened item within 30 days of delivery, for most products we refund the full cost of the merchandise minus the original shipping charge and actual return shipping fees. However, we reduce refunds for returns initiated more than 30 days after delivery or that are received at our returns processing facility more than 45 days after initial delivery. If our customer returns an item that has been opened or shows signs of wear, we issue a partial refund minus the original shipping charge and actual return shipping fees.
 
Revenue is recorded net of estimated returns. We record an allowance for returns based on current period revenues and historical returns experience. We analyze actual historical returns, current economic trends and changes in order volume and acceptance of our products when evaluating the adequacy of the sales returns allowance in any accounting period.

The following table provides additions to and deduction from the sales returns allowance (in thousands):
 
Amount
Allowance for returns at December 31, 2018
15,261

Additions to the allowance
31,768

Deductions from the allowance
(35,993
)
Allowance for returns at March 31, 2019
$
11,036


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.
 
Three months ended
March 31,
 
2019
 
2018
Total revenue, net
$
367,729

 
100
%
 
$
445,331

 
100
%
Cost of goods sold
 

 
 

 
 

 
 

Product costs and other cost of goods sold
277,218

 
75
%
 
333,521

 
75
%
Fulfillment and related costs
17,387

 
5
%
 
17,941

 
4
%
Total cost of goods sold
294,605

 
80
%
 
351,462

 
79
%
Gross profit
$
73,124

 
20
%
 
$
93,869

 
21
%
 
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 $28.5 million and $68.9 million during the three months ended March 31, 2019 and 2018, respectively. Prepaid advertising (included in Prepaids and other current assets in the accompanying consolidated balance sheets) was $478,000 and $961,000 at March 31, 2019 and December 31, 2018, respectively.
 

19


Stock-based compensation
 
We measure compensation expense for all outstanding unvested share-based awards at fair value on the date of grant and recognize compensation expense over the service period for awards at the greater of a straight-line basis or on an accelerated schedule when vesting of the share-based awards exceeds a straight-line basis. When an award is forfeited prior to the vesting date, we recognize an adjustment for the previously recognized expense in the period of the forfeiture. See Note 10—Stock-Based Awards.

Loss contingencies
 
In the normal course of business, we are involved in legal proceedings and other potential loss contingencies. We accrue a liability for such matters when it is probable that a loss has been incurred and the amount 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 March 31, 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 $1.5 million at March 31, 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. We are under audit by the Ireland Revenue Agency for the calendar year 2016.

Net loss per share
 
In 2016, we issued shares of our Blockchain Voting Series A Preferred Stock and our Voting Series B Preferred Stock (collectively the "preferred shares"). These 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)

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in determining net loss per common share.

Basic net loss per common share is computed by dividing net loss attributable to common shares (after allocating between common shares and participating securities) by the weighted average number of common shares outstanding during the period.

Diluted net loss per share is computed by dividing net loss attributable to common shares (after allocating between common shares and participating securities) by the weighted average number of common and potential common shares outstanding during the period (after allocating total dilutive shares between our common shares outstanding and our preferred shares outstanding). Potential common shares, comprising incremental common shares issuable upon the exercise of stock options, warrants, and restricted stock awards are included in the calculation of diluted net loss per common share to the extent such shares are dilutive. Net loss attributable to common shares is adjusted for options and restricted stock awards issued by our subsidiaries when the effect of our subsidiary's diluted earnings per share is dilutive.

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
March 31,
 
2019
 
2018
Net loss attributable to stockholders of Overstock.com, Inc.
$
(39,244
)
 
$
(50,909
)
Less: Preferred stock (Token) repurchase (gain)/loss
(425
)
 

Less: Preferred stock dividends - declared and accumulated
19

 
27

Undistributed loss
(38,838
)
 
(50,936
)
Less: Undistributed loss allocated to participating securities
(569
)
 
(1,186
)
Net loss attributable to common shares
$
(38,269
)
 
$
(49,750
)
Net loss per common share—basic:
 

 
 

Net loss attributable to common shares—basic
$
(1.18
)
 
$
(1.74
)
Weighted average common shares outstanding—basic
32,370

 
28,566

Effect of dilutive securities:
 

 
 

Stock options and restricted stock awards

 

Weighted average common shares outstanding—diluted
32,370

 
28,566

Net loss attributable to common shares—diluted
$
(1.18
)
 
$
(1.74
)
 
The following shares were excluded from the calculation of diluted shares outstanding as their effect would have been anti-dilutive (in thousands):
 
Three months ended
March 31,
 
2019
 
2018
Stock options and restricted stock units
1,030

 
685

Common shares issuable under stock warrant

 
83


Subsequent to March 31, 2019, we sold 745,737 common shares under the sales agreement with JonesTrading described further in Note 9—Stockholders' Equity.


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Recently adopted accounting standards

In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-02, Leases (Topic 842), which requires lessees to recognize operating leases on-balance sheet and disclose key information about leasing arrangements. Topic 842 was subsequently amended by ASU No. 2018-01, Land Easement Practical Expedient for Transition to Topic 842; ASU No. 2018-10, Codification Improvements to Topic 842, Leases; and ASU No. 2018-11, Targeted Improvements. The new standard establishes a right-of-use model (ROU) that requires a lessee to recognize an ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement.

We adopted the new standard on January 1, 2019. A modified retrospective transition approach is required, applying the new standard to all leases existing at the date of initial application. An entity may choose to use either (1) its effective date or (2) the beginning of the earliest comparative period presented in the financial statements as its date of initial application. If an entity chooses the second option, the transition requirements for existing leases also apply to leases entered into between the date of initial application and the effective date. The entity must also recast its comparative period financial statements and provide the disclosures required by the new standard for the comparative periods. We adopted the new standard on January 1, 2019 and thus used the effective date as our date of initial application. Consequently, financial information has not been updated and the disclosures required under the new standard are not provided for dates and periods before January 1, 2019. Upon adoption we recognized cumulative operating lease liabilities of approximately $35.1 million and operating right-of-use assets of approximately $31.0 million which were reflected as non-cash items in the consolidated statement of cash flows. The difference of $4.2 million represented deferred rent for leases that existed as of the date of adoption, which was an offset to the opening balance of right-of-use assets.

The new standard provides a number of optional practical expedients in transition. We elected the "package of practical expedients", which permits us to not reassess under the new standard our prior conclusions about lease identification, lease classification, and initial direct costs as well as the practical expedient pertaining to land easements. We did not elect the use-of-hindsight practical expedient. The new standard also provides practical expedients for an entity's ongoing accounting. We elected the short-term lease recognition exemption for all leases that qualify. This means, for those leases that qualify, we did not recognize ROU assets or lease liabilities, and this includes not recognizing ROU assets or lease liabilities for existing short-term leases of those assets in transition. We also elected the practical expedient to not separate lease and non-lease components for all of our leases.

The standard had a material effect on our financial statements, primarily related to (1) the recognition of new ROU assets and lease liabilities on our balance sheet for our warehouse, office, data center, and equipment operating leases; and (2) providing significant new disclosures about our leasing activities. The additional operating liabilities on our consolidated balance sheets were recognized based on the present value of the remaining minimum rental payments under current leasing standards for our existing operating leases, discounted by our incremental borrowing rate for borrowings of a similar duration on a fully secured basis, with corresponding ROU assets of approximately the same amount.

In June 2018, the FASB issued ASU 2018-07, Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting; which aligns the measurement and classification guidance for share-based payments to nonemployees with the guidance for share-based payments to employees, with certain exceptions. Under the guidance, the measurement of equity-classified nonemployee awards will be fixed at the grant date. We adopted the changes under the new standard on January 1, 2019 on a prospective basis. The implementation of ASU 2017-01 did not have a material impact on our consolidated financial statements and related disclosures.


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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 company that plans to build a regulatory-compliant bridge between the U.S. Dollar and cryptocurrencies and offer our customers the ability to purchase 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. tZERO plans to integrate the software and technology of Bitsy to offer customers a digital wallet service intended to create a bridge between traditional fiat currencies and cryptocurrencies.

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.

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. Determination and allocation of the purchase price to net tangible and intangible assets is based upon preliminary estimates pending our receipt of a completed valuation report and other information. These preliminary estimates and assumptions could change significantly during the measurement period as we finalize the valuations of the intangible assets acquired and related tax impact. Any change could result in variances between our future financial results and the amounts recognized in the financial information presented below, including variances in fair values recorded, as well as expenses associated with these items.

The preliminary 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
3,707

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
$
6,169

 
 
Allocation
 
Prepaids and other current assets
$
71

Property and equipment
16

Intangible assets and other
6,743

Other liabilities assumed
(661
)
Total net assets, net of cash acquired
$
6,169


Acquired intangible assets primarily include technology, patents, and license. The acquired assets, liabilities, and associated operating results of Bitsy were consolidated into our financial statements at the acquisition date.     Pro forma results of operations have not been presented because the effects of this acquisition were not material to our consolidated results of operations.


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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. As of March 31, 2019, we received the final valuation information and completed our determination and allocation of the purchase price and recognized adjustments to the provisional values as of March 31, 2019 which decreased the recognized Intangibles assets by $2.8 million, increased Accrued liabilities by $527,000, decreased Deferred tax liabilities by $837,000 and resulted in a corresponding increase to Goodwill of $2.5 million. Additionally, the change to the provisional amount resulted in a decrease in amortization expense and accumulated depreciation of $1.4 million, of which $981,000 relates to the year ended December 31, 2018, and a $459,000 increase in Other Income related to the Accrued Liabilities that were expensed in 2018. We estimated the fair value of the acquired assets and liabilities based on Level 3 inputs, which were unobservable (see Note 2—Accounting Policies, Fair value of financial instruments). These inputs included our estimate of future revenues, operating margins, discount rates, royalty rates, and assumptions about the relative competitive environment.

The fair values of the assets acquired and liabilities assumed at the acquisition date are as follows (in thousands):
Purchase Price
Fair Value
Cash paid, net of cash acquired
$
1,143

Allocation
 
Accounts receivable, net
$
399

Inventories, net
1,033

Prepaids and other current assets
29

Property and equipment
154

Intangible assets
653

Goodwill
3,376

Accounts payable and accrued liabilities
(1,432
)
Long-term debt, net
(3,069
)
Total net assets, net of cash acquired
$
1,143

            
4. ACCRUED LIABILITIES

Accrued liabilities consist of the following (in thousands):
 
March 31,
2019
 
December 31,
2018
 
 
 
 
Accrued compensation and other related costs
$
15,162

 
$
12,099

Accrued loss contingencies
11,088

 
10,940

Allowance for returns
11,036

 
15,261

Sales and other taxes payable
10,543

 
9,923

Accrued marketing expenses
10,385

 
14,150

Accounts payable accruals
10,172

 
15,872

Accrued freight
7,058

 
5,343

Other accrued expenses
5,780

 
4,270

Total accrued liabilities
$
81,224

 
$
87,858



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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 ("High Bench Loan"), in connection with our acquisition of Mac Warehouse, LLC. Under the amended agreement, the loan carries an annual interest rate of 11.0% and a default rate of 18.0%. The High Bench Loan is subject to monthly interest only payments with the remaining principal amount and any then unpaid interest due and payable on April 18, 2020. The High Bench Loan is subject to mandatory prepayment under certain circumstances, such as a change-in-control of the business, and is prepayable at our election at any time without penalty or premium. There are no financial covenants associated with the High Bench Loan. At March 31, 2019, our outstanding balance on the High Bench Loan was $3.1 million.

Letters of credit

At March 31, 2019 and December 31, 2018, letters of credit totaling $280,000 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 March 31, 2019, $59,000 was outstanding and $941,000 was available under the Purchasing Card. At December 31, 2018, $48,000 was outstanding and $952,000 was available under the Purchasing Card.


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6. LEASES

We have operating and finance leases for warehouses, office space, data centers, and certain equipment. Our leases have remaining lease terms of 1 year to 12 years, some of which may include options to extend the leases perpetually, and some of which may include options to terminate the leases within 1 year. We note our finance leases are immaterial to our financial statements as a whole and thus are not discussed below.

The following table provides a summary of leases by balance sheet location as of March 31, 2019 (in thousands):
 
March 31, 2019
Operating right-of-use assets
$
37,262

Operating lease liability - current
5,726

Operating lease liability - non-current
36,108


The components of lease expenses for the three months ended March 31, 2019 were as follows (in thousands):
 
Three months ended March 31, 2019
Operating lease cost
$
2,505

Short-term lease cost
34

Variable lease cost
528


The following tables provides a summary of other information related to leases for the three months ended March 31, 2019 (in thousands, apart from weighted-average lease term and weighted average discount rate):
 
Three months ended March 31, 2019
Cash paid for amounts included in the measurement of lease liabilities:
 
Operating cash flows from operating leases
$
(2,018
)
Right-of-use assets obtained in exchange for new operating lease liabilities
$
7,961

Weighted-average remaining lease term - operating leases
7.27 years

Weighted-average discount rate - operating leases
8
%

Maturity of lease liabilities under our non-cancellable operating leases as of March 31, 2019, are as follows (in thousands):
Payments due by period
 
 
2019 (Remainder)
 
$
6,847

2020
 
7,531

2021
 
7,694

2022
 
7,580

2023
 
6,678

Thereafter
 
19,571

Total lease payments
 
$
55,901

Less interest
 
(14,067
)
Present value of lease liabilities
 
$
41,834

 

As of March 31, 2019, we have an additional operating lease for office space, that has not yet commenced with future lease payments expected of $1.9 million. This operating lease will commence in the second quarter of 2019 with a lease term of 8 years.

Information for our leases for the year ended December 31, 2018 under ASC Topic 840, Leases, follows for comparative purposes.


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Minimum future payments under all operating leases as of December 31, 2018, were as follows (in thousands):
Payments due by period
 
 
2019
 
$
8,822

2020
 
7,414

2021
 
7,654

2022
 
7,579

2023
 
6,677

Thereafter
 
19,571

Total lease payments
 
$
57,717


Our subsidiary, tZERO, commenced a new lease subsequent to December 31, 2018. We have included the future lease payments associated with this lease in the table above.

7. COMMITMENTS AND CONTINGENCIES
 
Legal proceedings and contingencies

From time to time, we are involved in litigation concerning consumer protection, employment, intellectual property, claims under the securities laws, and other commercial matters related to the conduct and operation of our business and the sale of products on our Website. In connection with such litigation, we have been in the past and we may be in the future subject to significant damages. In some instances, other parties may have contractual indemnification obligations to us. However, such contractual obligations may prove unenforceable or non-collectible, and if we cannot enforce or collect on indemnification obligations, we may bear the full responsibility for damages, fees, and costs resulting from such litigation. We may also be subject to penalties and equitable remedies that could force us to alter important business practices. Such litigation could be costly and time consuming and could divert or distract our management and key personnel from our business operations. Due to the uncertainty of litigation and depending on the amount and the timing, an unfavorable resolution of some or all of such matters could materially affect our business, results of operations, financial position, or cash flows. The nature of the loss contingencies relating to claims that have been asserted against us are described below.

On September 23, 2009, SpeedTrack, Inc. sued us along with 27 other defendants in the United States District Court in the Northern District of California. We are alleged to have infringed a patent covering search and categorization software. We believe that certain third-party vendors of products and services sold to us are contractually obligated to indemnify us, and we have tendered defense of the case to an indemnitor who accepted the defense. On April 21, 2016, the court entered an order partially dismissing the claims against us. On May 4, 2016, the plaintiff filed an amended complaint, and we filed our answer. No estimate of the possible loss or range of loss can be made. We intend to vigorously defend this action and pursue our indemnification rights with our vendors.

On February 11, 2013, RPost Holdings, Inc., RPost Communications Limited, and RMail Limited, filed suit against us in the United States District Court in the Eastern District of Texas for infringement of patents covering products and services that verify the delivery and integrity of email messages. We tendered defense of the case to an indemnitor who accepted the defense. No estimate of the possible loss or range of loss can be made. We intend to vigorously defend this action and pursue our indemnification rights with our vendors.

On September 20, 2018, a jury returned a verdict against us in our Delaware unclaimed property case, which is expected to result in a judgment against us in the amount of approximately $7.3 million (for certain unredeemed gift card balances, treble damages, and penalties) plus attorneys’ fees and costs. Our estimated liability for these amounts was included in Accrued liabilities at March 31, 2019. The expense associated with these litigation charges was included in general and administrative expense in our consolidated statement of operations for the year ended December 31, 2018. William French ("French") and the State of Delaware ("Delaware") sued us, along with numerous other defendants, in the Superior Court of the State of Delaware for alleged violations of Delaware's unclaimed property laws. French and Delaware alleged that we knowingly refused to fulfill obligations under Delaware's Abandoned Property Law by failing to report and deliver unclaimed gift card funds to the State of Delaware, and knowingly made, used or caused to be made or used, false statements and records to conceal, avoid or decrease an obligation to pay or transmit money to Delaware in violation of the Delaware False Claims and Reporting Act. We intend to file an appeal once the judgment has been entered by the court.


27


In February 2018, the Division of Enforcement of the SEC informed tZERO and subsequently informed us that it is conducting an investigation and requested that we and tZERO voluntarily provide certain information and documents related to tZERO and the tZERO security token offering in connection with its investigation. In December of 2018, we received a follow-up request from the SEC expanding the scope of the investigation into certain public statements made by us. We are cooperating fully with the SEC in connection with its investigation.

tZERO's broker-dealer subsidiaries are, and any broker-dealer subsidiaries that it acquires or forms in the future will be, subject to extensive regulatory requirements under federal and state laws and regulations and self-regulatory organization ("SRO") rules. Each of SpeedRoute LLC ("SpeedRoute") and PRO Securities LLC ("PRO Securities") is registered with the SEC as a broker-dealer under the Exchange Act and in the states in which it conducts securities business and is a member of FINRA and other SROs (as applicable). In addition, PRO Securities owns and operates the PRO Securities ATS, which is registered with the SEC as an alternative trading system. Each of SpeedRoute and PRO Securities is subject to regulation, examination, investigation, and disciplinary action by the SEC, FINRA, and state securities regulators, as well as other governmental authorities and SROs with which it is registered or licensed or of which it is a member. Moreover, as a result of tZERO's projects seeking to apply distributed ledger technologies to the capital markets, tZERO's subsidiaries have been, and remain involved in, ongoing oral and written communications with regulatory authorities. As previously disclosed, tZERO's broker-dealer subsidiaries are currently undergoing various examinations, inquiries, and/or investigations undertaken by various regulatory authorities; as appropriate or required, we will provide further information to such regulatory authorities regarding such matters. Any failure by tZERO's broker-dealer subsidiaries to satisfy regulatory authorities that they are in compliance with all applicable rules and regulations could have a material adverse effect on tZERO and on us.
 
On January 31, 2019, a putative class action lawsuit was filed against us in the United States District Court, Southern District of New York, alleging that our website violates the Americans with Disabilities Act ("ADA") in addition to other New York specific laws, because it is not accessible to blind and visually impaired people. No estimate of the possible loss or range of loss can be made. We intend to vigorously defend this action.
 
On March 15, 2019, Consolidated Transaction Processing, LLC, filed suit against us in the United States District Court for the District of Delaware. We are alleged to have infringed patents covering electronic transaction processing methods. No estimate of the possible loss or range of loss can be made. We intend to vigorously defend this action and pursue any indemnification rights that exist with our vendors.

We establish liabilities when a particular contingency is probable and estimable. At March 31, 2019 and December 31, 2018, we have accrued $10.6 million and $10.3 million, which are included in Accrued liabilities in our consolidated balance sheets. It is reasonably possible that the actual losses may exceed our accrued liabilities.

8. INDEMNIFICATIONS AND GUARANTEES
 
During our normal course of business, we have made certain indemnities, commitments, and guarantees under which we may be required to make payments in relation to certain transactions. These indemnities include, but are not limited to, indemnities to various lessors in connection with facility leases for certain claims arising from such facility or lease, the environmental indemnity we entered into in favor of the lenders under our prior loan agreements, customary indemnification arrangements in underwriting agreements and similar agreements, and indemnities to our directors and officers to the maximum extent permitted under the laws of the State of Delaware. The duration of these indemnities, commitments, and guarantees varies, and in certain cases, is indefinite. In addition, the majority of these indemnities, commitments, and guarantees do not provide for any limitation of the maximum potential future payments we could be obligated to make. As such, we are unable to estimate with any reasonableness our potential exposure under these items. We have not recorded any liability for these indemnities, commitments, and guarantees in the accompanying consolidated balance sheets. We do, however, accrue for losses for any known contingent liability, including those that may arise from indemnification provisions, when future payment is both probable and reasonably estimable.

9. STOCKHOLDERS' EQUITY

Common Stock

Each share of common stock has the right to one vote. The holders of common stock are also entitled to receive dividends declared by the Board of Directors out of funds legally available, subject to prior rights of holders of all classes of

28


stock outstanding having priority rights as to dividends. No dividends have been declared or paid on our common stock through March 31, 2019.

Preferred Stock

Each share of Series A Preferred and each share of Series B Preferred (collectively the "preferred shares") is intended to have voting and dividend rights similar to those of one share of common stock. Preferred shares rank senior to common stock with respect to dividends. Holders of the preferred shares will be entitled to an annual cash dividend of $0.16 per share, in preference to any dividend payment to the holders of the common stock, out of funds of the Company legally available for payment of dividends and subject to declaration by our Board of Directors. Holders of the preferred shares are also entitled to participate in any cash dividends we pay to the holders of the common stock and are also entitled to participate in non-cash dividends we pay to holders of the common stock, subject to potentially different treatment if we effect a stock dividend, stock split, or combination of the common stock. There are no arrearages in cumulative preferred dividends. We declared and paid a cash dividend of $0.16 per share on our preferred stock during 2017 and 2018.

Neither the Series A Preferred nor Series B Preferred is required to be converted into or exchanged for shares of our common stock or any other entity; however, at our sole discretion, we may convert the Series A Preferred shares into Series B Preferred shares at any time on a one-to-one basis. Until the third anniversary of the original issuance date, we may redeem, at our discretion, both the Series A and Series B Preferred shares for an amount equal to the highest of the following: (1) the subscription price plus any accrued but unpaid dividends, (2) 105% of the average trading price of our common stock during a five-trading-day period and (3) 105% of the average trading price of the series of preferred shares during the same five-day-trading period. In the event of any liquidation, any amount available for distribution to stockholders after payment of all liabilities will be distributed proportionately, with each share of Series A Preferred and each share of Series B Preferred being treated as though it were a share of our common stock.

JonesTrading Sales Agreement

In August 2018, we entered into a sales agreement with JonesTrading Institutional Services LLC ("JonesTrading"), under which we conducted "at the market" public offerings of our common stock from time to time. Under the sales agreement, JonesTrading, acting as our agent, 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 expect to do so from time to time. We will pay JonesTrading up to a 2.0% sales commission on all sales. The sales agreement contemplates sales of up to $150 million of our common stock over a period of up to three years. As of March 31, 2019, we had sold 5,097,410 shares of our common stock pursuant to the sales agreement and have received $134.5 million in proceeds, net of $3.1 million of offering costs, including commissions paid to JonesTrading. During the quarter ended March 31, 2019, we sold shares of common stock for $39.9 million, net of offering expenses (including commissions), of which $9.0 million was recorded as a receivable at March 31, 2019 and collected shortly thereafter. The average gross price per share of stock sold pursuant to the sales agreement during the quarter ended March 31, 2019 was $18.25. We sold the remaining capacity under the sales agreement with JonesTrading (745,737 shares) the first week in April 2019, raising additional gross proceeds of $12.4 million.

tZERO Tokens

On December 18, 2017, tZERO launched an offering (the "security token offering") of the right to acquire tZERO Preferred Equity Tokens (the "tZERO Security Token") through a Simple Agreement for Future Equity ("SAFE"). The security token offering closed on August 6, 2018, and on October 12, 2018 tZERO issued the tZERO Security Tokens in settlement of the SAFEs. tZERO Security Token holders have the right to, prior to distributing earnings to tZERO common shareholders, a noncumulative dividend equal to 10% of tZERO's consolidated Adjusted Gross Revenue (as defined by the security token offering documents) for the most recently completed fiscal quarter, if declared by tZERO's Board of Directors, to be paid out of funds lawfully available on a quarterly basis. tZERO Security Token holders are not entitled to participate in any dividends paid to the holders of tZERO's common stock, have no rights to vote, and have no rights to the undistributed earnings of tZERO and are not entitled to any utility functionality as part of the tZERO Security Tokens. Any remaining undistributed earnings or losses of tZERO for a period shall be allocated to the noncontrolling interest held by the tZERO Security Token holders based on the contractual participation rights of the security to share in those earnings as if all the earnings for the period had been distributed and the effect will be reflected in determining net income/(loss) per share under the two-class method. In the event of any liquidation, dissolution or winding up of tZERO, the tZERO Security Token holders will be entitled to the limited preferential liquidation rights equal to USD $0.10 per token to the extent funds are available.


29


At December 31, 2018, cumulative proceeds since December 18, 2017 from the security token offering totaling $104.8 million, net of $22.0 million of withdrawals, have been classified as a component of noncontrolling interest within our consolidated financial statements. As of December 31, 2018, tZERO incurred $21.5 million of offering costs associated with the security token offering that are classified as a reduction in proceeds within noncontrolling interest of our consolidated financial statements. During the three months ended March 31, 2018, proceeds from the security token offering were $92.9 million, net of $11.4 million of withdrawals. During the three months ended March 31, 2018, tZERO incurred offering costs of $16.0 million.

Warrants

On November 8, 2017, we issued warrants to purchase up to a combined aggregate of 3,722,188 shares of our common stock to two purchasers in privately negotiated transactions, for an aggregate purchase price of $6.5 million, net of issuance costs. The exercise price for the warrants was $40.45 per share of common stock. On December 29, 2017, one of the warrant holders exercised its warrant in full and purchased a total of 2,472,188 shares of common stock for $100.0 million. On January 17, 2018, the other warrant holder exercised its warrant in full and purchased 1,250,000 shares of common stock for $50.6 million.

GSR Agreement

In August 2018, Overstock signed a Token Purchase Agreement with GSR Capital Ltd., a Cayman Islands exempted company ("GSR"). The Token Purchase Agreement sets forth the terms on which GSR agreed to purchase, for $30 million, on May 6, 2019 or such other date as may be agreed by the parties, security tokens at a price of $6.67 per security token. On May 8, 2019, the parties agreed to replace the Token Purchase Agreement with an executed Investment Agreement under which GSR purchased 508,710 shares of tZERO which represents approximately 0.5% of the issued and outstanding Common Stock of tZERO. In exchange, GSR agreed to transfer to tZERO a total $5.0 million in consideration, consisting of $1.0 million U.S. dollars, $1.0 million U.S. dollars' worth of Chinese Renminbi, and securities traded on the Hong Kong Stock Exchange with a market value of $3.0 million U.S. dollars.
    
10. STOCK-BASED AWARDS
 
We have equity incentive plans that provide for the grant to employees and board members of stock-based awards, including stock options, and restricted stock. Employee accounting applies to awards granted by the Company or subsidiary in the company or subsidiary's shares only to its own employees, respectively. Stock-based compensation expense was as follows (in thousands):
 
Three months ended
March 31,
 
2019
 
2018
Total stock-based compensation expense
$
3,985

 
$
6,435


Overstock restricted stock awards

The Overstock.com, Inc. Amended and Restated 2005 Equity Incentive Plan provides for the grant of restricted stock units and other types of equity awards of the Company to our officers, board members and employees. These restricted stock awards generally vest over three years at 33.3% at the end of the first year, 33.3% at the end of the second year and 33.3% at the end of the third year; subject to the recipient's continuing service to us. In addition to our traditional equity awards, during the three months ended March 31, 2019, we granted 502,765 restricted stock awards with a cumulative grant date fair value of $8.6 million which vest over a one-year period.

The cost of restricted stock units is determined using the fair value of our common stock on the date of the grant and compensation expense is either recognized on a straight-line basis over the vesting schedule or on an accelerated schedule when vesting of restricted stock awards exceeds a straight-line basis. The cumulative amount of compensation expense recognized at any point in time is at least equal to the portion of the grant date fair value of the award that is vested at that date.


30


The following table summarizes restricted stock award activity during the three months ended March 31, 2019 (in thousands):
 
Three months ended
March 31, 2019
 
Units
 
Weighted
Average
Grant Date
Fair Value
Outstanding—beginning of year
559

 
$
44.08

Granted at fair value
960

 
17.92

Vested
(242
)
 
35.89

Forfeited
(60
)
 
21.62

Outstanding—end of period
1,217

 
$
26.19


Medici Ventures stock options
 
The Medici Ventures, Inc. 2017 Stock Option Plan provides for the grant of options to employees and directors of and consultants to Medici Ventures to acquire up to approximately 10% of the authorized shares of Medici Ventures' common stock. During the three months ended March 31, 2019, Medici Ventures granted 25,000 stock options with a cumulative grant date fair value of $2.2 million which vest over a three year period.

tZERO equity awards

The tZERO.com 2017 Equity Incentive Plan provides for grant of options to employees and directors of and consultants to tZERO to acquire up to 5% of the authorized shares of tZERO's common stock. During the three months ended March 31, 2019, tZERO granted awards to acquire 20,000 shares of its stock with a cumulative grant date fair value of $5,000 which will be expensed on a straight-line basis over the vesting period of two to three years.
 
11. OTHER INCOME (EXPENSE), NET

Other income (expense), net consisted of the following (in thousands):
 
 
Three months ended
March 31,
 
 
2019
 
2018
Impairment of and loss on equity securities
 
$
(4,602
)
 
$
103

Allowance on notes receivable
 
(1,237
)
 

Loss on sale of equity securities
 
(977
)
 

Other
 
544

 
(112
)
Total other income (expense), net
 
$
(6,272
)
 
$
(9
)


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12. BUSINESS SEGMENTS

Segment information has been prepared in accordance with ASC Topic 280 Segment Reporting. As described in Note 1—Basis of Presentation, we have recast our segment information to conform with current year presentation. We determined our segments based on how we manage our business. In the fourth quarter of 2018, we completed our review of our segment reporting and in light of a strategic shift in our Chief Operating Decision Maker's long-term strategic focus for our organization, we no longer consider the split of retail direct and retail partner as a distinct and relevant measure of our business. Accordingly, Direct and Partner are no longer considered separate reportable segments but are included under Retail in our Business Segment disclosures. Beginning in the first quarter of 2019, we began allocating corporate support costs (administrative functions such as finance, human resources, and legal) to our operating segments based on their estimated usage and based on how we manage our business. Comparative prior year information has not been recast and as a result our corporate support costs for those comparative prior periods remain allocated to our Retail segment. Our Medici business includes one reportable segment, tZERO. We use pre-tax net income (loss) as the measure to determine our reportable segments. As a result, the remainder of our Medici business is not significant as compared to our Retail and tZERO segments. Our Other segment consists of Medici Ventures' remaining operations and the remainder of our unallocated corporate support costs (administrative functions such as finance, human resources, and legal).

Our Retail segment primarily consists of amounts earned through e-commerce sales through our Website. 

Our tZERO segment primarily consists of amounts earned through securities transactions through our broker-dealers and costs incurred to execute our tZERO business initiatives.

We do not allocate assets between our segments for our internal management purposes, and as such, they are not presented here. There were no significant inter-segment sales or transfers during the three months ended March 31, 2019 and 2018.

The following table summarizes information about reportable segments for three months ended March 31, 2019 and 2018 (in thousands):

 
Retail
 
tZERO
 
Other
 
Total
2019
 
 
 
 
 
 
 

Revenue, net
$
362,625

 
$
4,496

 
$
608

 
$
367,729

Cost of goods sold
290,640

 
3,357

 
608

 
294,605

Gross profit
$
71,985

 
$
1,139

 
$

 
$
73,124

Operating expenses (1)
85,336

 
15,553

 
8,253

 
109,142

Interest and other income (expense), net (2)
135

 
(963
)
 
(5,168
)
 
(5,996
)
Pre-tax loss
$
(13,216
)
 
$
(15,377
)
 
$
(13,421
)
 
(42,014
)
Provision for income taxes
 
 
 
 
 
 
878

Net loss (3)
 
 
 
 
 
 
$
(42,892
)
 
 
 
 
 
 
 
 
2018
 
 
 
 
 
 
 

Revenue, net
$
439,996

 
$
4,852

 
$
483

 
$
445,331

Cost of goods sold
347,580

 
3,399

 
483

 
351,462

Gross profit
$
92,416

 
$
1,453

 
$

 
$
93,869

Operating expenses
125,532

 
19,959

 
2,772

 
148,263

Interest and other income (expense), net (2)
(455
)
 
453

 
(337
)
 
(339
)
Pre-tax loss
$
(33,571
)
 
$
(18,053
)
 
$
(3,109
)
 
(54,733
)
Benefit from income taxes
 
 
 
 
 
 
(277
)
Net loss (3)
 
 
 
 
 
 
$
(54,456
)

__________________________________________
(1)
 — Corporate support costs have been allocated $12.6 million, $1.8 million, and $3.6 million to Retail, tZERO, and Other, respectively. Unallocated corporate support costs of $1.8 million are included in Other.

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(2)
 — Excludes intercompany transactions eliminated in consolidation, which consist primarily of service fees and interest. The net amounts of these intercompany transactions were $415,000 and $2.0 million for the three months ended March 31, 2019 and 2018.
(3)
 — Net income (loss) presented for segment reporting purposes is before any adjustments attributable to noncontrolling interests.
    
For the three months ended March 31, 2019 and 2018, substantially all of our revenues were attributable to customers in the United States. At March 31, 2019 and December 31, 2018, substantially all our property and equipment were located in the United States.

13. BROKER DEALERS
 
tZERO wholly owns each of two broker dealers, SpeedRoute and PRO Securities, which we acquired in January 2016.

SpeedRoute is an electronic, agency-only FINRA-registered broker dealer that provides connectivity for its customers to U.S. equity exchanges as well as off-exchange sources of liquidity such as dark pools. All of SpeedRoute's customers are registered broker dealers. SpeedRoute does not hold, own or sell securities.

PRO Securities is a FINRA-registered broker dealer that owns and operates the PRO Securities alternative trading system ("ATS"), which is registered with the SEC. An ATS is a trading system that is not regulated as an exchange, but is a licensed venue for matching buy and sell orders. The PRO Securities ATS is a closed system available only to its broker dealer subscribers. PRO Securities does not accept orders from non-broker dealers, nor does it hold, own or sell securities.

SpeedRoute and PRO Securities are subject to the SEC's Uniform Net Capital Rule (SEC Rule 15c3-1), which requires the maintenance of minimum net capital and requires that the ratio of aggregate indebtedness to net capital, both as defined, shall not exceed 15 to 1 and that equity capital may not be withdrawn or cash dividends paid if the resulting net capital ratio would exceed 10 to 1. At March 31, 2019, SpeedRoute had net capital of $1,112,135, which was $1,000,903 in excess of its required net capital of $111,232 and SpeedRoute's net capital ratio was 1.5 to 1. At March 31, 2019, PRO Securities had net capital of $87,159 which was $82,159 in excess of its required net capital of $5,000 and PRO Securities net capital ratio was 0.2 to 1. At December 31, 2018, SpeedRoute had net capital of $1,251,579, which was $1,152,854 in excess of its required net capital of $98,725 and SpeedRoute's net capital ratio was 1.2 to 1. At December 31, 2018, PRO Securities had net capital of $13,958, which was $8,958 in excess of its required net capital of $5,000 and PRO Securities net capital ratio was 2 to 1.

SpeedRoute and PRO Securities did not have any securities owned or securities sold, not yet purchased at March 31, 2019 and December 31, 2018, respectively.


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Special Note Regarding Forward-Looking Statements
This Report on Form 10-Q and the documents incorporated herein by reference, as well as our other public documents and statements our officers and representatives may make from time to time, contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements relate to our financial condition, liquidity, results of operations, earnings outlook and prospects. You can find many of these statements by looking for words such as "may," "would," "could," "should," "will," "expect," "anticipate," "predict," "project," "potential," "continue," "contemplate," "seek," "assume," "believe," "intend," "plan," "forecast," "goal," "estimate," or other similar expressions which identify these forward-looking statements. These forward-looking statements are not historical facts, and are based on current expectations, estimates and projections about our industry and business, and on management's beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond our control. Accordingly, you are cautioned that any such forward-looking statements are not guarantees of future performance and are subject to assumptions, risks and uncertainties that are difficult to predict, and that actual results may be materially different from the results expressed or implied by any of our forward-looking statements. We claim the protection of the safe harbor provided by the Private Securities Litigation Reform Act of 1995, as amended, for all such forward-looking statements.

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Unless otherwise required by law, we also disclaim any obligation to update our view of any such risks or uncertainties or to announce publicly any revisions to any forward-looking statements made or incorporated by reference in this report. A number of important factors could cause actual results to differ materially from those indicated by the forward-looking statements, including the risks set forth in the "Risk Factors" section of this report, and the risks described in our Annual Report on Form 10-K for the year ended December 31, 2018. Our forward-looking statements include all statements other than statements of historical fact including, without limitation, all statements regarding:
our strategies and plans for our retail business and our Medici businesses, including our tZERO initiatives;
the possibility that we will sell or attempt to sell our retail business or pursue or attempt to pursue one or more other strategic alternatives that could change our business dramatically, as well as the possibility that we will determine not to sell or attempt to sell our retail business or pursue any other strategic alternative at all in the foreseeable future;
the possibility that we may sell our retail business and all statements about the potential effects of any such sale;
whether we would or would not submit any sale of our retail business to a vote of our stockholders;
whether we would or would not distribute any proceeds of any sale of our retail business to our stockholders by any means or use those proceeds in our blockchain initiatives;
our expectations regarding the costs, benefits and risks of Medici Ventures' and tZERO's initiatives, including their acquisitions or purchases of interests in other companies;
potential negotiated equity investments in Overstock and/or tZERO, including the timing of such investments and their likelihood of closing on the agreed upon time frames, if at all;
the plans of tZERO and Medici Ventures and the costs, benefits and risks of their initiatives, including those of tZERO's ownership of SpeedRoute and PRO Securities;
our expectations regarding the costs, benefits and risks of the tZERO security token offering completed in 2018;
our expectations regarding the costs, benefits and risks of our efforts and plans to advertise or offer other additional businesses, innovations and projects that we or our subsidiaries may engage in, offer or advertise in the future;
our expectations regarding Medici Land Governance Inc., a newly-formed public benefit corporation;
our efforts to improve our natural search results in our retail business;
our future operating or financial results, or other GAAP or non-GAAP financial measures or amounts or anticipated changes in any of them;
our capital requirements and our ability to fund them;
the adequacy of our liquidity and our ability, if any, to increase our liquidity or capital resources;
tZERO's plans, including without limitation its plans regarding its Token Trading Systems, as well as its joint venture with Box Digital;
our plans and expectations regarding the costs, benefits, and risks of attempting to develop technology applications including applications using or relating to blockchain technology and our plans to commercialize any of these potential applications;
the competition we currently face and anticipate;
the effects of current and future government regulation;
our expectations for our international sales efforts and the anticipated results of our international operations;
our plans for further changes to our business;
our expectations regarding our emphasis on home and garden product offerings;
our expectations regarding our potential liabilities or exposure to claims under Delaware's Abandoned Property Law;
our expectations regarding the actual costs of our employees' health insurance claims for which we may be liable; and
our other statements about the anticipated benefits and risks of our business and plans.
Further, in some cases, you can identify forward-looking statements by terminology such as may, will, could, should, likely, expect, plan, seek, intend, anticipate, project, believe, estimate, predict, potential, goal, strategy, future or continue, the negative of such terms or other comparable terminology. These statements are only predictions. Actual events or results may differ materially from those contemplated by our forward-looking statements for a variety of reasons, including among others:
any changes we may make to our business as a result of our current ongoing review of potential strategic alternatives, which could involve a sale of our retail business and/or additional equity or debt financings;
the possibility that we may sell our retail business and retain the after-tax proceeds of the sale for use in our blockchain initiatives, which would result in our stockholders owning equity interests in a publicly-held

34


corporation seeking to develop entirely new businesses and revenue streams, without the benefits of our current retail business and the significant annual net revenues that it generates, but with most if not all of the expenses of operating a publicly-held corporation;
the potentially substantial corporate level income tax expense we could incur if we were to sell our retail business in a taxable transaction;
the possibility that our well-publicized review of potential strategic alternatives including the potential sale of our retail business may distract our management and other employees, may cause members of our management and/or other key employees to seek employment elsewhere, and may have adverse effects on our business and financial results;
the technical, operational, financial, regulatory, legal, reputational, marketing and other obstacles we face in trying to create a profitable business from our blockchain initiatives;
our ability to reach a definitive agreement or complete a capital raising transaction for tZERO on the terms contemplated by the previously-disclosed memorandum of understanding we signed with GSR Capital and Makara Capital in early 2019;
the possibility that the proceeds of the security token offering completed by tZERO in 2018 might be treated as income to us for federal income tax purposes;
difficulties we have encountered and continue to encounter with changes that Google has made to its natural search engine algorithms, which have periodically resulted in lower rankings of our products and may continue to do so, and future changes that Google and other search engine companies may make to their natural search engine algorithms, which may have similar effects on us;
increasing competition, including from Amazon, from well‑funded companies willing to incur substantial losses in order to build market share, and from others including competitors with delivery capabilities that we cannot currently match and do not expect to be able to match in the foreseeable future;
difficulties we may encounter in connection with our efforts to offer services to our customers outside of our retail business;
difficulties, including expense and any operational or regulatory issues we may encounter in connection with tZERO or its subsidiaries;
technical, operational, regulatory or other difficulties we may encounter with our Medici or tZERO blockchain and financial technology initiatives, including any difficulties we may have marketing any products or services tZERO may offer, whether due to lack of market size or acceptance or as a result of competition from any of the numerous competitors seeking to develop competing technologies or systems or as a result of patents that may be granted to other companies or persons, and losses we may continue to incur in connection with our Medici and tZERO blockchain and technology initiatives;
the difficulties tZERO will face in attempting to generate revenues from blockchain-based applications of any nature, including its potential DLR software product;
impairment charges we may recognize with respect to assets or businesses that we, Medici Ventures or tZERO have acquired or may acquire;
any liability or expense we may incur as a result of our interests in other companies, whether as a result of regulatory issues or otherwise;
any downturn in the U.S. housing industry or other changes in U.S. and global economic conditions or U.S. consumer spending;
the imposition of tariffs or occurrence of other factors that increase the price of importing into the U.S. the types of merchandise we sell in our retail business;
modifications we may make to our business model from time to time;
the mix of products purchased by our customers and changes to that mix;
any claims we may face regarding cyber security issues or data breaches or difficulties we encounter regarding Internet or other infrastructure or communications impairment problems or the costs of preventing or responding to any such problems;
any problems with or affecting our payment card processors, including cyber-attacks, Internet or other infrastructure or communications impairment or other events that could interrupt the normal operation of the payment card processors or any difficulties we may have maintaining compliance with the rules of the payment card processors;
the possibility that we will be unable to raise additional capital or obtain financing adequate to enable us to continue our operations;
problems with or affecting the facility where substantially all of our computer and communications hardware is located or other problems that result in the unavailability of our Website or reduced performance of our transaction systems;

35


any losses or issues we may encounter as a consequence of accepting or holding bitcoin or other cryptocurrencies, whether as a result of regulatory, tax or other legal issues, technological issues, value fluctuations, lack of widespread adoption of bitcoin or other cryptocurrencies as an acceptable medium of exchange or otherwise;
any difficulties we may encounter as a result of our reliance on numerous third parties that we do not control for the performance of critical functions material to our business;
difficulties we may encounter in connection with our efforts to emphasize our home and garden product offerings and to brand ourselves as a home and garden shopping destination, including the risk that our sales of home and garden product offerings could decrease substantially as a result of a significant downturn in some or all of the U.S. housing market;
difficulties we may encounter in connection with our efforts to expand internationally, including claims we may face and liabilities we may incur in connection with those efforts;
adverse results in legal proceedings, investigations or other claims;
any difficulties we may have optimizing our warehouse operations;
any decrease in the volume of retail sales, particularly in home goods, and the occurrence of any event that would adversely affect e-commerce or discourage or prevent consumers from shopping online or via mobile apps;
the possibility that our liability for our employees' health insurance claims increases as a result of more claims or larger claims than we expect and/or increases in the costs of healthcare generally; and
the other risks described in this report or in our other public filings.

In evaluating all forward-looking statements, you should specifically consider the risks outlined above or elsewhere in this report and the risks described in our Report on Form 10-K for the year ended December 31, 2018 filed with the SEC, especially under the headings "Risk Factors," "Legal Proceedings," and "Management's Discussion and Analysis of Financial Condition and Results of Operations." These factors may cause our actual results to differ materially from those contemplated by any forward-looking statement in this report. Although we believe that our expectations reflected in the forward-looking statements are reasonable, we cannot guarantee or offer any assurance of future results, levels of activity, performance or achievements or other future events.
Available Information
 
Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and other reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available free of charge through the Investor Relations section of our main website www.overstock.com as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission. Our website and the information contained therein or connected thereto are not a part of or incorporated into this Quarterly Report on Form 10-Q.
 
Overview

We are an online retailer and advancer of blockchain technology. Through our online retail business, we offer a broad range of price-competitive products, including furniture, home decor, bedding and bath, housewares, among other products. We sell our products and services through our Internet websites located at www.overstock.com, www.o.co and www.o.biz (referred to collectively as the "Website"). Although our three websites are located at different domain addresses, the technology and equipment and processes supporting the Website and the process of order fulfillment described herein are the same for all three websites. Our retail business initiatives are described in more detail below under "Our Retail Business".

Our Medici business initiatives seek to develop and advance the concepts of "Government as a Service" and a "Technology Stack for Civilization" by creating or fostering a set of products and solutions that leverage the transparency and immutability of blockchain technology to generate efficiencies and increase security and control in six areas of civilizational necessity: identity management, property rights and management, central banking and currencies, capital markets, supply chains and commerce, and voting systems. Our Medici business initiatives include our wholly-owned subsidiary, Medici Ventures, Inc. ("Medici Ventures"), which conducts the majority of its business through its majority-owned subsidiary tZERO Group, Inc. ("tZERO"), formerly tØ.com, Inc., a financial technology company pursuing potential financial applications of blockchain technologies as well as non-blockchain businesses. Medici Ventures currently holds minority equity interests in several technology companies whose focuses include the areas mentioned above. Our Medici business initiatives are described in more detail below under "Our Medici Business—Medici Ventures" and our tZERO business initiatives are described in more detail below under "Our Medici Business—tZERO".


36


We are considering a range of potential transactions, including a sale of our retail business and additional equity or debt financings. Our Board of Directors continually discusses a variety of potential strategic and financial options and other changes to our business, but has not approved or made any determination to consummate any strategic transaction, and may choose not to do so in the foreseeable future or at all.

Our company, based near Salt Lake City, Utah, was founded in 1997. We launched our initial website in March 1999 and were re-incorporated in Delaware in 2002. As used herein, "Overstock", "Overstock.com", "O.co", "the Company", "we," "our" and similar terms include Overstock.com, Inc. and our majority-owned subsidiaries, unless the context indicates otherwise.

Our Retail Business

Our retail business, through March 31, 2019, generated nearly all of our net revenues. In our retail business, our goal is to provide goods to furnish and accessorize "dream homes" for our target customers—consumers who seek quality, stylish merchandise at bargain prices. At March 31, 2019, we offered 4.9 million products (8.9 million SKUs), of which over 99% were in-line products (products in active production), including more than 25,000 private label products offered under eleven private label brands. We believe that the furniture and home goods market, which is highly fragmented and has traditionally been served by brick and mortar stores, will continue transitioning to online sales, particularly as Millennial consumers (defined as those aged 20-36), who are generally comfortable shopping online, start families and move into new homes. We regularly change our product assortment to meet the evolving preferences of our customers and current trends. Our products include, among others, furniture, home décor including rugs, bedding and bath, home improvement, and kitchen items. We compete primarily based on:

Quality customer experience with an emphasis on price, value, and a wide assortment of products delivered in a personalized format with the convenience of our mobile app, and with the benefits of our award-winning customer care;
Proprietary technologies which we believe help us provide our customers with a quality shopping experience;
Logistics capabilities tailored to the furniture and home goods category and developed over our many years of e-commerce experience;
Long-term mutually beneficial relationships with our partners, which currently number approximately 4,000; and
Our Club O Loyalty Program, which we believe increases customer engagement and retention.

For the quarter ended March 31, 2019, nearly all our retail sales through our Website were from transactions in which we fulfilled orders through our network of approximately 4,000 third-party manufacturers, distributors and other suppliers ("partners") selling on our Website. Our use of the term "partner" does not mean that we have formed any legal partnerships with any of our retail partners. We provide our partners with access to a large customer base and convenient services for order fulfillment, customer service, returns handling, and other services. Our supply chain allows us to ship directly to our customers from our suppliers or from our warehouses. Our retail sales also includes direct sales of our own inventory shipped from our warehouses, including some customer returns of partner products.

During the quarters ended March 31, 2019, 2018 and 2017 our sales were almost entirely to customers located in the United States and no single customer accounted for more than 1% of our total net revenue.

Additional Offerings

We offer additional products or services that may complement our primary retail offerings, but are not significant to our retail revenues. These include:

Our international business where we offer products to customers outside the United States using third party logistics providers;
Worldstock Fair Trade, a store within our Website that offers handcrafted products made by artisans all over the world to help improve the lives of people in emerging economies;
Pet Adoptions, a free service and portal within our Website that leverages our technology to display pets available for adoption from shelters across the United States;
Overstock Hotels, portal within our Website that enables customers to search and book hundreds of thousands of properties worldwide, including big box brands, modern boutiques, and more;

37


Supplier Oasis, a single integration point through which our partners can manage their products, inventory and sales channels, and also obtain multi-channel fulfillment services through our distribution network; and
Businesses advertising products or services on our Website.

Our Retail revenues are seasonal, with revenues historically being the highest in the fourth quarter, which ends December 31, reflecting higher consumer holiday spending. While we had lower sales volume during Q4 2018, we anticipate the trend of higher sales volume during our fourth quarter to continue for the foreseeable future. To the extent possible we maintain supplier relationships and seek new supplier relationships for our retail businesses.

Our Medici Business

Medici Ventures

Medici Ventures' strategy is to develop and advance the concepts of "Government as a Service" and a "Technology Stack for Civilization" by creating or fostering a set of products and solutions that leverage blockchain technology to generate efficiencies and increase security and control in six areas of civilizational necessity: identity management, property rights and management, central banking and currencies, capital markets, supply chains and commerce, and voting systems. A blockchain is a cryptographically secured, distributed infrastructure, or network, which may be accessed and, in some cases, maintained by each member of the network. Medici Ventures has a team of approximately 37 software engineers, developers and other technologists who work in blockchain development and deployment and enterprise level software development and deployment. Medici Ventures provides the services of its software engineers, developers, or other technologists to other blockchain companies. Medici Ventures also owns strategic minority equity interests in several blockchain-related companies, each of which focuses on at least one of the Government as a Service areas mentioned above. Medici Ventures takes an active interest in and holds seats on the boards of some of these companies. These companies include technology companies whose focuses include commercial blockchain applications for identity and social media, property and land, money and banking, capital markets, supply chain, and voting. All of the companies in which Medici Ventures holds strategic equity interests are startup businesses, businesses in the development stage, or businesses with a short operating history. The majority of Medici Ventures' business is its 80% interest in tZERO, which, as described below, is a financial technology company pursuing potential financial applications for blockchain technologies.

tZERO

tZERO is a financial technology company pursuing potential financial applications of blockchain technologies as well as non-blockchain businesses. tZERO’s primary focus at present is on its recent launch of a facility for the trading of digital securities tokens and on its joint venture with BOX Digital Markets LLC ("BOX Digital") intended to develop a U.S. national securities exchange (the "Exchange") with regulatory approvals that would enable the Exchange to trade digital securities.

tZERO continues to identify, evaluate and pursue various opportunities for strategic acquisitions or purchases of interests to add to the services and expertise it offers its customers. Subject to board approval, tZERO's management exercises substantial discretion in identifying appropriate strategic transactions and negotiating the terms of such transactions. Management's determinations are based on numerous financial, strategic and operational assumptions, and there can be no assurance that such assumptions will prove to be true. Moreover, such strategic transactions may fail to produce the benefits expected at the time of tZERO's acquisitions or purchases of interests.

The businesses, products, and services that tZERO is pursuing or contemplating will require substantial additional funding, initially for technology development and regulatory compliance, as well as for working capital, marketing and sales, and other substantial costs of developing new products and businesses in emerging areas of technology. These costs have been and are expected to continue to be material, both to tZERO and to Overstock.

Executive Commentary
 
This executive commentary is intended to provide investors with a view of our business through the eyes of our management. As an executive commentary, it necessarily focuses on selected aspects of our business. This executive commentary is intended as a supplement to, but not a substitute for, the more detailed discussion of our business included elsewhere herein. Investors are cautioned to read our entire "Management's Discussion and Analysis of Financial Condition and Results of Operations," as well as our interim and audited financial statements, and the discussion of our business and risk

38


factors and other information included elsewhere or incorporated in this report. This executive commentary includes forward-looking statements, and investors are cautioned to read "Special Cautionary Note Regarding Forward-Looking Statements."

Revenue decreased 17% in Q1 2019 compared to Q1 2018. This decrease was primarily due to a significant reduction in sales and marketing expenses as part of our effort to return to retail profitability. In January 2018, we shifted our retail strategy to aggressively pursue revenue growth and new customers with a large increase in sales and marketing expenses. We discontinued this strategy in August 2018 and have now returned to a disciplined approach to marketing.

Gross profit in Q1 2019 decreased 22% compared to Q1 2018 primarily as a result of decreased revenue and a decrease to gross margin. Gross margin decreased to 19.9% in Q1 2019, compared to 21.1% in Q1 2018. The decrease in gross margin was primarily due to increased freight costs, partially offset by decreased promotional activities, including coupons and site sales, due to our driving a lower proportion of our sales using such promotions.

Sales and marketing expenses as a percentage of revenue decreased from 17.3% to 9.1% in Q1 2019 as compared to Q1 2018, primarily due to our return to our historical focus on operational efficiency as we have shifted away from our aggressive retail marketing strategy from early 2018. As part of this effort, we significantly reduced spending in the sponsored search, display ads on social media, and television marketing channels.

Technology expenses in Q1 2019 increased $4.1 million compared to Q1 2018 primarily due to a $2.8 million increase in staff-related costs, a $555,000 increase in technology licenses and maintenance costs, and a $538,000 increase in consulting expenses.

General and administrative expenses in Q1 2019 increased $477,000 compared to Q1 2018, primarily due to a $3.1 million increase in consulting expenses, a $2.6 million increase in legal fees, a $1.8 million increase in staff-related costs due to employee severance, and an $820,000 increase in audit and tax preparation fees. These increases were largely offset by a $6.9 million decrease in cryptocurrency losses and a $783,000 decrease in depreciation. The cryptocurrency losses in Q1 2018 were primarily related to a decline in the value of cryptocurrency received during the tZERO STO.

Liquidity

In Q1 2019, our consolidated cash and cash equivalents balance decreased $21.9 million, from $141.5 million to $119.6 million, primarily as the result of cash outflows from operating activities of $51.4 million for the quarter, which was partially offset by cash inflows from the sale of common stock under our "at the market" sales agreement with JonesTrading of $31.0 million, net of offering costs (including commissions).

We continue to seek opportunities for growth in our retail business, through our Medici blockchain and financial technology initiatives, and through other means. As a result of these initiatives, we will continue to incur additional expenses and may purchase interests in, or make acquisitions of, other technologies or businesses. We anticipate that our initiatives may cause us to continue to incur losses in the foreseeable future. These losses, additional expenses, acquisitions or purchases may be material, and, coupled with existing marketing expense trends, and potential strategic changes in our retail business, may lead to increased consolidated losses in some periods, and to reduced liquidity. Additionally, we may recognize additional impairment charges from our ownership interests in other entities.

The balance of our Management's Discussion and Analysis of Financial Condition and Results of Operations provides further information about the matters discussed above and other important matters affecting our business.

39


Results of Operations
 
The following table sets forth our results of operations expressed as a percentage of total net revenue:
 
 
Three months ended
March 31,
 
 
2019
 
2018
 
 
(as a percentage of total net
revenue)
Revenue, net
 
 

 
 

Retail
 
98.6
 %
 
98.8
 %
Other
 
1.4

 
1.2

Total net revenue
 
100.0

 
100.0

Cost of goods sold
 
 
 
 
Retail
 
79.0

 
78.0

Other
 
1.1

 
0.9

Total cost of goods sold
 
80.1

 
78.9

Gross profit
 
19.9

 
21.1

Operating expenses:
 
 
 
 
Sales and marketing
 
9.1

 
17.3

Technology
 
9.6

 
7.0

General and administrative
 
10.9

 
8.9

Total operating expenses
 
29.7

 
33.3

Operating loss
 
(9.8
)
 
(12.2
)
Other income (expense), net
 
(1.6
)
 
(0.1
)
Loss before income taxes
 
(11.4
)
 
(12.3
)
Provision (benefit) from income taxes
 
0.2

 
(0.1
)
Consolidated net loss
 
(11.7
)%
 
(12.2
)%
 
Comparisons of Three Months Ended March 31, 2019 to Three Months Ended March 31, 2018

Revenue
 
The following table reflects our net revenues for the three months ended March 31, 2019 and 2018 (in thousands):
 
 
Three months ended
March 31,
 
 
 
 
 
 
2019
 
2018
 
$ Change
 
% Change
Revenue, net
 
 

 
 

 
 

 
 

Retail
 
$
362,625

 
$
439,996

 
$
(77,371
)
 
(17.6
)%
Other
 
5,104

 
5,335

 
(231
)
 
(4.3
)%
Total revenue, net
 
$
367,729

 
$
445,331

 
$
(77,602
)
 
(17.4
)%

The 17% decrease in total net revenue for the three months ended March 31, 2019, as compared to the same period in 2018, was primarily due to a significant reduction in sales and marketing expenses as part of our effort to return to retail profitability. In January 2018, we shifted our retail strategy to aggressively pursue revenue growth and new customers with a large increase in sales and marketing expenses. We discontinued this strategy in August 2018 and have now returned to a disciplined approach to marketing.

We continue to seek increased participation in our Club O loyalty program, including, in certain instances, by increasing Club O Rewards to our Club O members in lieu of coupons we offer to all customers. For additional information

40


regarding our Club O loyalty program see Item 1 of Part I, "Financial Statements (Unaudited)"—Note 2. Accounting Policies, Club O loyalty program.

The products and product lines we offer, and their respective percentages of our revenue, are based on many factors including customer demand, our marketing efforts, promotional pricing, joint-marketing offered by our suppliers, the types of inventory we are able to obtain and the number of SKUs we offer. These factors change frequently and can affect the mix of the product lines we sell. We have experienced a trend toward our home and garden category in recent years and we have recently focused our marketing and branding efforts towards our home and garden product line. We are also working to increase the number of SKUs we offer. While we do not currently expect any material shifts in our product line mix, the relative amounts of the product lines we sell and the revenue we earn from those product lines are generally an economic result of the factors described above, which may change from time to time.

International net revenues were less than 2% of total net revenues for each of the three months ended March 31, 2019 and 2018.

Change in estimate of average transit times (days)
 
Revenue related to merchandise sales is recognized upon delivery to our customers. 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. 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.
 
The following table shows the effect that hypothetical changes in the estimate of average shipping transit times would have had on the reported amount of revenue and pre-tax income for the three months ended March 31, 2019<