UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
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| ý | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2019
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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
OVERSTOCK.COM, INC.
(Exact name of registrant as specified in its charter)
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| Delaware | | 87-0634302 |
| (State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification Number) |
799 West Coliseum Way Midvale, UT | | 84047 |
| Midvale, | Utah | | 84047 |
| (Address of principal executive offices) | | (Zip code) |
(801) 947-3100 |
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(801) 947-3100
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Exchange Act:
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| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
| Common Stock, $0.0001 par value per share | OSTK | NASDAQ Global Market |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes oý No ýo
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No ý
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. |
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Large accelerated filer o | x | Accelerated filer | Acceleratedo
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Non-accelerated filerx | o | Smaller reporting company | o |
Non-accelerated filer o
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Emerging growth companyo | | 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 has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ý
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. o
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant's executive officers during the relevant recovery period pursuant to §240.10D-1(b). o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No ý
The aggregate market value of voting and non-voting common equity held by non-affiliates of the registrant as of the last business day of the registrant's most recently completed second quarter (June 30, 2019)2022), was approximately $385.9 million$1.1 billion based upon the last sales price reported by Nasdaq. For purposes of this disclosure, shares of Common Stock held by directors and certain officers and by others who may be deemed to be affiliates of the registrant have been excluded. The exclusion of such shares is not intended to, and shall not, constitute a determination as to which persons or entities may be affiliates as that term is defined in the federal securities laws.
There were 40,325,79345,033,198 shares of the Registrant's common stock, par value $0.0001, outstanding on March 6, 2020.February 17, 2023.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information required by Part III of Form 10-K is incorporated by reference to the Registrant's proxy statement for the 20202023 Annual Stockholders Meeting, which will be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year to which this Report relates.
Explanatory Note
Overstock.com, Inc. and our majority-owned subsidiaries ("the Company") holds a minority equity interest in tZERO Group, Inc. ("tZERO") which is accounted for under the equity method under ASC Topic 323, Investments—Equity Method and Joint Ventures as we can exercise significant influence, but not control, over tZERO through holding more than a 20% voting interest. In accordance with Rule 3-09 of Regulation S-X ("Rule 3-09"), we must determine if any of our equity method securities is a "significant subsidiary" under prescribed tests. tZERO did not meet the significant subsidiary test for the years ended December 31, 2021 and 2020 but met the significant subsidiary test for the year ended December 31, 2022. Accordingly, pursuant to Rule 3-09, we are required to provide in this Annual Report on Form 10-K ("Form 10-K") the audited financial statements for tZERO for the period ended December 31, 2022. We have requested the audited consolidated financial statements for the year ended December 31, 2022 from tZERO; however, the audited financial statements are not currently available to us. We rely upon tZERO for their audited financial statements and they are not reasonably available to us since they rest peculiarly within the knowledgeof tZERO, which we do not control. Therefore, in reliance on Rule 12b-21 under the Securities Exchange Act of 1934, as amended, we are omitting the audited consolidated financial statements of tZERO for the year ended December 31, 2022. In response to our request, however, tZERO has provided us with the audited financial statements for tZERO for the years ended December 31, 2021 and 2020 and unaudited limited financial information for year ended December 31, 2022. As a result, we have included in this Form 10-K the separate audited financial statements of tZERO for the years ended December 31, 2021 and 2020, which are filed herewith as Exhibit 99.3, and have also provided summarized financial information for the period ended December 31, 2022 in Note 8—Equity Securities in the "Notes to Consolidated Financial Statements" included in Item 8 of Part II, "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K aggregated with our other significant subsidiaries required by Rule 4-08(g). As a result of including such financial information for tZERO, we do not believe that the omission of the tZERO audited financial statements for year ended December 31, 2022 will have a material impact on a reader’s understanding of our financial condition or our results of operations. We plan to file the audited financial statements for tZERO for the year ended December 31, 2022, once we have them, with an amendment to this Form 10-K.
TABLE OF CONTENTS
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| Part I | |
| Item 1. | | |
| Item 1A. | | |
| Item 1B. | | |
| Item 2. | | |
| Item 3. | | |
| Item 4. | | |
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| Part II | |
| Item 5. | | |
| Item 6. | | |
| Item 7. | | |
| Item 7A. | | |
| Item 8. | | |
| Item 9. | | |
| Item 9A. | | |
| Item 9B. | | |
| Item 9C. | | |
| Part III | |
| Part III | |
| Item 10. | | |
| Item 11. | | |
| Item 12. | | |
| Item 13. | | |
| Item 14. | | |
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| Part IV | |
| Item 15. | | |
| Item 16. | | |
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O, Overstock.com, O.com, and Club O Main Street Revolution,are registered trademarks of Overstock.com, Inc. Overstock and WorldstockMaking Dream Homes Come True are registered trademarks of Overstock.com, Inc. Other service marks, trademarks and trade names which may be referred to herein are the property of their respective owners.
SPECIAL CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Report on Form 10-K and the documents incorporated herein by reference, as well asand our other public documents and statements our officers and representatives may make from time to time, contain forward-looking statements within the meaning of the federal securities laws. These statements are therefore entitled to the protection of the safe harbor provisions of these laws. 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 involve risks and uncertainties and relate to future events or our future financial or operating performance. TheThese forward-looking statements include allare 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 other than statementsare not guarantees of historical fact, including, without limitation, all statements regarding:
our strategiesfuture performance and plans for our retail business, including our expectations regardingare subject to assumptions, risks and uncertainties that are difficult to predict, and that actual results and outcomes may be materially different from the costs, benefits and risks of the initiatives related to our retail business;
the strategies and plans of Medici Ventures and the costs, benefits and risks of its initiatives, including acquisitions or purchases of interests in other companies;
tZERO's plans to develop financial applications of blockchain technology, including its efforts to create technology and invest in entities that support the trading of digital securities, in particular its ownership of SpeedRoute, tZERO ATS, LLC and tZERO Markets and its joint venture with Box Digital;
potential negotiated equity investments in Overstock and/or tZERO;
our expectations regarding the costs, benefits and risks of the TZROP offering;
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 trends in the furniture and home goods market;
our expectations regarding Medici Land Governance Inc., a public benefit corporation;
our efforts to improve our natural search results in our retail business;
our future operating or financial results or other GAAPoutcomes expressed or non-GAAP financial measures or amounts or anticipated changes inimplied by 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;
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• | our expectations regarding our potential sale of additional shares under the Capital on DemandTM Sales agreement;
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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;
our expectations regarding our tax contingencies and our effective tax rate and foreign earnings;
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;
the possibility that we may sell our retail business and all statements about the potential for stockholder approval of any such sale, the potential distribution of proceeds of any such sale, and other effects of any such sale;
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 changesdifficulties we may make to our businessencounter as a result of our current ongoing reviewreliance on third-parties that we do not control for the performance of potential strategic alternatives, which could involve critical functions material to our business, such as carriers, fulfillment partners, and SaaS/IaaS providers;
•any inability to compete successfully against existing or future competitors or to effectively market our business and generate customer traffic;
•a salerecession, other economic downturns, inflation, rising interest rates, our increasing exposure to the U.S. housing industry, or other changes in U.S. and global economic conditions or U.S. consumer spending;
•any increases in the price of importing into the U.S. or transporting to our customers the types of merchandise we sell or other supply chain challenges that limit our ability to deliver merchandise to our customers in a timely manner;
•any inability to attract and/or retain key personnel;
•any inability to generate and maintain unpaid natural traffic to our Website;
•any inability to maintain profitability and/or positive cash flow from operations;
•any negative impact from our workforce working on a remote, in-office, or hybrid schedule;
•any challenges that would result in the event of any loss of functionality or unavailability of our retail business and/Website or additional equity or debt financings;
the possibility that certainreduced performance of our former officerstransaction systems;
•our exposure to cyber security risks, risks of data loss and directors being named in shareholder class action lawsuitsother security breaches;
•the risk that the amount of deferred tax assets we consider realizable could affect management timebe reduced if estimates of future taxable income during the carryforward period are reduced;
•the risk that we may be required to recognize losses relating to our equity method investments;
•the impacts that we would experience if governmental entities or providers of consumer devices and attention and result in significant additional legal expensesinternet browsers further restrict or government enforcement actions;regulate the use of "cookie" tracking technologies;
•the possibilityimpact that current investigations of the Company and/any litigation, claims, or certain of its affiliates by the SEC Division of Enforcementregulatory matters could have a material adverse effect on our business, financial condition, results of operations, and cash flows;
the possibility that our D&O insurance policy cost could substantially increase, through increased self-retention amounts and premium increases, and that coverage under our policy fail to adequately protect us against liability for conduct of our directors and officers;
our significant negative working capital;
the possibility that we will require significantly more capital than we currently have in order to pursue some or all of our business initiatives, and the fact that such capital might not be available to us on attractive terms or at all;
the possibility that we will be unable to generate sufficient cash flow from operations, raise additional capital, or obtain debt or other financing adequate to enable us to continue our operations;
the possibility that changes in management roles and responsibilities, the loss of key personnel, or •any inability to attractoptimize and retain additional personnel could affectoperate our ability to successfully grow our business;distribution center, warehouse, and customer service operations;
the possibility that, if we fail to comply with ongoing Nasdaq listing standards and corporate governance requirements, we could be subject to delisting;
the possibility that future sales or other distributions•negative global economic consequences of our common or preferred stock,global conflict, including the contemplated distributionongoing tensions between the United States and Russia, the United States and China, and other effects of our Series A-1 Preferred stock dividendthe ongoing conflict in the near future, may depress our stock price;Ukraine;
the possibility that we become, or that securities regulatory authorities deem that we have become, an investment company under the Investment Company Act;
the possibility that the options granted by Medici Ventures, tZERO and Medici Land Governance could reduce our effective ownership of each of them significantly;
the possibility of increased regulatory and integration risks resulting from our strategic relationships, joint ventures, purchases of strategic interest in other companies and acquisitions of other companies;
the possibility that we are not able to realize our significant deferred tax assets in the future;
current claims of intellectual property infringement to which we are subject and additional infringement claims to which we may become subject in the future;
•the possibility that we are unable to protect our proprietary technology and to obtain trademark protection for our marks;
the possibility that our business could be harmed by one or more states successfully asserting that•current and future claims of intellectual property infringement to which we are liable for the collection of sales or other taxes for periods prior to the Supreme Court's decision in South Dakota v. Wayfair;subject;
vulnerabilities related to our retail business' dependence on the Internet, our infrastructure and transaction-processing systems;
changes to our marketing costs and strategies;
our exposure to cyber security risks, risks of data loss and other security breaches;
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;
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, including the spread of illness, that increase the price of importing into the U.S. the types of merchandise we sell in our retail business or other supply chain challenges that limit our access to merchandise we sell in our retail business;
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 corporation seeking to develop entirely new businesses and revenue streams, without the benefits of our current retail business and the approximately $1.4 billion it generates in annual net revenues, 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 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;
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;
•any difficulties we may encounter as a result of our reliance on numerous third partiesthird-parties that we do not control for the performance of critical functions material to our business;
the possibility of issuestheir representations regarding product safety, contentcompliance with various laws and quality, and for the proper labelling of products from our suppliers and fulfillment partners;regulations;
the possibility that our insurance coverage and indemnity rights are unable to adequately protect us against loss;
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;
modifications we may make to our business model from time to time;
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;our evolving business practices, including our exit from non-home categories and our continuing expansion into international markets;
the difficulty of evaluating tZERO's ability to generate revenue through its operations due to its limited operating history, and tZERO's failure to generate meaningful revenue from any commercially available blockchain-based applications as of the date of this filing;
the possibility that no additional digital securities will be traded on the tZERO ATS, and that, other than the tZERO ATS, no other operational exchange, alternative trading system or other regulated trading venue will license the tZERO Technology Stack;
any failure of the technology on which tZERO and its subsidiaries rely for their operations to function properly;
the possibility that tZERO Markets does not receive the regulatory approval required to operate its anticipated business;
the extensive regulation of tZERO's subsidiaries, which are or intend to become broker-dealers, two of which currently generate substantially all of tZERO's revenues;
ongoing discussions with and investigations by regulatory authorities of tZERO and its broker-dealer subsidiaries;
our inability to use tZERO's losses to offset taxable income generated by the rest of our U.S. business or conduct a tax-free spin-off;
the possibility that our planned Boston Security Token Exchange (BSTX) will not receive the regulatory approval required to operate;
complex and evolving U.S. and foreign laws and regulations regarding privacy, technology, data protection, and other matters;
•any inability of tZERO to maintain the technology and intellectual property rights which its business, including the tZERO Technology Stack, will likely require;
the substantial competition faced by tZERO from known and unknown competitors, and the possibility that such competitors obtain patents covering technology critical to the operation of the tZERO Technology Stack;
the limitation of tZERO Crypto's business in certain jurisdictions if it is unable to timely receive certain licenses it is in the process of obtaining or due to the regulations applicable to it;
the possibility that tZERO or its technology is the subject of cyber-attacks that expose tZERO to liability and reputational harm and seriously curtail the utilization of tZERO's services or technology and result in claims against tZERO or us;
the dependence of tZERO's core technology on the continued availability of key technology employees of tZERO and its affiliates and of tZERO on its ability to hire, retain and motivate qualified personnel;
the vulnerability of SpeedRoute and tZERO ATS, LLC, and by extension tZERO, to changes in the business and financial condition of, or demand by certain customers for the services of, SpeedRoute and tZERO ATS LLC, due to the percentage of SpeedRoute and tZERO ATS LLC's revenue generated by a small number of major customers;
tZERO's decision to postpone commercialization of the DLR Software, and the possibility that if tZERO does resume commercialization, it is unablePelion Venture Partners to successfully launch, market,manage the Medici Ventures, L.P. fund or sell its DLR Software;
disruptions or harm to tZERO's business due to strategic transactions it makes;
the possibility that the IRS disagrees with our characterization of the TZROP offering completedtZERO, in 2018 by tZERO and the possibility that the related proceeds might be treated as income to us for federal income tax purposes;
the risks of holding and the possibility thatwhich we are unable to sell the TZROP;
the possibility that TZROP becomes subject to registration under the Exchange Act if tZERO has assets above $10 million and more than a statutory minimum number of registered holders;
the possibility that law or regulation may limit the extent to which blockchain technology may be used to enhance securities in the future;
the possibility that regulatory authorities never permit the trading of certain digital securities or the involvement by market participants in their trading or require changes to permit such trading, limiting tZERO's business;
the possibility that digital securities are not widely adoptedlimited partner and have limited users;a direct minority interest, respectively; and
the possibility that some market participants oppose the development of blockchain based systems like those central to tZERO's commercial mission;
the uncertainty of the regulatory regime governing blockchain technologies and the possibility that new regulations or policies materially adversely affect tZERO's business;
the possible slowing or stopping of the development or acceptance of blockchain technologies, digital assets and assets enhanced by blockchain technologies and the possible effects on tZERO's business plans;
the potential negative impact of the price volatility of peer-to-peer digital assets and digital securities
the technical, operational, financial, regulatory, legal, reputational, marketing and other obstacles we face in trying to create a profitable business from our blockchain initiatives;
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 such initiatives 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;
impairment charges we may recognize with respect to assets or businesses that we, Medici Ventures or tZERO have acquired or may acquire;
trading capabilities of the Series A-1 Preferred stock on the tZERO ATS following the Dividend (as defined below):
uncertainty regarding the trading market for the Series A-1 Preferred stock following the Dividend, or any market reactions to such distribution;
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; 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 and in this Report, especially under the headings "Special Cautionary Note Regarding Forward-Looking Statements," "Risk Factors," "Legal Proceedings," and "Management's Discussion and Analysis of Financial Condition and Results of Operations." These factors may cause our actual results and outcomes to differ materially from those contemplated by any forward-looking statement. 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.
Our forward-looking statements contained in this report speak only as of the date of this report and, except as required by law, we undertake no obligation to update forward-looking statements to reflect events or circumstances occurring after the date of this report or any changes in our expectations or any change in any events, conditions or circumstances on which any of our forward-looking statements are based.
PART I
ITEM 1. BUSINESS
The following description of our business contains forward-looking statements relating to future events or our future financial or operating performance that involve risks and uncertainties, as set forth above under "Special Note Regarding Forward-Looking Statements." Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors described in this Annual Report on Form 10-K, including those set forth above in the Special Cautionary Note Regarding Forward-Looking Statements or in Section 1A under the heading "Risk Factors" or elsewhere in this Annual Report on Form 10-K.
Introduction
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,décor, area rugs, bedding and bath, home improvement, outdoor, and housewares,kitchen and dining items, among other products.others. We sell our products and services through our Internet websites located at www.overstock.com, www.o.co, www.overstock.ca, and www.o.bizwww.overstockgovernment.com (referred to collectively as the "Website"). and through our mobile app. Although our threefour 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 threefour websites. Our retail business initiatives are described in more detail below under "Our Retail Business".
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"), a financial technology company pursuing initiatives to develop and commercialize financial applications of blockchain technologies, primarily the development and adoption of digital securities. Our Medici business initiatives seek to create or foster 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: identity management, property rights and management, central banking and currencies, capital markets, supply chains and commerce, and voting systems. 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".
Our company, based near Salt Lake City, Utah, was founded as a Utah limited liability company ("LLC") in 1997, reorganized as a C Corporationcorporation in the State of Utah in 1998, and reincorporated in Delaware in 2002. We launched our initial website in March 1999. As used herein, "Overstock", "Overstock.com", "the Company", "we,""we", "our" and similar terms include Overstock.com, Inc. and our majority-owned subsidiaries, unless the context indicates otherwise.
Our Retail Business
For the last three fiscal years, our retail business has generated nearly all of our net revenues. In our retail business, ourOur goal is to provide goodsfurniture and home furnishings to furnish and accessorize "dream homes"assist consumers in "Making Dream Homes Come True", particularly for our target customers—consumers who seek smart value on quality, stylish merchandisefurniture and home furnishings at bargain prices. At December 31, 2019, we offered 2.7 million products (7.8 million SKUs), of which over 99% were in-line products (products in active production), including more than 32,000 private label products offered under twelve private label brands.competitive prices, and who want an easy shopping experience. We believe that the furniture and home goodsfurnishings 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 (which we define as those aged 20-36), who are generallybecome increasingly comfortable shopping online start families and move into new homes. We regularly change ourfor goods in this 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.category. We compete primarily based on:
Quality•Simple and easy customer experience with an emphasis on price, value, and quality with a wide assortment of products delivered in a personalized format with the convenience of our mobile app, and with the benefits ofsupported by our award-winning customer care;care team;
•Proprietary technologies and strategic technical relationships which we believe help us provide our customers with a qualityan intuitive shopping experience;
•Logistics capabilities tailored to the furniture and home goodsfurnishings category and developed over our many years of e-commerce experience;
•Long-term mutually beneficial relationships with third-party manufacturers, distributors and other suppliers (referred to collectively as our partners,"partners"), which currently numbernumbered approximately 3,560;2,600 as of December 31, 2022; and
•Our Club O Loyalty Program, which we believe increases customer engagement and retention.
For 2019, nearlyWe continue to increase the millions of items we offer by expanding the breadth and depth of our product assortment to meet the current and evolving trends and preferences of our customers. Nearly all our retail sales through our Website and mobile apps were from transactions in which we fulfilled orders through our network of approximately 3,560 third-party manufacturers, distributors and other suppliers ("partners") selling on our Website.partners. 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 marketing, order fulfillment, customer service, returns handling, and other services. Our supply chain allows us to ship directly to our customers from our supplierspartners or from our warehouses. Our retail sales also include direct sales of our own inventory shipped from our warehouses. Our warehouses primarily fulfill orders from direct sales of our ownpartners' owned inventory, including some customer returns of partner products. Our warehouses generally ship between 800 and 2,000 packages per day and up to approximately 6,000 packages per day during peak periods.
During the years ended December 31, 2019, 20182022, 2021 and 20172020 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.revenues, including:
•Businesses advertising products or services on our Website;
Our international business•Marketplace, a service we provide to our partners where we offerthey can sell their products through third party sites;
•International sales through third party logistics providers to certain customers outside the United States using third party logistics providers;States; and
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; and
•Supplier Oasis, a single integration point through which our partners can manage their products, inventory and sales channels, and obtain multi-channel fulfillment services through our distribution network.
Manufacturer, Distributor, and Supplier Relationships
To the extent possible we maintain manufacturer, distributor, and supplier relationships, and seek new manufacturer, distributor, and supplier relationships, and also use our working capital, to ensure a continuous allotmentassortment of product offerings for our customers. Generally, our manufacturers, distributors, or suppliers regularly communicate to us the quantity of products that are held in reserve for us, but our arrangements with them generally do not guarantee the availability of those products for a set duration. Our manufacturer, distributor, and supplier relationships are based on historical experience and are generally non-exclusive, and we retain the right to select and change our suppliers at our discretion. Generally, manufacturers, distributors, and suppliers do not control the terms under which products are sold through our Website.
Sales and Marketing
We use a variety of methods to target our retail consumer audience, including direct mail and online campaigns, such as advertising through keywords, product listing ads,search engine marketing, display ads, search engines, affiliate marketing, programs, social coupon websites, portals, banners, e-mail, direct mail, and viral and social media campaigns. We also do brand advertising through television, radio, printvideo ads, streaming video and audio, social media, and event sponsorships.
Customer Service
We are committed to providing superior customer service.service through our app, Website, and customer service department. We staff our customer service department with dedicated in-house and outsourced professionals who respond to phone, SMS, instant online chat, and e-mail inquiries on products, ordering, shipping status, returns, and other areas of customer inquiry. We also have certain partners who handle their own customer service requests, and we hold them to the same high standards as our in-house services.
Technology
We use our internally developed Website and a combination of proprietary technologies, open source technologies, and commercially available licensed technologies and solutions to support our retail operations. We use the services of multiple telecommunications companies to obtain connectivity to the Internet. Currently, our primary computer infrastructure is in a data center in Utah. We also have other data centers and public cloud providers which we use for backups, redundancy, development, testing, disaster recovery, and corporate systems infrastructure.
Competition
E-commerce is intensely competitive and has relatively low barriers to entry. We believe that competition in this industry is based predominantly on:
•price;
•product quality and assortment;
•shopping convenience;convenience and product findability;
•website organization and load speed;experience;
•order processing and fulfillment;
•order delivery time;time and accuracy;
•customer service;
•website functionality on mobile devices;
•brand recognition; and
•brand reputation.
We compete with other online retailers, traditional retailers,pure play, brick-and-mortar, and liquidation "brokers"omni-channel retailers which may specifically adopt our methods and target our customers. We currently or potentially compete with a variety of companies that can be divided intospecialize in several broad categories:
onlinecategories, including discount general retailers;
onlineretailers, private sale sites;
online specialty retailers;
online liquidators;
online retailers who have or are developing significant "brick and mortar" capabilities; and
traditional general merchandise andsales, specialty retailers, and liquidators, many of which have a significant online presence.liquidators.
Many of ourOur current and potential e-commerce competitors include entities that may have greater brand recognition, longer operating histories, larger customer bases, and significantly greater financial, marketing, and other resources than we do. Further, any of them may enter into strategic or commercial relationships with larger, more established and well-financed companies, including exclusive distribution arrangements with our vendors or service suppliers that could deny us access to key products or needed services, or acquisitions of our suppliers or service providers, having the same effect. Many of them do or could devote greater resources to marketing and promotional campaigns and devote substantially more resources to their websitewebsites and systems development than we do. Many have supply chain operations that decrease product shipping times to their customers, have options for in-store product pick-up, allow in-store returns, or offer other delivery and returns options that we do not have. New technologies, the continued enhancement of existing technologies, developments in related areas such as same-day product deliveries, and the development of proprietary delivery systems increase competitive pressures on us.
Financial Information about Business Segments and Geographic Areas
As described further in Item 15 of Part IV, "Financial Statements"—Note 21. Business Segments, contained in the "Notes to Consolidated Financial Statements" of this Annual Report on Form 10-K, we determined our segments based on how we manage our business, which, in our view, consists primarily of our Retail and Medici businesses. Our Retail business is a reportable segment. As described below, our Medici business is comprised of multiple components or operating segments, including our tZERO and Medici Ventures reportable segments. We use pre-tax net income (loss) as the measure to determine our reportable segments. As a result, tZERO and Medici Ventures are the only reportable segments of our Medici business as they are quantitatively significant. The remaining Medici business operating segment is not significant and is included in Other. See Item 15 of Part IV, "Financial Statements"—Note 21. Business Segments for information regarding our business segments and geographical areas.
Intellectual Property and Trade Secrets
We regard our domain names and other intellectual property as critical to our success. Included in our intellectual property is some of the financial technology we have developed as part of our Medici initiatives. We rely on a combination of laws and contractual restrictions with our employees, customers, suppliers, affiliates, and others to establish and protect our proprietary rights, including the law pertaining to trade secrets.
Our Medici Business
In late 2014, we began working on initiatives to develop and advance blockchain technologies. We pursue these initiatives through our wholly-owned subsidiary, Medici Ventures and its majority-owned subsidiary tZERO. These initiatives remain in the start-up phase, and neither Medici Ventures nor tZERO has generated significant revenues from any blockchain-based technology or application of blockchain technology.
Medici Ventures
Medici Ventures' strategy is to create or foster a set of products and solutions that leverage blockchain technology to generate efficiencies and increase security and control in six areas: 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 over 50 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 some 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 areas mentioned above. Medici Ventures takes an active interest in and holds seats on the boards of some of these companies. All 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.
See "Risk Factors—Additional Risks Relating to our Medici Business."
tZERO
tZERO is a financial technology company pursuing initiatives to develop and commercialize financial applications of blockchain technologies. tZERO's primary focus is on the development and adoption of digital securities, which are described in more detail below. tZERO focuses on developing the supply side of this marketplace by creating technology that enables issuers to issue, and relevant regulated market participants to support the issuance, trading, clearance and settlement of digital securities. tZERO also supports the demand for and adoption of such assets by developing technology for regulated venues on which those digital securities can trade, as well as investing in subsidiaries and joint venture entities that own and operate such trading venues. These investments include the alternative trading system (the "tZERO ATS") run by its wholly-owned subsidiary, tZERO ATS, LLC, formerly known as PRO Securities, LLC, which provides a licensed venue for matching buy and sell orders to its broker-dealer subscribers, including for the trading of digital securities, and its joint venture with BOX Digital Markets LLC ("BOX Digital"), intended to develop a U.S. national securities exchange facility with regulatory approvals enabling it to support trading in a type of digital security called a security token. In addition, tZERO also maintains certain non-blockchain businesses.
Throughout this report we refer to "digital securities" to describe conventional uncertificated securities where the issuer arranges for a digital "courtesy carbon copy" of the transfer agent's share registry to be viewable on the blockchain to enhance the trading experience. Securities with such digital enhancements may also be referred to as "digitally-enhanced securities". Digital securities, however, are not issued, traded, cleared, settled or custodied using distributed ledger or blockchain technology. Instead, record ownership of digital securities is kept by a U.S. Securities and Exchange Commission ("SEC") regulated transfer agent in its traditional books and records and they are traded on the relevant regulated trading venues on a book-entry basis. To enhance the investor experience, issuers arrange for a digital courtesy carbon copy of the transfer agent's share registry of holders of record to be viewable on the blockchain. The digital courtesy carbon copy of the transfer agents' books and records on the blockchain are pseudonymized (that is, such records do not identify the holders of record by name but each holder's assets are shown under a digital wallet address) and do not govern ownership of these securities. The transfer agent's conventional books and records remain as the only controlling record of ownership for corporate and securities law purposes. With respect to investors holding a digital security in a brokerage account, the controlling record of the underlying beneficial ownership is such investor's carrying broker-dealer's conventional books and records. The use of "digital" is intended solely to differentiate these securities from conventional securities which do not have the digital enhancements necessary to allow the transfer agents records to be viewable on the blockchain.
In certain other instances throughout this report we refer to "peer-to-peer digital assets" or "bearer digital assets", which may include virtual currencies or other pseudonymous bearer digital instruments (including instruments representing securities) which may trade peer-to-peer on a distributed ledger and/or rely on the distributed ledger to govern record
ownership. tZERO is focused on the development and adoption of digital securities as described above. In the future, subject to changes in the applicable regulatory landscape and the capabilities of market participants, tZERO may evolve its focus towards the advancement of digital securities to integrate blockchain technology in other ways.
tZERO's businesses include the broker-dealer activities of its subsidiaries, tZERO ATS, LLC and SpeedRoute, LLC ("SpeedRoute"). SpeedRoute provides connectivity to its registered broker-dealer customers to U.S. equity exchanges and off-exchange sources of liquidity. Additionally, tZERO has another subsidiary, tZERO Markets, LLC, that is in process of seeking regulatory approvals to operate as a broker-dealer and allow it to offer a website and mobile application that allow retail customers to conduct self-directed trading of conventional and digital securities. In addition, tZERO Markets is seeking approvals to provide certain investment banking, placement agent and best-efforts underwriting services. tZERO's remaining businesses include tZERO Crypto, Inc., a cryptocurrency wallet and exchange services business, and Verify Investor, LLC, an accredited investor verification company.
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.
tZERO's Intellectual Property
tZERO has received certain patents that it views as critical to its success. In particular, in January 2019, it received a patent from the United States Patent and Trademark Office ("USPTO") for an order system that can integrate with conventional asset trading platforms and translate orders for "digital transaction items" (including securities, tokens, shares, cash and other assets) from broker-dealers into orders on a regulated venue which utilizes blockchain technology. In May 2019, tZERO also received a patent for a base layer technology that uses digital signatures to record and verify time-series data such as trades, executions and settlements, allowing low-latency systems, including traditional matching engines or private blockchain ledgers, to be anchored into public blockchain ledgers which are able to verify the existence of previous trades and simultaneously produce an auditable and immutable record of those transactions. These patents were recently awarded and to date have not had any material effect on tZERO's business. tZERO believes these patents provide valuable functionality to regulated market participants involved in the trading of digital securities and will assist in protecting tZERO's proprietary technologies against trading solutions developed by competitors.
tZERO's Customers
tZERO ATS, LLC and SpeedRoute, which are tZERO's primary source of revenue, are reliant upon a small group of customers for a large part of their revenue. See "Risk Factors—Additional Risks Relating to our tZERO Initiatives—To date, SpeedRoute and tZERO ATS, LLC's revenues have come from a small number of major customers, making SpeedRoute and tZERO ATS, LLC, and by extension tZERO, vulnerable to changes in the business and financial condition of, or demand for SpeedRoute's and tZERO ATS, LLC's services by, such customers."
tZERO's Competitors
We believe other organizations are or may be working to develop applications for distributed ledger or blockchain technologies or other novel technologies in the financial industry or capital markets that may be competitive with tZERO and its blockchain-focused subsidiaries. Although it is difficult to obtain reliable information about blockchain activities by companies that may be our competitors, they may include numerous entities including some that are operating trading venues offshore or otherwise structured to avoid aspects of U.S. regulation.
SpeedRoute and tZERO ATS, LLC compete with and tZERO Markets will, in the event its broker-dealer application is approved, in the future compete with, a large number of broker-dealers, many of which are substantially larger and have substantially greater financial resources than SpeedRoute, tZERO ATS, LLC, tZERO Markets, tZERO or Overstock.
To the extent tZERO attempts to market its "digital locate receipt" software (the "DLR Software") in the future, tZERO would be competing with virtually all of the largest broker-dealers in the U.S., all of which have substantially greater resources than tZERO or Overstock, and some of which may generate substantial revenues and profits from the existing firmly entrenched system.
See "Risk Factors—Additional Risks Relating to our tZERO Initiatives."
Legal and Regulatory Matters
From time to time, we receive claims and become subject to regulatory investigations or other governmental actions, consumer protection, employment, intellectual property, and other commercial litigation related to the conduct of our business. We also prosecute lawsuits to enforce our legal rights. Regulatory investigations and other governmental actions as well as any litigation may be costly and time consuming and can divert our management and key personnel from our business operations. Regulatory investigations and other governmental actions as well as any such litigation may result in significant damages, associated costs, or equitable remedies relating to the operation of our business. Any such matters may materially harm our business, prospects, results of operations, financial condition, or cash flows.
These matters and other types of claims could result in legal expenses, fines, adverse judgments or settlements and increase the cost of doing business. They could also require us to change our business practices in expensive and significant ways. In addition, litigation could result in interpretations of the law that may limit our current or future business, require us to change our business practices, or otherwise increase our costs.
Additional litigation may be necessary in the future to enforce our intellectual property rights, to protect our trade secrets, or to determine the validity and scope of the proprietary rights of others. Any litigation, regardless of outcome or merit, could result in substantial costs and diversion of management and technical resources, any of which could materially harm our business.
For further information, see (see Item 1A—"Risk Factors") and the information set forth under Item 15 of Part IV, "Financial Statements"—Note 12. Commitments and Contingencies, Legal proceedings and contingencies, contained in the "Notes to Consolidated Financial Statements" of this Annual Report on Form 10-K.
Government Regulation and Legal Matters
We are subject to a wide variety of laws, rules, mandates, and regulations, some of which apply or may apply to us as a result of our retail business, some of which apply or may apply to us as a result of our Medici or tZERO businesses, and others of which apply to us for other reasons, such as our status as a publicly held company or the places in which we sell certain types or amounts of products. Our retail business is subject to general business regulations and laws, as well asand regulations and laws specifically governing the Internet,internet, e-commerce, and other services we offer. Existing and future laws and regulations may result in increasing expense and may impede our growth. Applicable and potentially applicable regulations and laws include regulations and laws regarding taxation, privacy, data protection, pricing, content, copyrights, distribution, mobile communications, electronic device certification, electronic waste, energy consumption, environmental regulation, electronic contracts and other communications, competition, consumer protection, employment, import and export matters, information reporting requirements, access to our services and facilities, the design and operation of websites, health, safety, and sanitation standards, the characteristics and quality of products and services, product labeling and unfair and deceptive trade practices.
Our efforts to expand our retail business outside of the U.S. exposeexposes us to foreign and additional U.S. laws and regulations, including but not limited to, laws and regulations relating to taxation, business licensing or certification requirements, advertising practices, online services, the use of cryptocurrency, the importation of specified or proscribed items, importation quotas, consumer protection, intellectual property rights, consumer and data protection, privacy, encryption, restrictions on pricing or discounts, and the U.S. Foreign Corrupt Practices Act and other applicable U.S. and foreign laws prohibiting corrupt payments to government officials and other third parties.
Our MediciFrom time to time, we receive claims and tZERO businesses arebecome subject to generalregulatory investigations or other governmental actions, consumer protection, employment, intellectual property, and other commercial litigation related to the conduct of our business. We periodically prosecute lawsuits to enforce our legal rights. These matters and other types of claims could result in legal expenses, fines, adverse judgments or settlements and increase the cost of doing business. They could also require us to change our business regulationspractices in expensive and laws, including some of those described above, but are also affected by a number of other laws and regulations, including but not limited to, laws and regulations relating to money transmitters and money services businesses, including the requirementssignificant ways. In addition, litigation could result in legal outcomes or interpretations of the Financial Crimes Enforcement Network of the U.S. Department of the Treasury ("FinCEN"law that may limit our current or future business, require us to change our business practices, or increase our costs or otherwise adversely impact our business.
For further information, see (Item 1A—"Risk Factors") and state requirements applicablethe information set forth under Item 8 of Part II, "Financial Statements and Supplementary Data"—Note 12—Commitments and Contingencies, Legal proceedings and contingencies, contained in the "Notes to money transmission, cryptocurrencies, public benefit corporations, provisionsConsolidated Financial Statements" of various securities laws and other laws and regulations governing broker-dealers, alternative trading systems and national securities exchanges, anti-money laundering requirements, know-your-customer requirements, record-keeping, reporting and capital and bonding requirements, and a variety of other matters. Blockchain and distributed ledger platforms are recent technological innovations, and the regulation of peer-to-peer digital assets and conventional securities, insofar as blockchain technologies are applied to conventional securities, is developing. In the U.S., the businesses that we are working to develop are or may be subject to a wide variety of complex statutes and rules, most of which were implemented prior to the development of these technologies, and it is sometimes unclear whether or how various statutes or regulations apply.this Annual Report on Form 10-K.
tZERO ATS, LLC, a wholly-owned subsidiary of tZERO, operates the tZERO ATS, which is subject to Regulation ATS as well as other regulations, and partners with broker-dealers that are also subject to regulation by the SEC and the Financial Industry Regulatory Authority, Inc. ("FINRA"). The tZERO ATS facilitates the current trading of our outstanding Series A-1 Preferred stock as well as tZERO's Preferred Equity Tokens, Series A ("TZROP").Human Capital Management
The joint venture that tZERO and BOX Digital announced in June 2018 is seeking regulatory approvals that would enable the parties to operate the Boston Security Token Exchange ("BSTX"), a national securities exchange facility to support trading in a type of digital security called a security token. BSTX, which will require approval from the SEC prior to beginning operations, would be subject to provisions of the Securities Exchange Act of 1934 and regulation substantially greater than that applicable to tZERO's current operations. The SEC published proposed rule changes relating to BSTX on October 11, 2019, soliciting public comments thereon. The SEC extended the review period on November 29, 2019. BOX Exchange LLC filed an amendment to the proposal on December 26, 2019, and the SEC again extended the review period on January 16, 2020. A subsequent amendment was filed by BOX Exchange LLC on February 19, 2020.
See Item 1A—"Risk Factors—Additional Risks Relating to our Medici Business" and "Additional Risks Relating to our tZERO Initiatives."
Employees
AtOn December 31, 2019,2022, we had approximately 1,6131,050 full-time employees. We seasonally increase our workforce during our fourth quarter to handle increased workload in both our warehouse and customer service operations. We have never had a work stoppage and none of our employees are represented by a labor union. We consider our employee relationshipsrelations to be good. Competition for qualified personnel in our industry is intense,high, particularly for software engineers and other technical staff. Overstock places great value on its human capital management and knows its people are critical to driving the business to success. We focus on our human capital management in many ways including:
Executive OfficersDiversity & Inclusion
We embrace diversity and collaboration in our workforce, our ways of thinking, and our decision-making. We know that fostering an inclusive culture delivers better business outcomes. Our commitments to improving diversity include 1) increasing the diversity of our team at all levels, 2) continuing real and meaningful gender and race dialogue within our Company, 3) amplifying the voices of our underrepresented groups of employees, 4) fostering inclusion and safety within our workforce, 5) continuing to condemn all forms of gender and racial discrimination and harassment, 6) encouraging our employees to vote by expanding our paid time off program, and 7) tracking and monitoring our progress. Among the many ways we demonstrate these commitments are through our hiring and development practices, flexible and working-parent-friendly programs, anti-discrimination policies, and efforts of our employee resource groups.
Through our commitments, actions, words, investments, and values, we promote a work environment that enables employees to feel safe to express their ideas and perspectives and feel they belong within our team.
Workforce Compensation & Pay Equity
The total rewards philosophy of Overstock is to create and maintain competitive programs that attract, motivate, develop, and retain employees based on the prevailing industry and geographic labor markets where the Company does business. Our competitive compensation programs consist of cash and non-cash compensation based on relevant pay factors designed to balance market competitiveness and cost containment to retain the human capital that enables the Company to achieve business performance goals and objectives. We designed our total rewards to link the market competitiveness of an employee's compensation with overall Company performance, aligning employees' financial interests with the interests of the RegistrantCompany.
Elements of our compensation package for all non-executive employees consists of base salary or wages, short-term bonus incentives to reward the achievement of behavioral goals and business objectives, and for eligible key contributors, long-term equity incentives.
We monitor changes in the value of each employee's job annually and adjust base pay and short-term incentives based on a combination of employee performance to pre-determined goals and the Company's overall performance to broader financial and operational goals and objectives. We determine external market competitiveness by gathering salary information from professionally managed third-party salary surveys and by determining pay for individual employees based on their skill level, experience, education, and any other relevant compensatory factors. We balance internal pay equity with external pay equity to ensure compensation is fairly and equitably dispersed.
Management is committed to the proposition that the total rewards of every employee in pay and benefits are equitably distributed regardless of their race, gender, gender identity, sexual orientation, religion, national origin, color, veteran status, age, or disability. Furthermore, to ensure the commitment to pay equity is aggressively pursued, we define appropriate metrics to track progress. The Human Resources Department prepares periodic reports for senior leadership and the Board of Directors to report progress toward equitable pay, promotions, and opportunities.
We offer all employees the ability to save for retirement by matching dollar for dollar up to 6% of their savings into a qualified savings plan up to certain pre-determined limits set by the IRS. For highly compensated employees who meet the salary threshold set by the IRS and who choose to continue pre-tax savings above the qualified savings plan limits, eligible employees can participate in a non-qualified tax deferred savings plan to save for future needs.
Our intention is to offer every employee fair and equitable cash compensation and competitive non-cash benefits to help employees manage their wealth, health, and wellness and the wealth, health, and wellness of their families.
Talent Acquisition & Retention
We work diligently to attract the best talent from a diverse range of sources and locations in order to meet the current and future demands of our business. We now recruit talent from twenty-one states across the country, as much of our workforce can work in a mostly remote arrangement. We are establishing relationships with universities, professional associations, and industry groups to proactively attract talent. We look for ways to improve our recruiting process regularly and ensure each applicant feels welcome and comfortable through the recruiting process. Our panel interviews are set up with a diverse group of interviewers to ensure for the best candidate experience. We have taken the ParityPledge in support of women and in support of people of color, demonstrating our commitment to improve the opportunity for advancement of women and people of color into senior leadership positions.
We have a strong employee value proposition that leverages our unique culture, collaborative and flexible working environment, shared sense of purpose, desire to do the right thing and innovative work to attract talent to our company. We empower employees to find new and better ways of doing things and the scale of our business means that careers can develop in exciting and unexpected directions. To ensure the long-term continuity of our business, we actively manage the development of existing talent to fill the roles that are most critical to the on-going success of our Company.
In 2022, we hired 180 new employees, excluding our customer service and warehouse departments, and 28 new customer service and warehouse employees. We have a total average tenure of six years, with an average tenure of four and three quarters years in our customer service and warehouse departments.
Employee Safety & Wellness
Creating a culture where all employees feel supported and valued is a key part of our corporate mission. We continue to evolve our programs to meet our employees' wealth, health, and wellness needs, which we believe is essential to attract and retain employees of the highest caliber, and we offer a competitive benefits package focused on fostering work/life integration. We offer comprehensive benefit options to our employees and their families to live healthier and more secure lives. Some of the various insurances we offer include medical, dental, and vision, among others, along with health savings accounts, flexible spending accounts and generous 401(k) matching and employee stock purchase plan (ESPP) programs. In addition to these more traditional benefits offerings, we also have programs that encourage better work/life balance. These benefits include a medical clinic, fitness center, child daycare, and two dedicated counselors, employee assistance program (EAP) support, and a 9/80 flexible work schedule. We offer family planning services including fertility coverage to assist potential parents. We offer paid parental leave for all new parents who have been with the Company for at least a year to ensure they are able to adjust to a new work/life balance. We also offer a caregiver benefit to parents who need to travel for work, which allows employees who have a child under the age of two to travel with the employee. In January 2023, we expanded our benefits offerings to include pelvic care benefits for women and lowered copayments for mental health office visits to provide enhanced mental health support.
Development & Training
We recognize how important it is for our employees to develop and progress in their careers. We provide a variety of resources to help our employees grow in their current roles and build new skills, including online development resources from a competency model development library to hundreds of online courses in our learning management system. We emphasize individual development planning as part of our annual goal setting process, and offer mentoring programs, along with change management and project management upskilling opportunities. We have leadership development resources for all leaders across the organization and continue to build tools for leaders to develop their teams on the job and in roles to create new opportunities to learn and grow. We also encourage higher education and continuing professional education by subsidizing these opportunities for our employees.
We have an annual training for all employees on the topic of Diversity and Inclusion. This program is designed to strengthen our organization by promoting the inclusion of various viewpoints from the natural talents and abilities of our people regardless of race, sexual orientation, gender, religion, or other differences.
Company Culture
We attribute the high levels of employee engagement to our corporate culture. We strive for a work environment that is results-driven, inclusive, agile, and collaborative. Our corporate vision, mission, values, leadership principles, and employee qualities help define who we are, where we are going, and the behavior we expect of the Company and our employees to be successful in the organization.
To fulfill our vision of "Making Dream Homes Come True" and the long-term financial goals of the Company, we focus on our mission of being a customer-focused online furniture and home furnishings retailer, our leading technology-focused innovation capabilities, and creating enterprise value. Our values articulate our commitment to an inclusive, outcome-driven, and positive work environment, and embody our "becoming" culture and spirit. Our five leadership principles guide our interactions with colleagues, creating a psychologically safe environment for productive and collaborative exchanges for improved outcomes. We strive to clearly define, look for, measure, and develop ten qualities in our employees so that we all become empowered to be effective and valuable contributors in the organization. We believe this culture allows us to attract, develop, engage, and retain highly qualified employees for each role in the organization. Our goal is to have every employee feel they are a valued and empowered member of a winning team, doing meaningful work, in an environment of trust. The Company endeavors to regularly reinforce this culture throughout the entire employee experience.
Oversight & Governance
Our focus on human capital management has been a hallmark of the Company for years, understanding that people truly are a Company's most valuable asset, and that culture is an organization's ultimate competitive advantage. Our 401(k) committee meets quarterly to review the plan and determine if any changes need to be made to the portfolio, in order to best serve our employees. Our board of directors dedicates significant time in quarterly meetings with management to discuss trends in hiring, engagement, and attrition. Our Compensation Committee is actively involved in determining competitive compensation strategies to help us continually improve in attracting, developing, and retaining top talent for our Company.
Information About Our Executive Officers
The following persons were executive officers of Overstock as of March 13, 2020:
| | | | | | | | | | | | | | | |
| Executive Officers | | | Age | | Position |
| | | | |
Executive Officers | | Age | | Position |
| Angela Hsu | | | 55 | | Chief Marketing Officer |
| | | | | |
| Jonathan E. Johnson III | | 54 | 56 | | Chief Executive Officer President, and Director |
Anthony StrongAdrianne Lee | | 43 | 45 | Acting | Chief Financial Officer (Principal Financial |
| Carter Lee | | | 53 | | Chief People Officer |
| E. Glen Nickle | | | 58 | | Chief Legal Officer and Principal Accounting Officer)Corporate Secretary |
Carter LeeDave Nielsen | | 50 | 53 | Chief Administrative Officer | President |
Meghan TuohigCarlisha Robinson | | 39 | 54 | | Chief PeopleProduct Officer |
Dave NielsenTushon Robinson | | 50 | 52 | President of Retail | Chief Supply Chain Officer |
John Paul "J.P." Knab | | 38 | | Chief Marketing Officer |
Ron Hilton | | 49 | | Chief Sourcing & Operations Officer |
Krista Mathews | | 34 | | Chief Customer Officer |
| Joel Weight | | 45 | 48 | | Chief Technology Officer |
Mark Baker | | 50 | | Chief Product Officer | |
Mr. Angela Hsu joined Overstock as our Chief Marketing Officer in March 2022. Prior to joining Overstock, Hsu served as Senior Vice President of Marketing and eCommerce at Lamps Plus from June 2017 to March 2022 and held other roles at Lamps Plus including Vice President of Internet Business and Marketing.
Jonathan E. Johnson III has served as Chief Executive Officer since AugustSeptember 2019 President of Medici Ventures since August 2016, and as a Director since 2013. Mr. Johnson also served as ourPresident of Medici Ventures from August 2016 to April 2021, Interim Chief Executive Officer from August 2019 to September 2019, and Chairman of the Board of Directors from 2014 through 2017. Mr. Johnson joined Overstock in 2002 and previously served as our President, Executive Vice Chairman, Acting Chief Executive Officer, Senior Vice President, and General Counsel. Mr. Johnson holds a bachelor's degree in Japanese from Brigham Young UniversityCounsel, and received his law degree from the J. Reuben Clark, Jr. Law School at Brigham Young University.various other positions.
Mr. Anthony Strong was appointedAdrianne Lee joined Overstock as our Acting Chief Financial Officer in March 2020. Mr. Strong hasPrior to joining Overstock, Lee served as Senior Vice President and CFO of North America RAC from December 2018 to March 2020 and as Vice President of Finance- Global Financial Planning and Controller sinceAnalysis and Corporate Development from December 2017 and previously served as Senior Finance Director from 2016 to 2017, and as Director of FP&A from 2013 to 2016. Mr. Strong originally joined Overstock in 2004 and has held various other roles including Assistant Controller and Accounting Manager. Mr. Strong holds a Bachelor of Science from the University of Utah.December 2018 at The Hertz Corporation.
Mr. Carter Leehas served as our Senior Vice President of Technology andChief People CareOfficer since 2015 and was appointed as our Chief Administrative Officer during 2018. Mr.January 2023. Lee joined Overstock in 2001 and previously served as Chief International Officer from September 2022 to December 2022, Chief Administrative Officer from August 2018 to September 2022, Acting Chief Marketing Officer from August 2020 to March 2021, Senior Vice President of Technology and People Care from February 2015 to July 2018, and held other roles including Vice President of Technology Operations and held other roles including Director of Internal Systems.
E. Glen Nickle has served as our Chief Legal Officer and Corporate Secretary since February 2021, and previously served as Vice President, Legal and General Counsel from July 2016 to February 2021. Nickle started with Overstock in May 2010 as Associate General Counsel. Prior to joining Overstock, Mr. Lee was a Systems Engineer for Hospice of the Valley and Vice President of Technology for Motherboard Discount Center in Phoenix, AZ.Nickle served as Associate General Counsel at ICON Health & Fitness, Inc.
Ms. Meghan Tuohig was appointed as our Chief People Officer in March 2019. Ms. Tuohig joined Overstock in 2004 and previously served in several leadership positions, most recently as the company's Vice President of People Care and founded the Overstock Women's Network (OWN) in 2017. She also oversaw the design of Overstock's Midvale, Utah global headquarters, Peace Coliseum, which opened in 2016. Ms. Tuohig holds a Bachelor of Science from the University of Utah, received her Master of Business Administration from Westminster College, and studied interior design and architecture at New York University.
Mr. Dave Nielsen has served as theour President of Retail (now President) since May 2019, and previously served as our Chief Sourcing and Operations Officer infrom October 2018 to May 2019, having returned to Overstock after serving for three and half years as the Chief Executive Officer and board member for Global Access from July 2015 to October 2018. Mr. Nielsen originally joined Overstock in 2009 and previously served as our Senior Vice President of Business Development, Senior Vice President and General Merchandise Manager and Co-President. Additionally, Mr. Nielsen also served as President and CEO of Old Town Imports, LLC, and also held several leadership positions with Payless ShoeSource, Inc. Mr. Nielsen received his bachelor's Degree in Business Management with an emphasis in Marketing from Brigham Young University.
Mr. John Paul "J.P." Knab has served as our Senior Vice President of Marketing since March 2016 and Carlisha Robinson was appointed as our Chief MarketingProduct Officer during 2018, having returnedin August 2022. Prior to joining Overstock, after serving for one-yearRobinson served as the Senior Vice President of Marketing, MerchandisingProduct at Volusion from July 2020 to July 2022, and Business Development for U.S. Water Filters in St. Paul, MinnesotaSenior Director of Product Management at CPA Global (Innogrpahy) from November 2015 to 2016, andJuly 2018.
Tushon Robinson was appointed as our Chief MarketingSupply Chain Officer in August 2018. Mr. Knab originally joined Overstock in 2005 and previously served as our Vice President of Marketing and held other roles including Director of Merchandising and Director of Analytics. Mr. Knab holds an MBA with a Marketing emphasis and a bachelor's degree in Finance from Brigham Young University.
Mr. Ron Hilton has served as our Chief Sourcing and Operations Officer since May 2019, and previously served as our Vice President of Sourcing, having returned to Overstock after serving for almost two years as the President of Endygo from 2015 to 2016. Mr. Hilton originally joined Overstock in November 2009 and previously served as our Vice President of Merchandising, General Merchandise Manager, and Divisional Merchandise Manager. Additionally, Mr. Hilton also served as Vice President of Marketing at Furniture Warehouse for almost eleven years.
Ms. Krista Mathews was appointed as our Chief Customer Officer in August 2019. In this role, Ms. Mathews oversees the company's Customer Care, Consumer Insights, Brand Strategy, Club O loyalty program, and CRM teams, as well as any other customer-facing technology, strategy, product, or experience. Ms. Mathews joined Overstock in 2017 as a Category Director and was previously appointed as Vice President of Private Label and Partner Management in 2018.January 2022. Prior to joining Overstock, Ms. Mathews held severalRobinson served as Chief Operating Officer of Bractlet from October 2019 to January 2022, Advisory Board Member of Bractlet from May 2018 to October 2019, Vice President, Product Management of Pitney Bowes from October 2018 to October 2019, and various other executive leadership positions with Target Corporation in their Merchandising division from 2008at Newgistics prior to 2017. Ms. Mathews holds a Bachelor of Arts in English and Classical Archeology from the University of Michigan.October 2018.
Mr. Joel Weight was appointed as our Chief Technology Officer in February 2020. Mr. Weight joined Overstock in 2011 and previously served as Chief Operations Officer of Medici Ventures from January 2019 to February 2020, and Chief Technology Officer of Medici Ventures from October 2016 to January 2019, of Medici Ventures, Lead Architect and various other Architect roles from October 2013 to October 2016, and Principal Developer and Senior Software Developer from 2012 to 2013, as well as various other positions. Additionally, Mr. Weight also served as Senior Software Developer at Access Development Corporation for three and a half years and Lead Software Engineer, among other roles, at Sungard Higher Education for seven years and has held other senior software developer and engineer roles at various other entities. Mr. Weight holds a Bachelor of Science in Computer Science from the University of Utah.
Mr. Mark Baker was appointed as our Chief Product Officer in February 2020. Mr. Baker joined Overstock in 2011 and previously served as Vice President of Product and Technology from December 2018 to February 2020, Senior Director of Software Development from January 2017 to August 2018, Director of Software Development from September 2015 to January 2017, Director of Application Development from October 2013 to September 2015, as well as various other positions. Additionally, Mr. Baker also served as Senior Software Engineer at Scitor Corporation for eight years and Lockheed Martin for seven and a half years and has held other senior software engineer roles at various other entities. Mr. Baker holds a Bachelor of Science in Aerospace Engineering from Iowa State University.
NoneThere are no family relationships between any of our officers has an employment agreement or any specific term of office.executive officers.
Available Information
We make our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, 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.Commission (the "SEC"). The SEC also maintains a website at www.sec.gov that contains reports, proxy and information statements, and other information filed by us. Our Internet Website and the information contained therein or connected thereto are not a part of or incorporated into this Annual Report on Form 10-K.
ITEM 1A. RISK FACTORS
Any investment in our securities involves a high degree of risk. Please consider the following risk factors carefully. If any one or more of the following risks were to occur, it could have a material adverse effect on our business, prospects, financial condition and results of operations, and the market price of our securities could decrease significantly. Statements below to the effect that an event could or would harm our business (or have an adverse effect on our business or similar statements) mean that the event could or would have a material adverse effect on our business, prospects, financial condition and results of operations, which in turn could or would have a material adverse effect on the market price of our securities. Many of the risks we face involve more than one type of risk. Consequently, you should carefully read all of the risk factors below, carefully, and in any reports we file with the SEC after we file this Form 10-K, before making any decision to acquire or hold our securities. The occurrence of any of these risks could harm our business, the trading price of our securities could decline, and investors could lose part or all of their investment.
Holders of, and potential investors in, our Series A-1 Preferred stock should also read "Additional Risks Related Primarily to our Series A-1 Preferred stock," and "Additional Risks Related to both our Series A-1 Preferred stock and our Series B Preferred stock," below.
Holders of, and potential investors in, our Series B Preferred stock should also read "Additional Risks Related to both our Series A-1 Preferred stock and our Series B Preferred stock," below.
Holders of, and potential investors in, TZROP, issued by tZERO Group, Inc. should also read "Additional Risks Related to TZROP," below.
Risks Relating to Our Company and its Operational, Litigation and Regulatory Environment
We depend on third-party companies to perform functions critical to our business, and any failure or increased cost on their part could have a material adverse effect on our business.
We depend on third-party companies, including third-party carriers and a large number of independent fulfillment partners whose products we offer for sale on our Website, to perform functions critical to our ability to deliver products and services to our customers on time and at a reasonable cost. We depend on our carriers and fulfillment partners to perform traditional retail operations such as maintaining inventory, preparing merchandise for shipment to our customers and delivering purchased merchandise on a timely and cost-effective basis. We also depend on the delivery and product assembly services that we and they utilize, on the payment processors that facilitate our customers' payments for their purchases, and on other third parties (including SaaS, IaaS, and other cloud-based third-party service providers) over which we have no control, for the operation of our business. Difficulties with any of our significant fulfillment partners or third-party carriers, delivery or product assembly services, payment processors or any of the third-party service providers involved in our business, regardless of the reason, could have a material adverse effect on our financial results, business and prospects.
We face intense competition and may not be able to compete successfully against existing or future competitors.
The online retail market is evolving rapidly and is intensely competitive. Barriers to entry are minimal, and current and new competitors can launch new websites at a relatively low cost. We currently compete with numerous competitors, including:
•online retailers with or without discount departments, including Amazon.com, AliExpress (part of the Alibaba Group), eBay, and Rakuten.com;
•online shopping services, including Google Shopping, Facebook, Instagram, and TikTok;
•online specialty retailers such as Wayfair, Build.com, Houzz, Hayneedle, Rugs.com, Groupon, World Market, and Zulily;
•furniture specialists including Bob's Discount Furniture, Havertys, Raymour & Flanigan, At Home, Tuesday Morning, Living Spaces, Nebraska Furniture Mart, RC Willey, and Rooms To Go;
•traditional general merchandise and specialty retailers and liquidators including Ashley Furniture, Bed, Bath & Beyond, Best Buy, Big Lots, Costco, Crate and Barrel, Ethan Allen, Gilt, Home Depot, HomeGoods, Hudson's Bay Company, IKEA, J.C. Penney Company, Kirkland's, Kohl's, Lands' End, Lowe's, Macy's, Nordstrom, Pier 1 Imports, Pottery Barn, Restoration Hardware, Ross Stores, Saks Fifth Avenue, Sears, T.J. Maxx, Target, Walmart, West Elm, and Williams-Sonoma, all of which also have an online presence; and
•online liquidators such as SmartBargains.
We expect that existing and future traditional manufacturers and retailers will continue to add or improve their e-commerce offerings, and that our existing and future e-commerce competitors, including Amazon, will continue to increase their offerings, their delivery capabilities, and the ways in which they enable shoppers to purchase goods, including their mobile technology and the voice-activated shopping services offered by Amazon. Further, large marketplace websites and sites which aggregate marketplace sellers with a large product selection are becoming increasingly popular, and we may not be able to place our products on these sites to take advantage of their internal search platforms and some shoppers may begin their searches at these websites rather than utilize traditional search engines at all. Many of our competitors specialize in one or more of the areas in which we offer products. For example, our furniture offerings compete with numerous retail furniture websites and traditional furniture retail specialists. We also face competition from shopping services such as Google Shopping, which offers products from Walmart, Costco, Target and many other retailers. Competition from our competitors, many of whom have longer operating histories, larger customer bases, greater brand recognition, greater access to capital and significantly greater financial, marketing and other resources than we do, affects us and has had and could continue to have a material adverse effect on our financial results, business and prospects.
Our Current Reviewbusiness depends on effective marketing, including marketing via email, search engine marketing, influencer marketing, and social media marketing, and our competitors have and may continue to directly increase our marketing costs, may outspend us on marketing, and also have and may continue to cause us to decrease certain types of Strategic Initiativesmarketing.
We depend on effective marketing and customer traffic. We depend on search engine marketing, email, and other e-commerce marketing methods to promote our site and offerings and to generate a substantial portion of our revenue. If a significant portion of our target customers no longer utilize email, or if we are unable to effectively and economically deliver email or marketing materials through other channels to our potential customers, whether for legal, regulatory or other reasons, it would have a material adverse effect on our business. We also rely on social media and influencers for marketing purposes, and anything that limits our ability or our customers' ability or desire to utilize social media could have a material adverse effect on our business. In addition to competing with us for customers, suppliers, and employees, our competitors have and may continue to directly increase our operating costs, by driving up the cost of various forms of online advertising. Furthermore, our competitors may outspend us on various forms of advertising or marketing, making our marketing efforts less effective. We may elect to decrease our use of search engine marketing or other forms of marketing from time to time in order to decrease our costs, which may have a material adverse effect on our financial results and business. We may also elect to spend additional amounts on search engine marketing or other forms of marketing from time to time in order to increase traffic to our Website, or to take other strategic actions to increase traffic and/or conversion, and such increased spending may not be effective on a cost-benefit basis, or at all. If we are unable to develop, improve, implement and maintain effective and efficient cost-effective advertising and marketing programs, it would have a material adverse effect on our financial results and business.
Numerous potential economic factors, including a recession, other economic downturns, inflation, our increasing exposure to the U.S. housing industry, and the potential for a decrease in consumer spending, have affected and could continue to adversely affect us.
Various potential adverse economic conditions, including a recession, other economic downturns, inflation, and weakness in the U.S. housing market, could decrease consumer discretionary spending and further adversely affect our financial performance. Consumer prices for all items rose 6.5% percent from December 2021 to December 2022. High inflation rates have led to increased interest rates. We believe that our sales of home-related products are affected by the strength of the U.S. housing industry. A recession or other economic downturn, in particular in the U.S. housing industry, has already negatively impacted our sales, and could have a material adverse effect on our financial results, business, and prospects.Similarly, a substantial portion of the products and services we offer are products or services that consumers may view as discretionary items rather than necessities. As a result, our results of operations are sensitive to changes in macroeconomic conditions that impact consumer spending, including discretionary spending. Difficult macroeconomic conditions also impact our customers' ability to obtain consumer credit. Other factors, including consumer confidence, employment levels, interest rates, fuel and energy costs, tax rates, and consumer debt levels could reduce consumer spending or change consumer purchasing habits. Slowdowns in the U.S. or global economy, or an uncertain economic outlook, could materially adversely affect consumer spending habits, have already negatively impacted our sales, and could have a material adverse effect on our financial results, business, and prospects.
Tariffs, bans, the spread of illness, or other measures or events that increase the effective price of products or limit our ability to access products we or our suppliers or fulfillment partners import into the United States could have a material adverse effect on our business.
We and many of our suppliers and fulfillment partners source a large percentage of the products we offer on our Website from China and other countries. If the United States imposes tariffs or bans on imports, or if other factors that are outside of our control increase the prices of imported products sold on our Website or limit our ability to access products sold on our Website, the increased prices and/or supply chain challenges could have a material adverse effect on our financial results, business and prospects.
The changing job market, the loss of key personnel, the changing job structure, or any inability to attract, retain and engage additional key personnel could affect our ability to successfully grow our business.
Our performance is substantially dependent on the continued service and performance of our senior management and other key personnel. Our performance also depends on our ability to retain and motivate our officers and key employees. Given the current labor migration trends in the U.S., and more businesses allowing employees to work remotely, we are forced to compete with businesses in other locations and states to attract and retain key employees. We recently announced that under our FORWARD (Future of Remote Work and Re-entry Design) Plan, most of our local workforce will increase their onsite workdays to three days each week and perform the remaining workdays in that week remotely. This hybrid job structure for most of our workforce, with increased time onsite, could create consequences such as a lack of productivity, a lack of engagement, employee dissatisfaction, and employee fatigue. Some key employees may leave to work for businesses that offer
full-time remote work schedules, full-time onsite work schedules, or for businesses they otherwise find more attractive. The loss of, or the inability to retain or engage the services of key employees for any reason, could harm our business. Our future success depends on our ability to identify, attract, hire, train, engage, retain, and motivate highly-skilled personnel. Our failure to attract, retain, and engage the personnel necessary to successfully operate our business could have a material adverse effect on our financial results, business and prospects.
We rely upon paid and natural search engines to rank our product offerings, and our financial results may suffer if we are unable to maintain our prior rankings in natural searches.
We rely on paid and natural search engines to attract consumer interest in our product offerings, including Google, Bing, and Yahoo!. Changes to their ranking algorithms and competition from other retailers to attract consumer interest may adversely affect our product offerings in paid and/or natural searches, and we may at times be subject to ranking penalties if the operators of search engines believe we are not in compliance with their guidelines. Search engine companies change their natural search engine algorithms periodically and online retailers compete to rank well with these search engine companies. Our ranking in natural searches may be adversely affected by those changes, as has occurred from time to time, which has led us to pursue revenue growth in other more expensive marketing channels. Google's search engine is dominant in our business and has historically been a significant source of traffic to our website, much of it at essentially no incremental cost to us. Search engine companies may also determine that we are not in compliance with their guidelines from time to time, as has occurred in the past, and they may penalize us in their search algorithms as a result. In recent years, we have experienced declines in our rankings in Google's natural search engine, which has required us to utilize more expensive marketing channels or otherwise compensate for the loss of some of the natural search traffic. Any future declines in our rankings in Google's natural search engine could have a material adverse effect on our business.
If we are not profitable and/or are unable to generate sufficient positive cash flow from operations, our ability to continue in business will depend on our ability to raise additional capital, obtain financing or monetize significant assets, and we may be unable to do so.
At December 31, 2022 our accumulated deficit was $173.8 million. We experienced significant losses in years leading up to 2020. Although our financial results were significantly better in 2020 and 2021, we incurred additional losses in 2022 which included significant non-cash losses on our equity method investments. If we are unable to successfully manage our business in the future, our ability to continue in business could depend on our ability to raise sufficient additional capital, obtain sufficient financing, or sell or otherwise monetize significant assets such as our corporate headquarters. Additionally, we may not be able to raise capital on acceptable terms or at all. The occurrence of any of the foregoing risks would have a material adverse effect on our financial results, business and prospects.
Remote or hybrid work schedules, resulting from future pandemics or otherwise, could have technology and security consequences, could result in policies, mandates, or regulations that apply unevenly to businesses, could cause employee fatigue, and could negatively impact our operations.
Many of our employees and contractors continue to work remotely or on a hybrid work schedule. Additional risks are inherent when employees and contractors work remotely, including risks that third-party Internet and phone service providers may not provide adequate services for employees and contractors to perform their responsibilities, risks that hardware, software, or other technological problems or failures could prevent employees or contractors from performing their responsibilities and could take an excessive amount of time to resolve and risks that employees and contractors may not be trained as effectively or monitored as closely from remote locations, creating greater risks for the security of confidential information. Additionally, government policies, mandates, or regulations created in response to the future spread of disease or illness could apply unevenly to businesses, whether based on business size, industry, or some other reason, which could make certain businesses less desirable for employment and could impair our ability to attract and/or retain key employees. Employees may leave to work for businesses they find more attractive. Any such occurrences could have a material negative impact on the business.
Our business depends on the Internet, our infrastructure and transaction-processing systems.
We are completely dependent on our infrastructure and on the availability, reliability and security of the Internet and related systems. Although we have migrated and continue to migrate some of our computer systems and operations to the public cloud, a substantial majority of our computer and communications infrastructure is running in our private cloud on hardware that is located at a single Overstock owned and operated facility. Our systems and operations are vulnerable to damage or interruption from fire, flood, power loss, telecommunications failure, terrorist attacks, cyber-attacks, acts of war, break-ins, earthquake and similar events. Our back-up facility by itself is not adequate to support fulfillment of sales orders. Our servers and applications are vulnerable to malware, physical or electronic break-ins, internal sabotage, and other disruptions, the occurrence of any of which could lead to interruptions, delays, loss of critical data or the inability to accept and fulfill customer
orders. Any internal or critical third-party system interruption that results in the unavailability of our Website or our mobile app or reduced performance of our transaction systems could interrupt or substantially reduce our ability to conduct our business. We have experienced periodic systems interruptions due to server failure, application failure, power failure and intentional cyber-attacks in the past, and may experience additional interruptions or failures in the future. Any failure or impairment of our infrastructure or of the availability of the Internet or related systems could have a material adverse effect on our financial results, business and prospects. In addition, the occurrence of any event that would adversely affect e-commerce or discourage or prevent consumers from shopping online or via mobile apps could significantly decrease the volume of our sales.
We are subject to cyber security risks and risks of data loss or other security breaches.
Our business involves the storage and transmission of users' proprietary information, and security breaches could expose us to a risk of loss or misuse of this information, and to resulting claims, fines, and litigation. We have developed certain software products to assist with the operation and management of our business which could contain flaws or vulnerabilities that could present cyber security-related risks, data loss, other security breaches, or damage to our business, our suppliers, or our customers. We have been subjected to a variety of cyber-attacks, which have increased in number and variety over time. We believe our systems are probed by potential hackers virtually 24/7, and we expect the problem will continue to grow worse over time. Cyber-attacks may target us, our customers, our suppliers, banks, credit card processors, delivery services, public cloud providers, e-commerce in general or the communication infrastructure on which we depend. Any flaws or vulnerabilities in the software we created or technologies designed to prevent attacks on our systems and other third-party systems, compromise of our security, data breaches, malfunctions, or errors, could result in a violation of applicable privacy and other laws, significant legal and financial exposure, damage to our reputation, and a loss of confidence in our security measures, any of which could have a material adverse effect on our financial results and business. Moreover, any insurance coverage we may carry may be inadequate to cover the expenses and other potential financial exposure we could face as a result of a cyber-attack or data breach.
We recently reversed the valuation allowance for a significant portion of our deferred tax assets, and we may not be able to realize these assets in the future. Our deferred tax assets may also be subject to additional valuation allowances, which could adversely affect our operating results.
Determining whether a valuation allowance for deferred tax assets is appropriate requires judgment and an evaluation of all positive and negative evidence. At each reporting period, we assess the need for, or the sufficiency of a valuation allowance against deferred tax assets. During 2021, based on the weight of all the positive and negative evidence, we concluded that it was more likely than not that we will realize certain federal and state net deferred tax assets based on future taxable income. Therefore, we reversed the valuation allowance on those deferred tax assets during 2021. We maintain a valuation allowance against our deferred tax assets for capital losses and the state of Utah where not supported by future reversals of taxable temporary differences, because of the uncertainty regarding the realizability of these deferred tax assets.
Our conclusion that it is more likely than not that we will realize certain federal and state net deferred tax assets is primarily based on our estimate of future taxable income. Our estimate of future taxable income is based on internal projections which primarily consider historical performance, but also include various internal estimates and assumptions and certain external data. We believe all of these inputs to be reasonable, although inherently subject to judgment. If actual results differ significantly from these estimates of future taxable income, we may need to reestablish a valuation allowance for some or all of our deferred tax assets. Establishing an allowance on our net deferred tax assets could have a material adverse effect on our financial condition and operating results.
We may be required to recognize losses relating to our equity method investments.
At December 31, 2022, we held equity method investments totaling approximately $296.3 million. The underlying equity interests are in entities that are in the startup or development stages. Equity method securities are inherently risky because we do not have the ability to influence business decisions. Further, these investments are inherently risky because the markets for the technologies or products these companies are developing are typically in the early stages and may never materialize. Since these investments are in companies that are in the early startup or development stages, even if their technology or products are viable, they may not be able to obtain the capital or resources necessary to successfully bring their technology or products to market. We have recognized losses related to these equity method securities in the past and may in the future recognize additional losses. Additionally, due to tax law limitations around deductibility of capital and investment losses, we may not be able to recognize a tax benefit on these losses when they occur. Any such loss could be material and could have a material adverse effect on our financial results.
If governmental entities or providers of consumer devices and internet browsers further restrict or regulate the use of "cookie" tracking technologies, the amount or accuracy of online user information we collect could decrease, which could harm our business and operating results.
Various federal, state and international governmental entities have enacted or are considering enacting legislation or regulations that could significantly restrict the ability of companies to use proprietary or third-party "cookies" and other methods of online tracking for behavioral advertising. For example, some governmental agencies have regulated the level of consumer notice and consent required before a company can employ cookies or other electronic tracking tools or the use of data gathered with such tools. Additionally, some providers of consumer devices and web browsers have implemented or plan to implement methods of making it easier for Internet users to prevent the placement of cookies, to block other tracking technologies or to require new permissions from users for certain activities, which have impacted us in the past and have the potential to significantly reduce the effectiveness of such practices and technologies in the future. Any further restriction on the use of cookies and other online tracking and advertising practices could limit our ability to effectively retain existing customers or acquire new customers and consequently, materially adversely affect our business, financial condition and operating results.
If the legal, regulatory, or tax treatment of our company changes adversely, it could impact our ability to conduct business and, accordingly, our financial results.
New or revised laws, regulations, or court decisions may subject us to additional requirements and new disclosures that could increase the cost of doing business, increase scrutiny for the way decisions are made, decrease our revenues, or impact our business model. For example, the SEC has proposed rules that would affect publicly-traded company disclosure obligations in the areas of climate change and cyber security which, if approved, would increase our costs of doing business and expose us to potential compliance risk. In addition, new or revised tax regulations or court decisions may subject us or our customers to additional taxes. Other new or revised legal, regulatory, or tax treatment could expose us to additional risk, increase the cost of doing business online, and increase internal costs necessary to capture data, report data, and collect and remit taxes. For example, the Tax Cuts and Jobs Act of 2017 eliminated the option to immediately deduct research and development expenditures in 2022, and instead required them to be amortized in future years. This new requirement caused us to utilize significant federal and state net operating loss carryforwards in the current year. We expect to continue to utilize federal and state tax attributes at a faster rate than our financial statement earnings in the future and there may be increases to cash taxes paid unless legislation is passed that would defer, repeal, or otherwise modify these new requirements. Any of these items could have a material adverse effect on our business and financial results.
We and certain of our former and current officers and directors have beenare named in shareholder class action lawsuits and shareholder derivative lawsuits, which could require significant additional management time and attention, result in significant additional legal expenses or result in government enforcement actions.
We and certain of our former and current officers and directors have beenare named in shareholder class action lawsuits and shareholder derivative lawsuits, and may become subject to further litigation, government investigations or proceedings arising therefrom. The pending litigation and any future litigation, investigations or other actions that may be filed or initiated against us or our current or former officers or directors may be time consuming and expensive. We cannot predict what losses, if any, we may incur in these litigation matters, and expect to incur significant legal expenditures in defending and responding to these litigation matters.
Any such legal proceedings, if decided adversely to us, could result in significant monetary damages, penalties and reputational harm, and will likely involve significant defense and other costs. We have entered into indemnification agreements with each of our directors and certain of our officers, requiring us to indemnify them. Further, our insurance may not cover all claims that have been or may be brought against us, and insurance coverage may not continue to be available to us at a reasonable cost. As a result, we may be exposed to substantial uninsured or under-insured liabilities, including pursuant to our indemnification obligations, which could materially adversely affect our business, prospects, results of operations and financial condition.
We and tZERO, in which we own a direct minority interest, are both the subjects of, and parties to, investigations by the SEC Division of Enforcement, which has required us to expend significant financial and legal resources. The resolution of those investigations may have a material adverse effect on our business, financial condition, results of operations and cash flows.
In February 2018, the Division of Enforcement of the SEC informed tZERO and subsequently informed us that it is conducting an investigation and requested that we and tZERO voluntarily provide certain information and documents related to tZERO and the tZERO security token offering in connection with its investigation. In December 2018, we received a follow-up request from the SEC relating to its investigation and relating to GSR Capital Ltd., a Cayman Islands exempted company ("GSR"). As previously disclosed, onin October 7, 2019, we received a subpoena from the SEC's Division of Enforcement pursuant to a formal SEC order of investigation requiring us to produce documents and other information related to the Series A-1 Preferred stock dividend we announced to stockholders in June 2019 (the "Dividend") and requesting copies of 10b5-1 plans entered into by certain officers and directors. OnIn December 9, 2019, we received a subpoena from the SEC requesting documents related to the GSR transaction and the alternative trading system run by tZERO ATS, LLC. On December 19, 2019, we received a subpoena from the SEC requesting our insider trading policies as well asand certain employment and consulting agreements. We have also previously received requests from the SEC regarding GSR andfor our communications with our former chief executive officerChief Executive Officer and director,Director, Patrick Byrne,
and the matters referenced in the December 2019 subpoenas. In January 2021, we received a subpoena from the SEC requesting
information regarding our Retail guidance in 2019 and certain communications with current and former executives, board members, and investors. We are cooperatingcontinue to cooperate with the SEC's investigation and have provided documents requestedSEC in the subpoenas.these matters.
Although we believe that we have fully complied with all relevant laws and regulations, there can be no assurance that the SEC will not commence an enforcement action against us or members of our management, or as to the ultimate resolution of any enforcement action that the SEC may decide to bring. Under applicable law, the SEC has the ability to impose significant sanctions on companies and individuals who are found to have violated the provisions of applicable federal securities laws, including cease and desist orders, civil money penalties, and barring individuals from serving as directors or officers of public companies. We have expended significant financial and legal resources responding to the SEC subpoena and such responses have required a significant amount of the time and attention of our senior management and personnel. Defending any enforcement action brought by the SEC against us or members of our management would involve further significant expenditures and the resolution of any such enforcement action could have a material adverse effect on our business, financial condition, results of operations and cash flows. Additionally, the outcome of any investigation related to the activities of tZERO could result in negative publicity for tZERO or us or limit the products which tZERO may be able to offer, which may have an adverse effect on the current and future business ventures of tZERO or us.
Our D&O insurance policy cost could substantially increase, through increased self-retention amounts and premium increases, and coverage under our policy could fail to adequately protect us against liability for conduct of our directors and officers.
We carry directors and officers liability insurance (D&O insurance) for losses and advancement of defense costs in the event legal actions are brought against our directors and officers for alleged wrongful acts in their capacity as directors or officers. Our current annual D&O insurance policy, effective on October 1, 2019, contains significantly larger self-insured-retention amounts and more exclusions to coverage than in the past. As such, our D&O insurance may not be adequate to fully protect the company against liability for the conduct of its directors and officers.
The costs of our D&O insurance policy premiums increased substantially in the most recent annual renewal, effective October 1, 2019, compared to the prior year policy premiums. If the costs of maintaining adequate insurance coverage increases significantly in the future, our operating results could be materially adversely affected.
We have a history of significant losses. If we do not achieve profitability or generate positive cash flowsuccessfully optimize and operate our distribution center, warehouse, and customer service operations, our business could be harmed.
We have expanded, contracted, and otherwise modified our distribution center, warehouse, and customer service operations from operationstime to time in the near future,past, and expect that we will continue to do so. If we do not successfully optimize and operate our distribution center, warehouse, and customer service operations, it could significantly limit our ability to continuemeet customer demand, customer shipping or return time expectations, or result in business will depend onexcessive costs and expenses for the size of our abilitybusiness. Because it is difficult to raise additional capital, obtain financing or monetize significant assets, and we may be unable to do so.
We have a history of significant losses and our losses have accelerated in recent years and we expect to incur operating and net losses in the foreseeable future. Net cash used in operating activities were $81.6 million during 2019, and at December 31, 2019 our accumulated deficit was $580.4 million. Our losses have accelerated in recent years andpredict demand, we may not be able to achieve profitability promptlymanage our facilities in an optimal way, which may result in excess or insufficient inventory or warehousing capacity. Our fulfillment and customer service centers may also fail to staff at all. We are workingoptimal levels. Our failure to improve the efficiency ofmanage our warehouse operations, but may be unable to do so. Cost reductions we may implement in the future maydistribution centers or our fulfillment and customer service centers optimally could adversely affect our business operations. If we are unable to successfully manage our business while reducing our expenses, our ability to continue in business could depend on our ability to raise sufficient additional capital, obtain sufficient financing, or sell or otherwise monetize significant assets such as our corporate headquarters. We do not expect to be able to obtain significant debt financing in the near future. Additionally, we may not be able to raise capital on acceptable terms or at all. The occurrence of any of the foregoing risks would have a material adverse effect on our financial results business and prospects.
We have significant negative working capital.
Our net working capital (current assets less current liabilities) was a negative $38.6 million at December 31, 2019 compared to a negative $26.2 million at December 31, 2018. Additionally, any significant declines in our revenues could result in decreases in our working capital, which would further reduce our cash balances. Our failure to generate sufficient revenues or profits or to obtain additional financing or raise additional capital could have a material adverse effect on our operations and on our ability to meet our obligations as they become due. The occurrence of any of the foregoing risks would have a material adverse effect on our financial results, business and prospects.
Changes in management roles and responsibilities, the loss of key personnel, or any inability to attract and retain additional personnel could affect our ability to successfully grow our business.
Our performance is substantially dependent on the continued services and on the performance of our senior management and other key personnel. Our performance also depends on our ability to retain and motivate our officers and key employees. Our former chief executive officer and director, Dr. Patrick Byrne, and our former chief financial officer, Gregory Iverson, resigned in August 2019 and September 2019, respectively. The loss of the services of these executive officers, and any of our executive officers or other key employees for any reason, could harm our business. We do not have employment agreements with any of our key personnel. Our future success, in both our e-commerce business and in our Medici business, also depends on our ability to identify, attract, hire, train, retain and motivate other highly-skilled technical, managerial, editorial, merchandising, marketing and customer service personnel. Our failure to attractexperience and retain the necessary personnel could have a material adverse effect on our financial results, business and prospects.
Future salesGlobal conflict, increasing tensions between the United States and Russia, the United States and China, and other effects of the ongoing conflict in Ukraine, could negatively impact our business, results of operations, and financial condition.
Global conflict could increase costs and limit availability of fuel, energy, and other resources we depend upon for our business operations and could also limit product assortment availability. For example, while we do not operate in Russia or Ukraine, the increasing tensions between the United States and Russia and the other distributionseffects of the ongoing conflict in Ukraine, have resulted in many broader economic impacts such as the United States imposing sanctions and bans against Russia and Russian products imported into the United States. Such sanctions and bans have impacted and may continue to impact commodity pricing such as fuel and energy costs, making it more expensive for us and our partners to deliver products to our customers. Further, we and many of our common or preferred stock may depresssuppliers and fulfillment partners source a large percentage of the products we offer on our stock price or subject usWebsite from China. Relations between the United States and China have become increasingly strained and if tensions were to limitations onescalate, it could limit our ability to useprovide a full assortment of furniture and home furnishings on our net operating and tax credit carryforwards.
SalesWebsite. Sanctions, bans, trade restrictions, or other distributionseconomic actions in response to the present or future conflict in Ukraine, China, or in response to any other global conflict could result in an increase in costs, further disruptions to our supply chain, and a lack of a substantial numberconsumer confidence resulting in reduced demand. While the extent of sharessuch items is not presently known, any of them could negatively impact our common stock or our preferred stock, including our potential Series A-1 dividend, in the public market or otherwise, by us or by a significant stockholder, has in the pastbusiness, results of operations, and could in the future, depress the trading price of our common or preferred stock and impair our ability to raise capital through the sale of additional equity securities. The transfer of ownership of a significant portion of our outstanding shares of common or preferred stock in the public market or otherwise, by us or by a significant stockholder, within a three-year period could adversely affect our ability to use our net operating losses and tax credit carryforwards to offset future taxable net income.financial condition.
In addition, we may issue additional shares of our common or preferred stock from time to time in the future in amounts that may be significant. We are planning to issue approximately four million new shares of Series A-1 Preferred stock to pay the Dividend we announced in June of 2019. Further, we have sold common stock under our "at the market" sales agreement with JonesTrading in the past and may do so in the future. The sale of substantial amounts of our common or preferred stock, by us or a significant stockholder, or the perception that these sales may occur, could adversely affect the trading prices of either or both of these securities or subject us to limitations on our ability to use our net operating and tax credit carryforwards.
We are subject to the risk of possibly becoming an investment company under the Investment Company Act.
The Investment Company Act regulates certain companies that invest in, holdor trade securities. Primarily as a result of a portion of our assets consisting of minority investment positions, we are subject to the risk of inadvertently becoming an investment company. Because registration under the Investment Company Act would make it impractical for us to operate our business, we need to avoid becoming subject to the registration requirements of the Investment Company Act. To do so, we may structure transactions in a less advantageous manner than if we did not have Investment Company Act concerns, or we may avoid otherwise economically desirable transactions and/or strategic initiatives due to those concerns. In addition, events beyond our control, including significant appreciation or depreciation in the value of certain of our holdings or adverse developmentspartially self-insured with respect to our ownershipemployees' health insurance. If the actual costs of certainthese claims exceed the amounts we have accrued for them, we would incur additional expense.
Since January 1, 2017, we have been partially self-insured with respect to our employees' health insurance, except to the extent of stop-loss coverage that limits our losses both on a per employee basis and an aggregate basis. The actual costs of our subsidiaries,employees' health insurance claims could resultexceed our estimates of those costs for a number of reasons, including more claims or larger claims than we expect, and increases in us inadvertently becoming an investment company.the costs of healthcare generally. If it were established that we were an investment company, there would be a risk, among other material adverse consequences, that we could become subject to monetary penalties or injunctive relief, or both, in an action brought by the SEC, that we would be unable to enforce contracts with third parties or that third parties could seek to obtain rescission of transactions with us undertaken during the period it was established that we were an unregistered investment company. If it were established that we were an investment company, it would have a material adverse effect on our business and financial operations and our ability to continue our business.
We have an evolving business model, which increases the complexityactual cost of our retailemployees' health insurance claims and Medici businesses.
In prior years we added additional types of services and product offerings and in some cases, we modified or discontinued those offerings, and in some cases have re-launched offerings we had previously terminated. We may continue to try to offer additional types of products or services, and we do not know whether any of them will be successful. From time to timerelated expenses exceeds the amounts we have also modified aspects of our business model relating to our product mix and the mix of direct/partner sourcing of the productsaccrued, we offer. In addition, we continue to experiment with new technologies to enhance the customer experience and iterate on delivery of new features. The additions and modifications to our business have increased the complexity of our business and impacted our management, personnel, operations, systems, technical performance, financial resources, and internal financial control and reporting functions. Further, our efforts to promote a culture of experimentation amongst our technologists in an attempt to stay ahead of the competition may result in the introduction of technologies that are less mature
or stable which could cause problems in our website or back-end logistics systems. Future additions to or modifications of our business are likely to have similar effects. Further, any new business, technology, or website we launch that is not favorably received by consumers could damage our reputation or our brand. The occurrence of any of the foregoing could have a material adverse effect on our financial results, business and prospects.
If we fail to comply with ongoing Nasdaq listing standards and corporate governance requirements, we could be subject to delisting.
Our common stock is currently listed on the Nasdaq Global Market. In order to maintain this listing, we are required to comply with various continued listing standards, including corporate governance requirements, set forth in the Nasdaq Listing Rules. These standards and requirements include an obligationrecord additional charges for these claims and/or to maintain a Board of Directors, a majority of whom are deemed to be independent and that we maintain an Audit Committee consisting of at least three independent Board Members. Our Board of Directors currently has five members, four of whom are deemed independent, and our Audit Committee consists of three of these independent directors. If more than one of our independent directors should cease to be on the Board within a short period of time, we may not be able to recruit one or moreestablish additional independent directors in such time period in order to have a majority of independent directors on our Board and at least three independent directors on our Audit Committee. If such a scenario was not rectified in accordance with applicable Nasdaq Listing Rules, we could become subject to Nasdaq delisting procedures.
The size or skills of our workforce may not be adequate to execute initiatives to improve the performance of our retail business effectively or at all.
We have been and are currently implementing certain initiatives to improve the performance of our retail business, and any insufficiency in the size of our workforce or any insufficiency of certain required skills of our workforce, could prevent us from engaging in certain initiatives we had previously considered and could prevent us from executing such initiatives effectively,cash reserves, which could have a material adverse effect on our financial results, business and prospects.
Our ownership of less than 100% of our subsidiaries may cause conflicts of interest.
Our wholly-owned subsidiary Medici Ventures owns approximately 80% of the outstanding common stock of tZERO, and tZERO employees, former employees and others own the balance of the shares. tZERO has issued employee stock options that may further dilute our ownership interest. In addition, tZERO may in the future engage in capital raising activities that could further dilute our ownership interest. Medici Ventures, tZERO and Medici Land Governance also issued employee stock options that could result in the dilution of our ownership interest in Medici Ventures, tZERO and Medici Land Governance in the future. The boards of directors of Medici Land Governance, tZERO and Medici Ventures must consider the interests of all of their stockholders, and the interests of the other stockholders may differ from our interests. Any significant divergence between our interests and the interests of other stockholders, a significant portion of whom are also likely to be employees, of our subsidiaries, could result in disagreements regarding business matters and could have an adverse effect on employee morale and on our business.
The options granted by Medici Ventures, tZERO and Medici Land Governance could reduce our effective ownership of each of them significantly.
Medici Ventures, tZERO and Medici Land Governance have granted compensatory options under their respective stock option plans and warrants have also been sold to purchase Medici Ventures common stock. If all of the currently outstanding Medici Ventures options were vested and exercised and all of the currently outstanding warrants were exercised, our ownership of Medici Ventures would decrease from 100% to 89%.
tZERO has granted compensatory options under its equity incentive plan. If all of the currently outstanding tZERO options were vested and exercised, Medici Ventures' ownership of tZERO would decrease from 80% to 74%.
If all of the currently outstanding Medici Ventures options and warrants and all of the currently outstanding tZERO options were exercised, our effective indirect ownership of tZERO would decrease from 80% to 66%.
Medici Land Governance has granted compensatory options under its equity incentive plan. If all of the currently outstanding Medici Land Governance options were vested and exercised, Medici Ventures' ownership of Medici Land Governance would decrease from 35% to 34%.
If all of the currently outstanding Medici Ventures options and warrants and all of the currently outstanding Medici Land Governance options were exercised, our effective indirect ownership of Medici Land Governance would decrease from 35% to 30%.
We are exploring strategic initiatives, and decisions we make could have material adverse effects on our business and the market price of our common stock.
We have been and are currently exploring certain strategic initiatives, and decisions we make could change our business fundamentally and increase the risks and uncertainties of our business substantially. We are considering a range of potential transactions, including additional equity or debt financings. There can be no assurance that we will pursue or consummate any strategic transaction or, if consummated, that any such transaction will ultimately be favorable to us or our stockholders. Any such transaction could materially adversely affect our business and financial results. In addition, our exploration of strategic and financing options has required and will continue to require significant time and attention by our management, and the incurrence of significant expenses. Further, our efforts to keep investors informed about our consideration of strategic alternatives may result in distraction and unrest among our employees, which may adversely affect employee engagement, morale and retention and which could have a material adverse effect on our financial results, business and prospects.
Our previous efforts to sell our retail business could have a materially adverse effect on our business, financial results and future prospects.
As a consequence of our previous discussions with potential bidders for our retail business, or any future discussions that may arise as a result of our previous efforts, it may be possible for potential bidders to misappropriate intellectual property and other confidential information from us, which in turn could have a material adverse effect on our financial results, business operations and prospects. Our previous efforts to sell our retail business could result in future offers from potential bidders and, if we sell our retail business as a result of any such offer, our revenues would decrease to an insignificant amount and we would become a much smaller company. Consequently, risks relating to our Medici businesses, including our tZERO initiatives, which may currently be immaterial to us, would likely each become material risks to us. See "Additional Risks Relating to our Medici Business," and "Additional Risks Relating to our tZERO Initiatives" below. Our retail business is a relatively mature and predictable business compared to our Medici initiatives, which have a short history, minimal revenues, significant expenses, significant losses and significant uncertainties, and conduct business in a new and rapidly changing industry. We would continue to bear most of the expenses we currently bear as a publicly held company but would have to build a new business and develop new sources of revenue based on our blockchain initiatives, and there is no assurance that we would be able to do so or, even if we could do so, that our new business could become profitable. Further, a sale of our retail business in a taxable transaction could result in a substantial corporate level income tax expense for the Company. If we sell our retail business, at present we do not expect to submit any transaction to a stockholder vote unless we are required to do so, whether by applicable law or otherwise, and we currently expect to retain all of the after-tax proceeds of the sale for use in our blockchain initiatives. If we sell our retail business, the Compensation Committee of our Board of Directors may accelerate the vesting, in whole or in part, of some or all outstanding restricted stock units ("RSUs") under our 2005 Equity Incentive Plan, which would result in an increase in the number of shares outstanding and would dilute stockholders' ownership of our company. As a result of any such actions, the market price of our securities, our business, financial results and prospects could be materially adversely affected.
Strategic relationships, joint ventures, purchases of strategic interests in other companies and acquisitions of other companies involve numerous risks, including increased regulatory and integration risks and may require additional capital investment.
We have developed strategic relationships, entered into joint ventures, purchased strategic interests in other companies, and acquired other companies, and we expect to pursue and engage in similar types of activities in the future. Each of these types of business transactions involve numerous risks, including difficulties in the evaluation of business opportunities and risks, including regulatory and integration risks, as well as difficulties in the assimilation of acquired operations and products. These types of transactions can also result in the diversion of management's attention from other business matters, employee retention issues, and the risk of liability for liabilities of acquired companies. We may not be able to successfully integrate businesses, operations, personnel, services, products or other assets that we have acquired or may acquire in the future. In addition, as discussed under "Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Off-Balance Sheet Arrangements", we have a $5 million contingent obligation to provide additional funding in the future to our BSTX joint venture if and when, during the first 48 months after the establishment of the entity, the aggregate cash balance of BSTX's combined bank accounts fall below $2 million for any reason.
Further, acquisitions may also create a need for additional accounting, tax, compliance, documentation, risk management and internal control procedures, and may require us to hire additional personnel to implement, perform and/or monitor such procedures. To the extent our procedures are not adequate to appropriately implement, perform and/or monitor all necessary procedures relating to any new or expanded business, we could be exposed to a material loss or regulatory sanction. We may also recognize impairment charges as a result of future acquisitions. In addition, we may be unable to sell or otherwise monetize any of the interests or companies or other assets or rights we have acquired or may acquire in the future. We also may be unable to maintain our strategic relationships, including those with joint venture partners, or develop new strategic relationships. The occurrence of any of the foregoing which could have a material adverse effect on our financial results, business and prospects.
We have significant deferred tax assets, and we may not be able to realize these assets in the future.
We have established a valuation allowance for our net deferred tax assets, primarily due to realized losses and uncertainty regarding our future taxable income. In addition, the transfer of ownership of a significant portion of our outstanding shares of common or preferred stock in the public market or otherwise, by us or by a significant stockholder, within a three-year period could adversely affect our ability to use our net operating losses and tax credit carryforwards to offset future taxable net income. Determining whether a valuation allowance for deferred tax assets is appropriate requires significant judgment and an evaluation of all positive and negative evidence. At each reporting period, we assess the need for, or the sufficiency of, a valuation allowance against deferred tax assets. We intend to maintain 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.
We are currently subject to claims that we have infringed intellectual property rights of third parties and may be subjected to additional infringement claims in the future.
We are currently and may in the future be subject to claims that we have infringed the intellectual property rights of others, by offering allegedly infringing products or otherwise. We have contested and expect to continue to contest claims we consider unfounded rather than settling such claims, even when we expect the costs of contesting the claims to exceed the cost of settlement. Any claims may result in significant expenditure of our financial and managerial resources and may result in us making significant damages or settlement payments or changes to our business. We could be prohibited from using software or business processes, or required to obtain licenses from third parties, which could be expensive or unavailable. Any such difficulties could have a material adverse effect on our financial results, business and prospects.
We may be unable to protect our proprietary technology and to obtain trademark protection for our marks.
Our success depends to a significant degree upon the protection of our software and other proprietary intellectual property rights. We rely on a combination of laws and contractual restrictions with our employees, customers, suppliers, affiliates, and others to establish and protect our proprietary rights, including the law pertaining to trade secrets. Despite these precautions, it may be possible for a third party to copy or otherwise obtain and use our intellectual property or trade secrets without authorization. In addition, we cannot ensure that others will not independently develop similar intellectual property. Third parties have in the past recruited and may in the future recruit our employees who have had access to our proprietary technologies, processes and operations. These recruiting efforts expose us to the risk that such employees and those hiring them will misappropriate and exploit our intellectual property and trade secrets. We may be unable to protect against such risks, in the United States or elsewhere, which could have a material adverse effect on our business. Although we have registered and are pursuing the registration of our key trademarks in the United States and some other countries, some of our trade names may not be eligible to receive registered trademark protection. In addition, effective trademark protection may not be available or we may not seek protection in every country in which we market or sell our products and services, including in the United States. Our competitors might adopt product or service marks like our marks or might try to prevent us from using our marks. Any claim by another party against us, or customer confusion related to our trademarks, or our failure to obtain trademark registration, could have a material adverse effect on our financial results, business and prospects.
If one or more states successfully assertsWe are currently subject to claims that we have infringed intellectual property rights of third parties and may be subjected to additional infringement claims in the future.
We are liable for the collection of sales or other taxes for periods prior to the Supreme Court's recent decision in South Dakota v. Wayfair, our business could be harmed.
Prior to the Supreme Court's 2018 decision in South Dakota v. Wayfair, in which we were a named party, to overturn its 1992 decision in Quill v. North Dakota, we generally did not collect sales or other similar taxes on sales of goods into states where we had no duty to do so under Quill. Some jurisdictions where we did not collect sales or other taxes have asserted that we should have done so,currently and other jurisdictions couldmay in the future assertbe subject to claims that we should have collected sales taxesinfringed the intellectual property rights of others, by offering allegedly infringing products or other taxesotherwise. We have contested and expect to continue to contest claims we consider unfounded rather than settling such claims, even when we did not,expect the costs of contesting the claims could potentially exceed the cost of settlement. Any claims may result in significant expenditure of our financial and managerial resources and may result in us making significant damages or settlement payments or changes to our business. We could be prohibited from using software or business processes, or required to obtain licenses from third parties, which could be expensive or unavailable. Any such difficulties could have a material adverse effect on our financial results, business regardlessand prospects.
We depend on our suppliers' and fulfillment partners' representations regarding product safety, content and quality, product compliance with various laws and regulations, including registration and/or reporting obligations, and for proper labeling of products.
We rely on our suppliers' and fulfillment partners' representations of product safety, content and quality, product compliance with various laws and regulations, including registration and/or reporting obligations, and proper labeling of products. Issues or concerns regarding product safety, compliance, registration and/or reporting, labeling, content or quality could result in consumer or governmental claims and could adversely affect our financial results and business. Any indemnity agreement we may have with a supplier or fulfillment partner of a product may be inadequate or inapplicable, and any insurance coverage we may carry may be inadequate. Even unsuccessful claims could result in the expenditure of funds and management time and could have a negative impact on our business. The occurrence of any of the ultimate outcome.foregoing could have a material adverse effect on our financial results, business and prospects.
We have an evolving business model, which increases the complexity of our business.
In prior years we added additional types of services and product offerings and in some cases, we modified or discontinued those offerings, and in some cases have re-launched offerings we had previously terminated. We may continue to try to offer additional types of products or services, and we do not know whether any of them will be successful. From time to time we have also modified aspects of our business model relating to our product mix and the mix of direct/partner sourcing of the products we offer. We recently eliminated our assortment of non-home goods offered for sale on our Website in order to increase our brand association with "home" expertise. In addition, we continue to experiment with new technologies to enhance the customer experience and iterate on delivery of new features. The additions and modifications to our business have increased the complexity of our business and impacted our management, personnel, operations, systems, technical performance, financial resources, and internal financial control and reporting functions. The elimination of non-home goods has resulted in reduced revenues which we have not yet been able to fully offset. Further, our efforts to promote a culture of innovation amongst our technologists in an attempt to stay ahead of the competition may result in the introduction of technologies that are less mature or stable which could cause problems in our website or back-end logistics systems. Future additions to or modifications of our business are likely to have similar effects. Further, any new business, technology, or website we launch that is not favorably received by consumers could damage our reputation or our brand. The occurrence of any of the foregoing could have a material adverse effect on our financial results, business, prospects, and the trading prices of our securities.
If Pelion is not successful in managing the Medici Ventures, L.P. fund or has to resign if there is a change in the interpretation or application of the Investment Advisers Act of 1940 (the "Advisers Act"), we would be unable to realize the anticipated benefits of this arrangement.
As the general partner of the Medici Ventures, L.P. fund, Pelion has control over the limited partnership and its activities, including day-to-day operations and investment decisions. Pelion is able to sell investments of the limited partnership at any time, make additional investments, modify, amend or change existing investments, make new investments and otherwise control the activities of the limited partnership.
The success of the Medici Ventures, L.P. fund depends on Pelion's ability to successfully manage the activities of the Medici Ventures, L.P. fund portfolio companies and its existing and future portfolio company investments. Pelion may not be successful in managing these investments and we may not receive the benefits we anticipate of the transaction with Pelion. Moreover, even if successful in managing the Partnership, Pelion has the right to withdraw as general partner under certain circumstances, including certain changes in Pelion's status under the Advisers Act. The occurrence of such an event is beyond our control, and, as a result, there can be no assurance that Pelion will remain as general partner for the term contemplated. If Pelion is no longer serving as the general partner, we will have the right under the partnership agreement to appoint a new general partner; however, it may not be possible to accomplish this in a timely manner, which could result in the termination of the partnership. Even if a new general partner is appointed in a timely manner, it may be unable to manage the activities of the Medici Ventures, L.P. fund and its portfolio company investments, which would prevent us from receiving the anticipated benefits of the partnership.
Our international business efforts could adversely affect us.
We sell products in international markets. International sales and transactions are subject to inherent risks and challenges that could adversely affect us, including:
•the need to develop new supplier and manufacturer relationships;
•the need to comply with additional U.S. and foreign laws and regulations;
•changes in international laws, regulatory requirements, taxes and tariffs;
•our limited experience with different local cultures and standards;
•geopolitical events, such as war and terrorist attacks;
•the risk that the products we offer may not appeal to customers in international markets;markets, whether due to the products themselves, the time to deliver, a lack of brand recognition, or another reason; and
•the additional resources and management attention required for such expansion.
Our international business could expose us to penalties for non-compliance with laws applicable to international business and trade, including the U.S. Foreign Corrupt Practices Act, which could have a material adverse effect on our business. Foreign data protection, privacy and other laws and regulations are different and often more restrictive than those in the United States. Compliance with such laws and regulations will result in additional costs and may necessitate changes to our business practices, which may adversely affect our business. A lack of brand recognition, increased costs associated with shipping products cross-border, increased times to deliver products to customers, or other matters that may reduce customer demand, could adversely affect our business. To the extent that we make purchases or sales denominated in foreign currencies, we would have foreign currency risks, which could have a material adverse effect on our financial results, business and prospects.
Additional Risks Relating to our tZERO Initiatives
tZERO has a limited operating history, which makes it hard to evaluate its ability to generate revenue through operations, and to date, has not generated revenue from any commercially available blockchain-based applications.
tZERO was formed in 2014 to develop blockchain and financial technology as part of Overstock's Medici initiatives. tZERO's limited operating history and the relative immaturity of the blockchain industry make it difficult to evaluate its current business and future prospects. tZERO has encountered, and will continue to encounter, risks and difficulties frequently experienced by growing companies in rapidly developing and changing industries, including challenges in forecasting accuracy, determining appropriate uses of its limited resources, gaining market acceptance, managing a complex and evolving regulatory landscape and developing new products. tZERO's current or future operating model may require changes in order for it to scale its operations efficiently and be successful. Investors in our common stock should consider tZERO's business and prospects in light of the risks and difficulties it faces as an early-stage company focused on developing products in the field of financial technology.
To date, tZERO has focused primarily on developing its business and exploring novel applications of blockchain technology. This has included developing a suite of technologies which enable the trading of digital securities (the "tZERO Technology Stack") and using this technology to offer products and services to potential issuers of digital securities and regulated market participants. Digital securities are conventional uncertificated securities where the issuer arranges for a digital "courtesy carbon copy" of the transfer agent's share registry to be viewable on the blockchain to enhance the trading experience and may also be referred to as "digitally-enhanced securities". tZERO has generated limited revenue, no meaningful portion of which can be attributed to its commercialization of the tZERO Technology Stack or the support of such issuers and regulated market participants and has accumulated losses since its inception. As such, tZERO has historically been dependent upon continued financial support from us. If we are unable to generate positive cash flow in our retail business, raise additional capital, obtain financing, or sell or otherwise monetize significant assets, we may be unable to continue funding tZERO at the rate or levels we would otherwise do, which could have a material adverse effect on us and on the current and future business of tZERO.
To date only two digital securities are traded on the tZERO ATS and, other than the tZERO ATS, no other operational exchange, alternative trading system or other regulated trading venue licenses the tZERO Technology Stack.
tZERO continues to develop the tZERO Technology Stack and offer it as part of its services to potential issuers of digital securities and regulated market participants. As of December 31, 2019, tZERO has only utilized the tZERO Technology Stack to digitally-enhance the Series A-1 Preferred stock (exchanged from the Series A Preferred stock in May 2019) and TZROP, which are the only digital securities trading on the tZERO ATS. tZERO has been engaged to provide technology services, which will utilize the tZERO Technology Stack, to a select number of other prospective issuers of digital securities but there can be no assurance that tZERO will be engaged to provide these services by additional issuers in the future, that these services, if provided, will be profitable, or that these securities will trade on the tZERO ATS.
Additionally, the tZERO Technology Stack is only utilized by regulated market participants facilitating the trading of the Series A-1 Preferred stock and TZROP. These entities include the tZERO ATS, which is owned by a subsidiary of tZERO, and Dinosaur and ETC. BSTX plans to use the tZERO Technology Stack but is not yet operational and requires regulatory approval before it may begin operations. The trading of digital securities and the technology used by regulated market participants to support the trading of digital securities implicates complex technological considerations and raises numerous legal and regulatory issues that will need to be addressed—likely, in consultation with the regulators of regulated market participants facilitating such trading. As a result of these technological, legal and regulatory considerations, tZERO may not be able to successfully market and commercialize the tZERO Technology Stack to other market participants. If tZERO is unable to successfully market and commercialize the tZERO Technology Stack, tZERO's business plans would be materially adversely affected. See "Risks Related to the Development of the tZERO Technology Stack" below.
The technology on which tZERO and its subsidiaries rely for its operations may not function properly.
The technology on which tZERO and its subsidiaries and licensees rely, including the technology underlying the tZERO Technology Stack and the wallet and exchange services provided by tZERO Crypto, may not function properly, which would have a material adverse effect on tZERO's plans, operations and financial condition. Although the tZERO Technology Stack has worked for the Series A Preferred stock, Series A-1 Preferred stock and TZROP, trading in these securities has been extremely limited, and consequently the tZERO Technology Stack has not been tested with significant trading volume. We could experience a significant increase in trading volume for the Series A-1 Preferred stock once the planned Dividend is distributed, which will stress the tZERO Technology Stack in new ways. Similarly, while tZERO Crypto's technology has proven suitable for its wallet and exchange services mobile application to date, the volume of activity on the application has been limited, and as a result has not been tested at scale. tZERO and its subsidiaries' technology may malfunction because of errors in the underlying technology, an unanticipated increase in transactions using the technology or as a result of cyber-attacks or external security breaches. If tZERO or its subsidiaries' technology does not work as anticipated or malfunctions, any resolution of the issue may take time and be costly to implement or there may be no solution or alternative technology available. The importance of this technology to tZERO's operations means that any problems in its functionality would have a direct materially adverse effect on tZERO's plans and expectations for revenues from its blockchain applications and expose it to material loss. Any such technological problems could have a material adverse effect on tZERO's prospects, operations and financial condition and a material adverse effect on us.
tZERO Markets may not receive the regulatory approval it requires to operate its anticipated business.
tZERO Markets, LLC ("tZERO Markets") was formed in May 2019 to offer certain brokerage (including for retail customers), investment banking, placement agent and best-efforts underwriting services for traditional equities and digital securities. tZERO Markets has applied for regulatory approval, including by filing a Form BD and New Member Application with FINRA, and is in correspondence with the relevant regulators, to permit it to offer such services.
We believe that digital securities should be treated as any other conventional, uncertificated book-entry security. However, various regulators may disagree with this assertion and conclude that the digital securities should not be treated as a traditional investment security. For example, we do not believe that tZERO Markets will offer brokerage services with respect to any "digital asset securities" within the meaning of the July 8, 2019 Joint Staff Statement on Broker-Dealer Custody of Digital Asset Securities. However, federal securities regulatory authorities may disagree with that conclusion and tZERO Markets could be required to take further steps with regulators to obtain approval to start business operations. Additionally, tZERO's other broker-dealer subsidiaries are subject to investigations by the SEC and FINRA, which may indirectly impact tZERO Markets' regulatory approvals. As a result, there may be delay in the receipt of the regulatory approvals tZERO Markets requires to operate, if they are received at all. In the event tZERO Markets is not able to receive the regulatory approvals it requires to provide the services it intends or there is significant delay in tZERO Markets' receipt of such approvals it may be
forced to revise its business plan. Any such revision could have a material adverse effect on tZERO's operations and financial condition and a material adverse effect on us.
tZERO ATS, LLC and SpeedRoute, two subsidiaries of tZERO that currently generate substantially all of tZERO's revenues, are registered broker-dealers and are subject to extensive regulation.
Broker-dealers are subject to extensive regulatory requirements under federal and state laws and regulations and self-regulatory organization ("SRO") rules. tZERO ATS, LLC and SpeedRoute, which currently generate substantially all of tZERO's revenues, are registered with the SEC as broker‑dealers under the Exchange Act and in the states in which they conduct securities business and are members, and subject to the rules, of FINRA, and other SROs (as applicable). In addition, tZERO ATS, LLC owns and operates the tZERO ATS, an SEC-registered alternative trading system. tZERO ATS, LLC and SpeedRoute are 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 they are registered or licensed or of which they are a member.
Any failure of tZERO ATS, LLC or SpeedRoute to comply with all applicable rules and regulations or satisfy FINRA, the SEC, or any other regulatory authority with which such subsidiary must comply could have a material adverse effect on tZERO's operations and financial condition and a material adverse effect on us. In addition, tZERO Markets may be subject to even more extensive regulations. See "—tZERO Markets intends to be registered as a broker-dealer and would be subject to extensive regulation, which is anticipated to be more rigorous and expensive to establish and maintain than for tZERO's other broker-dealer subsidiaries." below.
tZERO Markets intends to be registered as a broker-dealer and would be subject to extensive regulation, which is anticipated to be more rigorous and expensive to establish and maintain than for tZERO's other broker-dealer subsidiaries.
tZERO Markets has applied for regulatory approvals to allow it to conduct certain brokerage and investment banking activities, including certain activities which tZERO's other broker-dealer subsidiaries have not historically provided, in particular by providing broker-dealer services to retail investors. If these approvals are received, tZERO Markets will become a registered broker-dealer under the Exchange Act and a member of FINRA and the Securities Investor Protection Corporation and will be 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 becomes registered or licensed or of which it becomes a member. In addition, because tZERO Markets intends to provide broker-dealer services that tZERO's other broker-dealer subsidiaries have not historically provided, in particular by providing broker-dealer services to retail investors, certain of these legal and regulatory requirements will be new to tZERO. We expect that federal and state securities regulators will require enhanced supervision, compliance and control procedures for tZERO Markets as a result of servicing retail investors, and that such requirements will be more expensive to establish, implement and maintain than those for tZERO ATS, LLC and SpeedRoute.
Any failure of tZERO Markets to comply with all applicable rules and regulations or satisfy FINRA, the SEC, or any other regulatory authority with which it must comply could have a material adverse effect on tZERO's operations and financial condition and a material adverse effect on us. See also "—tZERO ATS, LLC and SpeedRoute, two subsidiaries of tZERO that currently generate substantially all of tZERO's revenues, are registered broker-dealers and are subject to extensive regulation."below.
tZERO's broker-dealer subsidiaries and tZERO are involved in ongoing discussions with and are subject to investigation by regulatory authorities.
tZERO's broker-dealer subsidiaries, tZERO ATS, LLC and SpeedRoute, and tZERO have been and remain involved in ongoing oral and written communications with regulatory authorities in connection with ongoing examinations, inquiries, or investigations, which may result in trading halts on the tZERO ATS and financial and other settlements or penalties. Additionally, on December 9, 2019, we received a subpoena from the SEC requesting documents related to, among other things, the tZERO ATS. Any failure of tZERO or its broker-dealers to satisfy FINRA, the SEC, or any other regulatory authority that they are in compliance with all applicable rules and regulations could have a material adverse effect on tZERO's operations and financial condition and a material adverse effect on us.
Our ownership in tZERO is below the threshold required to permit us to use its losses to offset taxable income generated by the rest of our U.S. business and is below the threshold required to conduct a tax-free spin-off.
Due to our ownership percentages of both tZERO common stock and TZROP, we own less than the required percentage to file a federal consolidated income tax return. tZERO therefore files a separate federal tax return from the rest of our U.S. domestic operations, and as a result, certain tax attributes, such as federal net operating losses and tax credits, generated by tZERO are not available to offset taxable income generated by the rest of our U.S. domestic operations, and vice versa. Additionally, among other gating factors, our ownership percentage is also currently below the level required to conduct a tax-free spin-off of tZERO, and therefore, at this time we do not believe that a tax-free spin-off of the tZERO business is a viable option.
There can be no assurance that BSTX will receive the regulatory approval it requires to operate.
tZERO and BOX Digital have entered into a joint venture intended to develop a national securities exchange facility of BOX Exchange LLC ("BSTX") that would facilitate the trading of a type of digital security called a security token that would utilize the tZERO Technology Stack. The SEC published proposed rule changes relating to BSTX on October 11, 2019, soliciting public comments thereon. The SEC extended the review period on November 29, 2019 and the SEC again extended the review period on January 16, 2020. In addition, a subsequent amendment was filed by BOX Exchange LLC on February 19, 2020.
The application of federal securities law and other bodies of law to assets enhanced by blockchain technology is subject to significant uncertainty and likely to rapidly evolve as government agencies take greater interest in them. As a result, there may be delay in the receipt of the regulatory approvals BSTX requires to operate, if they are received at all. In the event BSTX is not able to receive the regulatory approvals it requires to begin operations or there is significant delay in BSTX's receipt of such approvals it may be forced to revise its anticipated operations. Any such revision could have a material adverse effect on tZERO's operations and financial condition and a material adverse effect on us.
tZERO's and its subsidiaries' businesses are subject to complex and evolving U.S. and foreign laws and regulations regarding privacy, technology, data protection, and other matters. Many of these laws and regulations are subject to change and uncertain interpretation, and could result in claims, changes to their business practices, increased cost of operations or otherwise harm their businesses.
tZERO and its subsidiaries are subject to a variety of laws and regulations in the United States and abroad that involve matters central to its business, including user privacy, data protection and intellectual property, among others. Foreign data protection, privacy, and other laws and regulations are often more restrictive than those in the United States. These U.S. federal and state and foreign laws and regulations are constantly evolving and can be subject to significant change. In addition, the application and interpretation of these laws and regulations are often uncertain, particularly in the new and rapidly evolving industry in which tZERO and its subsidiaries operate.
tZERO and its subsidiaries have adopted policies and procedures they believe are appropriate to comply with these laws. The growth of their respective businesses and expansion outside of the United States may increase the potential of violating these laws or its internal policies and procedures. The risk of being found in violation of these or other laws and regulations is further increased by the fact that many of these have not been fully interpreted by the regulatory authorities or the courts and are open to a variety of interpretations. Any action brought against tZERO or its subsidiaries for violation of these or other laws or regulations, even if tZERO or its subsidiaries successfully defend against it, could cause tZERO or any of its subsidiaries to incur significant legal expenses and divert its management's attention from the operation of its business. If its operations are found to be in violation of any of these laws and regulations, it may be subject to any applicable penalty associated with the violation, including civil and criminal penalties, damages and fines, it could be required to refund payments received by it, and it could be required to curtail or cease its operations. Any of the foregoing consequences could seriously harm tZERO's or any of its subsidiaries' business and their financial results. These existing and proposed laws and regulations can be costly to comply with and can delay or impede the development of new products, result in negative publicity, increase tZERO's or any of its subsidiaries' operating costs, require significant management time and attention, and subject any of them to claims or other remedies, including fines or demands that they modify or cease existing business practices.
The development and operation of tZERO's business, including the tZERO Technology Stack, will likely require, technology and intellectual property rights.
The ability of tZERO to operate its businesses, including its efforts to develop and market the tZERO Technology Stack, may depend on technology and intellectual property rights that tZERO may license from unaffiliated third parties. If for
any reason tZERO were to fail to comply with its obligations under an applicable license agreement, or were unable to provide or were to fail to provide the technology and intellectual property that tZERO or any licensee requires, their operations would be negatively affected, which would have a material adverse effect on tZERO's operations and financial condition and could have a material adverse effect on us.
tZERO may face substantial competition from known and unknown competitors as well as the risk that one or more of them may obtain patents covering technology critical to the operation of the tZERO Technology Stack.
We believe that a number of organizations are or may be working to develop applications for distributed ledger or blockchain technologies or other novel technologies in the financial industry or capital markets that may facilitate or enhance the experience of trading securities or other financial assets that may be competitive with tZERO's own technology, including its patented technology. As the blockchain industry matures, tZERO expects that larger existing companies in the financial services and technology industries may compete with it in providing technological solutions related to the capital markets or other potential areas of business tZERO may enter. Such competitors may develop technology for the trading of securities which may or may not utilize blockchain technology which may provide a more attractive trading solution than tZERO may be able to provide. Any or all of them may also compete with tZERO now or in the near future for the time and attention of regulators and for the services of persons with the expertise it needs. Some or all of such organizations may have substantially greater technological expertise, experience with blockchain technologies or the capital markets and/or financial resources than tZERO or Overstock has, and many of them appear to be attempting to patent technologies that may be competitive with or similar to the technology tZERO has developed and patented. tZERO does not have access to detailed information about the technologies these organizations may be attempting to patent. If other persons, companies or organizations obtain a valid patent covering technology critical to tZERO's business, tZERO, issuers of digital securities or regulated market participants that need the relevant technology in order to operate as intended might be unable or unwilling to license the technology, and it could become impossible for tZERO to successfully develop or market the tZERO Technology Stack, which could have a material adverse effect on tZERO's operations and financial condition and a material adverse effect on us.
Further, certain of tZERO's subsidiaries may also face competition in the areas of their respective businesses including money services, accredited investor verification services, or broker-dealer services, and these competitors may have substantially greater resources than tZERO or its subsidiaries. Any or all of them may compete with tZERO's subsidiaries now for current business or in the near future for potential business.
tZERO Crypto's business may be limited in certain jurisdictions if it is unable to timely receive certain licenses it is in process of obtaining or due to the regulations applicable to it.
The business of tZERO's subsidiary tZERO Crypto, Inc. ("tZERO Crypto"), formerly known as Bitsy, Inc., is a mobile application that allows consumers to buy, sell and hold supported cryptocurrencies. Various aspects of the business that tZERO Crypto is engaging in are heavily regulated. Both the federal government and virtually every state in the U.S. regulates money transmitters and money services businesses. In some states, the licensing requirements and regulations expressly cover companies engaged in digital currency activities; in certain other states it is not clear whether or how the existing laws and regulations apply to digital currency activities. tZERO Crypto is applying for licenses to operate as a money transmitter (or its equivalent), as required, and has obtained such licenses in many states and territories. tZERO Crypto has also registered with FinCEN. There can be no assurance that tZERO Crypto will be able to obtain money transmitter licenses on a timely basis in all states where they have not already been obtained, that they will be obtained at all, or that it will be able to retain such licenses over time as its business or applicable law and regulation evolve, which may limit the services tZERO Crypto is able to offer in certain jurisdictions or require potential product changes.
tZERO Crypto is subject to extensive regulation.
As a money transmitter (or equivalent) licensed in multiple states and territories and due to its registration with FinCEN, tZERO Crypto is subject to obligations and restrictions with respect to various anti-money laundering, know-your-customer, record-keeping, reporting, capital and bonding requirements, limitations on the investment of customer funds, and examination and inspection by state and federal regulatory agencies. Regulations relating to money transmission and cryptocurrencies are evolving quickly and compliance with existing and evolving requirements requires the dedication of significant resources by tZERO Crypto. As a result, in the event tZERO Crypto was unable to comply with, or dedicate the resources necessary to comply with all rules and regulations or satisfy state and federal regulatory authorities with which it must comply, tZERO Crypto may be subject to additional liability, including governmental fines, restrictions on its business, or other sanctions, and it could be forced to cease conducting certain aspects of its business with residents of certain jurisdictions, be forced to otherwise change it business practices in certain jurisdictions, or be required to obtain additional licenses or regulatory approvals.
Any failure of tZERO Crypto to comply with all applicable rules and regulations or satisfy state or federal regulatory authorities with which it must comply could have a material adverse effect on tZERO's operations and financial condition and a material adverse effect on us.
tZERO or its technology may be the subject of cyber-attacks, which may result in security breaches and the loss or theft of assets, which could expose tZERO to liability and reputational harm and could seriously curtail the utilization of tZERO's services or technology and could result in claims against tZERO or us.
Certain of tZERO's businesses store and transmit user's proprietary information (or may do so in the future) and create technology, including the tZERO Technology Stack, which is involved in third-parties' storage and transmission of users' proprietary information. As a result, tZERO's businesses may be the subject of security breaches, computer malware and other computer hacking attacks which could expose it to a risk of loss or misuse of this information, and to resulting claims, fines, and litigation. tZERO has experienced cyberattacks and believes its systems are probed by potential hackers on a daily basis. tZERO expects the problem will continue to grow worse over time. Cyber-attacks may also target tZERO's customers or third-parties and other services on which tZERO or its customers depend on. In the event such cyber-attacks target customers utilizing tZERO's technology they may attempt to identify and exploit weaknesses in tZERO's technology to conduct a cyber-attack.
Security breaches and cyber-attacks are also of particular concern to businesses, like tZERO Crypto, that directly interact with cryptocurrencies. While tZERO Crypto wallet users hold their cryptocurrency directly on their mobile devices (as opposed to being held in custody by tZERO Crypto), tZERO Crypto holds a limited cryptocurrency inventory on hand to facilitate its exchange services and has access to customer information. As a result, tZERO Crypto is subject to an increased risk of cyber-attacks, which could result in loss of cryptocurrency, unauthorized access to customer information and the resulting legal or financial exposures or the unexpected unavailability of tZERO Crypto's services.
Any compromise of tZERO's security or that of a third-party involving tZERO's technology could result in a violation of applicable privacy and other laws, and cause significant financial loss, legal fines and other legal exposure, damage to tZERO's reputation, and a loss of confidence in the maturity of tZERO's security program and tZERO's ability to implement security measures on par with its peers; further, a compromise of tZERO's security could reduce market participants' willingness to adopt and regularly use its technology (including the tZERO Technology Stack), any of which could have a material adverse effect on tZERO and our financial position and business.
tZERO's core technology has been and will be, as applicable, developed by key technology employees of tZERO and its affiliates, and their operation and further development depend on the continued availability of those key employees.
The tZERO Technology Stack and other core technology used for tZERO's operations, have been or will be, as applicable, developed primarily by a small number of key technology employees of tZERO and its affiliates. This includes technology used for the operation of the regulated trading venues tZERO supports, including the tZERO ATS. The loss of the services of any of those key employees could have a material adverse effect on the ability of tZERO to develop, operate or maintain the tZERO Technology Stack or other technology used for tZERO's operations. If tZERO were to lose the services of any such key employees, it could be difficult or impossible to replace them, and the loss of any of them could have a material adverse effect on tZERO's operations and financial condition.
tZERO's success will be dependent on its ability to hire, retain or motivate qualified personnel.
tZERO's business largely depends on the talents and efforts of highly skilled individuals, particularly those with technology, operational and regulatory backgrounds. tZERO's future success will depend on its continuing ability to identify, hire, develop, motivate, and retain highly skilled personnel. Without such individuals, tZERO may not have or may not be able to obtain the skills or expertise needed to successfully develop, maintain and implement the tZERO Technology Stack or its other initiatives. In addition, its compensation arrangements, such as its equity award program, may not always be successful in attracting new employees and retaining and motivating its existing employees, which would affect its future success. Any failure by tZERO to hire, retain or motivate qualified personnel would materially adversely affect tZERO's business and us.
To date, SpeedRoute and tZERO ATS, LLC's revenues have come from a small number of major customers, making SpeedRoute and tZERO ATS, LLC, and by extension tZERO, vulnerable to changes in the business and financial condition of, or demand for SpeedRoute's and tZERO ATS, LLC's services by, such customers.
To date, the primary source of revenue for SpeedRoute and tZERO ATS, LLC has been two major customers, making SpeedRoute and tZERO ATS, LLC vulnerable to changes in the business and financial condition of, or demand for services by,
such customers. During the year ended December 31, 2019, revenue attributable to these two customers accounted for, respectively, 30% and 23% of SpeedRoute and tZERO ATS, LLC's combined revenue. Additionally, to date, SpeedRoute and tZERO ATS, LLC account for tZERO's primary sources of revenue, making tZERO vulnerable to any changes in the business and financial condition of, or demand for SpeedRoute and tZERO ATS, LLC's services by such customers as well. SpeedRoute, tZERO ATS, LLC and tZERO's income and ability to meet its financial obligations could also be adversely affected in the event of bankruptcy, insolvency or significant downturn in the business of one of these customers.
tZERO has chosen to temporarily postpone commercialization of the DLR Software, and if it does resume commercialization, it may never successfully launch, market, or sell its DLR Software.
tZERO has developed the DLR Software, which is intended to enable broker-dealer licensees with stock inventory to create a blockchain-based record of the shares that the licensee has made available for "locates" and of the daily purchases of the right to "locate" specifically identified shares for purposes of compliance with regulatory requirements. tZERO is temporarily postponing the further commercialization of the DLR Software as it focuses on other blockchain applications but may, in the future, resume commercialization thereof.
In the event tZERO were to recommence commercializing the DLR Software, its viability would be dependent on whether the DLR Software would be effective at satisfying regulatory obligations of those effecting short sales, which is currently uncertain. Confirming this regulatory compliance is the responsibility of broker-dealer licensees using the DLR Software, however, tZERO may be required to expend significant resources to assist licensees in doing so. Additionally, the existing system which the DLR Software is meant to replace is firmly entrenched and it would require the devotion of significant resources to persuade market participants to transition to the DLR Software. As a result, there can be no assurance that tZERO will choose to recommence commercialization of the DLR Software or that if it wishes to do so, that it will be successful in doing so, either due to the regulatory uncertainty relating to the DLR Software or due to a lack of sufficient resources available to tZERO at such time.
Strategic transactions tZERO has and may engage in could disrupt its business, divert its management's attention or harm its business.
From time to time tZERO has engaged in strategic transactions, including acquisitions, strategic investments and partnerships and divestitures, and may do so again in the future. Many of tZERO's businesses and the counterparties with which it may engage in transactions with are heavily regulated which may complexify such strategic transactions. The identification, evaluation, and negotiation of potential strategic transactions may divert the attention of management and require the incurrence of significant expenses, whether or not such transactions are ultimately completed. We also may not achieve the anticipated benefits from such transactions due to a number of factors, including difficulties resulting from the integration or separation of technologies, accounting or other operational systems, culture or personnel involved in any acquisition or divestment; diversion of management's attention; litigation; prioritization of resources; regulatory constraints or other disruptions to tZERO's operations. Also, the anticipated benefits of such strategic transactions may not materialize or increase tZERO's revenue. If any strategic transaction fails to meet tZERO's expectations, tZERO's business may be materially and adversely effected, which could have a material adverse effect on us.
Additional Risks Related to TZROP
The IRS may disagree with our characterization of the TZROP offering, which would have a material adverse effect on us.
Although we have taken the position that the sale of TZROP in the TZROP offering was a sale of equity for tax purposes, if the IRS disagrees with our characterization and instead requires us to treat the proceeds as income to us for federal income tax purposes, this would reduce our federal net operating loss carryforwards byapproximately $104.2 million as a result of the TZROP offering. In addition, if we are required to treat the proceeds of the security token offering as a liability rather than equity for accounting purposes, that would reduce tZERO's net book value compared to equity treatment, which might delay or prevent tZERO from declaring a dividend on the TZROP.
We are subject to the risks of holding TZROP and the risk that we will be unable to sell the TZROP.
As part of the TZROP offering, we elected to accept TZROP in payment of $30 million of tZERO's indebtedness to us. As an affiliate of the issuer, we may only resell the TZROP we hold under certain circumstances, and are therefore subject to all of the risks of holding TZROP, including the risk that we will be unable to resell any TZROP. We do not have any contractual
rights to require tZERO or any third party to assist us in making such resales and as a result, expect to remain subject to the risks of holding TZROP for the foreseeable future.
TZROP may be subject to registration under the Exchange Act if tZERO has assets above $10 million and more than a statutory number of registered token holders, which would increase tZERO's costs significantly and require substantial attention from tZERO's management.
Companies with total assets above $10 million and more than 2,000 holders of record of their equity securities, or 500 holders of record of its equity securities who are not accredited investors, at the end of their fiscal year must register the subject class of equity securities with the SEC under the Exchange Act. If tZERO is required to register TZROP with the SEC under the Exchange Act, it would be a laborious and expensive process and require a substantial portion of tZERO management's attention. Furthermore, if such registration takes place, tZERO would be subject to ongoing public reporting requirements and require additional accounting, tax, compliance, documentation, risk management and internal control procedures, necessitating the need for tZERO to hire additional personnel to implement, perform and/or monitor such procedures and creating materially higher compliance and reporting costs going forward.
Risks Related to the Development of Digital Securities and the tZERO Technology Stack
Applicable law and regulation may limit the extent to which blockchain technology may be used to enhance securities in the future, limiting tZERO's business.
The complex legal and regulatory requirements applicable to issuers and SEC-registered exchanges, alternative trading systems or other regulated venues and market participants currently limits the extent to which tZERO is able to further enhance securities using blockchain technology. For instance, regulators have emphasized the legal complexity raised by custodying securities on the blockchain and that it may not currently be regulatorily permissible in certain circumstances, regardless of whether tZERO is able to provide technology for this purpose. The ability of tZERO to provide additional applications of blockchain technology to digital securities or the financial industry more broadly may be dependent on legislators or regulatory authorities adopting additional rules and regulations or modifying existing rules and regulations, or interpretations thereof, which may take significant time to occur and would be largely outside of tZERO's control. There can be no assurance that digital securities or any future legally and regulatorily compliant advancement thereof which tZERO may be able to develop will meet investor expectations—for example, there can be no assurance that it will enable less expensive or more efficient trading than is possible from other available trading solutions, whether traditional or otherwise.
The current user experience for digital securities, like TZROP and others traded on the tZERO ATS, is not analogous to one involving a virtual currency or any other anonymous bearer digital instrument that trades peer-to-peer on a distributed ledger because distributed ledger technology does not play a role in the sale, issuance, transfer or custody of digital securities. However, in the future regulatory authorities may take the position that the existing regulatory framework precludes the enhancement of digital securities with a digital "courtesy carbon copy". As a result, legal and regulatory developments could render the issuance and trading of digital securities impermissible or change the manner in which digital securities are permitted to be enhanced by blockchain technology.
Any such regulatory issues may limit the commercial viability of tZERO's business, which would have a material adverse impact on tZERO's business and could have a material adverse effect on us.
Regulatory authorities may never permit the trading of certain digital securities or involvement by market participants in their trading or require changes to permit such trading to occur, limiting tZERO's businesses.
Depending on the particular digital security and regulated trading venues on which a security would trade, numerous regulatory authorities, including FINRA and the SEC, may need to be consulted or provide their consent before any trading could occur. Any such regulatory authorities could prevent such trading from ever occurring if they objected to aspects of the anticipated method in which such trading would occur, including how the tZERO Technology Stack would be used and whether such regulated trading venues are permitted to trade digital securities. Applicable legal or regulatory requirements or authorities may also require changes to the manner in which such trading might occur before to permitting it to occur, which may require tZERO to make changes to the underlying technology for specific licensees or more broadly before trading may begin. The regulatory landscape that potential issuers and tZERO ATS and other regulated market participants involved in the trading of digital securities and their partners, need to navigate in order to successfully permit a digital security to begin trading is complex, and there can be no assurance that they will successfully do so. Assisting partners in addressing such considerations may require significant time and resources from tZERO both in navigating any legal and regulatory concerns or adapting the tZERO Technology Stack in a way that realizes the requirements of the particular digital security or regulated market participant.
Any such regulatory issues may limit the commercial viability of tZERO's business, including the tZERO Technology Stack and regulated trading venues trading digital securities which tZERO has an interest in or its subsidiaries operate, which would have a material adverse impact on tZERO's business and could have a material adverse effect on us.
Digital securities may not be widely adopted and may have limited users.
It is possible that digital securities will not be used by a large number of issuers or investors or tradeable on many regulated trading venues (or venues with sufficient market participants) or that there will be limited public interest in the continued creation and development of digital securities. Additionally, it is possible that other technology for the trading of securities which may or may not utilize blockchain technology will be developed or receive greater public interest, competing with or limiting demand for digital securities. Such a lack of use or interest could negatively impact the continued development and commercialization of the tZERO Technology Stack and the growth of the tZERO ATS trading ecosystem and have a material adverse effect on the business and financial position of tZERO and have a material adverse effect on us.
Some market participants may oppose the development of blockchain‑based systems like those central to tZERO's commercial mission, which could adversely affect tZERO.
Many participants in the system currently used for trading public securities in the United States may oppose the development of capital markets systems and processes that involve the use of blockchain technology, whether by permitting trading to occur directly on the blockchain or by adding digital courtesy carbon copies such as those used by digital securities. The market participants who may oppose such a system may include entities with significantly greater resources, including financial resources and political influence, than tZERO or we have. The ability of tZERO to operate and achieve its commercial goals could be adversely affected by any actions of any such market participants that result in additional regulatory requirements or other activities that make it more difficult for tZERO to operate could adversely affect tZERO's ability to achieve its commercial goals, which could have a material adverse effect on us.
Risks Related to Blockchain Technology and the Blockchain Industry
The application of blockchain technologies to existing legal and regulatory regimes is uncertain, and new laws and regulations or policies may materially adversely affect tZERO's business.
Certain of tZERO's businesses transact directly in peer-to-peer digital assets while others intend to advance existing industries by promoting the integration of blockchain technologies, either by creating technology to enable or investing in regulated venues to enable the issuance, trading, clearance and settlement of digital securities. The application of blockchain technologies to the legal and regulatory regimes applicable to these businesses, many of which were developed for earlier technologies, is often unclear and varies significantly among international, federal, state and local jurisdiction. Such legal and regulatory regimes are also likely to rapidly evolve as legislators and regulatory authorities take greater interest in blockchain technology.
Various legislative and executive bodies in the United States and in other countries may in the future adopt laws, regulations, or guidance, or take other actions, which may severely impact the adoption of blockchain technologies. Additionally, in the future, tZERO expects to evolve its focus towards the advancement of financial industry through the
integration of blockchain technology in new ways which may present novel questions of legal and regulatory interpretation. Failure by tZERO, its subsidiaries or any of their partners (including issuers of digital securities or market participants utilizing the tZERO Technology Stack) to comply with any laws, rules and regulations applicable to them, some of which may not exist yet or are subject to interpretation and may be subject to change, could result in a variety of adverse consequences, including civil penalties and fines, the need to implement product changes, or an increase in costs related to compliance or operational changes and reputational harm, any of which could have a substantial and materially adverse effect to tZERO's business and us.
The further development and acceptance of blockchain technologies, which are part of a new and rapidly changing industry, are subject to a variety of factors that are difficult to evaluate. The slowing or stopping of the development or acceptance of blockchain technologies, peer-to-peer digital assets and assets enhanced by blockchain technologies would have a material adverse effect on tZERO's business plans and could have a material adverse effect on us.
The growth of blockchain technology and the blockchain industry in general, as well as the specific blockchain networks which peer-to-peer digital assets such as cryptocurrencies and assets enhanced by blockchain technology, including digital securities such as TZROP, utilize, is subject to a high degree of uncertainty. The factors affecting the further development and acceptance of blockchain technology and the growth of the blockchain industry include, without limitation:
worldwide growth in the adoption and use of peer-to-peer digital assets, assets enhanced by blockchain technology and other blockchain technologies;
government and quasi-government regulation of peer-to-peer digital assets and assets enhanced by blockchain technology and their use, or restrictions on or regulation of access to and operation of blockchain networks or similar systems;
the maintenance and development of the open-source software protocol of blockchain networks;
changes in consumer demographics and public tastes and preferences;
the availability and popularity of other forms or methods of buying and selling goods and services, or trading assets including new means of using government-backed currencies or existing networks;
exploitable flaws inherent in blockchain technology (e.g. "double-spend" attacks or "51%" attacks);
general economic conditions affecting investment in and demand for peer-to-peer digital assets and assets enhanced by blockchain technology; and
a decline in the popularity or acceptance of peer-to-peer digital assets and assets enhanced by blockchain technology.
The blockchain industry as a whole has been characterized by rapid changes and innovations and are constantly evolving. Although it has experienced significant growth in recent years, the slowing or stopping of the development, general acceptance and adoption and usage of blockchain networks, peer-to-peer digital assets such as cryptocurrencies and assets enhanced by blockchain technology such as digital securities may materially adversely affect tZERO's business plans.
The prices of peer-to-peer digital assets and digital securities have historically been extremely volatile. Fluctuations in the price of individual assets could affect market perception of blockchain technology and thereby materially and adversely affect tZERO's business.
The prices of peer-to-peer digital assets, such as Bitcoin and Ether, and digital securities, including TZROP, have historically been subject to dramatic price fluctuations and are highly volatile. A fluctuation in the price of a single peer-to-peer digital asset or digital security may cause volatility in the value of such assets generally or a subset thereof. For example, a security breach that affects confidence and causes price fluctuations in Bitcoin or Ether may affect market perception of blockchain technology and may discourage potential investors from investing in or utilizing all peer-to-peer digital assets. Even though digital securities are conventional, uncertificated book-entry securities, investors may perceive them to be part of the same asset class as peer-to-peer digital assets due to their enhancement with a digital "courtesy carbon copy" of the transfer agent's share registry, and the price volatility of peer-to-peer digital assets may thereby affect investor perception of and demand for digital securities. This volatility may adversely affect interest in and demand for cryptocurrencies, such as those tZERO Crypto provides wallet and exchange services for, or digital securities which the tZERO Technology Stack is meant to enable and which trade on regulated venues tZERO invests in, each of which would materially adversely affect tZERO's business and us.
Additionally, tZERO Crypto holds a limited amount of cryptocurrency in an inventory to facilitate purchases and sales of cryptocurrency with its customers which have historically been subject to dramatic fluctuations and are highly volatile. This may subject tZERO Crypto to cryptocurrency price volatility risk which may materially adversely affect its financial condition.
Additional Risks Relating to our Retail Business
Our business depends on the Internet, our infrastructure and transaction-processing systems.
We are completely dependent on our infrastructure and on the availability, reliability and security of the Internet and related systems. A substantial amount of our computer and communications hardware is located at a single Overstock owned and operated facility. Our systems and operations are vulnerable to damage or interruption from fire, flood, power loss, telecommunications failure, terrorist attacks, cyber-attacks, acts of war, break-ins, earthquake and similar events. Our back-up facility is not adequate to support sales at a high level. Our servers and applications are vulnerable to malware, physical or electronic break-ins and other disruptions, the occurrence of any of which could lead to interruptions, delays, loss of critical data or the inability to accept and fulfill customer orders. Any system interruption that results in the unavailability of our Website or our mobile app or reduced performance of our transaction systems could interrupt or substantially reduce our ability to conduct our business. We have experienced periodic systems interruptions due to server failure, application failure, power failure and intentional cyber-attacks in the past, and may experience additional interruptions or failures in the future. Any failure or impairment of our infrastructure or of the availability of the Internet or related systems could have a material adverse effect on our financial results, business and prospects. In addition, the occurrence of any event that would adversely affect e-commerce or discourage or prevent consumers from shopping online or via mobile apps could significantly decrease the volume of our retail sales.
We rely upon paid and unpaid natural search engines to rank our product offerings, and our financial results may suffer if we are unable to regain our prior rankings in natural searches.
We rely on paid and unpaid natural search engines to attract consumer interest in our product offerings, including Google, Bing, and Yahoo!. Changes to their ranking algorithms may further adversely affect our product offerings in paid and/or unpaid searches, and we may at times be subject to ranking penalties if the operators of search engines believe we are not in compliance with their guidelines. Search engine companies change their natural search engine algorithms periodically, and our ranking in natural searches may be adversely affected by those changes, as has occurred from time to time, and which have led us to pursue revenue growth in other more expensive marketing channels. Google's search engine is dominant in our business and has historically been a significant source of traffic to our website, much of it at essentially no incremental cost to us. Search engine companies may also determine that we are not in compliance with their guidelines from time to time, as has occurred in the past, and they may penalize us in their search algorithms as a result. In recent years, we have experienced declines in our rankings in Google's natural search engine, which has required us to utilize more expensive marketing channels or otherwise compensate for the loss of some of the natural search traffic. Any future declines in our rankings in Google's natural search engine could have a material adverse effect on our business.
Our business depends on effective marketing, including marketing via email and social networking messaging and our competitors have and may continue to directly increase our marketing costs and also have and may continue to cause us to decrease certain types of marketing.
We depend on effective marketing and high customer traffic. We depend on email to promote our site and offerings and to generate a substantial portion of our revenue. If a significant portion of our target customers no longer utilize email, or if we are unable to effectively and economically deliver email to our potential customers, whether for legal, regulatory or other reasons, it would have a material adverse effect on our business. We also rely on social networking messaging services for marketing purposes, and anything that limits our ability or our customers' ability or desire to utilize social networking services could have a material adverse effect on our business. In addition to competing with us for customers, suppliers, and employees, our competitors have and may continue to directly increase our operating costs, by driving up the cost of various forms of online advertising. We may elect to decrease our use of sponsored search or other forms of marketing from time to time in order to decrease our costs, which may have a material adverse effect on our financial results and business. We may also elect to spend additional amounts on sponsored search or other forms of marketing from time to time in order to increase traffic to our Website, or to take other actions to increase traffic and/or conversion. If we are unable to develop, improve, implement and maintain effective and efficient cost-effective advertising and marketing programs, it would have a material adverse effect on our financial results and business.
We are subject to cyber security risks and risks of data loss or other security breaches.
Our business involves the storage and transmission of users' proprietary information, and security breaches could expose us to a risk of loss or misuse of this information, and to resulting claims, fines, and litigation. We have been subjected to a variety of cyber-attacks, which have increased in number and variety over time. We believe our systems are probed by potential hackers virtually 24/7, and we expect the problem will continue to grow worse over time. Cyber-attacks may target us,
our customers, our suppliers, banks, credit card processors, delivery services, e-commerce in general or the communication infrastructure on which we depend. Any compromise of our security could result in a violation of applicable privacy and other laws, significant legal and financial exposure, damage to our reputation, and a loss of confidence in our security measures, any of which could have a material adverse effect on our financial results and business. Moreover, any insurance coverage we may carry may be inadequate to cover the expenses and other potential financial exposure we could face as a result of a cyber-attack or data breach.
We face intense competition and may not be able to compete successfully against existing or future competitors.
The online retail market is evolving rapidly and intensely competitive. Barriers to entry are minimal, and current and new competitors can launch new websites at a relatively low cost. We currently compete with numerous competitors, including:
online retailers with or without discount departments, including Amazon.com, AliExpress (part of the Alibaba Group), eBay, and Rakuten.com (formerly Buy.com);
online shopping services, including Google Express;
online specialty retailers such as Blue Nile, Bluefly, Houzz, Jet.com, Wayfair, Zappos.com, and Zulily;
furniture specialists including Ashley Furniture, Bob's Discount Furniture, Havertys, Raymour & Flanigan and Rooms To Go;
traditional general merchandise and specialty retailers and liquidators including Barnes and Noble, Bed, Bath & Beyond, Best Buy, Costco, Crate and Barrel, Ethan Allen, Gilt, Home Depot, HomeGoods, Hudson's Bay Company, IKEA, J.C. Penney Company, Kirkland's, Kohl's, Lands' End, Lowe's, Macy's, Nordstrom, Pier 1 Imports, Pottery Barn, Restoration Hardware, Ross Stores, Saks Fifth Avenue, Sears, T.J. Maxx, Target, Wal-Mart, and Williams-Sonoma, all of which also have an online presence; and
online liquidators such as SmartBargains.
We expect that existing and future traditional manufacturers and retailers will continue to add or improve their e-commerce offerings, and that our existing and future e-commerce competitors, including Amazon, will continue to increase their offerings, their delivery capabilities, and the ways in which they enable shoppers to purchase goods, including their mobile technology and the voice-activated shopping services offered by Amazon. Further, large marketplace websites and sites which aggregate marketplace sellers with a large product selection are becoming increasingly popular, and we may not be able to place our products on these sites to take advantage of their internal search platforms and some shoppers may begin their searches at these websites rather than utilize traditional search engines at all. Many of our competitors specialize in one or more of the areas in which we offer products. For example, our furniture offerings compete with more than 100 online retail furniture websites, in addition to many more traditional furniture retail specialists. Some of our competitors run at net losses to gain market share in the online retail market. We also face competition from shopping services such as Google Express, which offers products from Walmart, Costco, Target and other retailers on a voice-activated shopping platform. Competition from Amazon and from other competitors, many of whom have longer operating histories, larger customer bases, greater brand recognition, greater access to capital and significantly greater financial, marketing and other resources than we do, affect us and have had and could continue to have a material adverse effect on our financial results, business and prospects.
Tariffs, the spread of illness, or other measures or events that increase the effective price of products or limit our ability to access products we or our suppliers or fulfillment partners import into the United States could have a material adverse effect on our business.
We and many of our suppliers and fulfillment partners source a large percentage of the products we offer on our Website from China and other countries. The United States imposed tariffs on goods from China in 2019 which adversely impacted our revenues. Further, the spread of the COVID-19 virus (also known as coronavirus) has been declared a "pandemic" by the World Health Organization. If the United States imposes additional tariffs, or if a disease or illness such as COVID-19 spreads and such measures or events directly or indirectly increase the price of imported products sold on our Website, or limit our ability to access products sold on our Website, the increased prices and/or supply chain challenges could have a material adverse effect on our financial results, business and prospects. Further, the broader global effects of potentially reduced consumer confidence and spending related to COVID-19 could also have a negative effect on our overall business. At this point, the extent to which COVID-19 may impact our business is uncertain.
The spread of the COVID-19 could negatively impact our operations.
We have facilities located in Washington, New York, Pennsylvania, Missouri, Utah, and Ireland, and the employees working in those facilities may be at greater risk for exposure to and for contracting COVID-19. The U.S. Center for Disease Control, or the CDC, has reported known cases of COVID-19 in these states and country. The spread of COVID-19 in these locations may result in our employees being forced to work from home or missing work if they or a member of their family contract COVID-19. At this point, the extent to which COVID-19 may impact our business is uncertain.
Economic factors, including our increasing exposure to the U.S. housing industry and the potential for a decrease in consumer spending, could adversely affect us.
Economic conditions, particularly any weakness in the United States housing market, may adversely affect our financial performance. Over the last several years, the percentage of our sales from home and garden products has increased substantially. We believe that our sales of home and garden products are affected by the strength of the U.S. housing industry, and that downturns in the U.S. housing industry could have a material adverse effect on our financial results, business and prospects.Similarly, a substantial portion of the products and services we offer are products or services that consumers may view as discretionary items rather than necessities. As a result, our results of operations are sensitive to changes in macro-economic conditions that impact consumer spending, including discretionary spending. Difficult macro-economic conditions, particularly high levels of unemployment or underemployment, also impact our customers' ability to obtain consumer credit. Other factors, including consumer confidence, employment levels, interest rates, tax rates, consumer debt levels, and fuel and energy costs could reduce consumer spending or change consumer purchasing habits. Slowdowns in the U.S. or global economy, or an uncertain economic outlook, could materially adversely affect consumer spending habits and could have a material adverse effect on our financial results, business and prospects.
If we do not successfully optimize and operate our warehouse, distribution centers and customer service operations, our business could be harmed.
We have expanded, contracted and otherwise modified our warehouse, distribution centers and customer service operations from time to time in the past, and expect that we will continue to do so. If we do not successfully optimize and operate our warehouse, distribution centers and customer service operations, it could significantly limit our ability to meet customer demand, customer shipping or return time expectations, or result in excessive costs and expenses for the size of our business. Because it is difficult to predict demand, we may not be able to manage our facilities in an optimal way, which may result in excess or insufficient inventory or warehousing capacity. We may also fail to staff our fulfillment and customer service centers at optimal levels. Our failure to manage our warehouse operations, distribution centers or our fulfillment and customer service centers optimally could adversely affect our financial results and customer experience and could have a material adverse effect on our financial results, business and prospects.
We depend on third-party companies to perform functions critical to our business, and any failure on their part could have a material adverse effect our business.
We depend on third-party companies, including a large number of independent fulfillment partners whose products we offer for sale on our Website, to perform functions critical to our ability to deliver products and services to our customers. We depend on our fulfillment partners to perform traditional retail operations such as maintaining inventory, preparing merchandise for shipment to our customers and delivering purchased merchandise on a timely basis. We also depend on the delivery services that we and they utilize, on the payment processors that facilitate our customers' payments for their purchases, and on other third parties over which we have no control, for the operation of our business. Difficulties with any of our significant fulfillment partners, delivery services, payment processors or other third parties involved in our business, regardless of the reason, could have a material adverse effect on our financial results, business and prospects.
We depend on our suppliers' and fulfillment partners' representations regarding product safety, content and quality, and for proper labelling of products.
We rely on our suppliers' and fulfillment partners' representations of product safety, content and quality. We also rely on our suppliers and partners to ensure proper labelling of products. Issues or concerns regarding product safety, labelling, content or quality could result in consumer or governmental claims and could adversely affect our financial results and business. Any indemnity agreement we may have with a supplier or partner of a product may be inadequate or inapplicable, and any insurance coverage we may carry may be inadequate. Even unsuccessful claims could result in the expenditure of funds and management time and could have a negative impact on our business. The occurrence of any of the foregoing could have a material adverse effect on our financial results, business and prospects.
Our decision to accept and hold cryptocurrency, such as bitcoin, may subject us to exchange risk and additional tax and regulatory requirements.
In 2014, we began accepting bitcoin as a form of payment for purchases on our website. Neither bitcoin nor any of the other cryptocurrencies we may hold are considered legal tender or backed by any government, and bitcoin and other cryptocurrencies we may hold have experienced price volatility, technological glitches and various law enforcement and regulatory interventions. The use of cryptocurrency such as bitcoin has been prohibited or effectively prohibited in some countries. If we fail to comply with regulations or prohibitions applicable to us, we could face regulatory or other enforcement actions and potential fines and other consequences. Our Board of Directors has authorized us to retain, in bitcoin, up to 50% of our sales revenues paid for by customers in bitcoin. From time to time we hold bitcoin and other cryptocurrencies directly, and we have exchange rate risk on the amounts we hold as well as the risks that regulatory or other developments may adversely affect the value of the cryptocurrencies we hold. We may choose not to hedge or may be unable to fully hedge our exposure to cryptocurrencies and may at times be unable to convert cryptocurrencies to U.S. dollars. If any regulatory authority asserts that we require a license or other regulatory approval to conduct business or own an interest in other businesses involving cryptocurrencies, it could have a material adverse effect on our financial results and business.
Our insurance coverage and indemnity rights may not adequately protect us against loss.
The types, coverage, or the amounts of any insurance coverage we may carry from time to time may not be adequate to compensate us for any losses we may actually incur in the operation of our business. Further, any insurance we may desire to purchase may not be available to us on terms we find acceptable or at all. We are not indemnified by all of our suppliers, and any indemnification rights we may have may not be enforceable or adequate to cover actual losses we may incur as a result of our sales of their products. Actual losses for which we are not insured or indemnified, or which exceed our insurance coverage or the capacity of our indemnitors or our ability to enforce our indemnity agreements, could have a material adverse effect on our financial results, business and prospects.
We are partially self-insured with respect to our employees' health insurance. If the actual costs of these claims exceed the amounts we have accrued for them, we would incur additional expense.
Beginning January 1, 2017, we are partially self-insured with respect to our employees' health insurance, except to the extent of stop-loss coverage that limits our losses both on a per employee basis and an aggregate basis. The actual costs of our employees' health insurance claims could exceed our estimates of those costs for a number of reasons, including more claims or larger claims than we expect, and increases in the costs of healthcare generally. If the actual cost of our employees' health insurance claims and related expenses exceeds the amounts we have accrued, we may be required to record additional charges for these claims and/or to establish additional cash reserves, which could have a material adverse effect on our financial results, business and prospects.
Additional Risks Relating to our Medici Business
Certain equity financings completed by some of our subsidiaries could result in the acceleration of the vesting of outstanding equity awards granted by such subsidiaries.
Pursuant to equity incentive plans entered into by our subsidiaries, Medici Ventures, tZERO and Medici Land Governance, upon a "change in control" (as defined in the plans), outstanding equity awards that were issued under such plans would be subject to acceleration, vesting, and/or the lapsing of applicable restrictions on such awards. For purposes of the relevant tZERO plan, a "change in control" includes Overstock and any entity or entities directly or indirectly controlled by Overstock ceasing to be the legal or beneficial owner of a majority of the total voting power of the outstanding stock of tZERO. As a result, a sale of a number of shares by tZERO that would result in Overstock owning less than a majority of the total voting of the outstanding stock of tZERO would result in the acceleration of the vesting of the awards granted by tZERO. Further, the exercise of a sufficient number of outstanding equity awards issued under such plans could constitute a "change of control" as defined in such plan and thereby cause the accelerated vesting of unvested awards.
Our subsidiary Medici Land Governance, Inc. is a public benefit corporation.
Our subsidiary Medici Ventures has formed Medici Land Governance, Inc. ("MLG") as a public benefit corporation under Delaware law. Directors of traditional corporations, including Overstock and Medici Ventures, are required to make decisions they believe to be in the best interests of their stockholders. The directors of MLG are required by Delaware law to manage MLG in a manner that balances (1) MLG stockholders' pecuniary interests, (2) the best interests of those materially
affected by MLG conduct, and (3) MLG public benefit purpose, which is to promote full financial inclusion, economic advancement, and enfranchisement of individuals, by creating systems using blockchain and other technologies that help individuals prove rightful ownership of assets, capitalize their assets, and establish a formal identity. As a result, MLG may not have the same focus on increasing stockholder value that Overstock and Medici Ventures have, and the duties of the officers and directors of MLG, some of whom also are or will be officers and/or directors of Overstock and/or Medici Ventures, may conflict with the duties of the officers and directors of Medici Ventures and Overstock. Even in the absence of common directors, conflicts of interest may arise.
Subsidiaries of Medici Ventures, including Medici Land Governance, have emerging business models, without profits, and may require additional capital.
Subsidiaries of Medici Ventures, including MLG, are in the early stages of their business and do not generate profits. Many of MLG's current projects are being done as pilot projects without charge, at MLG's expense, to demonstrate MLG's capabilities and develop its reputation. Although MLG intends to generate profits in the future, it has not done so to date. If subsidiaries of Medici Ventures, including MLG, cannot generate profits, such subsidiaries might require additional capital, which could have a material adverse effect on our financial results, business and prospects.
The businesses that we are pursuing through our Medici Ventures initiatives are novel and subject to technical, operational, financial, regulatory, legal, reputational and marketing risks.
Medici Ventures has acquired interests in various businesses, including financial technology companies, broker-dealers, and digital currency transfer and payment businesses. We have limited experience with the operation of such businesses. Virtually every state in the U.S. regulates money transmitters and money service businesses. In some states the licensing requirements and regulations expressly cover companies engaged in digital currency activities; in other states it is not clear whether or how the existing laws and regulations apply to digital currency activities. Further, U.S. federal law requires registration of most such businesses with FinCEN. These licenses and registrations subject companies to various anti-money laundering, know-your-customer, record-keeping, reporting and capital and bonding requirements, limitations on the investment of customer funds, and inspection by state and federal regulatory agencies. Under U.S. federal law, it is a crime for a person, entity or business that is required to be registered with FinCEN or licensed in any state to fail to do so. Further, under U.S. federal law, anyone who owns all or part of an unlicensed money transmitting business may be subject to civil and criminal penalties. For example, if Bitt, Spera, Ripio, or FinClusive take any action that could subject them to registration with FinCEN or to licensing requirements in any state before they become properly licensed and registered, we could be subject to potential civil and criminal penalties. In addition, our majority-owned subsidiary tZERO is working on financial applications of blockchain technology, including the development and management of a trading platform for digital "tokens," "coins," and digital securities. See "Additional Risks Relating to our tZERO Initiatives" below. These areas, along with other areas, are areas in which we do not have substantial experience, and which are subject to the risks of new and novel businesses, including technical, operational, financial, regulatory, legal and reputational risks, as well as the risk that we may be unable to market, license or sell our technology successfully or profitably. The occurrence of any such risks, any such penalties, or even allegations of criminal or civil misconduct, could have a material adverse effect on us and on our financial results and business.
We may be required to write off amounts relating to our interests in startup businesses.
At December 31, 2019, Overstock and its subsidiaries held minority interests totaling approximately $52.4 million in several companies that are in the startup or development stages and we may acquire additional minority interests in other entities in the future. Minority interests are inherently risky because we may not have the ability to influence business decisions. Further, these interests are inherently risky because the markets for the technologies or products these companies are developing are typically in the early stages and may never materialize. Additionally, since these interests are in companies that are in the early startup or development stages, even if their technology or products are viable, they may not be able to obtain the capital or resources necessary to successfully bring their technology or products to market. Furthermore, we have no assurance that the technology or products of companies we have funded would be successful, even if they were brought to market. We have written off amounts related to these interests in the past and may in the future write off additional amounts related to these interests. Any such write-offs could be material and could have a material adverse effect on our financial results and business.
If we do not keep pace with technological and regulatory changes, it may impair our ability to market, license or sell the products and services developed as part of our Medici initiatives.
The market for products and services based on blockchain technology is characterized by rapid technological change, frequent product and service innovation and evolving industry standards. The success of our Medici initiatives depends on several factors, including the timely completion, introduction and market acceptance of such products and services, as well as
our ability to comply with changing regulations and laws. Failure in this regard may significantly impair our competitiveness and financial results. In addition, we may need to continuously modify and enhance our offerings to keep pace with changes in Internet-related hardware, software, communication, browser and database technologies. We may not be successful in either developing these modifications and enhancements or in bringing them to market in a timely fashion. Furthermore, uncertainties about the timing and nature of new network platforms or technologies, or modifications to existing platforms or technologies, could increase our research and development expenses. Any failure of products and services to keep pace with technological or regulatory changes or operate effectively with future network platforms and technologies could reduce the demand for our products and services. The occurrence of any of the foregoing could have a material adverse effect on our financial results and business.
The blockchain related products and services that we are developing as part of our Medici initiatives have the potential to be used in ways we do not intend, including for criminal or other illegal activities.
Blockchain related products and services, in particular cryptocurrencies, have the potential to be used for financial crimes or other illegal activities. Because the Medici initiatives are novel there are uncertainties regarding any legal and regulatory requirements for preventing blockchain related products and services from being put to such uses, and there are uncertainties regarding the liabilities and risks to the Company if we are unable to prevent such uses. Even if we comply with all laws and regulations regarding financial and blockchain related products and services, we have no ability to ensure that our customers, partners or others to whom we license or sell our products and services comply with all laws and regulations applicable to them and their transactions. Any negative publicity we receive regarding any allegations of unlawful uses of our Medici initiatives could damage our reputation. More generally, any negative publicity regarding unlawful uses of blockchain technology in the marketplace could reduce the demand for our products and services. The occurrence of any of the foregoing could have a material adverse effect on our financial results and business.
Risks Relating to Our Common Stock and Other Securities
The trading pricesprice of our securitiescommon stock may be adversely affected by short-selling activities involving our common stock.
The trading pricesprice of our common stock and other securities havehas been and may continue to be volatile. Our stock price fluctuations may be due in part to short-selling activity related to our common stock. The practice of short-selling activity may adversely affect our common stock price, which in turn could adversely affect our ability to raise capital and could have a material adverse effect on our financial results, business and prospects.
Significant fluctuations in our securitiesquarterly operating results may be adversely affected byaffect the pursuit of our strategic initiatives.
The tradingmarket prices of our common stock, and other securitiesyou may lose all or a part of your investment.
Our revenues and operating results have beenvaried in the past and may continue to be volatile. Our stock price fluctuations may bevary significantly from quarter to quarter due in part to our disclosures about our explorationa number of strategic initiatives. Our stock price may be adversely affected by our future actions, including any decisions we may make or announcements to pursue or not to pursue such strategic initiatives, and by any announcements we may make regarding any such matters, anyfactors, many of which are outside our control. In addition to the other risk factors described in this report, factors that have caused and/or could cause our quarterly operating results to fluctuate and in turn affect the tradingmarket prices of our securitiescommon stock include:
•increases in the cost of advertising and changes in our sales and marketing expenditures;
•our inability to decrease significantlyretain existing customers or encourage repeat purchases;
•the extent to which our existing and future marketing campaigns are successful;
•price competition, particularly in turnthe costs of marketing and product pricing;
•the amount and timing of operating costs and capital expenditures;
•the amount and timing of our purchases of inventory;
•our inability to manage distribution operations or provide adequate levels of customer service;
•increases in the cost of fuel, transportation or distribution;
•our inability to implement technology changes or integrate operations and technologies from acquisitions or other business combinations;
•our efforts to offer new lines of products and services;
•our inability to attract users to our website; and
•losses associated with our equity method investments.
Any of the foregoing could adversely affecthave a material adverse effect on our financial results and business and our ability to raise capital and could have a material adverse effect on our financial results, business and prospects.
The trading prices of our securities may be affected by the prices of cryptocurrencies, particularly Bitcoin, despite our disclosures that we generally hold very little Bitcoin, and by perceptions regarding the business prospects of blockchain technology generally.
The trading prices of our securities may be affected by the prices of cryptocurrencies, particularly Bitcoin, which may be the result of an apparent misperception that the value of our business is related to the value of Bitcoin, despite our disclosures that we generally hold very little Bitcoin. The market price of our securities may also be affected by perceptions regarding the business prospects of our Medici business and blockchain technology generally. To the extent that our blockchain initiatives do not succeed in a timely manner or at all, or the development or acceptance of blockchain networks, blockchain assets or blockchain applications slows or stops, the trading prices of our securities could decrease significantly, which in turn could adversely affect our ability to raise capital and could have a material adverse effect on our financial results, business and prospects.
Sales by our significant stockholders could have an adverse effect on the market priceholders of our common and preferredstock.
Future sales or other distributions of our stock may depress our stock price or subject us to limitations on our ability to use our net operating and tax credit carryforwards.
A smallSales or other distributions of a substantial number of our stockholders own a significant percentage of our common stock. In the past, our former executive officer and director Dr. Patrick Byrne owned a significant amountshares of our common stock, that he sold in September of 2019,the public market or otherwise, by us or by a significant stockholder, has in the past and which sale had an adverse effect oncould in the marketfuture, depress the trading price of our common stock and increased the risk that we may trigger a limitation onimpair our ability to use our net operating loss and tax credit carryforwards inraise capital through the future. According to public filings with the SEC, at December 31, 2019, a small numbersale of institutional investors were beneficial owners of significant percentages of our common stock. Sales by any of such stockholders could have a material adverse effect on the market prices of our common stock and/or preferred stock. In addition, theadditional equity securities. The transfer of ownership of a significant portion of our outstanding shares of common or preferred stock in the public market or otherwise, by us or by a significant stockholder, within a three-year period could adversely affect our ability to use our net operating losses and tax credit carryforwards to offset future taxable net income. Any of the foregoing could have a material adverse effect on the holders of our securities.
Our quarterly operating results are volatile andIn addition, we may adversely affect the market pricesissue additional shares of our common stock andor preferred stock and youfrom time to time in the future in amounts that may lose all or a part of your investment.
be significant. We have experiencedsold common stock including under "at the market" sales agreement and expect to continue to experience significant fluctuations in our operating results in part because of seasonal fluctuations in traditional retail patterns. Our gross revenues have historically been significantly lower in the first and second calendar quarters than in the fourth quarter of the prior year due primarily to increased shopping activity during the fourth quarter holiday season. Further, we generally increase our inventories substantially in anticipation of holiday season shopping activity, which has a negative effect on our cash flow. As a result of the fourth quarter holiday season shopping, we also typically have unusually large payments due to our fulfillment partners in the first calendar quarter. Our revenues and operating results have variedfollow-on underwritten offerings in the past and may continue to vary significantly from quarter to quarter due todo so in the future. We also previously issued a numberclass of other factors, manypreferred stock that was publicly traded, and may in the future issue preferred stock that is publicly traded. The sale of which are outside our control. In addition to seasonal effects and the other risk factors described in this report, factors that have caused and/or could cause our quarterly operating results to fluctuate and in turn affect the market pricessubstantial amounts of our common stock andor preferred stock, include:
increases inby us or a significant stockholder, or the cost of advertising and changes in ourperception that these sales and marketing expenditures;
expenses we incur in our Medici and tZERO business development efforts;
our inability to retain existing customers or encourage repeat purchases;
the extent to which our existing and future marketing campaigns are successful;
price competition, particularly in the costs of marketing as well as in product pricing;
the amount and timing of operating costs and capital expenditures;
the amount and timing of our purchases of inventory;
our inability to manage distribution operations or provide adequate levels of customer service;
increases in the cost of fuel, transportation or distribution;
our inability to implement technology changes or integrate operations and technologies from acquisitions or other business combinations;
our efforts to offer new lines of products and services; and
our inability to attract users to our website.
Any of the foregoing could have a material adverse effect on our financial results and business and our ability to raise capital and could have a material adverse effect on the holders of our common stock and of our preferred stock.
Our outstanding preferred stockmay occur, could adversely affect the holderstrading prices of our common stock in some circumstances.
We have two series of preferred stock outstanding. The preferred stock could adversely affect the holders ofsecurities or subject us to limitations on our common stock in some circumstances. The preferred stock generally votes with the common stock, with holders of the preferred stock having one vote for each share held. As of December 31, 2019, the 481,259 outstanding shares of preferred stock constituted approximately 1.2% of the total number of shares of the preferred stock and the common stock, taken together. Holders of the Series A-1 Preferred stock are entitled to an annual cash dividend of $0.16 per share, and holders of the Series B Preferred stock are entitled to an annual cash dividend at the annual rate of 1.0% multiplied by $15.68, in each case in preference to any dividend payment to the holders of the common stock, out of funds legally available for payment of dividends and subject to declaration by our Board of Directors. Holders of our preferred stock are also generally entitled to participate in any dividends we pay on the common stock. The preferred stock ranks equally with the common stock upon our liquidation, winding up or dissolution, with each share of Series A-1 Preferred stock and each share of Series B Preferred stock being treated as though it were a share of our common stock. Generally, in a business combination, we are obligedability to use all commercially reasonable efforts to cause each share of the preferred stock to be treated as a share of common stock. Any of the foregoing could have a material adverse effect on the holders of the common stock in connection with any such transactions.our net operating and tax credit carryforwards.
We generally have not received significant coverage by securities analysts, and the lack of coverage may adversely affect our share price and trading volume.
We generally have not received significant coverage by securities analysts, and the securities analysts who do cover us may stop coverage at any time. The lack of coverage may adversely affect our share price and trading volume and may cause our share price or trading volume to be lower than they might be if more analysts covered us.
Anti-takeover provisions contained in our amended and restated certificate of incorporation and amended and restated bylaws, as well asand provisions of Delaware law, could impair a takeover attempt.
Our amended and restated certificate of incorporation, amended and restated bylaws and Delaware law contain provisions which could have the effect of rendering more difficult, delaying, or preventing an acquisition deemed undesirable by our Board of Directors. Among other things, our amended and restated certificate of incorporation and amended and restated bylaws include provisions:
•limiting the liability of, and providing indemnification to, our directors and officers;
•limiting the ability of our stockholders to call and bring business before special meetings;
•providing that our Board of Directors is classified into three classes of directors with staggered three-year terms;
•only permitting the Board of Directors to fix the number of directors and to fill vacancies;
•prohibiting cumulative voting in the election of directors;
•prohibit stockholder action by written consent, which requires all stockholder actions to be taken at a meeting of our stockholders;
•requiring advance notice of stockholder proposals for business to be conducted at meetings of our stockholders and for nominations of candidates for election to our Board of Directors;
•controlling the procedures for the conduct and scheduling of Board of Directors and stockholder meetings; and
•designating a state court located in the State of Delaware as the sole and exclusive forum for specified matters.
These provisions, alone or together, could delay or prevent hostile takeovers and changes in control or changes in our management.
As a Delaware corporation, we are also subject to provisions of Delaware law, including Section 203 of the Delaware General Corporation law, which prevents certain stockholders holding more than 15% of our outstanding common stock from engaging in certain business combinations without approval of the holders of at least two-thirds of our outstanding common stock not held by such 15% or greater stockholder.
Any provision of our amended and restated certificate of incorporation, amended and restated bylaws or Delaware law that has the effect of delaying, preventing or deterring a change in control could limit the opportunity for our stockholders to receive a premium for their shares of our common stock or other securities and could also affect the price that some investors are willing to pay for our common stock or other securities.
We are subject to the risk of possibly becoming an investment company under the Investment Company Act.
Additional Risks Related
The Investment Company Act regulates certain companies that invest in, holdor trade securities. Primarily as a result of a portion of our assets consisting of indirectly-held minority investment positions through the Medici Ventures, L.P. fund, we are subject to the risk of inadvertently becoming an investment company. Because registration under the Investment Company Act would make it impractical for us to operate our business, we need to avoid becoming subject to the registration requirements of the Investment Company Act. To do so, we may structure transactions in a less advantageous manner than if we did not have Investment Company Act concerns, or we may avoid otherwise economically desirable transactions and/or strategic initiatives due to those concerns. In addition, events beyond our control, including significant appreciation or depreciation in the value of certain of our holdings or adverse developments with respect to our Series A-1 Preferred Stock
Our Series A-1 Preferred stock may only be sold through the tZERO ATS.
The amended and restated certificateownership of designation for the Series A-1 Preferred stock providescertain of our subsidiaries, could result in us inadvertently becoming an investment company. If it were established that shares of the Series A-1 Preferred stock can be sold only on the tZERO ATS. The Series A-1 Preferred stock is not and will not be listed on any national securities exchange or other trading market of any kind. The limitation on trading shares of Series A-1 Preferred stock through the tZERO ATS may adversely affect the liquidity for, and market price of, the shares of Series A-1 Preferred stock. It may at times be very difficult to sell any shares of the Series A-1 Preferred stock.
The Series A-1 Preferred stock may only be sold through a brokerage account established with a broker-dealer that subscribes to and effects trading on the tZERO ATS. Currently, Dinosaur is the only broker-dealer that facilitates trades of any security on the tZERO ATS. Unless and until another broker-dealer effects trading on the tZERO ATS or maintainswe were an account with an ATS-executing broker-dealer, any holder of Series A-1 Preferred stock that wishes to sell its shares must open an account at Dinosaur. While tZERO ATS, LLC is working to add additional broker-dealer effects trading on the tZERO ATS, there is no assurance that any executing broker-dealers will be added, and Dinosaur could continue to be the only ATS-executing broker-dealer. If Dinosaur for any reason ceases to operate,investment company, there would be no broker-dealer to effect sales of the Series A-1 Preferred stock on tZERO ATS. This could prevent all trading in the Series A-1 Preferred stock and would likely materially and adversely affect the trading prices of the Series A-1 Preferred stock. In such a case, however, the Board could exercise its authority to change or add additional alternative trading systems, trading markets or venues on which the Series A-1 Preferred stock may be sold.
Likewise, Electronic Transaction Clearing, Inc., now doing business as Apex PRO ("Apex"), is the only broker-dealer that clears transactions effected on the tZERO ATS. If for any reason Apex ceases to clear trades for Dinosaur or refuses to clear trades for any future ATS-executing broker-dealers of tZERO ATS and no clearing firm succeeds Apex, trading in the Series A-1 Preferred stock on the tZERO ATS may be interrupted and such an interruption would likely materially and adversely affect the trading price of the Series A-1 Preferred stock.
The tZERO ATS has had limited volume. Even if a more liquid trading market for the Series A-1 Preferred does develop on the tZERO ATS utilizing the tZERO Technology Stack orrisk, among other technology developed by tZERO, the depth and liquidity of that market and the ability to sell the Series A-1 Preferred stock may nevertheless be limited, which may have a material adverse effect on the liquidity for, and the market price of, the Series A-1 Preferred stock.
Moreover, peer-to-peer transfers of the Series A-1 Preferred stock outside of orders submitted to the tZERO ATS by an ATS-executing broker-dealer, or with a broker-dealerconsequences, that itself maintains an account with an ATS-subscribing broker-dealer, on behalf of its customers ("peer-to-peer transfers"), are not permitted,we could become subject to limited circumstances. Computershare will register peer-to-peer transfers of record ownership of the Series A-1 Preferred stockmonetary penalties or injunctive relief, or both, in limited circumstances that do not constitute "sales" for purposes of securities laws, such as a transfer from broker-dealer to broker-dealer, with the stockholder's carrying broker-dealer being reflected as the record holder, or a transfer by a stockholder who is the record holder pursuant to a divorce decree, death or gift (and then only following compliance with Computershare's procedures, including delivery of appropriate documentation). However, the Board is authorized to exclude additional transactions or classes of transactions from the requirement to make "sales" on the tZERO ATS.
The restrictions on the tax reporting of holder's cost basis in shares of Series A-1 Preferred stock will not allow normal tax planning in the sale of shares of Series A-1 Preferred stock and may result in disadvantageous tax consequences to a seller of Series A-1 Preferred stock.
Only one method of cost basis reporting (the first-in, first-out, or "FIFO" method) is available for the Series A-1 Preferred stock. As a result, sellers of Series A-1 Preferred stock may be required to pay more tax on their sales or to pay taxes earlier than if other normal methods of cost basis reporting had been available, which could have an adverse tax effect on sellers of Series A-1 Preferred stock and the market price of the Series A-1 Preferred stock.
The record of ownership of each digital wallet address will be available to the general public and it may be possible for members of the public to determine the identity of the record holders of the Series A-1 Preferred stock.
Although the record of ownership included in the blockchain is a non-controlling digital "courtesy carbon copy" of the records maintained by Computershare, it will be made publicly available. The publicly available information will include the digital wallet address of each holder of record transacting in Series A-1 Preferred stock and the security position information of such holder of record and the entire history of debits and credits to the relevant security position information of each digital
wallet address, but it will not include any personal identifiable information. As a result, it may be possible for members of the public to determine the identity of the record holders of certain wallet addresses based on the publicly available information in the courtesy carbon copy, as well as other publicly available information, including any ownership reports required to be filed with the SEC regarding the Series A-1 Preferred stock.
The Series A-1 Preferred stock depends on Computershare as the transfer agent for the Series A-1 Preferred stock.
Computershare serves as the transfer agent for the Series A-1 Preferred stock and ownership of the Series A-1 Preferred stock is determinedaction brought by the books and records of Computershare. Our agreement with Computershare can be terminated by either party on 60 days' notice. If Computershare chooses to exercise its termination rights or otherwise ceases to operate as a transfer agent, we would seek to engage a successor transfer agent. In the absence of finding such a successor, Overstock would need to assume the role of transfer agent. While we believe we could successfully assume the role of transfer agent, no assurance can be givenSEC, that we would be able to do so and if we are unable to do so the trading market for the Series A-1 Preferred stock would be adversely affected and it may be difficultenforce contracts with third parties or impossible for Overstock to pay dividends or liquidation preference or provide voting rights to the correct holders of record of the Series A-1 Preferred stock.
The potential application of U.S. laws regarding traditional investment securities to the Series A-1 Preferred is unclear.
We believe that the Series A-1 Preferred stock should be treated as any other conventional, uncertificated book-entry security. However, various regulators may disagree with this assertion and conclude that the Series A-1 Preferred stock should not be treated as any other traditional investment security. For example, we believe that the Series A-1 Preferred stock is not a "digital asset security" within the meaning of the July 8, 2019 Joint Staff Statement on broker-dealer Custody of Digital Asset Securities (the "July Statement"), and that as a result, broker-dealers will have a good control location consistent with the July Statement. However, federal securities regulatory authorities may disagree with that conclusion and we could be required to take further steps with regulators to establish a good control location. The occurrence of any such issue or dispute could have a material adverse effect on the liquidity for, and market price of, the Series A-1 Preferred stock. In addition, if regulatory authorities take the position that Series A-1 Preferred stock is a "digital asset security," then broker-dealers may need to submit a Form CMA with FINRA in order to hold the Series A-1 Preferred stock on your behalf, and that could prevent other broker-dealers from becoming executing broker-dealers to the tZERO ATS. As a result, holders of the Series A-1 Preferred stock may not be able to open an account with another ATS-executing broker-dealer authorized to facilitate trading of the Series A-1 Preferred stock on the tZERO ATS.
If we elect to repurchase the Series A-1 Preferred stock on the tZERO ATS, it could have a material adverse effect on the liquidity in, and trading prices of, the Series A-1 Preferred stock.
We do not currently intend to repurchase any of the Series A-1 Preferred stock on the tZERO ATS. However, we could do so, subject to applicable regulations regarding issuer repurchases of their capital stock. If we do so, we would do so only at prices lower than the prices at which we are entitled to redeem the shares. If we repurchase shares of Series A-1 Preferred stock, the trading market for the Series A-1 Preferred stock could become less liquid, which would likely cause the trading prices of the Series A-1 Preferred stock to decrease, which would give us an economic incentive to repurchase additional shares. The occurrence of the foregoing could have a material adverse effect on the liquidity in, and trading prices of, the Series A-1 Preferred stock. There are no restrictions on our repurchase of shares of Series A-1 Preferred stock while there is any arrearage in the payment of dividends.
We may have the right to convert the outstanding shares of Series A-1 Preferred stock into shares of Series B Preferred stock at any time.
Pursuant to the amended and restated Series A-1 Preferred stock certificate of designation, we have the right to convert the Series A-1 Preferred stock into Series B Preferred stock at any time, and the terms of the Series B Preferred stock may be amended at any time without the consent of the holders of the Series A-1 Preferred stock. Currently, there are not enough authorized shares of Series B Preferred stock to permit conversion of the Series A-1 Preferred stock into Series B Preferred stock. In the future, the Boardthird parties could seek stockholder approval to increaseobtain rescission of transactions with us undertaken during the authorized number of shares of preferred stock in an amount sufficient to permit the Board to increase the authorized shares of Series B Preferred stock to permit conversion of the Series A-1 Preferred stock into Series B Preferred stock, and then we would have the ability to exercise this conversion right. Any such conversion and any such amendment of the Series B Preferred stock could have a material adverse effect on the trading price of the Series A-1 Preferred stock. Ifperiod it was established that we were to do so at a time when the Series B Preferred stockan unregistered investment company. If it were trading at a price lower than the trading price of the Series A-1 Preferred stock, holders of Series A-1 Preferred stock would likely experienceestablished that we were an immediate and potentially material decrease in the market value of the Series A-1 Preferred stock they hold and
of the Series B Preferred stock they would receive upon the conversion. Moreover, the existence of this conversion right could have a negative impact on the liquidity for, and market value of, our Series A-1 Preferred stock.
tZERO ATS and tZERO are involved in ongoing discussions with regulatory authorities.
tZERO ATS and tZERO have been and remain involved in ongoing oral and written communications with, and have received subpoenas from, regulatory authorities in connection with ongoing examinations, inquiries, or investigations. Any failure of tZERO ATS, LLC, the tZERO ATS, or tZERO to satisfy FINRA, the SEC, or any other regulatory authority could result in trading halts on the tZERO ATS and fines and penalties being imposed. Any such trading halt will adversely affect the trading market for the Series A-1 Preferred stock and may prevent the sale of Series A-1 Preferred stock until the failure is rectified.
Technology on which the tZERO ATS relies for its operations may not function properly.
The technology on which the tZERO ATS relies, including the tZERO Technology Stack, may not function properly because of internal problems or as a result of cyber-attacks or external security breaches. Any such malfunction may adversely affect the ability of holders with a brokerage account at a tZERO ATS subscriber to execute trades of the Series A-1 Preferred stock on the tZERO ATS. Moreover, since trading in the Series A-1 Preferred stock has been limited, the tZERO ATS platform may not function properly in cases of increased trading volume. If the technology used by the tZERO ATS does not work as anticipated, trading of the Series A-1 Preferred stock could be limited or even suspended. In such as case, however, our board of directors has the authority to change or add alternative trading systems, trading markets or venues on which the Series A-1 Preferred stock may be sold, but there can be no assurance that they will choose to do so in the future, or that any such additional trading venues would be found or prove suitable to support the Series A-1 Preferred stock.
The technology on which the tZERO ATS depends has been developed by our indirectly held majority-owned subsidiary, tZERO, and is licensed to its wholly-owned subsidiary, tZERO ATS, LLC, and the Series A-1 Preferred stock depends on both tZERO and tZERO ATS, LLC, neither of which has substantial resources.
tZERO is an indirectly held majority-owned subsidiary of ours and owns 100% of the equity interest in tZERO ATS, LLC. tZERO licenses the technology to tZERO ATS, LLC, and tZERO uses tZERO technology, including the tZERO Technology Stack, to operate the tZERO ATS. tZERO is a growth-stageinvestment company, and neither tZERO nor tZERO ATS, LLC has substantial resources. If any one or more of Overstock, tZERO or tZERO ATS, LLC were unable to fund its operations in the future, or if any one or more of them were to become the subject of a bankruptcy or other insolvency proceeding, tZERO ATS, LLC might be unable to continue to operate the tZERO ATS, and the Series A-1 Preferred stock could be materially adversely affected. In any such event, or if the tZERO ATS, LLC or tZERO technology were to be unable to operate as intended for any reason, holders of our capital stock, including the Series A-1 Preferred stock, could lose their ability to trade our Series A-1 Preferred stock, whichit would have a material adverse effect on the market value of that stock,our business and may have a material adverse effect on the liquidity for, and the price of, our Common Stock.
Transactions involving the Series A-1 Preferred stock may not be properly reflected on the blockchain.
A significant feature of the Series A-1 Preferred stock is that, while the records of Computershare (as our transfer agent) govern record ownership of the Series A-1 Preferred stock, for all record holders on the transfer agent's official and controlling records there is a "courtesy carbon copy" of certain Computershare ownership records on the blockchain. Following Computershare's approval of any change in record ownership, the security position information relevant to a record holder's digital wallets addresses on the blockchain is updated consistent with changes to Computershare's official books and records. To the extent that Computershare's records and the "courtesy carbon copy" get out of sync, there could be a delay while we correct any such inconsistencies and such inconsistencies may cause investor confusion with respect to their record holdings of the Series A-1 Preferred stock, which could adversely affect the liquidity for, and market value of, the Series A-1 Preferred stock.
The potential application of U.S. laws regarding virtual currencies and money transmission to tZERO ATS, LLC's use of the Ethereum blockchain is unclear.
The non-controlling blockchain-based "courtesy carbon copy" of record ownership uses tZERO technology, which, in turn, uses the Ethereum blockchain. Although tZERO's wholly owned subsidiary, tZERO Crypto maintains certain licenses in connection with its virtual currency applications, none of the parties involved in the operation of the tZERO ATS using tZERO technology is licensed under the virtual currency or money transmission regulations of any state in the United States or registered with FinCEN. If any regulatory authority were to assert that additional licensing or registration was required by tZERO ATS, LLC or tZERO, it could affect thefinancial operations or viability of either of them, and could adversely affect the availability of the tZERO ATS as a trading venue for the Series A-1 Preferred stock. This in turn would have a material adverse
effect on the liquidity of the Series A-1 Preferred stock and the holders' ability to trade such securities. In addition, because tZERO ATS, LLC is a wholly-owned subsidiary of tZERO, any negative impact on the value of the tZERO ATS or tZERO technology, including the tZERO Technology Stack, could have an adverse impact on the value of Overstock, which would cause our stock price to decrease.
Although the Series A-1 Preferred stock has characteristics similar to those of our common stock, the differences may adversely affect the trading prices of the Series A-1 Preferred stock.
Each share of Series A-1 Preferred stock is intended to have voting and dividend rights and rights upon liquidation substantially similar to those of one share of our common stock, except that the Series A-1 Preferred stock will have a dividend preference over the common stock, the Series A-1 Preferred stock will be limited to trading on the tZERO ATS, and we will have the right to convert the Series A-1 Preferred stock into Series B Preferred stock. These provisions may have a material adverse effect on the liquidity for, and trading price of, the Series A-1 Preferred stock.
We do not expect there to be any market makers to develop a trading market in the Series A-1 Preferred stock.
Most securities that are publicly traded in the United States have one or more broker-dealers acting as "market makers" for the security. A market maker is a firm that stands ready to buy and sell the security on a regular and continuous basis at publicly quoted prices. We have no assurances that the Series A-1 Preferred stock will ever have any market makers. We expect the lack of market makers to continue to contribute to a lack of liquidity in the Series A-1 Preferred stock, which could have a material adverse effect on holders' ability to trade them.
Additional Risks Related to both our Series A-1 Preferred stock and our Series B Preferred stock
We do not intend to issue any additional shares of Series B Preferred stock, which is expected to continue to result in very limited trading.
We do not intend to issue any additional shares of Series B Preferred stock. This will likely result in limited trading in the Series B Preferred and the number of shares of Series B is limited to 370,000.
A share of Series A-1 Preferred stock and/or Series B Preferred stock may have a substantially lower market value than a share of our common stock.
The trading prices of the Series A-1 Preferred stock and the Series B Preferred stock have been at times, and may be in the future, substantially lower than the trading price of our common stock, which could have a material adverse effect on holders of Series A-1 Preferred stock and holders of Series B Preferred stock.
It is uncertain whether the IRS will treat the Series A-1 Preferred stock and Series B Preferred stock as common stock or preferred stock for U.S. federal income tax purposes.
We intend to treat the Series A-1 Preferred stock and Series B Preferred stock as common stock for U.S. federal income tax purposes. Nevertheless, it is unclear whether the IRS will treat the Series A-1 Preferred stock and Series B Preferred stock as common stock for U.S. federal income tax purposes. If the IRS were not to treat either the Series A-1 Preferred stock or the Series B Preferred stock as common stock for U.S. federal income tax purposes, it could have a material adverse effect on the holders of Series A-1 Preferred stock and the holders of Series B Preferred stock.
Holders of Series A-1 Preferred stock and Series B Preferred stock will have no rights with respect to our common stock.
Holders of Series A-1 Preferred stock and holders of the Series B Preferred stock will have no rights with respect to our common stock, and no right to convert shares of Series A-1 Preferred stock or Series B Preferred stock into shares of common stock or to exchange shares of Series A-1 Preferred stock or Series B Preferred stock for shares of common stock, except that holders of Series A-1 Preferred stock and holders of Series B Preferred stock will have the right to vote with the common stock on any matter submitted to a vote of the holders of the common stock, the right to receive payments upon liquidation equally with the holders of the common stock, and the right to receive dividends in preference to the holders of the common stock and to participate in any dividend paid to the holders of our common stock, subject to the limitations set forth in the respective certificates of designation of Series A-1 Preferred stock and Series B Preferred stock.
Our obligation to pay dividends on the Series A-1 Preferred stock and Series B Preferred stock is limited, and our ability to pay dividends on the Series A-1 Preferred stock and Series B Preferred stock may be limited.continue our business.
Our obligation to pay preferential dividends on the Series A-1 Preferred stock is subject to our Board declaring such dividend payments. Further, although we will be contractually restricted from paying a dividend on the common stock unless we have paid preferential cumulative $0.16 per share annual dividends on the Series A-1 Preferred stock and preferential cumulative 1.0% annual dividends on the Series B Preferred stock, we have never paid a cash dividend on the common stock and we have no present intention of doing so. Consequently, our failure to pay preferential dividends on the Series A-1 Preferred stock and on the Series B Preferred stock might have no legal effect on us at all, although it could adversely affect the liquidity for, and trading prices of, the Series A-1 Preferred stock and of the Series B Preferred stock. Further, our payment of any dividends will be subject to contractual and legal restrictions and other factors our Board deems relevant. Further, we may elect not to pay dividends on the Series A-1 Preferred stock, the Series B Preferred stock or both rather than limiting other proposed expenditures, including expenditures that may not be contractually required. Moreover, agreements governing any future indebtedness of ours may further limit our ability to pay dividends on our capital stock, including the Series A-1 Preferred stock and the Series B Preferred stock. In addition, our ability to pay dividends is limited by applicable law. Although there are no arrearages in cumulative preferred dividends and we declared and paid a cash dividend of $0.16 per share to the holders of our then outstanding preferred stock during 2017, 2018 and 2019, there is no assurance that we will be able or that our Board will decide to do so in 2020 or the future. Any of the foregoing facts or events could have a material adverse effect on the holders of the Series A-1 Preferred stock and the holders of the Series B Preferred stock and on the liquidity for, and trading prices of, the Series A-1 Preferred stock and the Series B Preferred stock.
Voting rights on the Series A-1 Preferred stock and Series B Preferred stock generally will be limited to voting together with the holders of the common stock and Series A Preferred stock or Series B Preferred stock as a single class, and the holders of the Series A-1 Preferred stock and the holders of the Series B Preferred stock collectively will have only a small percentage of the voting power on any matter submitted to the holders of the common stock, Series A-1 Preferred stock and Series B Preferred stock, voting together as a single class.
Voting rights of the Series A-1 Preferred stock or Series B Preferred stock generally will be limited to voting together with the holders of the common stock, Series A-1 Preferred stock and Series B Preferred stock, as a single class. If an amendment requiring stockholder approval is proposed to our amended and restated certificate of incorporation, the holders of the Series A-1 Preferred stock and the holders of the Series B Preferred stock will vote together with the holders of the common stock as a single class, but neither the holders of the Series A-1 Preferred stock nor the holders of the Series B Preferred stock will be entitled to a class vote on the amendment, unless the proposed amendment would adversely affect the special rights, preferences, privileges and voting powers of the Series A-1 Preferred stock or Series B Preferred stock, respectively increases or decreases of the authorized number of shares of Series A-1 Preferred stock or Series B Preferred stock, respectively. These limited voting rights could have a material adverse effect on holders of Series A-1 Preferred stock and holders of Series B Preferred stock and on the trading prices of the Series A-1 Preferred stock and the Series B Preferred stock.
The holders of the Series A-1 Preferred stock and Series B Preferred stock will have no right as a separate class to elect any members of our board of directors under any circumstances, including upon any failure of our board of directors to declare or pay any dividend on the Series A-1 Preferred stock or Series B Preferred stock. Further, the holders of the Series A-1 Preferred stock and the holders of the Series B Preferred stock, together, also will have no right by themselves to elect any members of our board of directors under any circumstances. The holders of the Series A-1 Preferred stock and the holders of the Series B Preferred stock will be entitled only to vote with the holders of the common stock as a single class in the election of directors and on any other matter coming before a vote of the holders of the common stock. Holders' lack of such rights could have a material adverse effect on holders of the Series A-1 Preferred stock and the holders of the Series B Preferred stock and the liquidity for, and trading prices of, the Series A-1 Preferred stock and the Series B Preferred stock.
The Series A-1 Preferred stock and the Series B Preferred stock will rank junior to all of our and our subsidiaries' liabilities in the event of a bankruptcy, liquidation or winding up of our or our subsidiaries' business.
In the event of our bankruptcy, liquidation or winding up, our assets will be available to make payments to holders of Series A-1 Preferred stock and to holders of Series B Preferred stock only after all of our liabilities have been paid, and neither the Series A-1 Preferred stock nor the Series B Preferred stock will have any preference over our common stock in the event of our bankruptcy, liquidation or winding up. In addition, the Series A-1 Preferred stock and Series B Preferred stock will rank structurally junior to all existing and future liabilities of our subsidiaries. Holders' rights to participate in the assets of our subsidiaries upon any liquidation or reorganization of any subsidiary will rank junior to the claims of creditors. In the event of our bankruptcy, liquidation or winding up, there may not be sufficient assets remaining, after paying our and our subsidiaries' liabilities, to pay any amounts to the holders of Series A-1 Preferred stock or Series B Preferred stock then outstanding. We may
incur significant debt or other liabilities in the future, and the Series A-1 Preferred stock and Series B Preferred stock contain no covenant or restriction on our ability to incur debt or other obligations. Any bankruptcy, liquidation or winding up of our company or any of its wholly or partially owned subsidiaries would have a material adverse effect on the liquidity for, and trading prices of, the Series A-1 Preferred stock and Series B Preferred stock.
Moreover, we do not own all of the equity securities of our subsidiaries, including tZERO. For example, we have adopted an employee equity incentive plan pursuant to which tZERO has issued, and may continue to issue, shares or other equity interests or awards having the economic effects of equity interests to employees. As a result, following satisfaction of the claims of creditors of those subsidiaries as discussed above, our right to receive distributions as a stockholder with respect to our equity interests in those majority owned subsidiaries will be shared with third party equity holders of tZERO and our other subsidiaries, whether now existing or created in the future, including our employees holding shares of any of them.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
We own and lease various properties in the United States and internationally. We use the properties for corporate office space, data centers, and warehouse, fulfillment and customer service space. As of March 6, 2020,December 31, 2022, we operated the following facilities (square feet in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | | United States | | International | | Total |
| Owned facilities | | 260 | | | — | | | 260 | |
| Leased facilities | | 1,018 | | | 13 | | | 1,031 | |
| Total facilities | | 1,278 | | | 13 | | | 1,291 | |
|
| | | | | | | | | |
| | | United States | | International | | Total |
| Owned facilities | | 236 |
| | — |
| | 236 |
|
| Leased facilities | | 1,494 |
| | 21 |
| | 1,515 |
|
| Total facilities | | 1,730 |
| | 21 |
| | 1,751 |
|
ITEM 3. LEGAL PROCEEDINGS
From time to time, we are involved in, or become subject to litigation or other legal proceedings 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. We also prosecute lawsuits to enforce our legal rights. In connection with such litigation or other legal proceedings, we have been in the past and we may be in the future subject to significant damages, associated costs, or equitable remedies relating to the operation of our business. 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. For additional details, see the information set forth under Item 158 of Part IV,II, "Financial Statements—Statements and Supplementary Data"—Note 12. 12—Commitments and Contingencies, subheading Legal Proceedings" and Contingencies, contained in the "Notes to Consolidated Financial Statements" of this Annual Report on Form 10-K, which is incorporated by reference in answer to this Item.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market information
The principal U.S. trading market for our common stock is the Nasdaq Global Market. Our common stock is traded under the symbol "OSTK."
Holders
As of March 6, 2020,February 17, 2023, there were 110333 holders of record of our common stock. Many of our shares of common stock are held by brokers and other institutions on behalf of the beneficial owners.
Dividends
We have never declared or paid any cash dividends on our common stock. However, we announced on July 30, 2019 that we had declared a dividend in the form of one Series A-1 Preferred stock share for every 10 shares of common stock or preferred shares held by a stockholder on the record date. The record and distribution dates for the preferred stock dividend were announced at that time to be September 23, 2019 and November 15, 2019, respectively. On September 18, 2019, we announced that we were postponing the record date for the preferred stock dividend. On February 13, 2020, a special meeting of stockholders was held, where the stockholders approved amendments to our certificate of designation allowing us to proceed with issuing the Dividend. As of the date of this filing, we have not declared a record date for the Dividend, nor have we distributed the Dividend. With regard to cash dividends, weWe currently intend to retain any earnings for future growth and do not anticipate paying any cash dividends on our common stock in the foreseeable future. Any future determination to pay any dividends on our common stock will be at the discretion of our Board of Directors and will depend on our results of operations, financial conditions, contractual and legal restrictions and other factors the Board of Directors deems relevant.
At December 31, 2019 we had 481,259 shares of our Preferred Stock (as defined below) outstanding. The Preferred Stock ranks senior to our common stock with respect to dividends. Holders of the Class A-1 Preferred Stock are entitled to an annual cash dividend of $0.16 per share, and holders of the Class B Preferred Stock are entitled to an annual cash dividend at the annual rate of 1.0% multiplied by $15.68, in each case in preference to any dividend payment to the holders of the common stock, out of funds legally available for payment of dividends and subject to declaration by our Board of Directors. Holders of the Preferred Stock are also entitled to participate in any dividends we pay to the 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 2019.2021 and 2020. As discussed below under "—Preferred Stock Conversion," we converted all of our then-outstanding Series A-1 and Series B preferred stock into common stock on June 10, 2022, and did not pay a cash dividend prior to conversion in 2022. At December 31, 2022 we had no preferred stock outstanding.
Recent sales of unregistered securities
None.
Issuer purchases of equity securities
None.
Preferred Stock
In December 2016, we issued 695,898The following table sets forth information with respect to repurchases of shares of our common stock made during the quarter ended December 31, 2022 (in thousands, except share and per share data):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Period | | Total Number of Common Shares Purchased | | | | Average Price Paid per Common Share | | | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Approximate Dollar Value of Shares that may yet be Purchased under the Plans or Programs(1) |
| October 1 - 31 | | — | | | | | $ | — | | | | | — | | | $ | 39,923 | |
| November 1 - 30 | | 808,803 | | | | | $ | 24.76 | | | | | 808,803 | | | $ | 19,884 | |
| December 1 - 31 | | — | | | | | $ | — | | | | | — | | | $ | 19,884 | |
| Total | | 808,803 | | | | | | | | | 808,803 | | | |
___________________________________________
(1) In August 2021, our Board of Directors approved a stock repurchase program (the "Repurchase Program") for the repurchase of up to $100.0 million of our common stock. On March 9, 2022, our Board of Directors expanded the Repurchase Program to include the repurchase of our Series A-1 preferred stock consisting of 126,565 shares of our Blockchain Voting Series A Preferred stock (the "Series A Preferred") and 569,333 shares of our Votingand/or Series B preferred stock. The Repurchase Program expires in December 2023.
Preferred stock (the "Series B Preferred"), in a public offering registered under the Securities Act of 1933, as amended.Stock Conversion
On May 1, 2019, we informed holders12, 2022, Overstock shareholders voted to approve separate proposals to approve the amendment of the Company's Amended and Restated Certificate of Designation for both classes of its preferred stock to provide that each share of our Series A Preferred stock of an opportunity to exchange (the "Exchange") outstanding Series A Preferred stock for newly-issued shares of the Company's Series A-1 Preferred stock (the "Series A-1 Preferred" and together with the Series A Preferred stock and Series B Preferredpreferred stock the "Preferred Stock"would be automatically converted into 0.90 of a share of our common stock (the "Conversion"). BetweenOn June 26, 2019 and July 30, 2019, the Exchange was completed for participating stockholders. In connection with the Exchange, 124,546 shares of Series A Preferred stock were validly tendered and accepted for exchange by the Company and the Company
issued 124,546 shares of Series A-1 Preferred stock10, 2022, in exchange therefore. In connection with the completion of the Exchange, 2,019Conversion, the Company issued 4,097,697 shares of our common stock in exchange for the outstanding Series A Preferred stock were converted into shares ofA-1 and Series B Preferredpreferred stock (such transaction,on that date. As the "Conversion"). Followingfair value of our common stock issued exceeded the completionfair value of the ExchangeSeries A-1 and Series B preferred stock exchanged on the Conversion date, we recognized a non-cash deemed dividend to our preferred stockholders of $1.7 million due to the excess fair value per share compared to the conversion ratio. Following the Conversion, the Company eliminated the Series A PreferredA-1 and Series B preferred stock class by filing a CertificateCertificates of Elimination with the Delaware Secretary of State.
As of December 31, 2019, the 481,259 The shares of Preferred Stock that remained outstanding constituted approximately 1.2%preferred stock previously designated as Series A-1 and Series B preferred stock returned to the status of the total number ofauthorized and undesignated shares of the Preferred Stock and the commonpreferred stock taken together. Neither the Series A-1 Preferred stock nor the Series B Preferred stock is registered under the Securities Exchange Actour certificate of 1934, as amended. The Series A-1 Preferred stock are digital securities that trade exclusively on the alternative trading system run by tZERO ATS, LLC, an SEC-registered broker-dealer and member of FINRA and SIPC. The tZERO ATS utilizes the tZERO Technology Stack to facilitate trading of the Series A-1 Preferred stock. While the Series A-1 Preferred stock benefit from a digital "courtesy carbon copy" of record ownership on the blockchain, the records of Computershare, acting as transfer agent and registrar, govern record ownership of the Series A-1 Preferred stock in all instances. In order to trade the Series A-1 Preferred stock, holders must open an account with a broker-dealer subscribing to the tZERO ATS, which currently includes only Dinosaur Financial Group, LLC ("Dinosaur"), an SEC registered broker-dealer and member of FINRA and SIPC, but may in the future include other broker-dealers that become subscribers to the tZERO ATS or maintain an account with an ATS-subscribing broker-dealer. The Series B Preferred stock are conventional securities that trade in the over-the-counter market and are quoted on the OTCQX market operated by OTC Markets Group.incorporation.
Holders of the Preferred Stock do not have any right to convert or exchange such shares for shares of our common stock or any other security; however, at our sole discretion, we may convert the Series A-1 Preferred stock shares into Series B Preferred stock at any time on a one-to-one basis. The Preferred Stock ranks senior to the common stock with respect to dividends. Holders of the Class A-1 Preferred Stock are entitled to an annual cash dividend equal to $0.16 per share, and holders of the Class B Preferred Stock are entitled to an annual cash dividend at the annual rate of 1.0% multiplied by $15.68, rounded to the nearest $0.01, in each case in preference to any dividend payment to the holders of the common stock, out of funds legally available for payment of dividends and subject to declaration by our Board of Directors. Holders of the Preferred Stock are also entitled to participate in any dividends we pay to the holders of the common stock, subject to different treatment if we effect a stock dividend, stock split or combination of the common stock. In the event of any liquidation, any amount available for distribution to stockholders after payment of all liabilities will be distributed proportionately among the holders of common stock, the holders of Series A-1 Preferred stock and the holders of Series B Preferred stock, with each share of Series A-1 Preferred stock and each share of Series B Preferred stock being treated as though it were a share of our common stock. If we are party to any merger or consolidation in which our common stock is changed into or exchanged for stock or other securities of any other person (or the Company) or cash or any other property (or a right to receive the foregoing), we will use all commercially reasonable efforts to cause each outstanding share of the Preferred Stock to be treated as if such share were an additional outstanding share of common stock in connection with any such transaction.
Securities Authorized for Issuance under Equity Compensation Plans
Except as set forth herein, the information required by this Item is included in Part III, Item 12.
COMPARISON OF 5-YEAR CUMULATIVE TOTAL RETURN
The following graph comparesshows a comparison of the cumulative total cumulative stockholder return on our common stock with the cumulative total cumulative returnreturns of the NASDAQ Market Index—U.S. ("NASDAQ Market Index")Index, the S&P 500 Index and the Morningstar SpecialtyS&P Retail Index ("Morningstar Group Index") during the period commencing on January 1, 2015 through December 31, 2019.Select Index. The graph assumestracks the performance of a $100 investment at the beginning of the period in our common stock and in each of the indexes during the last five fiscal years ended December 31, 2022. Data for the NASDAQ Market Index, and the Morningstar GroupS&P 500 Index and the S&P Retail Select Index assume reinvestment of any dividends. The NASDAQ Market IndexStockholder returns over the indicated period are based on historical data and the Morningstar Group Index are included for comparative purposes only.should not be considered indicative of future stockholder returns. They do not necessarily reflect management's opinion that such indices are an appropriate measure of the relative performance of the stock involved, and they are not intended to forecast or be indicative of possible future performance of the Company's common stock. Historic stock price performance is not necessarily indicative of future stock price performance.
Prepared by Zacks Investment Research, Inc. Used with permission. All rights reserved. Copyright 1980-2023.
Index Data: Copyright NASDAQ OMX, Inc. Used with permission. All rights reserved.
Index Data: Copyright Standard and Poor's, Inc. Used with permission. All rights reserved.
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data presented below should be read in conjunction with the consolidated financial statements of Overstock.com, Inc. and related footnotes included elsewhere in this Annual Report on Form 10-K and the discussion under Item 7—"Management's Discussion and Analysis of Financial Condition and Results of Operations." The selected consolidated financial data has been derived from our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K. The historical financial and operating information may not be indicative of our future performance. The following discussion and analysis also should be read in conjunction with the disclosures in Item 1. "Business" under "Our Retail Business" and "Our Medici Business," as well as the risk factors described in Item 1A. "Risk Factors."Reserved.
Revenues and cost of goods sold recorded in "Direct" and "Partner and Other" are now split between "Retail" and "Other" on the consolidated statements of operations. "Other" includes revenues and costs of goods sold related to our Medici business. In addition, we have recast the prior period revenues and cost of goods sold to conform with current year presentation.
|
| | | | | | | | | | | | | | | | | | | | |
| | | Year ended December 31, |
| | | 2019 | | 2018 | | 2017 | | 2016 | | 2015 |
| | | (in thousands, except per share data) |
| Consolidated Statement of Operations Data: | | | | | | | | | | |
| Revenue, net | | | | | | | | | | |
| Retail | | $ | 1,434,974 |
| | $ | 1,800,187 |
| | $ | 1,728,104 |
| | $ | 1,784,782 |
| | $ | 1,655,908 |
|
| Other | | 24,444 |
| | 21,405 |
| | 16,652 |
| | 15,181 |
| | 1,930 |
|
| Total net revenue | | 1,459,418 |
| | 1,821,592 |
| | 1,744,756 |
| | 1,799,963 |
| | 1,657,838 |
|
| Cost of goods sold | | | | | | | | | | |
| Retail | | 1,147,025 |
| | 1,452,195 |
| | 1,392,558 |
| | 1,458,411 |
| | 1,353,184 |
|
| Other | | 19,300 |
| | 15,489 |
| | 11,647 |
| | 10,203 |
| | — |
|
| Total cost of goods sold | | 1,166,325 |
| | 1,467,684 |
| | 1,404,205 |
| | 1,468,614 |
| | 1,353,184 |
|
| Gross profit | | 293,093 |
| | 353,908 |
| | 340,551 |
| | 331,349 |
| | 304,654 |
|
| Operating expenses: | | | | | | | | | | |
| Sales and marketing | | 143,120 |
| | 274,479 |
| | 180,589 |
| | 147,896 |
| | 124,468 |
|
| Technology | | 135,338 |
| | 132,154 |
| | 115,878 |
| | 106,760 |
| | 98,533 |
|
| General and administrative | | 138,124 |
| | 164,481 |
| | 90,718 |
| | 89,298 |
| | 82,187 |
|
| Litigation settlement | | — |
| | — |
| | — |
| | (19,520 | ) | | — |
|
| Total operating expenses | | 416,582 |
| | 571,114 |
| | 387,185 |
| | 324,434 |
| | 305,188 |
|
| Operating income (loss) | | (123,489 | ) | | (217,206 | ) | | (46,634 | ) | | 6,915 |
| | (534 | ) |
| Interest income | | 1,797 |
| | 2,208 |
| | 659 |
| | 326 |
| | 155 |
|
| Interest expense | | (342 | ) | | (1,468 | ) | | (2,937 | ) | | (877 | ) | | (140 | ) |
| Other income (expense), net | | (12,501 | ) | | (3,488 | ) | | 1,178 |
| | 14,181 |
| | 3,634 |
|
| Income (loss) before income taxes | | (134,535 | ) | | (219,954 | ) | | (47,734 | ) | | 20,545 |
| | 3,115 |
|
| Provision (benefit) for income taxes | | 185 |
| | (2,384 | ) | | 64,188 |
| | 9,297 |
| | 1,895 |
|
| Consolidated net income (loss) | | $ | (134,720 | ) | | $ | (217,570 | ) | | $ | (111,922 | ) | | $ | 11,248 |
| | $ | 1,220 |
|
| Less: Net loss attributable to noncontrolling interests | | (12,879 | ) | | (11,500 | ) | | (2,044 | ) | | (1,274 | ) | | (1,226 | ) |
| Net income (loss) attributable to stockholders of Overstock.com, Inc. | | $ | (121,841 | ) | | $ | (206,070 | ) | | $ | (109,878 | ) | | $ | 12,522 |
| | $ | 2,446 |
|
| Net income (loss) per common share—basic: | | | | | | | | | | |
| Net income (loss) attributable to common shares—basic | | $ | (3.46 | ) | | $ | (6.83 | ) | | $ | (4.28 | ) | | $ | 0.49 |
| | $ | 0.10 |
|
| Weighted average common shares outstanding—basic | | 34,865 |
| | 29,976 |
| | 25,044 |
| | 25,342 |
| | 24,612 |
|
| Net income (loss) per common share—diluted: | | | | | | | | | | |
| Net income (loss) attributable to common shares—diluted | | $ | (3.46 | ) | | $ | (6.83 | ) | | $ | (4.28 | ) | | $ | 0.49 |
| | $ | 0.10 |
|
| Weighted average common shares outstanding—diluted | | 34,865 |
| | 29,976 |
| | 25,044 |
| | 25,426 |
| | 24,703 |
|
|
| | | | | | | | | | | | | | | | | | | | |
| | | As of December 31, |
| | | 2019 (1) | | 2018 | | 2017 | | 2016 | | 2015 |
| | | (in thousands) |
| Balance Sheet Data: | | | | | | | | | | |
| Cash and cash equivalents | | $ | 112,266 |
| | $ | 141,512 |
| | $ | 203,215 |
| | $ | 183,098 |
| | $ | 170,262 |
|
| Restricted cash | | 2,632 |
| | 1,302 |
| | 455 |
| | 430 |
| | 430 |
|
| Working capital | | (38,636 | ) | | (26,219 | ) | | 50,534 |
| | (4,843 | ) | | (10,308 | ) |
| Total assets | | 417,727 |
| | 461,219 |
| | 433,815 |
| | 485,076 |
| | 428,389 |
|
| Long-term debt | | — |
| | 3,069 |
| | 39,909 |
| | 44,179 |
| | 8,843 |
|
| Total liabilities | | 239,872 |
| | 250,513 |
| | 261,692 |
| | 312,116 |
| | 279,028 |
|
| Stockholders' equity | | 177,855 |
| | 210,706 |
| | 172,123 |
| | 172,960 |
| | 149,361 |
|
| |
(1) | — As a result of the adoption of new accounting guidance on January 1, 2019, we recognized lease assets and liabilities for operating leases with terms of more than twelve months. Prior period amounts were not adjusted and continue to be reported in accordance with our historic accounting policies. See Item 15 of Part IV, "Financial Statements"—Note 2. Accounting Policies for additional information. |
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis contains forward-looking statements relating to future events or our future financial or operating performance that involve risks and uncertainties, as set forth above under "Special Cautionary Note Regarding Forward-LookingForward Looking Statements." Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors described in this Annual Report on Form 10-K, including those set forth above under "Special Cautionary Note Regarding Forward-Looking Statements" or in Item 1A under the heading "Risk Factors" or included elsewhere in this Annual Report on Form 10-K. In addition, our future results may be significantly different from our historical results.
The following discussionFinancial Reporting Presentation Relating to Discontinued Operations
Unless otherwise specified, disclosures throughout Management's Discussion and analysis also should be readAnalysis of Financial Condition and Results of Operations, including disclosures under “Liquidity and Capital Resources,” reflect continuing operations only. See Note 4—Discontinued Operations in conjunction with the disclosures"Notes to Consolidated Financial Statements" included in Item 1. "Business" under "Our Retail Business"8 of Part II, "Financial Statements and "Our Medici Business,Supplementary Data" of this Annual Report on Form 10-K for further information.
Overview
Overstock provides furniture and home furnishings to assist consumers in "Making Dream Homes Come True," particularly for our target customers—consumers who seek smart value on quality, stylish furniture and home furnishings at competitive prices, and who want an easy shopping experience. We believe that the furniture and home furnishings market, which is highly fragmented and has traditionally been served by brick-and-mortar stores, will continue transitioning to online sales as well asconsumers become increasingly comfortable shopping online. We regularly update our product assortment to meet the risk factors described in Item 1A. "Risk Factors."evolving preferences of our customers and current trends. Our abilityproducts include furniture, décor, area rugs, bedding and bath, home improvement, outdoor, and kitchen and dining items, among others. Our supply chain allows us to pursue someship directly to our customers from our suppliers or all of the strategies described below, and the extent to which we would be able to pursue some or all of them, will depend on the resources we have available, and may require significantly more capital than we currently have. These costs have been and are expected to continue to be material.from our warehouses. See Item 71—"Business—Our Business" for an additional overview on our business.
We are focused on growth drivers including, increasing our home assortment to improve our brand association with home, making it easier for our customers to find and view a broad assortment of Part II,products, increasing mobile app adoption driving higher customer retention and brand loyalty, optimizing our marketing efforts to grow Overstock consideration among home shoppers, growing our customer base in Canada, and gaining market share by strengthening our brand pillars of "Product Findability," "Smart Value," and "Easy Delivery and Support."
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—Operations," and our interim and audited financial statements, and the discussion of our business and risk 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."
Our consolidated cash and cash equivalents balance decreased from $503.3 million as of December 31, 2021 to $371.3 million as of December 31, 2022, a decrease of $132.1 million, primarily as the result of repurchases of our common stock and Series A-1 preferred stock under the Repurchase Program of $80.1 million, purchases of equity securities of $18.9 million, expenditures of property and equipment of $14.9 million, and net cash outflows from operating activities of $12.5 million during the year ended December 31, 2022.
Revenue decreased 30% in 2022 compared to 2021. This decrease was primarily due to a 39% decrease in the number of customer orders, partially offset by a 15% increase in average order value driven by a continued product mix shift into furniture and home furnishings categories. This decreased order activity was largely driven by the absence of pandemic-related shopping behavior as seen in the prior year, the impact of macroeconomic factors including a heightened inflationary environment and uncertainty impacting consumer sentiment, a shift in consumer spending preferences, and our strategy to exit non-home categories.
Gross profit decreased 29% in 2022 compared to 2021 primarily due to decreased sales volume and partially offset by an increase in gross margin. Gross margin increased to 23.0% in 2022, compared to 22.6% in 2021, primarily due to merchandising actions, advertising revenue, and operational efficiencies. The increase was partially offset by higher promotional discounting and carrier costs.
Sales and marketing expenses as a percentage of revenue increased to 11.2% in 2022 compared to 11.0% in 2021, primarily due to increased brand advertising, partially offset by decreased performance marketing expenses.
Technology expenses decreased $1.8 million in 2022 compared to 2021, primarily due to decreased third party spend and staff-related expenses. The decrease was partially offset by increased licensing costs.
General and administrative expenses decreased $7.7 million in 2022 compared to 2021, primarily driven by reduced legal, third-party vendor, and facilities-related expenses, partially offset by increased staff-related expenses.
Additional commentary related to macroeconomic trends
We continue to monitor recent macroeconomic trends, including the impact caused by global developments such as the current conflict between Russia and Ukraine (including the related heightened geopolitical tensions and economic actions in response thereto by various countries), and their impact on our supply chain, customers, and employees. While we have no operations in or direct exposure to Russia or Ukraine, we believe the conflict between Russia and Ukraine combined with higher consumer price inflation has resulted in reduced consumer confidence and consumer spending which negatively impacted our sales during the year. In addition, we have experienced increased employee turnover, inflation in product costs, higher wages, higher share-based compensation expenses, and higher energy and fuel costs, each at a higher rate than what we have experienced in recent years. However, we continue to work with our partners to limit price increases in response to higher costs and have been able to improve gross margins year over year.
Due to the uncertain and constantly evolving nature and extreme volatility created by these disruptions in the capital markets, we cannot currently predict the long-term impact of these events on our operations and financial results. Nevertheless, as of December 31, 2022, the challenges arising from these events have not adversely affected our liquidity or capacity to service our debt, nor have these conditions required us to reduce our capital expenditures.
Liquidity and Capital Resources."Resources
StrategiesOverview
We believe that our cash and cash equivalents currently on hand and expected cash flows from future operations will be sufficient to continue operations for at least the next twelve months. We continue to monitor, evaluate, and manage our Retail Businessoperating plans, forecasts, and liquidity considering the most recent developments driven by macroeconomic conditions, such as supply chain challenges, inflation, rising interest rates, and the current conflict between Russia and Ukraine. We proactively seek opportunities to improve the efficiency of our operations and have in the past and may in the future take steps to realize internal cost savings, including aligning our staffing needs based on our current and expected future levels of operations and process streamlining.
We periodically evaluate opportunities to repurchase our equity securities, obtain credit facilities, or issue additional debt or equity securities which may impact our future operations and liquidity. In addition, we may, from time to time, consider the investment in, or acquisition of, complementary businesses, products, services, or technologies to expand our business, any of which might affect our liquidity requirements or cause us to issue additional debt or equity securities that would be dilutive to shareholders.
Cash flows from discontinued operations are disclosed on our statement of cash flows as separate line items in the operating, investing, and financing activities sections. We anticipate that the absence of cash flows from discontinued operations will positively affect future liquidity and capital resources.
Current sources of liquidity
Our Retail business initiatives enableprincipal sources of liquidity are existing cash and cash equivalents, and accounts receivable, net. At December 31, 2022, we had cash and cash equivalents of $371.3 million and accounts receivable, net of $17.7 million.
Cash flow information is as follows (in thousands):
| | | | | | | | | | | |
| | Year ended December 31, |
| | 2022 | | 2021 |
| Cash provided by (used in): | | | |
| Operating activities | $ | (12,535) | | | $ | 98,047 | |
| Investing activities | (33,034) | | | (56,433) | |
| Financing activities | (86,340) | | | (12,683) | |
At December 31, 2022, we had $150.0 million available under our "at the market" sales program which permits us to conduct "at the market" public offerings of our common stock under a sales agreement, dated June 26, 2020, with JonesTrading Institutional Services LLC ("JonesTrading") and D.A. Davidson & Co. ("D.A. Davidson"). We did not sell any shares under our at the market sales program during the years ended December 31, 2022 and 2021.
Operating activities
Cash received from customers generally corresponds to our net revenues as our customers primarily use credit cards to buy from us causing our receivables from these sales transactions to settle quickly. We have payment terms with our partners that generally extend beyond the amount of time necessary to collect proceeds from our customers.
The $12.5 million of net cash used by continuing operating activities during the year ended December 31, 2022 was primarily due to income from continuing operations, adjusted for non-cash items, of $67.8 million, offset by cash used by changes in operating assets and liabilities of $80.3 million.
The $98.0 million of net cash provided by continuing operating activities during the year ended December 31, 2021 was primarily due to income from continuing operations, adjusted for non-cash items, of $141.6 million, offset by cash used by changes in operating assets and liabilities of $43.6 million.
Investing activities
The $33.0 million of net cash used in investing activities during the year ended December 31, 2022 was primarily due to purchases of equity securities of $18.9 million and expenditures for property and equipment of $14.9 million.
The $56.4 million of net cash used in investing activities during the year ended December 31, 2021 was primarily due to contributions for capital calls relating to our limited partnership interest in the Medici Ventures, L.P. fund of $41.1 million and expenditures for property and equipment of $13.6 million.
Financing activities
The $86.3 million net cash used in financing activities during the year ended December 31, 2022 resulted primarily from $80.1 million for repurchases of our common stock and Series A-1 preferred stock under the Repurchase Program, $3.7 million of payments of taxes withheld upon vesting of restricted stock, and $3.4 million of payments on long-term focusdebt.
The $12.7 million net cash used in financing activities during the year ended December 31, 2021 resulted primarily from $8.3 million of payments of taxes withheld upon vesting of restricted stock and $3.0 million of payments on long-term debt.
Contractual Obligations and Commitments
The following table summarizes our contractual obligations as of December 31, 2022 and the effect such obligations and commitments are expected to have on our three brand pillars, "Product Findability," "Smart Value,"liquidity and "Easy Deliverycash flow in future periods (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Payments due by period |
| Contractual Obligations | | Total | | Less than 1 year | | 1-3 years | | 3-5 years | | More than 5 years |
| Operating leases (1) | | $ | 8,718 | | | $ | 4,816 | | | $ | 3,569 | | | $ | 333 | | | $ | — | |
| Loan agreements (2) | | 49,331 | | | 5,264 | | | 3,261 | | | 2,968 | | | 37,838 | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| Total contractual cash obligations | | $ | 58,049 | | | $ | 10,080 | | | $ | 6,830 | | | $ | 3,301 | | | $ | 37,838 | |
___________________________________________
(1) Represents the future minimum lease payments under non-cancellable operating leases. For information regarding our operating lease obligations, see Item 8 of Part II, "Financial Statements and Support." InitiativesSupplementary Data"—Note 11—Leases contained in the "Notes to Consolidated Financial Statements" of this Annual Report on Form 10-K.
(2) Represents future interest and principal payments on our financing agreements. For information regarding our financing agreements, see Item 8 of Part II, "Financial Statements and Supplementary Data"—Note 10—Borrowings contained in the "Notes to Consolidated Financial Statements" of this Annual Report on Form 10-K.
Tax contingencies
We are involved in various tax matters, the outcomes of which are uncertain. As of December 31, 2022, and 2021, tax contingencies were $3.5 million and $3.2 million, respectively, which are included in our reconciliation of unrecognized tax benefits (see Item 8 of Part II, "Financial Statements and Supplementary Data"—Note 19—Income Taxes contained in the "Notes to Consolidated Financial Statements" of this Annual Report on Form 10-K). Changes in state, federal, and foreign tax laws may increase our tax contingencies. The timing of the resolution of income tax contingencies is highly uncertain, and the amounts ultimately paid, if any, upon resolution of issues raised by the taxing authorities may differ from the amounts accrued. It is reasonably possible that within the next 12 months we will receive additional assessments by various tax authorities. These assessments may or may not result in changes to our contingencies related to positions on prior years' tax filings.
Results of Operations
Net revenue, costs of goods sold, gross profit and gross margin
The following table summarizes our net revenue, costs of goods sold, gross profit and gross margin for the Retailyears ended December 31, 2022 and 2021 (in thousands):
| | | | | | | | | | | |
| | Year ended December 31, |
| 2022 | | 2021 |
| Net revenue | $ | 1,929,334 | | | $ | 2,756,446 | |
| Cost of goods sold | | | |
| Product costs and other cost of goods sold | 1,409,197 | | | 2,026,363 | |
| Merchant fees, customer service, and other | 76,793 | | | 106,181 | |
| Total cost of goods sold | 1,485,990 | | | 2,132,544 | |
| Gross profit | $ | 443,344 | | | $ | 623,902 | |
| Year-over-year percentage changes | | | |
| Net revenue | (30.0) | % | | |
| | | |
| | | |
| | | |
| | | |
| Gross profit | (28.9) | % | | |
| Percent of total net revenue | | | |
| Cost of goods sold | | | |
| Product costs and other cost of goods sold | 73.0 | % | | 73.5 | % |
| Merchant fees, customer service, and other | 4.0 | % | | 3.9 | % |
| Total cost of goods sold | 77.0 | % | | 77.4 | % |
| Gross margin | 23.0 | % | | 22.6 | % |
The 30% decrease in net revenue for the year ended December 31, 2022, as compared to the same period in 2021, was primarily due to a 39% decrease in the number of customer orders, partially offset by a 15% increase in average order value driven by a continued product mix shift into furniture and home furnishings categories. This decreased order activity was largely driven by the absence of pandemic-related shopping behavior as seen in the prior year, the impact of macroeconomic factors including a heightened inflationary environment and uncertainty impacting consumer sentiment, a shift in consumer spending preferences, and our strategy to exit non-home categories.
We cannot estimate the impact that macroeconomic conditions, such as supply chain challenges, inflation, rising interest rates, or the current conflict between Russia and Ukraine will have on our business include:
Improve Mobile Experience - As more website visitors movein the future due to mobile, we are focusing on ensuring our mobile experience is fast, frictionless, and meets the unique needsunpredictable nature of the mobile shopping journey.ultimate development and duration of these conditions.
International net revenues were less than 1% of total net revenues for 2022 and 2021.
Estimate of unearned product revenue on undelivered product
Our 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 believe an improved mobile experience improves product findability, conversion, search engine rankings,review and organic traffic.update our estimates on a quarterly basis based on our actual transit time experience. However, actual shipping times may differ from our estimates, which can be further impacted by uncertainty, volatility, and any disruption to our carriers caused by certain macroeconomic conditions, such as supply chain challenges, inflation, rising interest rates, or the current conflict between Russia and Ukraine.
The following table shows the effect that hypothetical changes in the estimate of average shipping transit times would have on the reported amount of revenue and income before taxes (in thousands):
| | | | | | | | | | | |
| | Year Ended December 31, 2022 |
| Change in the Estimate of Average Transit Times (Days) | Increase (Decrease)
Revenue | | Increase (Decrease) Income Before Income Taxes |
| 2 | $ | (8,819) | | | $ | (1,810) | |
| 1 | $ | (5,794) | | | $ | (1,189) | |
| As reported | As reported | | As reported |
| (1) | $ | 3,702 | | | $ | 760 | |
| (2) | $ | 6,776 | | | $ | 1,392 | |
Overhaul Discounting
Gross profit and Pricing Experience - "Smart Value" is the heart of our value proposition. We believe clarifying our pricinggross margin
Our overall gross margins fluctuate based on competitive pricing; inventory management decisions; sales coupons and discounting experience allows customers to more confidently purchase at Overstock. Savvy shoppers expect a "smart deal," including saving through coupons, site sales, free shipping (over $45), Club O rewards and financing. We believe our net promoter score (NPS), repeat purchase rates and conversion will improve as we better optimize thepromotions; product mix of offerssales; advertising revenue and clarify the pricingour marketing allowance program; and discounting experience.
Real Time Performanceoperational and SKU Profitability - We are improvingfulfillment costs. Merchant fees, customer service, and other (previously labeled "Fulfillment and related costs") include merchant processing fees associated with customer payments made by credit cards and other payment methods and other variable fees, customer service costs, costs incurred to operate and staff our warehouses, including rent and depreciation expense associated with these facilities, costs to receive, inspect, pick, and prepare customer order for delivery, and direct and indirect labor costs including payroll, payroll-related benefits, and stock-based compensation, all of which we include as costs in calculating gross margin. Merchant fees, customer service, and other as a percentage of sales may vary due to several factors, such as our ability to address site, assortmenteffectively manage merchant fees, customer service costs, and pricing issues more quicklywarehouse costs. We believe that some companies in our industry, including some of our competitors, account for merchant fees, customer service, and other costs within operating expenses, and therefore exclude merchant fees, customer service, and other costs from gross margin. As a result, our gross margin may not be directly comparable to others in our industry.
Gross margins for the past eight quarterly periods and years ending December 31, 2022 and 2021 were:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Q1 | | Q2 | | Q3 | | Q4 | | FY |
| 2022 | 23.4 | % | | 22.9 | % | | 23.3 | % | | 22.1 | % | | 23.0 | % |
| 2021 | 23.3 | % | | 22.0 | % | | 22.7 | % | | 22.7 | % | | 22.6 | % |
| | | | | | | | | |
| | | | | | | | | |
Gross profit for the year ended December 31, 2022 decreased 29% compared to the same period in 2021, primarily due to decreased sales volume and partially offset by enhancing our real-time visibility into site, category,an increase in gross margin. Gross margin increased to 23.0% for the year ended December 31, 2022, compared to 22.6% for the same period in 2021, primarily due to merchandising actions, advertising revenue, and operational efficiencies. The increase was partially offset by higher promotional discounting and carrier costs.
Operating expenses
Sales and marketing channel performance. expenses
We believe this initiative allows us to reduce negative margin transactions, increase site issue resolution speed, and improve the overall customer experience.
Expand Partner Sponsored Marketing - We are accelerating the "Overstock Sponsored Product" program, a platform for our drop ship partners to promote their products to shoppers through a cost-per-click auction platform. In addition, we are implementing a marketing allowance program across all partners. We believe this allowance program will optimize the marketing promotion type mix and on-sale assortment to better meet the needs of customers.
Strategies for our Medici Business
Medici Ventures' primary business focus continues to be accelerating adoption of blockchain technology to democratize capital, eliminate middlemen, and re-humanize commerce. Medici Ventures accomplishes this by doing the following:
Enable existing keiretsu companies to extend runway to profitability - The companies in Medici Ventures' keiretsu continue to push products into production. Medici Ventures supports its keiretsu companies by offeringuse a variety of servicesonline advertising channels to attract new and repeat customers, including development, design, public relationssearch engine marketing, personalized emails, mobile app, loyalty program, affiliate marketing, display banners, and social media. We also build our brand awareness through linear and streaming TV.
Costs associated with our discounted shipping and other promotions, such as coupons, are not included in sales and marketing expense. Rather, they are accounted for as a reduction in revenue as they reduce the amount of consideration we expect to receive in exchange for goods or services and assistancetherefore affect net revenues and gross margin. We consider discounted shipping and other promotions, such as our policy for free shipping on orders, as an effective marketing tool.
The following table summarizes our sales and marketing expenses for the years ended December 31, 2022 and 2021 (in thousands):
| | | | | | | | | | | | | | | |
| | Year ended December 31, | | | | |
| | 2022 | | 2021 | | | | |
| Sales and marketing expenses | $ | 215,477 | | | $ | 302,430 | | | | | |
| Advertising expense included in sales and marketing expenses | 205,523 | | | 289,019 | | | | | |
| Year-over-year percentage change | | | | | | | |
| Sales and marketing expenses | (28.8) | % | | | | | | |
| Advertising expense included in sales and marketing expenses | (28.9) | % | | | | | | |
| Percentage of net revenue | | | | | | | |
| Sales and marketing expenses | 11.2 | % | | 11.0 | % | | | | |
| Advertising expense included in sales and marketing expenses | 10.7 | % | | 10.5 | % | | | | |
The 20 basis point increase in raisingsales and marketing expenses as a percent of net revenues for the year ended December 31, 2022, as compared to the same period in 2021, was primarily due to increased brand advertising, partially offset by decreased performance marketing expenses.
Technology expenses
We seek to deploy our capital fromresources efficiently in technology to support operations including private and public cloud, web services, customer support solutions, and product search, and in technology to enhance the customer experience, including machine learning algorithms, improving our process efficiency, modernizing and expanding our systems, and supporting and expanding our logistics infrastructure. We expect to continue to incur technology expenses to support these efforts and these expenditures may continue to be material.
The frequency and variety of cyberattacks on our Website, enterprise systems, services, and on third parties we use to extend the companies' runway to profitability.
Educate the public and policy makers on blockchain technologies - Medici Ventures works to increase general knowledge of blockchainsupport our technology use cases, and corresponding value through speaking opportunities, article publication, policy maker outreach, and other public relations work.
Opportunistically approach future partnerships - Medici Ventures continues to reviewincrease. The impact of such attacks, their costs, and seek out tactical opportunitiesthe costs we incur to partner with seed-stage and startup companies that effectively use blockchain technology. This includes looking for opportunities that can effectively use Medici Ventures' enterprise-level technology development and design talent.
Strategies for our tZERO Business
tZERO is a financial technology company pursuing initiativesprotect ourselves against future attacks have not been material to develop and commercializedate. However, we consider the financial applications of blockchain technologies. tZERO's primary initiatives currently consist of the following:
tZERO Technology Stack - In furtherance of its mission to revolutionize capital markets with distributed ledger technology, tZERO developed a suite of technologies which enable the trading of digital securities, which are conventional uncertificated securities where the issuer arranges for a digital "courtesy carbon copy" of the transfer agent's share registryrisk introduced by cyberattacks to be viewableserious and will continue to incur costs related to efforts to protect ourselves against them.
The following table summarizes our technology expenses for the years ended December 31, 2022 and 2021 (in thousands):
| | | | | | | | | | | | | | | |
| | Year ended December 31, | | | | |
| | 2022 | | 2021 | | | | |
| Technology expenses | $ | 121,158 | | | $ | 123,001 | | | | | |
| Year-over-year percentage change | | | | | | | |
| Technology expenses | (1.5) | % | | | | | | |
| Technology expenses as a percent of net revenue | 6.3 | % | | 4.5 | % | | | | |
The $1.8 million decrease in technology expenses for the year ended December 31, 2022, as compared to the same period in 2021, was primarily due to decreased third party spend and staff-related expenses. The decrease was partially offset by increased licensing costs.
General and administrative expenses
The following table summarizes our general and administrative expenses for the years ended December 31, 2022 and 2021 (in thousands):
| | | | | | | | | | | | | | | |
| | Year ended December 31, | | | | |
| | 2022 | | 2021 | | | | |
| General and administrative expenses | $ | 79,701 | | | $ | 87,399 | | | | | |
| Year-over-year percentage change | | | | | | | |
| General and administrative expenses | (8.8) | % | | | | | | |
| General and administrative expenses as a percent of net revenue | 4.1 | % | | 3.2 | % | | | | |
The $7.7 million decrease in general and administrative expenses for the year ended December 31, 2022, as compared to the same period in 2021, was primarily driven by reduced legal, third-party vendor, and facilities-related expenses, partially offset by increased staff-related expenses.
Other income (expense), net
The $76.3 million decrease in other income (expense), net for the year ended December 31, 2022, as compared to the same period in 2021, was primarily due to a $76.5 million decrease in income recognized on our equity method securities.
Income taxes
Our effective tax rate for the blockchainyears ended December 31, 2022 and may also be referred2021 was (4.1)% and (39.6)%, respectively. Our effective tax rate is affected by recurring items such as research tax credits and non-recurring items such as changes in valuation allowances. We record valuation allowances against deferred tax assets when there is uncertainty about our ability to generate future income in relevant jurisdictions. The impact that macroeconomic conditions, such as "digitally-enhanced securities". We refer to this suite of technologies assupply chain challenges, inflation, rising interest rates, or the "tZERO Technology Stack." The Series A-1 Preferred stockcurrent conflict between Russia and TZROP and the alternative trading systemUkraine will have on which they trade each use the tZERO Technology Stack. tZERO intends to further develop, market and license the tZERO Technology Stack to issuers interested in raising capital from the issuance of digital securities and to regulated venues and other market participants that trade, or participate in trading venues for digital securities.
tZERO ATS, LLC - tZERO ATS, LLC, formerly known as PRO Securities, LLC, is a FINRA-registered broker-dealer that owns and operates the tZERO ATS and is a wholly-owned subsidiary of tZERO. The tZERO ATS is a closed system available only to broker-dealer subscribers. The tZERO ATS does not accept orders from non-broker-dealers, nor does it hold, own or sell securities. The tZERO ATS currently supports the trading of two digital securities, the Series A-1 Preferred stock and TZROP and,our business in the future make estimates of future income more challenging due to the unpredictable nature of the ultimate development and duration of these conditions. It is expectedalso affected to support digital securities from other issuers.
Boston Security Token Exchange - tZERO and BOX Digital have a joint venture, the Boston Security Token Exchange LLC or BSTX, that intends to operate a U.S. national securities exchange facility of BOX Exchange LLC and support tradinglesser extent by tax rates in a type of digital security called a security token. tZERO is working to create the necessary technology, including leveraging the tZERO Technology Stack, and will manage the ongoing technology implementation, administration, maintenance and support. BOX Digital is providing executive leadership and regulatory expertise. The commencement of operations of BSTX remains subject to approvals by the SEC regarding the proposed trading rules for BSTX and other matters related to its operation.
tZERO Markets - tZERO formed a new wholly-owned subsidiary in May 2019, tZERO Markets, LLC. tZERO Markets is in process of seeking regulatory approvals from FINRAforeign jurisdictions and the SECrelative amount of income we earn in those jurisdictions, which would allow it to provide certain brokerage, investment banking, placement agent and best-efforts underwriting services for traditional equities and digital securities. tZERO Markets intends to offer a website and mobile application that allow retail customers to conduct self-directed trading of conventional and digital securities, along with its other activities.
tZERO Crypto - Effective January 1, 2019, tZERO acquired 100% of the equity interest in tZERO Crypto, Inc., formerly Bitsy, Inc., a startup founded to create a regulatorily compliant bridge between cryptocurrency and fiat currency for retail customers. tZERO Crypto began limited operations in 2018 and tZERO expanded the cryptocurrency wallet's capabilities throughout 2019. tZERO Crypto now provides non-custodial cryptocurrency wallet and exchange services allowing customers the ability to store, purchase and sell certain cryptocurrencies through the tZERO Crypto mobile application.
SpeedRoute - SpeedRoute is a wholly-owned broker-dealer subsidiary of tZERO. 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.
Digital Locate Receipts Software - tZERO has completed development of "digital locate receipt" software intended to help broker-dealer licensees with stock inventory load to manage and create a blockchain-based record of their inventory. The DLR Software is meant to allow broker-dealer licensees to assist short sellers of public securities in establishing that they have a record of compliance with regulatory requirements. At this point, tZERO has paused commercialization of the DLR Software as it focuses its resources on other blockchain initiatives but may resume its commercialization and expects the underlying technology retains valuable potential uses in tZERO's product ecosystem.
Verify Investor, LLC - tZERO's subsidiary, Verify Investor, LLC, provides an online accredited investor verification solution.
tZERO also continues to identify, evaluate and pursue various opportunities for strategic transactions to enhance the services and expertise it offers its customers as well as to refine its strategic operational focus. 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 provewe expect to be true. Moreover, such strategic transactions may failfairly consistent in the near term. Our low effective tax rate is primarily attributable to producean increase in our valuation allowance for capital loss deferred tax assets associated with unrealized losses on our equity method securities. Our tax expense increased as compared to the benefits expectedsame period in 2021 primarily due to the fact we no longer maintain a valuation allowance on most of our federal and state deferred tax assets.
We have indefinitely reinvested foreign earnings of $7.1 million at the time tZERO enters into such transactions. December 31, 2022. We would need to accrue and pay various taxes on this amount if repatriated. We do not intend to repatriate these earnings.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles ("GAAP") requires estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities in the consolidated financial statements and accompanying notes. The Securities and Exchange Commission ("SEC")SEC has defined a company's critical accounting policies as the ones that are most important to the portrayal of the company's financial condition and results of operations, and which require the company to make its most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Based on this definition, we have identified the critical accounting policies, estimates and judgments addressed below. We also have other key accounting policies, which involve the use of estimates, judgments, and assumptions that are significant to understanding our results. For additional information, see Item 158 of Part IV,II, "Financial Statements"Statements and Supplementary Data"—Note 2. 2—Accounting Policies. Although wePolicies and Supplemental Disclosures. We believe that our estimates, assumptions, and judgments are reasonable, they are based upon information presently available.reasonable. We evaluate our estimates and assumptions on an ongoing basis. Actual results may differ significantly from these estimates. Our critical accounting policies are as follows:
revenue recognition;•valuation of certain equity method securities carried at fair value.
Valuation of certain equity method securities carried at fair value
We measured certain equity method securities at fair value at the reporting date. In the absence of quoted market prices (e.g., a privately held entity), the fair value was determined in good faith under our valuation policy and
accounting process using generally accepted valuation approaches. We utilized an independent third party valuation firm to assist us in determining the fair value of our direct minority interest in tZERO using a market approach. The market approach relied upon market transaction valuations of the subject company, adjusted for enterprise value changes in guideline public companies. The fair value determination of our direct minority interest in tZERO required the tZERO digital security offering.
Revenue recognition
We derive our revenue primarily from our retail business through our Website from merchandise sold at a pointuse of significant unobservable inputs (Level 3 inputs) as shown in timethe table within Note 2—Accounting Policies and shipped to customers. When we areSupplemental Disclosures, Equity securities accounted for under the principal in a transaction and control the specific good or service before it is transferredequity method under ASC 323. Due to the customer, revenue is recorded gross; otherwise, revenue is recorded oninherent uncertainty of determining the fair value of Level 3 securities that do not have a net basis.
Revenue is recognized when controlreadily available market value, the determination of the product passes to the customer, typically at the date of delivery of the merchandise to the customerfair value required significant judgment or the date a service is providedestimation 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, 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 based on historical data. 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 revenueestimates and income before taxes for the year ended December 31, 2019 (in thousands):
|
| | | | | | | | |
| | | Year Ended December 31, 2019 |
| Change in the Estimate of Average Transit Times (Days) | | Increase (Decrease)
Revenue | | Increase (Decrease)
Income Before Tax |
| 2 | | $ | (8,167 | ) | | $ | (1,364 | ) |
| 1 | | $ | (1,977 | ) | | $ | (333 | ) |
| As reported | | As reported |
| | As reported |
|
| (1) | | $ | 3,332 |
| | $ | 506 |
|
| (2) | | $ | 6,520 |
| | $ | 1,031 |
|
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 tax, discounts, and expected refunds.
Our merchandise sales contracts include terms that could cause variabilityassumptions used in the transaction pricevaluation models could materially affect the determination of fair value for items such as discounts, credits, or sales returns.
We recognize gift cards and Club O rewards in the period they are redeemed. Unredeemed gift cards and Club O rewards not subject to requirements to remit balances to governmental agencies are recognized as net revenue based on historical redemption patterns.
Our Other revenue occurs primarily through our broker-dealer subsidiaries in our tZERO segment. We recognize revenue for our broker-dealer subsidiaries based on the gross amount of consideration that we expect to receive on securities transactions (commission revenue) on a trade date basis.
Accounting for the tZERO Digital Security offering
The Simple Agreements for Future Equity ("SAFEs") offered through tZERO's offering (the "TZROP offering") of its Preferred Equity Tokens, Series A ("TZROP") were accounted for as a prepaid contract to obtain equity interest in tZERO and were classified as a component of noncontrolling interest in our consolidated financial statements. The TZROP issued under the TZROP offering represent a form of preferred stock and are classified as a component of noncontrolling interest within our consolidated financial statements. For additional information, see Item 15 of Part IV, "Financial Statements"—Note 14. Stockholders' Equity.
For information about recent accounting pronouncements, see Item 15 of Part IV, "Financial Statements"—Note 2. Accounting Policies.
Comparison of Years Ended December 31, 2019 and 2018
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 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 approximately 20% in 2019 compared to 2018. This decrease was primarily due to decreased product sales that resulted from a significant reduction in sales and marketing activities, which was 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 returned to a more disciplined approach to marketing, but we continued to see revenue benefits from this strategy into the fourth quarter of 2018. In addition, we have seen our revenues negatively impacted due to increased tariffs on goods manufactured in China, search traffic taking longer than expected to translate into purchasing customers, waning consumer confidence decreasing conversion on high dollar purchases industry-wide, and other more general decreases in conversion.
Gross profit decreased approximately 17% in 2019 compared to 2018 primarily due to the decrease in net revenue in the retail business, partially offset by an increase in gross margin. Gross margin increased to 20.1% in 2019, compared to 19.4% in 2018, primarily due to a decrease in product costs resulting from a sales mix shift into home & garden products and a higher proportion of our revenue coming from marketplace sales, which we recognize on a net basis.
Sales and marketing expenses as a percentage of revenue decreased from 15.1% in 2018 to 9.8% in 2019 primarily due to our shift in retail marketing strategy, as described above. This included significantly reduced spending in the sponsored search, display ads on social media, television, and branding marketing channels. In addition, we had a $5.6 million decrease in marketing staff-related costs due to cost-saving and streamlining actions which began in 2018.
Technology expenses increased $3.2 million in 2019 compared to 2018 primarily due to a $4.7 million increase in technology staff-related costs, partially offset by a $794,000 decrease in depreciation and amortization expenses and a $251,000 decrease in technology licenses and maintenance costs.
General and administrative expenses decreased $26.4 million in 2019 compared to 2018 primarily due to an $11.3 million decrease in legal fees largely due to expenses we incurred in 2018 for our gift card escheatment case in Delaware and capital raising efforts, and a $10.3 million decrease in intangible asset impairments and asset disposal losses. In addition, we had a $2.9 million dollar decrease in travel expenses, a $2.8 million decrease in consulting expenses, and a $1.2 million decrease in depreciation and amortization expenses. These decreases were partially offset by a $2.8 million increase in corporate insurance costs.
Liquidity
Our consolidated cash and cash equivalents balance decreased from $141.5 million as of December 31, 2018 to $112.3 million as of December 31, 2019, a decrease of $29.2 million, primarily as the result of cash outflows from operating activities of $81.6 million and expenditures for fixed assets of $21.8 million for the year ended December 31, 2019, which was partially offset by cash inflows from the sale of common stock under our "at the market" sales agreement with JonesTrading of $83.0 million, net of offering costs (including commissions) during the year ended December 31, 2019.
We continue to seek opportunities for growth, in our retail business and through our Medici and tZERO 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 lead to increased consolidated losses in the foreseeable future, and to reduced liquidity.
Additional commentary related to Medici Ventures
The majority of Medici Ventures' business is its 80% interest in tZERO, which is described below. The remaining business activities of Medici Ventures are focused on developing and advancing blockchain technology. As a result of its business model of providing technical assistance to companies in which Medici Ventures owns an interest, as well as the early stage of development of the companies in which it owns interests, Medici Ventures has not yet generated material revenues. Medici Ventures intends to continue to acquire strategic equity interests in blockchain-related companies, with a focus on companies to which Medici Ventures believes it can provide technical or managerial assistance from time to time. For the year ended December 31, 2019, our pre-tax loss in our Medici Ventures business, excluding our loss in our tZERO business, was $28.8 million, and we expect to continue to incur significant losses in our Medici Ventures business during 2020.
Additional commentary related to tZERO
To date, tZERO has focused primarily on developing its blockchain businesses and exploring opportunities for novel financial applications of blockchain technology. tZERO does not yet have a stable customer base or backlog orders and has not yet generated any meaningful revenue from any commercially available applications of its blockchain initiatives. 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. For the year ended December 31, 2019, our pre-tax loss in our tZERO business, excluding our loss in the non-tZERO portion of our Medici business, was $47.4 million, and we expect to continue to incur significant losses in our tZERO business during 2020.
Results of Operations
The following table sets forth our results of operations expressed as a percentage of total net revenue for the years ended December 31, 2019 and 2018:assets.
|
| | | | | | |
| | | Year ended December 31, |
| | | 2019 | | 2018 |
| | | (as a percentage of total revenue) |
| Revenue, net | | |
| | |
|
| Retail | | 98.3 | % | | 98.8 | % |
| Other | | 1.7 |
| | 1.2 |
|
| Total net revenue | | 100.0 |
| | 100.0 |
|
| Cost of goods sold | | | | |
| Retail | | 78.6 |
| | 79.7 |
|
| Other | | 1.3 |
| | 0.9 |
|
| Total cost of goods sold | | 79.9 |
| | 80.6 |
|
| Gross profit | | 20.1 |
| | 19.4 |
|
| Operating expenses: | | | | |
| Sales and marketing | | 9.8 |
| | 15.1 |
|
| Technology | | 9.3 |
| | 7.3 |
|
| General and administrative | | 9.5 |
| | 9.0 |
|
| Total operating expenses | | 28.6 |
| | 31.4 |
|
| Operating income (loss) | | (8.5 | ) | | (12.0 | ) |
| Interest income | | 0.1 |
| | 0.1 |
|
| Interest expense | | — |
| | (0.1 | ) |
| Other income (expense), net | | (0.9 | ) | | (0.2 | ) |
| Income (loss) before income taxes | | (9.3 | ) | | (12.2 | ) |
| Provision (benefit) for income taxes | | — |
| | (0.1 | ) |
| Consolidated net income (loss) | | (9.3 | )% | | (12.1 | )% |
Our Annual Report on Form 10-K for the year ended December 31, 2018, filed March 15, 2019, includes a discussion and analysis of our year-over-year changes, financial condition, and results of operations for the years ended December 31, 2018 and 2017 in Item 7 of Part II, "Management's Discussion and Analysis of Financial Condition and Results of Operations."
Revenue
The following table reflects our net revenue for the years ended December 31, 2019 and 2018 (in thousands):
|
| | | | | | | | | | | | | | | |
| | | Year ended December 31, | | | | |
| | | 2019 | | 2018 | | $ Change | | % Change |
| Revenue, net | | |
| | |
| | |
| | |
|
| Retail | | $ | 1,434,974 |
| | $ | 1,800,187 |
| | $ | (365,213 | ) | | (20.3 | )% |
| Other | | 24,444 |
| | 21,405 |
| | 3,039 |
| | 14.2 | % |
| Total revenue, net | | $ | 1,459,418 |
| | $ | 1,821,592 |
| | $ | (362,174 | ) | | (19.9 | )% |
The approximately 20% decrease in total net revenue for the year ended December 31, 2019, as compared to the same period in 2018, was primarily due to decreased product sales that resulted from a significant reduction in sales and marketing activities, which was 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 returned to a more disciplined approach to marketing, but we continued to see revenue benefits from this strategy into the fourth quarter of 2018. In addition, we have seen our revenues negatively impacted due to increased tariffs on goods manufactured in China, search traffic taking longer than expected to translate into purchasing
customers, waning consumer confidence decreasing conversion on high dollar purchases industry-wide, and other more general decreases in conversion.
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 regarding our Club O loyalty program see Item 15 of Part IV, "Financial Statements"—Note 2. Accounting Policies, Club O loyalty program.
International sales were less than 3% of total net revenues for 2019 and 2018.
Gross profit and gross margin
Our overall gross margins fluctuate based on changes in supplier cost and / or sales price, including competitive pricing; inventory management decisions; sales coupons and promotions; product mix of sales; and operational and fulfillment costs.
The following table reflects our net revenues, cost of goods sold and gross profit for the years ended December 31, 2019 and 2018 (in thousands):
|
| | | | | | | | | | | | | | | |
| | | Year ended December 31, | | | | |
| | | 2019 | | 2018 | | $ Change | | % Change |
| Revenue, net | | |
| | |
| | |
| | |
|
| Retail | | $ | 1,434,974 |
| | $ | 1,800,187 |
| | $ | (365,213 | ) | | (20.3 | )% |
| Other | | 24,444 |
| | 21,405 |
| | 3,039 |
| | 14.2 | % |
| Total net revenue | | 1,459,418 |
|
| 1,821,592 |
| | (362,174 | ) | | (19.9 | )% |
| Cost of goods sold | | |
| | |
| | |
| | |
|
| Retail | | 1,147,025 |
| | 1,452,195 |
| | (305,170 | ) | | (21.0 | )% |
| Other | | 19,300 |
| | 15,489 |
| | 3,811 |
| | 24.6 | % |
| Total cost of goods sold | | 1,166,325 |
| | 1,467,684 |
| | (301,359 | ) | | (20.5 | )% |
| Gross Profit | | |
| | |
| | |
| | |
|
| Retail | | 287,949 |
| | 347,992 |
| | (60,043 | ) | | (17.3 | )% |
| Other | | 5,144 |
| | 5,916 |
| | (772 | ) | | (13.0 | )% |
| Total gross profit | | $ | 293,093 |
| | $ | 353,908 |
| | $ | (60,815 | ) | | (17.2 | )% |
Gross margins for the past eight quarterly periods and years ending December 31, 2019 and 2018 were:
|
| | | | | | | | | | | | | | | |
| | | Q1 2019 | | Q2 2019 | | Q3 2019 | | Q4 2019 | | FY 2019 |
| Retail | | 19.9 | % | | 19.7 | % | | 20.0 | % | | 20.7 | % | | 20.1 | % |
| Other | | 22.3 | % | | 22.6 | % | | 20.6 | % | | 19.1 | % | | 21.0 | % |
| Combined | | 19.9 | % | | 19.8 | % | | 20.0 | % | | 20.6 | % | | 20.1 | % |
|
| | | | | | | | | | | | | | | |
| | | Q1 2018 | | Q2 2018 | | Q3 2018 | | Q4 2018 | | FY 2018 |
| Retail | | 21.0 | % | | 18.9 | % | | 19.5 | % | | 17.9 | % | | 19.3 | % |
| Other | | 27.2 | % | | 24.1 | % | | 33.1 | % | | 26.8 | % | | 27.6 | % |
| Combined | | 21.1 | % | | 19.0 | % | | 19.7 | % | | 18.0 | % | | 19.4 | % |
Gross profit for the year ended December 31, 2019 decreased approximately 17% compared to the same period in 2018 primarily due to the decrease in net revenue in the retail business. Gross margin was 20.1% for the year ended December 31, 2019, compared to 19.4% for the same period in 2018. The increase in gross margin was primarily due to decreased product costs resulting from a sales mix shift into home & garden products and a higher proportion of our revenue coming from marketplace sales, which we recognize on a net basis.
Fulfillment costs
Fulfillment costs include all warehousing costs, including fixed overhead and variable handling costs (excluding packaging costs), as well as credit card fees and customer service costs, all of which we include as costs in calculating gross margin. We believe that some companies in our industry, including some of our competitors, account for fulfillment costs within operating expenses, and therefore exclude fulfillment costs from gross margin. As a result, our gross margin may not be directly comparable to others in our industry.
The following table has been included to provide investors additional information regarding our classification of fulfillment costs, gross profit and margin, thus enabling investors to better compare our gross margin with others in our industry (in thousands): |
| | | | | | | | | | | | |
| | | Year ended December 31, |
| | | 2019 | | 2018 |
| Total revenue, net | | $ | 1,459,418 |
| | 100% | | $ | 1,821,592 |
| | 100% |
| Cost of goods sold | | |
| | | | |
| | |
| Product costs and other cost of goods sold | | 1,100,351 |
| | 75.4% | | 1,390,750 |
| | 76.3% |
| Fulfillment and related costs | | 65,974 |
| | 4.5% | | 76,934 |
| | 4.2% |
| Total cost of goods sold | | 1,166,325 |
| | 79.9% | | 1,467,684 |
| | 80.6% |
| Gross profit | | $ | 293,093 |
| | 20.1% | | $ | 353,908 |
| | 19.4% |
Fulfillment costs as a percentage of sales may vary due to several factors, such as our ability to manage costs at our warehouses, significant changes in the number of units received and fulfilled, the extent to which we use third party fulfillment services and warehouses, and our ability to effectively manage customer service costs and credit card fees. Fulfillment and related costs remained relatively flat during the year ended December 31, 2019 as compared to 2018.
See Gross profit and gross margin above for additional discussion.
Operating expenses
Sales and marketing expenses
We use a variety of methods to target our consumer audience, including online campaigns, such as advertising through keywords, product listing ads, display ads, search engines, affiliate marketing programs, social coupon websites, portals, banners, e-mail, direct mail and viral and social media campaigns. We also do brand advertising through television, radio, print ads, and event sponsorships.
The following table reflects our sales and marketing expenses for the years ended December 31, 2019 and 2018 (in thousands):
|
| | | | | | | | | | | | | | | |
| | | Year ended December 31, | | | | |
| | | 2019 | | 2018 | | $ Change | | % Change |
| Sales and marketing expenses | | $ | 143,120 |
| | $ | 274,479 |
| | $ | (131,359 | ) | | (47.9 | )% |
| Sales and marketing expenses as a percent of net revenues | | 9.8 | % | | 15.1 | % | | | | |
|
The 48% decrease in sales and marketing expenses for the year ended December 31, 2019, as compared to the same period in 2018, was primarily due to our shift in retail marketing strategy, as described above. In addition, we had a $5.6 million decrease in marketing staff-related costs due to cost-saving and streamlining actions which began in 2018.
We are also experiencing an increasingly competitive digital marketing landscape. We have competitors who are spending significant amounts on advertising bidding up the cost of certain marketing channels, such as paid keywords, and expect this trend to continue. While we may not choose to match their levels of spending, this has increased our marketing costs in recent years.
We do not include costs associated with our discounted shipping and other promotions, such as coupons in sales and marketing expense. Rather, we account for them as a reduction of revenue and therefore affect sales and gross margin. We consider discounted shipping and other promotions, such as our policy of free shipping on orders over $45, as an effective marketing tool, and intend to continue to offer them as we deem appropriate as part of our overall marketing plan.
Technology expenses
We seek to invest efficiently in technology, including web services, customer support solutions, website search, expansion of new and existing product categories, and in investments in technology to enhance the customer experience, improve our process efficiency and support and expand our logistics infrastructure. We expect to continue to increase our technology expenses to support these initiatives and these increases may be material.
The frequency and variety of cyberattacks on our Website, our corporate systems, and on third parties we use to support our technology continues to increase. The impact of such attacks, their costs, and the costs we incur to protect ourselves against future attacks have not been material. However, we consider the risk introduced by cyberattacks to be serious and will continue to incur costs related to efforts to protect ourselves against them.
The following table reflects our technology expenses for the years ended December 31, 2019 and 2018 (in thousands):
|
| | | | | | | | | | | | | | | |
| | | Year ended December 31, | | | | |
| | | 2019 | | 2018 | | $ Change | | % Change |
| Technology expenses | | $ | 135,338 |
| | $ | 132,154 |
| | $ | 3,184 |
| | 2.4 | % |
| Technology expenses as a percent of net revenues | | 9.3 | % | | 7.3 | % | | |
| | |
|
The $3.2 million increase in technology costs for the year ended December 31, 2019, as compared to the same period in 2018, was primarily due to a $4.7 million increase in technology staff-related costs, partially offset by a $794,000 decrease in depreciation and amortization expenses and a $251,000 decrease in technology licenses and maintenance costs.
General and administrative expenses
The following table reflects our general and administrative expenses for the years ended December 31, 2019 and 2018 (in thousands):
|
| | | | | | | | | | | | | | | |
| | | Year ended December 31, | | | | |
| | | 2019 | | 2018 | | $ Change | | % Change |
| General and administrative expenses | | $ | 138,124 |
| | $ | 164,481 |
| | $ | (26,357 | ) | | (16.0 | )% |
| General and administrative expenses as a percent of net revenues | | 9.5 | % | | 9.0 | % | | |
| | |
|
The $26.4 million decrease in general and administrative expenses for the year ended December 31, 2019, as compared to the same period in 2018, was primarily due to a $11.3 million decrease in legal fees largely due to expenses we incurred in 2018 for our gift card escheatment case in Delaware and capital raising efforts, and a $10.3 million decrease in intangible asset impairments and asset disposal losses. In addition, we had a $2.9 million decrease in travel expenses, a $2.8 million decrease in consulting expenses, and a $1.2 million decrease in depreciation and amortization expenses. These decreases were partially offset by a $2.8 million increase in corporate insurance costs.
We continue to seek opportunities for growth, in our retail business and 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 lead to increased consolidated losses in the foreseeable future, and to reduced liquidity. Additionally, we may recognize additional impairment charges from our ownership interest in other entities.
Depreciation and amortization expense
Depreciation expense is classified within the corresponding operating expense categories in the consolidated statements of operations as follows (in thousands):
|
| | | | | | | | |
| | | Year ended December 31, |
| | | 2019 | | 2018 |
| Cost of goods sold—retail | | $ | 687 |
| | $ | 354 |
|
| Technology | | 20,798 |
| | 21,894 |
|
| General and administrative | | 4,777 |
| | 4,163 |
|
| Total depreciation | | $ | 26,262 |
| | $ | 26,411 |
|
Amortization of intangible assets other than goodwill is classified within the corresponding operating expense categories in the consolidated statements of operations as follows (in thousands):
|
| | | | | | | | |
| | | Year ended December 31, |
| | | 2019 | | 2018 |
| Technology | | $ | 3,726 |
| | $ | 3,424 |
|
| Sales and marketing | | 64 |
| | 460 |
|
| General and administrative | | (458 | ) | | 1,402 |
|
| Total amortization | | $ | 3,332 |
| | $ | 5,286 |
|
General and administrative amortization above was net of reversals due to adjustments to the purchase price allocation for Mac Warehouse. See Item 15 of Part IV, "Financial Statements"—Note 3. Business Combinations.
Stock-based compensation expense
Stock-based compensation expense is classified within the corresponding operating expense categories on our consolidated statements of operations as follows (in thousands):
|
| | | | | | | | |
| | | Year ended December 31, |
| | | 2019 | | 2018 |
| Cost of goods sold—retail | | $ | 212 |
| | $ | 201 |
|
| Sales and marketing | | 1,941 |
| | 1,728 |
|
| Technology | | 5,796 |
| | 2,066 |
|
| General and administrative | | 10,280 |
| | 10,361 |
|
| Total stock-based compensation | | $ | 18,229 |
| | $ | 14,356 |
|
Non-operating income (expense)
Interest expense
Total interest expense decreased $1.1 million, from $1.5 million for the year ended December 31, 2018 to $342,000 for the year ended December 31, 2019. The decrease in interest expense is primarily due to paying off the loan on our headquarters building in May 2018.
Other expense, net
The $9.0 million increase in other expense, net for the year ended December 31, 2019, as compared to the same period in 2018, was primarily due to a $10.5 million increase in non-cash losses on equity holdings and other assets.
Income taxes
Our effective tax rate for the years ended December 31, 2019 and 2018 was (0.1%) and 1.1%, respectively. Our effective tax rate is affected by recurring items such as research tax credits and non-recurring items such as changes in valuation allowances. It is also affected to a lesser extent by tax rates in foreign jurisdictions and the relative amount of income we earn in those jurisdictions, which we expect to be fairly consistent in the near term. Our low effective tax rate is primarily attributable to the valuation allowance we are maintaining on our net deferred tax assets.
We have indefinitely reinvested foreign earnings of $2.5 million at December 31, 2019. We would need to accrue and pay various taxes on this amount if repatriated. We do not intend to repatriate these earnings.
Liquidity and Capital Resources
Overview
We are proactively seeking opportunities to improve the efficiency of our operations. During the latter half of 2018 we began taking, and during 2019 took, significant steps to realize internal cost savings, including staff reductions in early 2019 and we continue to focus on process streamlining. We continue to seek opportunities for growth, in our retail business and through our Medici and tZERO blockchain and financial technology initiatives and through other means. See "Strategies for our Retail Business," "Strategies for our Medici Business" and "Strategies for our tZERO Business" above. We anticipate that our initiatives may lead to increased consolidated losses in the foreseeable future, and to reduced liquidity. Our ability to pursue some or all of these initiatives and the extent to which we would be able to pursue some or all of them, will depend on the resources we have available, and will require significantly more capital than we currently have. We continue to manage our costs carefully and seek to improve the efficiency of our operations, including through process improvement and added focus on machine learning automation. We believe that our cash and cash equivalents currently on hand and expected cash flows from future operations will be sufficient to continue operations for at least the next twelve months.
Current sources of liquidity
Our principal sources of liquidity are existing cash and cash equivalents. At December 31, 2019, we had cash and cash equivalents of $112.3 million. Our ability to access the liquidity of our subsidiaries may be limited by tax and legal considerations and other factors.
Cash flow information is as follows (in thousands):
|
| | | | | | | | |
| | | Year ended December 31, |
| | | 2019 | | 2018 |
| Cash provided by (used in): | | |
| | |
|
| Operating activities | | $ | (81,612 | ) | | $ | (138,934 | ) |
| Investing activities | | (26,852 | ) | | (110,923 | ) |
| Financing activities | | 80,548 |
| | 189,001 |
|
We entered into a Capital on DemandTM Sales agreement dated August 9, 2018 (which was subsequently amended on March 15, 2019 and November 12, 2019) with JonesTrading Institutional Services LLC ("JonesTrading"), under which we conducted "at the market" public offerings of our common stock. 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. As of December 31, 2019, we had $115 million remaining available under our "at the market" sales program. We have no obligation to sell additional shares under the sales agreement, but may do so from time to time. Under the amended agreement, we will pay JonesTrading up to a 3.0% sales commission on all sales. For the year ended December 31, 2019, we sold 7,590,498 shares of our common stock pursuant to the sales agreement and have received $85.8 million in proceeds, including $2.8 million of proceeds included in Accounts receivable, net on our consolidated balance sheet, net of $2.0 million of offering costs, including commissions paid to JonesTrading. For the year ended December 31, 2018, we sold 2,883,344 shares of our common stock pursuant to the sales agreement and received $94.6 million in proceeds, net of $2.6 million of offering costs, including commissions paid to JonesTrading.
In August 2018, Overstock signed a Token Purchase Agreement with GSR Capital Ltd., a Cayman Islands exempted company ("GSR"), and a term sheet contemplating a sale of Overstock common stock to GSR. Concurrently, tZERO signed a term sheet contemplating a sale of tZERO common stock to GSR.
The Token Purchase Agreement sets forth the terms on which GSR had agreed to purchase, for $30 million, on May 6, 2019 or such other date as agreed by the parties, security tokens at a price of $6.67 per security token. On May 8, 2019, the parties executed an Investment Agreement to replace the Token Purchase Agreement under which GSR agreed to purchase 508,710 shares of tZERO common stock, representing approximately 0.5% of the issued and outstanding common stock of tZERO. In exchange, GSR agreed to transfer to tZERO a total $5.0 million in consideration. On September 16, 2019, in recognition of GSR's remaining obligations under the Investment Agreement, tZERO and GSR entered into a Promissory Note under which GSR promised to pay the remaining consideration due to tZERO under the Investment Agreement in the form of U.S. dollars in multiple installments by December 6, 2019. As of December 31, 2019, GSR had provided $4.4 million U.S. dollars, which represents principal, interest, and late payment fees pursuant to the Investment Agreement and Promissory Note, and such amount is included in Accrued liabilities. Approximately $911,000 of principal and accrued interest remained unpaid as of December 31, 2019. tZERO entered into an agreement with GSR in March 2020 under which GSR made a further $100,000 partial payment on March 5, 2020, with the remaining balance due by March 31, 2020. Under the same agreement, in the event such remaining payment is not made, tZERO will be entitled to retain all amounts previously paid by GSR pursuant to, or in connection with, the Investment Agreement and the Promissory Note as non-exclusive damages, and, notwithstanding any provision of the Investment Agreement or the Promissory Note, tZERO will be relieved of any obligation to issue shares to GSR. Overstock and tZERO also reserve the right to pursue additional rights and remedies they may have.
The previously-announced GSR equity investments in Overstock and tZERO contemplated by the term sheets described above did not occur, and the previously-announced memorandum of understanding in which GSR and Makara Capital would co-lead an investment of up to $100 million in tZERO common stock did not close in April 2019 as initially expected. Following further discussions, GSR and Makara Capital informed tZERO in the third quarter of 2019 that they would not be pursuing an investment in tZERO pursuant to the memorandum of understanding or under the separate term sheets.
Subsequent to December 31, 2019, we entered into two loan agreements totaling $47.5 million with Loan Core Capital Funding Corporation LLC. For additional information, see Borrowings - below.
Cash flows from operating activities
Cash received from customers generally corresponds to our net revenues as our customers primarily use credit cards to buy from us causing our receivables from these sales transactions to settle quickly. We have payment terms with our partners that generally extend beyond the amount of time necessary to collect proceeds from our customers. As a result, following our fourth quarter seasonal sales, at December 31 of each year, our cash, cash equivalents and accounts payable balances normally reach their highest level (other than as a result of cash flows provided by or used in investing and financing activities). However, our accounts payable balance normally declines during the first three months following year-end, which normally results in a decline in our cash and cash equivalents balances from the year-end balance. The seasonality of our business normally causes payables and accruals to grow significantly in the fourth quarter, and then decrease in the first quarter when they are typically paid.
The $81.6 million of net cash used in operating activities during the year ended December 31, 2019 was primarily from a consolidated net loss of $134.7 million and cash used by operating assets and liabilities of $16.7 million, which were partially offset by certain non-cash items including depreciation and amortization expense, and non-cash operating lease costs of $37.7 million, stock-based compensation of $18.2 million, losses recognized on equity method securities of $7.7 million, and impairments recognized on equity securities of $7.1 million.
The $138.9 million of net cash used in operating activities during the year ended December 31, 2018 was primarily from a consolidated net loss of $217.6 million, partially offset by cash provided by operating assets and liabilities of $19.5 million, and certain non-cash items including depreciation and amortization expense of $31.7 million, stock-based compensation of $14.4 million, impairment on intangible assets of $6.0 million, losses recognized on equity method securities of $3.9 million, loss on disposal of business and other asset abandonments of $3.6 million, and impairment losses, net of realized gains, recognized on cryptocurrency holdings of $2.1 million.
Cash flows from investing activities
The $26.9 million of net cash used in investing activities during the year ended December 31, 2019 was primarily from expenditures for property and equipment of $21.8 million and purchases of equity securities of $12.6 million, partially offset by $7.3 million in proceeds from the sale of equity securities, $4.9 million of cash acquired through a business combination that was funded at the end of the fourth quarter of 2018 but closed in the first quarter of 2019, and $4.7 million disbursement of notes receivable.
The $110.9 million of net cash used in investing activities during the December 31, 2018 was primarily from purchases of equity securities and marketable securities of $48.7 million, expenditures for fixed assets of $28.7 million, acquisitions of businesses, net of cash acquired of $12.9 million, purchase of intangible assets of $9.6 million, deposits made in advance of acquisition of $8.0 million, and disbursements for loans made of $3.1 million.
Cash flows from financing activities
The $80.5 million provided by financing activities during the year ended December 31, 2019 resulted primarily from $83.0 million of net proceeds from sales of our common stock under the at the market offering and $4.9 million of proceeds from our short-term contract financing, partially offset by $3.1 million payment on long-term debt, $1.4 million of payments on our short-term contract financing, and $1.4 million of taxes withheld upon vesting of restricted stock.
The $189.0 million provided by financing activities during the year ended December 31, 2018 resulted primarily from $94.6 million of proceeds from sales of our common stock, $82.4 million of proceeds from the TZROP offering, $50.6 million of proceeds from sales and exercises of stock warrants, and $6.7 million of proceeds from sale of subsidiary shares, partially offset by $40.0 million of repayments on our PCL term loan and $4.6 million of taxes withheld upon vesting of restricted stock.
Contractual Obligations and Commitments
The following table summarizes our contractual obligations as of December 31, 2019 and the effect such obligations and commitments are expected to have on our liquidity and cash flow in future periods (in thousands):
|
| | | | | | | | | | | | | | | | | | | | |
| | | Payment due by period |
| Contractual Obligations | | Total | | Less than 1 year | | 1-3 years | | 3-5 years | | More than 5 years |
| Operating leases | | $ | 35,552 |
| | $ | 8,639 |
| | $ | 11,382 |
| | $ | 8,170 |
| | $ | 7,361 |
|
| Technology services | | 2,514 |
| | 2,514 |
| | — |
| | — |
| | — |
|
| Total contractual cash obligations | | $ | 38,066 |
| | $ | 11,153 |
| | $ | 11,382 |
| | $ | 8,170 |
| | $ | 7,361 |
|
Operating leases
From time to time we enter into operating leases for facilities and equipment for use in our operations.
Technology services
From time to time we enter into long-term contractual agreements for technology services and finance leases for equipment included in such service agreements.
Off-Balance Sheet Arrangements
As of December 31, 2019, we had a $5 million contractual off-balance sheet contingent obligation to provide additional funding in the future to our BSTX joint venture if and when, during the first 48 months after the establishment of the entity, the aggregate cash balance of BSTX's combined bank accounts fall below $2 million for any reason. Such obligation has not been accrued for nor included in the table above as the timing of the resolution of the contingency and payment of such obligation is not determinable as of the balance sheet date.
New loan agreements
Subsequent to December 31, 2019, we entered into two loan agreements totaling $47.5 million with Loan Core Capital Funding Corporation LLC, which are excluded from the table above. For additional information, see Borrowings - below.
Tax contingencies
We are involved in various tax matters, the outcomes of which are uncertain. As of December 31, 2019, and 2018, tax contingencies were $1.5 million and $1.5 million, respectively, which are included in our reconciliation of unrecognized tax benefits (see Item 15 of Part IV, "Financial Statements"—Note 18. Income Taxes contained in the "Notes to Consolidated Financial Statements" of this Annual Report on Form 10-K). We expect the total amount of tax contingencies to decrease in the next 12 months. In addition, changes in state, federal, and foreign tax laws may increase our tax contingencies. The timing of the resolution of income tax contingencies is highly uncertain, and the amounts ultimately paid, if any, upon resolution of issues raised by the taxing authorities may differ from the amounts accrued. It is reasonably possible that within the next 12 months we will receive additional assessments by various tax authorities. These assessments may or may not result in changes to our contingencies related to positions on prior years' tax filings.
Borrowings
High Bench Senior Credit Agreement
On June 25, 2018, we became party to a senior credit agreement, as amended, with High Bench-Mac Warehouse-Senior Debt, LLC (the "High Bench Loan"), in connection with our acquisition of Mac Warehouse, LLC. Under the amended agreement, at the time of the acquisition, the loan carried an annual interest rate of 11.0%. During July 2019, we repaid the entire outstanding balance of the High Bench Loan effectively terminating the agreement. For additional information, see Item 15 of Part IV, "Financial Statements"—Note 3. Business Combinations.
Letters of credit
At December 31, 2019 and 2018, letters of credit totaling $205,000 and $280,000, respectively, were issued on our behalf collateralized by compensating cash balances held at a bank, which are included in Restricted cash in the accompanying 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 December 31, 2019, $21,000 was outstanding and $979,000 was available under the Purchasing Card. At December 31, 2018, $48,000 was outstanding and $952,000 was available under the Purchasing Card.
Loan Core Capital Funding Corporation LLC loan agreements
In March 2020, we entered into two loan agreements with Loan Core Capital Funding Corporation LLC. The loan agreements provide a $34.5 million Senior Note and a $13.0 million Mezzanine Note. The loans carry an annual interest rate of 4.45%. The Senior Note is for a 10-year term and requires interest only payments, with the principal amount and any then unpaid interest due and payable at the end of the 10-year term. The Mezzanine Note is for approximately a 46-month term and requires principal and interest payments monthly over the life of the loan. Both loans are secured by our corporate headquarters and the related land. We incurred insignificant debt issuance costs with the new loan agreements.
Other Factors that May Affect Future Results
We periodically evaluate opportunities to repurchase our equity securities, obtain credit facilities, or issue additional debt or equity securities. In addition, we may, from time to time, consider the investment in, or acquisition of, complementary businesses, products, services, or technologies, any of which might affect our liquidity requirements or cause us to issue additional debt or equity securities. There can be no assurance that financing arrangements will be available in amounts or on terms acceptable to us, if at all. Our future results may be significantly different from our historical results for several other reasons as well, including the possibility discussed in this Annual Report on Form 10-K that we may sell our retail business, which would have a dramatic effect on our future results. Other reasons that our future results may be significantly different from our historical results include the potential effects on us of the accounting and tax changes discussed in this Annual Report on Form 10-K, and other reasons described in Item 1. "Business" under "Our Retail Business" and "Our Medici Business," as well as the risk factors described in Item 1A. "Risk Factors."
Any investment in our securities involves a high degree of risk. Investors should consider carefully the risks and uncertainties described in this Form 10-K, including the risks described in Item 1A of Part I, "Risk Factors", and all other information in this Form 10-K and in our other filings with the SEC including those we file after we file this Form 10-K, before deciding whether to purchase or hold our securities. Additional risks and uncertainties not currently known to us or that we currently deem immaterial may also become important factors that may harm our business. The occurrence of any of the risks described under "Risk Factors" in this report could harm our business. The trading price of our securities could decline due to any of these risks and uncertainties, and investors may lose part or all of their investment.
Off-Balance Sheet Arrangements
Refer to Contractual Obligations and Commitments above for discussion regarding our off-balance sheet arrangement.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our financial instruments consist
We are exposed to market risk for the effect of interest rate changes, foreign currency fluctuations, and changes in the market values of our investments. Information relating to quantitative and qualitative disclosures about these market risks is set forth below.
Interest Rate Sensitivity
The fair value of our cash and cash equivalents trade accounts and contracts receivable, accounts payable and long-term obligations. We consider highly-liquid(highly-liquid instruments with a remainingan original maturity of 90 days or less at the date of purchasepurchase) would not be significantly affected by either an increase or decrease in interest rates due mainly to be cash equivalents. We currently do not hold any derivative financial instruments or foreign exchange contracts.the short-term nature of these instruments.
Our exposure to marketloan agreements carry a fixed blended annual interest rate of 4.45%. As a result, we have no direct financial statement risk forassociated with changes in interest rates relates primarilyrates.
Foreign Currency Risk
Most of our sales and operating expenses are denominated in U.S. dollars, and therefore, our total revenue and operating expenses are not currently subject to significant foreign currency risk.
Inflation
Increases in commodity and shipping prices and energy and labor costs have resulted in inflationary pressures across various parts of our short-term equity securitiesbusiness and marketable securitiesoperations, including our partners and short-term obligations; thus, fluctuationssupply chain. We continue to monitor the impact of inflation in interest rates wouldorder to minimize its effects on our customers. We work with our partners to limit the amount of cost increases that are passed on through higher pricing. If costs borne by ourselves or our partners were to be subject to incremental inflationary pressures, we may not have a material impact on the fair valuebe able to fully offset such higher costs through pricing actions or other cost efficiency measures. Our inability or failure to do so could harm our business, financial condition and results of these securities. However, theoperations.
Investment Risk
The fair values of our equity securities and marketable securities may be subject to fluctuations due to volatility of the stock market in general, investment-specific circumstances, and changes in general economic conditions.
At December 31, 2019, we had $112.3 million in cash and cash equivalents. Hypothetically, an increase or decrease in interest rates of one hundred basis points would have an estimated impact of $1.1 million on our earnings or loss, or the cash flows of these instruments. This amount represents a decrease in the estimated impact of an increase or decrease in interest rates of one hundred basis points, from $1.4 million in 2018. At December 31, 2018, we had $141.5 million in cash and cash equivalents.
At December 31, 2019, letters of credit totaling $205,000 were outstanding under collateralized compensating cash balances held at our bank. Hypothetically, an increase or decrease in interest rates of one hundred basis points would have an estimated impact of $2,000 on our earnings or loss if the letters of credit were fully drawn. This amount represents a decrease in the estimated impact of an increase or decrease in interest rates of one hundred basis points, from $3,000 in 2018, if the letters of credit were fully drawn. At December 31, 2018, letters of credit totaling $280,000 were outstanding under collateralized compensating cash balances held at our bank.
At December 31, 2019, we had cryptocurrency-denominated assets totaling $2.6 million. Hypothetically, an increase or decrease in the market value of one hundred basis points would have an estimated impact of $26,000 on our earnings or loss, or the recorded value of these instruments. This amount represents an increase in the estimated impact of an increase or decrease in the market value of one hundred basis points, from $24,000 in 2018. At December 31, 2018, we had cryptocurrency-denominated assets totaling $2.4 million. It is generally not our policy to hold material amounts of cryptocurrency because of volatility and market risk.
At December 31, 2019,2022, our recorded value in equity securities and marketable securities in public and private companies was $52.4$296.3 million, compared to $60.4$342.7 million at December 31, 2018. Our equity securities and marketable securities in2021, of which $36,000 relates to publicly traded companies, represent $11.1 million of our equity securities and marketable securities as of December 31, 2019, compared to $2.6 million$174,000 at December 31, 2018, and are2021, recorded at fair value, which isare subject to market price volatility. We perform a qualitative assessment forFor our equity securitiesinterest in private companies to identify impairment. If this assessment indicates that an impairment exists,Medici Ventures, L.P., we estimaterecord our proportionate share of the entity's reported net income or loss, which reflects the fair value changes of the securityunderlying investments of the entity and ifany other income or losses of the entity. We have elected to account for our direct minority interests in tZERO and SpeedRoute using the fair value is less than carrying value, we write down the security to fair value.option. Our assessment includes a review of recent operating results and trends, recent sales/acquisitions of the investeeequity securities, and other publicly available data.data, and the use of third-party valuation experts, as needed. Valuations of private companies are inherently more complex due to the lack of readily available market data. As such, we believe that market sensitivities are not practicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
Overstock.com, Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Overstock.com, Inc. and subsidiaries (the Company) as of December 31, 20192022 and 2018,2021, the related consolidated statements of operations, comprehensive loss,income (loss), changes in stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2019,2022, and the related notes and financial statement schedule II (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 20192022 and 2018,2021, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2019,2022, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2019,2022, based on criteria established in Internal Control—Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 13, 2020February 24, 2023 expressed an unqualified opinion on the effectiveness of the Company's internal control over financial reporting.
Change in Accounting Principles
As discussed in Note 2 to the consolidated financial statements, the Company has changed its method of accounting for leases as of January 1, 2019 due to the adoption of Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) No. 2016-02, Leases(Topic 842), and related amendments.
As discussed in Note 2 to the consolidated financial statements, the Company has changed its method of accounting for revenue from contracts with customers as of January 1, 2018 due to the adoption of FASB ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606).
Basis for Opinion
These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Valuation of certain equity method securities
As discussed in Notes 2 and 8 to the consolidated financial statements, the Company values certain equity method securities using a market transaction backsolve approach adjusted for enterprise value changes in guideline public companies. As of December 31, 2022, the Company reported the carrying amount of its equity method securities was $296.3 million, a portion of which related to certain equity method securities valued using this approach.
We identified the valuation of certain equity method securities using a market transaction backsolve approach adjusted for enterprise value changes in guideline public companies as a critical audit matter. A high degree of subjective auditor judgment was required in evaluating the selection of the percentage change in enterprise value for guideline public companies. The valuation was sensitive to reasonably possible changes to this assumption.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the Company's fair value determination process for equity method securities carried at fair value, including a control related to the development of the percentage change in
enterprise value for guideline public companies. We involved valuation professionals with specialized skills and knowledge, who assisted in evaluating the selected percentage change in enterprise value for guideline public companies by comparing the selected percentage change to a range of percentages independently developed using publicly available data for comparable entities.
/s/ KPMG LLP
We have served as the Company's auditor since 2009.
Salt Lake City, Utah
March 13, 2020February 24, 2023
Overstock.com, Inc.
Consolidated Balance Sheets
(in thousands)thousands, except share data)
| | | | December 31,
2019 | | December 31,
2018 | | December 31,
2022 | | December 31,
2021 |
| Assets | |
| | |
| Assets | | | |
| Current assets: | |
| | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 112,266 |
| | $ | 141,512 |
| Cash and cash equivalents | $ | 371,263 | | | $ | 503,341 | |
| Restricted cash | 2,632 |
| | 1,302 |
| Restricted cash | 194 | | | 25 | |
| Marketable securities at fair value | 10,308 |
| | — |
| |
| Accounts receivable, net | 24,728 |
| | 35,930 |
| |
| Notes receivable, current | 3,111 |
| | 359 |
| |
| Inventories, net | 5,840 |
| | 14,108 |
| |
| | Accounts receivable, net of allowance for credit losses of $3,223 and $2,429 | | Accounts receivable, net of allowance for credit losses of $3,223 and $2,429 | 17,693 | | | 21,190 | |
| | Inventories | | Inventories | 6,526 | | | 5,137 | |
| Prepaids and other current assets | 18,478 |
| | 22,056 |
| Prepaids and other current assets | 18,833 | | | 22,097 | |
| | Total current assets | 177,363 |
| | 215,267 |
| Total current assets | 414,509 | | | 551,790 | |
| Property and equipment, net | 130,028 |
| | 134,687 |
| Property and equipment, net | 109,906 | | | 109,479 | |
| Intangible assets, net | 11,756 |
| | 13,370 |
| |
| Deferred tax assets, net | | Deferred tax assets, net | 41,439 | | | 40,035 | |
| | Goodwill | 27,120 |
| | 22,895 |
| Goodwill | 6,160 | | | 6,160 | |
| Equity securities | 42,043 |
| | 60,427 |
| |
| Equity securities, including securities measured at fair value of $82,823 and $102,529 | | Equity securities, including securities measured at fair value of $82,823 and $102,529 | 296,317 | | | 342,682 | |
| Operating lease right-of-use assets | 25,384 |
| | — |
| Operating lease right-of-use assets | 7,460 | | | 12,584 | |
| Other long-term assets, net | 4,033 |
| | 14,573 |
| Other long-term assets, net | 2,755 | | | 3,236 | |
| | Total assets | $ | 417,727 |
| | $ | 461,219 |
| Total assets | $ | 878,546 | | | $ | 1,065,966 | |
| Liabilities and Stockholders' Equity | |
| | |
| Liabilities and Stockholders' Equity | | | |
| Current liabilities: | |
| | |
| Current liabilities: | | | |
| Accounts payable | $ | 75,416 |
| | $ | 102,574 |
| Accounts payable | $ | 75,130 | | | $ | 102,293 | |
| Accrued liabilities | 88,197 |
| | 87,858 |
| Accrued liabilities | 63,614 | | | 101,902 | |
| Deferred revenue | 41,821 |
| | 50,578 |
| |
| Unearned revenue | | Unearned revenue | 44,480 | | | 59,387 | |
| Operating lease liabilities, current | 6,603 |
| | — |
| Operating lease liabilities, current | 4,410 | | | 5,402 | |
| Other current liabilities | 3,962 |
| | 476 |
| Other current liabilities | 3,508 | | | 3,349 | |
| | Total current liabilities | 215,999 |
| | 241,486 |
| Total current liabilities | 191,142 | | | 272,333 | |
| Long-term debt, net | — |
| | 3,069 |
| Long-term debt, net | 34,476 | | | 37,984 | |
| | Operating lease liabilities, non-current | 21,554 |
| | — |
| Operating lease liabilities, non-current | 3,626 | | | 7,960 | |
| Other long-term liabilities | 2,319 |
| | 5,958 |
| Other long-term liabilities | 3,476 | | | 3,303 | |
| | Total liabilities | 239,872 |
| | 250,513 |
| Total liabilities | 232,720 | | | 321,580 | |
| Commitments and contingencies (Note 12) | | | | |
| Commitments and Contingencies (Note 12) | | Commitments and Contingencies (Note 12) | | | |
| Stockholders' equity: | |
| | |
| Stockholders' equity: | | | |
| Preferred stock, $0.0001 par value, authorized shares - 5,000 | |
| | |
| Preferred stock, $0.0001 par value, authorized shares - 5,000 | | | |
| Series A, issued and outstanding - 0 and 127 | — |
| | — |
| |
| Series A-1, issued and outstanding - 4,210 and 0 (including 4,085 shares declared as a stock dividend, not yet distributed) | — |
| | — |
| |
| Series B, issued and outstanding - 357 and 355 | — |
| | — |
| |
| | Series A-1, issued and outstanding - 0 and 4,204 | | Series A-1, issued and outstanding - 0 and 4,204 | — | | | — | |
| Series B, issued and outstanding - 0 and 357 | | Series B, issued and outstanding - 0 and 357 | — | | | — | |
| Common stock, $0.0001 par value, authorized shares - 100,000 | |
| | |
| Common stock, $0.0001 par value, authorized shares - 100,000 | | | |
| Issued shares - 42,790 and 35,346 | |
| | |
| |
| Outstanding shares - 39,464 and 32,146 | 4 |
| | 3 |
| |
| Issued shares - 51,102 and 46,625 | | Issued shares - 51,102 and 46,625 | | | |
| Outstanding shares - 44,951 and 43,023 | | Outstanding shares - 44,951 and 43,023 | 5 | | | 4 | |
| Additional paid-in capital | 764,845 |
| | 657,981 |
| Additional paid-in capital | 982,718 | | | 960,544 | |
| Accumulated deficit | (580,390 | ) | | (458,897 | ) | Accumulated deficit | (173,829) | | | (136,590) | |
| Accumulated other comprehensive loss | (568 | ) | | (584 | ) | Accumulated other comprehensive loss | (522) | | | (537) | |
| Treasury stock at cost - 3,326 and 3,200 | (68,807 | ) | | (66,757 | ) | |
| Treasury stock at cost - 6,151 and 3,602 | | Treasury stock at cost - 6,151 and 3,602 | (162,546) | | | (79,035) | |
| Equity attributable to stockholders of Overstock.com, Inc. | 115,084 |
| | 131,746 |
| Equity attributable to stockholders of Overstock.com, Inc. | 645,826 | | | 744,386 | |
| Equity attributable to noncontrolling interests | 62,771 |
| | 78,960 |
| Equity attributable to noncontrolling interests | — | | | — | |
| Total stockholders' equity | 177,855 |
| | 210,706 |
| Total stockholders' equity | 645,826 | | | 744,386 | |
| Total liabilities and stockholders' equity | $ | 417,727 |
| | $ | 461,219 |
| Total liabilities and stockholders' equity | $ | 878,546 | | | $ | 1,065,966 | |
See accompanying notes to consolidated financial statements.
Overstock.com, Inc.
Consolidated Statements of Operations
(in thousands, except per share data)
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
| | | | | |
| Net revenue | $ | 1,929,334 | | | $ | 2,756,446 | | | $ | 2,493,915 | |
| | | | | |
| | | | | |
| | | | | |
| Cost of goods sold | 1,485,990 | | | 2,132,544 | | | 1,922,559 | |
| | | | | |
| | | | | |
| Gross profit | 443,344 | | | 623,902 | | | 571,356 | |
| Operating expenses: | | | | | |
| Sales and marketing | 215,477 | | | 302,430 | | | 260,714 | |
| Technology | 121,158 | | | 123,001 | | | 116,248 | |
| General and administrative | 79,701 | | | 87,399 | | | 97,679 | |
| | | | | |
| | | | | |
| Total operating expenses | 416,336 | | | 512,830 | | | 474,641 | |
| Operating income | 27,008 | | | 111,072 | | | 96,715 | |
| Interest income (expense), net | 2,965 | | | (556) | | | (838) | |
| Other income (expense), net | (63,825) | | | 12,500 | | | 613 | |
| Income (loss) before income taxes from continuing operations | (33,852) | | | 123,016 | | | 96,490 | |
| Provision (benefit) for income taxes | 1,384 | | | (48,775) | | | 1,363 | |
| Income (loss) from continuing operations | (35,236) | | | 171,791 | | | 95,127 | |
| Income (loss) from discontinued operations, net of income taxes | — | | | 217,246 | | | (48,956) | |
| Consolidated net income (loss) | $ | (35,236) | | | $ | 389,037 | | | $ | 46,171 | |
| Less: Net loss attributable to noncontrolling interests from discontinued operations | — | | | (335) | | | (9,830) | |
| Net income (loss) attributable to stockholders of Overstock.com, Inc. | $ | (35,236) | | | $ | 389,372 | | | $ | 56,001 | |
| Net income (loss) attributable to common shares—basic | | | | | |
| Continuing operations | $ | (0.83) | | | $ | 3.60 | | | $ | 2.13 | |
| Discontinued operations | — | | | 4.58 | | | (0.88) | |
| Total | $ | (0.83) | | | $ | 8.18 | | | $ | 1.25 | |
| Net income (loss) attributable to common shares—diluted | | | | | |
| Continuing operations | $ | (0.83) | | | $ | 3.57 | | | $ | 2.12 | |
| Discontinued operations | — | | | 4.54 | | | (0.88) | |
| Total | $ | (0.83) | | | $ | 8.11 | | | $ | 1.24 | |
| Weighted average shares of common stock outstanding: | | | | | |
| Basic | 44,323 | | | 42,981 | | | 41,217 | |
| Diluted | 44,323 | | | 43,332 | | | 41,607 | |
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2019 | | 2018 | | 2017 |
| Revenue, net | |
| | |
| | |
|
| Retail | $ | 1,434,974 |
| | $ | 1,800,187 |
| | $ | 1,728,104 |
|
| Other | 24,444 |
| | 21,405 |
| | 16,652 |
|
| Total net revenue | 1,459,418 |
| | 1,821,592 |
| | 1,744,756 |
|
| Cost of goods sold | |
| | |
| | |
|
| Retail | 1,147,025 |
| | 1,452,195 |
| | 1,392,558 |
|
| Other | 19,300 |
| | 15,489 |
| | 11,647 |
|
| Total cost of goods sold | 1,166,325 |
| | 1,467,684 |
| | 1,404,205 |
|
| Gross profit | 293,093 |
| | 353,908 |
| | 340,551 |
|
| Operating expenses: | |
| | |
| | |
|
| Sales and marketing | 143,120 |
| | 274,479 |
| | 180,589 |
|
| Technology | 135,338 |
| | 132,154 |
| | 115,878 |
|
| General and administrative | 138,124 |
| | 164,481 |
| | 90,718 |
|
| Total operating expenses | 416,582 |
| | 571,114 |
| | 387,185 |
|
| Operating loss | (123,489 | ) | | (217,206 | ) | | (46,634 | ) |
| Interest income | 1,797 |
| | 2,208 |
| | 659 |
|
| Interest expense | (342 | ) | | (1,468 | ) | | (2,937 | ) |
| Other income (expense), net | (12,501 | ) | | (3,488 | ) | | 1,178 |
|
| Loss before income taxes | (134,535 | ) | | (219,954 | ) | | (47,734 | ) |
| Provision (benefit) from income taxes | 185 |
| | (2,384 | ) | | 64,188 |
|
| Consolidated net loss | $ | (134,720 | ) | | $ | (217,570 | ) | | $ | (111,922 | ) |
| Less: Net loss attributable to noncontrolling interests | (12,879 | ) | | (11,500 | ) | | (2,044 | ) |
| Net loss attributable to stockholders of Overstock.com, Inc. | $ | (121,841 | ) | | $ | (206,070 | ) | | $ | (109,878 | ) |
| Net loss per common share—basic: | |
| | |
| | |
|
| Net loss attributable to common shares—basic: | $ | (3.46 | ) | | $ | (6.83 | ) | | $ | (4.28 | ) |
| Weighted average common shares outstanding—basic | 34,865 |
| | 29,976 |
| | 25,044 |
|
| Net loss per common share—diluted: | |
| | |
| | |
|
| Net loss attributable to common shares—diluted: | $ | (3.46 | ) | | $ | (6.83 | ) | | $ | (4.28 | ) |
| Weighted average common shares outstanding—diluted | 34,865 |
| | 29,976 |
| | 25,044 |
|
See accompanying notes to consolidated financial statements.
Overstock.com, Inc.
Consolidated Statements of Comprehensive Loss
(in thousands)
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2019 | | 2018 | | 2017 |
| Consolidated net loss | $ | (134,720 | ) | | $ | (217,570 | ) | | $ | (111,922 | ) |
| Other comprehensive income: | | | | | |
| Unrealized gain on cash flow hedges, net of benefit (expense) for taxes of $0, $0 and $(689) | 16 |
| | 15 |
| | 941 |
|
| Other comprehensive income | 16 |
| | 15 |
| | 941 |
|
| Comprehensive loss | $ | (134,704 | ) | | $ | (217,555 | ) | | $ | (110,981 | ) |
| Less: Comprehensive loss attributable to noncontrolling interests | (12,879 | ) | | (11,500 | ) | | (2,044 | ) |
| Comprehensive loss attributable to stockholders of Overstock.com, Inc. | $ | (121,825 | ) | | $ | (206,055 | ) | | $ | (108,937 | ) |
See accompanying notes to consolidated financial statements.
Overstock.com, Inc. Consolidated Statements of Changes in Stockholders' Equity (in thousands, except per share data) |
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2019 | | 2018 | | 2017 |
| Equity attributable to stockholders of Overstock.com, Inc. | |
| | |
| | |
|
| Number of common shares issued | | | | | |
| Balance at beginning of year | 35,346 |
| | 30,632 |
| | 27,895 |
|
| Common stock issued upon vesting of restricted stock | 270 |
| | 234 |
| | 212 |
|
| Common stock issued for asset purchase | — |
| | 147 |
| | — |
|
| Exercise of stock options | — |
| | — |
| | 39 |
|
| Exercise of stock warrants | — |
| | 1,250 |
| | 2,472 |
|
| Common stock sold through ATM offering | 7,174 |
| | 2,883 |
| | — |
|
| Other | — |
| | 200 |
| | 14 |
|
| Balance at end of year | 42,790 |
|
| 35,346 |
|
| 30,632 |
|
| Number of treasury stock shares | | | | | |
| Balance at beginning of year | 3,200 |
| | 3,135 |
| | 2,463 |
|
| Tax withholding upon vesting of restricted stock | 79 |
| | 65 |
| | 68 |
|
| Purchases of treasury stock | — |
| | — |
| | 604 |
|
| Common stock repurchased through business combination | 47 |
|
| — |
|
| — |
|
| Balance at end of year | 3,326 |
| | 3,200 |
| | 3,135 |
|
| Total number of outstanding shares | 39,464 |
| | 32,146 |
| | 27,497 |
|
| Common stock | | | | | |
| Balance at beginning of year | $ | 3 |
| | $ | 3 |
| | $ | 3 |
|
| Common stock sold through ATM offering | 1 |
| | — |
| | — |
|
| Balance at end of year | $ | 4 |
| | $ | 3 |
| | $ | 3 |
|
| Number of Series A preferred shares issued and outstanding | | | | | |
| Balance at beginning of year | 127 |
| | 127 |
| | 127 |
|
| Exchange of shares to Series A-1 | (125 | ) | | — |
| | — |
|
| Conversion of shares to Series B | (2 | ) | | — |
| | — |
|
| Balance at end of year | — |
| | 127 |
| | 127 |
|
| Number of Series A-1 preferred shares issued and outstanding | | | | | |
| Balance at beginning of year | — |
| | — |
| | — |
|
| Exchange of shares from Series A | 125 |
| | — |
| | — |
|
| Dividend declared, not yet distributed | 4,085 |
| | — |
| | — |
|
| Balance at end of year | 4,210 |
| | — |
| | — |
|
| Number of Series B preferred shares issued and outstanding | | | | | |
| Balance at beginning of year | 355 |
| | 555 |
| | 569 |
|
| Conversion of shares from Series A | 2 |
| | — |
| | — |
|
| Other | — |
| | (200 | ) | | (14 | ) |
| Balance at end of year | 357 |
| | 355 |
| | 555 |
|
| Preferred stock | $ | — |
| | $ | — |
| | $ | — |
|
| | | | | | |
| Continued on the following page |
Overstock.com, Inc. Consolidated Statements of Changes in Stockholders' Equity (in thousands, except per share data) |
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2019 | | 2018 | | 2017 |
| Additional paid-in capital |
|
| |
|
| | |
| Balance at beginning of year | $ | 657,981 |
| | $ | 494,732 |
| | $ | 383,348 |
|
| Stock-based compensation to employees and directors | 18,229 |
| | 10,316 |
| | 4,077 |
|
| Common stock issued for asset purchase | — |
| | 4,430 |
| | — |
|
| Exercise of stock options | — |
| | — |
| | 664 |
|
| Issuance and exercise of stock warrants | — |
| | 50,588 |
| | 106,462 |
|
| Common stock sold through ATM offering, net | 85,801 |
| | 94,554 |
| | — |
|
| Other | 2,834 |
| | 3,361 |
| | 181 |
|
| Balance at end of year | $ | 764,845 |
|
| $ | 657,981 |
|
| $ | 494,732 |
|
| Accumulated deficit | | | | | |
| Balance at beginning of year | $ | (458,897 | ) | | $ | (254,692 | ) | | $ | (153,898 | ) |
| Cumulative effect of change in accounting principle | — |
| | 5,040 |
| | 9,374 |
|
| Net loss attributable to stockholders of Overstock.com, Inc. | (121,841 | ) | | (206,070 | ) | | (109,878 | ) |
| Declaration and payment of preferred dividends | (77 | ) | | (77 | ) | | (109 | ) |
| Other | 425 |
| | (3,098 | ) | | (181 | ) |
| Balance at end of year | $ | (580,390 | ) | | $ | (458,897 | ) | | $ | (254,692 | ) |
| Accumulated other comprehensive loss | | | | | |
| Balance at beginning of year | $ | (584 | ) | | $ | (599 | ) | | $ | (1,540 | ) |
| Net other comprehensive income | 16 |
| | 15 |
| | 941 |
|
| Balance at end of year | $ | (568 | ) | | $ | (584 | ) | | $ | (599 | ) |
| Treasury stock | | | | | |
| Balance at beginning of year | $ | (66,757 | ) | | $ | (63,816 | ) | | $ | (52,587 | ) |
| Tax withholding upon vesting of restricted stock | (1,407 | ) | | (2,941 | ) | | (1,229 | ) |
| Common stock repurchased through business combination | (643 | ) |
| — |
|
| — |
|
| Purchases of treasury stock | — |
| | — |
| | (10,000 | ) |
| Balance at end of year | (68,807 | ) | | (66,757 | ) | | (63,816 | ) |
| Total equity attributable to stockholders of Overstock.com, Inc. | $ | 115,084 |
| | $ | 131,746 |
| | $ | 175,628 |
|
| | | | | | |
| Equity attributable to noncontrolling interests | | | | | |
| Balance at beginning of year | $ | 78,960 |
| | $ | (3,505 | ) | | $ | (2,366 | ) |
| Proceeds from security token offering, net | — |
| | 82,354 |
| | 905 |
|
| Stock-based compensation to employees and directors | — |
| | 4,040 |
| | — |
|
| Tax withholding upon vesting of restricted stock | — |
| | (1,681 | ) | | — |
|
| Paid in capital for noncontrolling interest | — |
| | 5,932 |
| | — |
|
| Fair value of noncontrolling interest at acquisition | — |
| | 4,468 |
| | — |
|
| Net loss attributable to noncontrolling interests | (12,879 | ) | | (11,500 | ) | | (2,044 | ) |
| Other | (3,310 | ) | | (1,148 | ) | | — |
|
| Total equity attributable to noncontrolling interests | $ | 62,771 |
| | $ | 78,960 |
| | $ | (3,505 | ) |
| | | | | | |
| Total stockholders' equity | $ | 177,855 |
| | $ | 210,706 |
| | $ | 172,123 |
|
Consolidated Statements of Comprehensive Income (Loss)
(in thousands)
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
| Consolidated net income (loss) | $ | (35,236) | | | $ | 389,037 | | | $ | 46,171 | |
| Other comprehensive income: | | | | | |
| Unrealized gain on cash flow hedges, net of tax of $0, $0 and $0 | 15 | | | 16 | | | 15 | |
| Other comprehensive income | 15 | | | 16 | | | 15 | |
| Comprehensive income (loss) | $ | (35,221) | | | $ | 389,053 | | | $ | 46,186 | |
| Less: Comprehensive loss attributable to noncontrolling interests—discontinued operations | — | | | (335) | | | (9,830) | |
| Comprehensive income (loss) attributable to stockholders of Overstock.com, Inc. | $ | (35,221) | | | $ | 389,388 | | | $ | 56,016 | |
See accompanying notes to consolidated financial statements.
Overstock.com, Inc. Consolidated Statements of Cash Flows (in thousands) |
| | | | | | | | | | | |
| | Year ended December 31, |
| | 2019 |
| 2018 |
| 2017 |
| Cash flows from operating activities: | |
| | |
| | |
| Consolidated net loss | $ | (134,720 | ) | | $ | (217,570 | ) | | $ | (111,922 | ) |
| Adjustments to reconcile consolidated net loss to net cash used in operating activities: | |
| | |
| | |
| Depreciation of property and equipment | 26,262 |
| | 26,411 |
| | 28,848 |
|
| Amortization of intangible assets | 4,769 |
| | 5,286 |
| | 3,999 |
|
| Non-cash operating lease cost | 6,676 |
| | — |
| | — |
|
| Stock-based compensation to employees and directors | 18,229 |
| | 14,356 |
| | 4,077 |
|
| Deferred income taxes, net | (69 | ) | | (2,386 | ) | | 65,199 |
|
| Gain on investment in precious metals | — |
| | — |
| | (1,971 | ) |
| Gain on sale of cryptocurrencies | (569 | ) | | (8,370 | ) | | (1,995 | ) |
| Impairment of cryptocurrencies | 334 |
| | 10,463 |
| | — |
|
| Impairment of equity securities | 7,090 |
| | 536 |
| | 5,487 |
|
| Losses on equity method securities | 7,734 |
| | 3,869 |
| | 508 |
|
| Loss on disposal of business and other asset abandonments | — |
| | 3,565 |
| | — |
|
| Impairments on intangible assets | 1,406 |
| | 6,000 |
| | — |
|
| Other non-cash adjustments | (2,037 | ) | | (583 | ) | | 2,832 |
|
| Changes in operating assets and liabilities, net of acquisitions: | |
| | |
| | |
| Accounts receivable, net | 13,385 |
| | (5,558 | ) | | (1,938 | ) |
| Inventories, net | 8,268 |
| | 628 |
| | 5,234 |
|
| Prepaids and other current assets | 5,956 |
| | (3,622 | ) | | (2,799 | ) |
| Other long-term assets, net | (660 | ) | | (2,870 | ) | | (2,307 | ) |
| Accounts payable | (27,158 | ) | | 16,499 |
| | (20,995 | ) |
| Accrued liabilities | (281 | ) | | 5,661 |
| | (12,311 | ) |
| Deferred revenue | (8,757 | ) | | 9,150 |
| | 4,688 |
|
| Operating lease liabilities | (8,013 | ) | | — |
| | — |
|
| Other long-term liabilities | 543 |
| | (399 | ) | | 145 |
|
| Net cash used in operating activities | (81,612 | ) | | (138,934 | ) | | (35,221 | ) |
| Cash flows from investing activities: | |
| | |
| | |
| Proceeds from sale of precious metals | — |
| | — |
| | 11,917 |
|
| Purchase of intangible assets | — |
| | (9,597 | ) | | (423 | ) |
| Purchase of equity securities | (12,641 | ) | | (48,731 | ) | | (5,188 | ) |
| Proceeds from sale of equity securities and marketable securities | 7,339 |
| | — |
| | — |
|
| Disbursement for notes receivable | (4,715 | ) | | (3,059 | ) | | (750 | ) |
| Acquisitions of businesses, net of cash acquired | 4,886 |
| | (12,912 | ) | | — |
|
| Deposit on purchase of a business | — |
| | (8,000 | ) | | — |
|
| Expenditures for property and equipment | (21,774 | ) | | (28,680 | ) | | (23,586 | ) |
| Other investing activities, net | 53 |
| | 56 |
| | 70 |
|
| Net cash used in investing activities | (26,852 | ) | | (110,923 | ) | | (17,960 | ) |
| |
| Continued on the following page |
| | Year ended December 31, |
| | 2019 |
| 2018 |
| 2017 |
| Cash flows from financing activities: | |
| | |
| | |
| Payments on finance obligations | — |
| | — |
| | (15,316 | ) |
| Payments on interest swap | — |
| | — |
| | (1,535 | ) |
| Payment on long-term debt | (3,141 | ) | | (40,000 | ) | | (45,766 | ) |
| Proceeds under short-term contract financing | 4,858 |
|
| — |
|
| — |
|
| Payments under short-term contract financing | (1,353 | ) |
| — |
|
| — |
|
| Proceeds from long-term debt | — |
| | — |
| | 40,000 |
|
| Payments of preferred dividends | (77 | ) | | (77 | ) | | (109 | ) |
| Proceeds from issuance and exercise of stock warrants | — |
| | 50,588 |
| | 106,462 |
|
| Proceeds from exercise of stock options | — |
| | — |
| | 664 |
|
| Proceeds from security token offering, net of offering costs and withdrawals | — |
| | 82,354 |
| | 905 |
|
| Proceeds from sale of common stock, net of offering costs | 82,954 |
| | 94,554 |
| | — |
|
| Paid in capital for noncontrolling interest | — |
| | 6,700 |
| | — |
|
| Purchase of treasury stock | — |
| | — |
| | (10,000 | ) |
| Payments of taxes withheld upon vesting of restricted stock | (1,407 | ) | | (4,622 | ) | | (1,229 | ) |
| Payment of debt issuance costs | — |
| | — |
| | (670 | ) |
| Other financing activities, net | (1,286 | ) | | (496 | ) | | (83 | ) |
| Net cash provided by financing activities | 80,548 |
| | 189,001 |
| | 73,323 |
|
| Net increase (decrease) in cash and cash equivalents | (27,916 | ) | | (60,856 | ) | | 20,142 |
|
| Cash, cash equivalents and restricted cash, beginning of year | 142,814 |
| | 203,670 |
| | 183,528 |
|
| Cash, cash equivalents and restricted cash, end of year | $ | 114,898 |
| | $ | 142,814 |
| | $ | 203,670 |
|
| | | | | | |
| Supplemental disclosures of cash flow information: | |
| | |
| | |
| Cash paid during the period: | |
| | |
| | |
| Interest paid, net of amounts capitalized | $ | 264 |
| | $ | 1,319 |
| | $ | 2,940 |
|
| Income taxes paid (refunded), net | (1,259 | ) | | (726 | ) | | 487 |
|
| Non-cash investing and financing activities: | |
| | |
| | |
| Property and equipment financed through accounts payable and accrued liabilities | $ | 350 |
| | $ | 139 |
| | $ | 989 |
|
| Equipment acquired under capital lease obligations | — |
| | — |
| | 1,421 |
|
| Proceeds from sale of common stock included in accounts receivable | 2,848 |
| | — |
| | — |
|
| Acquisition of assets through stock issuance | — |
| | 4,430 |
| | — |
|
| Change in fair value of cash flow hedge | — |
| | — |
| | (1,738 | ) |
| Common stock repurchased through business combination | 643 |
| | — |
| | — |
|
| Receivables converted to equity securities | 2,887 |
| | 200 |
| | 1,368 |
|
| Deposit applied to business combination purchase price | 7,347 |
| | — |
| | — |
|
| Equity method security applied to business combination purchase price | 3,800 |
| | — |
| | — |
|
| Recognition of right-of-use assets upon adoption of ASC 842 | 30,968 |
| | — |
| | — |
|
| | | | | | | | | | | | | | | | | |
Overstock.com, Inc.
Consolidated Statements of Changes in Stockholders' Equity
(in thousands, except per share data) |
| Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
| Equity attributable to stockholders of Overstock.com, Inc. | | | | | |
| Shares of common stock issued | | | | | |
| Balance at beginning of year | 46,625 | | | 46,331 | | | 42,790 | |
| Common stock issued upon vesting of restricted stock | 295 | | | 294 | | | 710 | |
| Common stock issued for ESPP purchases | 84 | | | — | | | — | |
| | | | | |
| Conversion of preferred stock | 4,098 | | | — | | | — | |
| Common stock sold through offerings | — | | | — | | | 2,831 | |
| | | | | |
| Balance at end of year | 51,102 | | | 46,625 | | | 46,331 | |
| Shares of treasury stock | | | | | |
| Balance at beginning of year | 3,602 | | | 3,563 | | | 3,326 | |
| Repurchases of common stock | 2,461 | | | — | | | — | |
| Tax withholding upon vesting of employee stock awards | 88 | | | 86 | | | 237 | |
| Sale of treasury stock | — | | | (47) | | | — | |
| | | | | |
| Balance at end of year | 6,151 | | | 3,602 | | | 3,563 | |
| Total shares of common stock outstanding | 44,951 | | | 43,023 | | | 42,768 | |
| Common stock | | | | | |
| Balance at beginning of year | $ | 4 | | | $ | 4 | | | $ | 4 | |
| Conversion and elimination of preferred stock | 1 | | | — | | | — | |
| Balance at end of year | $ | 5 | | | $ | 4 | | | $ | 4 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Shares of Series A-1 preferred stock issued | | | | | |
| Balance at beginning of year | 4,204 | | | 4,204 | | | 4,210 | |
| Conversion and elimination of preferred stock | (4,204) | | | — | | | — | |
| | | | | |
| | | | | |
| Shares declared, not distributed | — | | | — | | | (6) | |
| Balance at end of year | — | | | 4,204 | | | 4,204 | |
| Shares of treasury stock | | | | | |
| Balance at beginning of year | — | | | — | | | — | |
| Repurchases of shares | 7 | | | — | | | — | |
| Conversion and elimination of preferred stock | (7) | | | — | | | — | |
| Balance at end of year | — | | | — | | | — | |
| Total shares of Series A-1 preferred stock outstanding | — | | | 4,204 | | | 4,204 | |
| Shares of Series B Preferred stock issued and outstanding | | | | | |
| Balance at beginning of year | 357 | | | 357 | | | 357 | |
| | | | | |
| Conversion and elimination of preferred stock | (357) | | | — | | | — | |
| Balance at end of year | — | | | 357 | | | 357 | |
| Preferred stock | $ | — | | | $ | — | | | $ | — | |
| | | | | |
| Continued on the following page |
| | | | | | | | | | | | | | | | | |
Overstock.com, Inc.
Consolidated Statements of Changes in Stockholders' Equity
(in thousands, except per share data) |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
| Additional paid-in capital | | | | | |
| Balance at beginning of year | $ | 960,544 | | | $ | 970,873 | | | $ | 764,845 | |
| Stock-based compensation to employees and directors | 18,318 | | | 11,700 | | | 12,930 | |
| Common stock issued for ESPP purchases | 2,779 | | | — | | | — | |
| | | | | |
| Conversion and elimination of preferred stock | 1,043 | | | — | | | — | |
| Sale of treasury stock | — | | | 2,726 | | | — | |
| Subsidiary equity award tender offer | — | | | (2,130) | | | — | |
| Change in noncontrolling interest ownership | — | | | (22,625) | | | — | |
| Common stock sold through offerings, net | — | | | — | | | 192,692 | |
| | | | | |
| Other | 34 | | | — | | | 406 | |
| Balance at end of year | $ | 982,718 | | | $ | 960,544 | | | $ | 970,873 | |
| Accumulated deficit | | | | | |
| Balance at beginning of year | $ | (136,590) | | | $ | (525,233) | | | $ | (580,390) | |
| | | | | |
| Net income (loss) attributable to stockholders of Overstock.com, Inc. | (35,236) | | | 389,372 | | | 56,001 | |
| Dividend issued upon conversion and elimination of preferred stock | (1,697) | | | — | | | — | |
| Conversion and elimination of preferred stock | (306) | | | — | | | — | |
| Declaration and payment of preferred dividends | — | | | (729) | | | (731) | |
| Other | — | | | — | | | (113) | |
| Balance at end of year | $ | (173,829) | | | $ | (136,590) | | | $ | (525,233) | |
| Accumulated other comprehensive loss | | | | | |
| Balance at beginning of year | $ | (537) | | | $ | (553) | | | $ | (568) | |
| Net other comprehensive income | 15 | | | 16 | | | 15 | |
| Balance at end of year | $ | (522) | | | $ | (537) | | | $ | (553) | |
| Treasury stock | | | | | |
| Balance at beginning of year | $ | (79,035) | | | $ | (71,399) | | | $ | (68,807) | |
| Repurchases of common and Series A-1 preferred stock | (80,117) | | | — | | | — | |
| Tax withholding upon vesting of restricted stock | (3,700) | | | (8,279) | | | (2,592) | |
| Conversion and elimination of preferred stock | 306 | | | — | | | — | |
| Sale of treasury stock | — | | | 643 | | | — | |
| | | | | |
| Balance at end of year | (162,546) | | | (79,035) | | | (71,399) | |
| Total equity attributable to stockholders of Overstock.com, Inc. | $ | 645,826 | | | $ | 744,386 | | | $ | 373,692 | |
| | | | | |
| Continued on the following page |
| | | | | | | | | | | | | | | | | |
Overstock.com, Inc.
Consolidated Statements of Changes in Stockholders' Equity
(in thousands, except per share data) |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
| Equity attributable to noncontrolling interests | | | | | |
| Balance at beginning of year | $ | — | | | $ | 62,634 | | | $ | 62,771 | |
| | | | | |
| | | | | |
| | | | | |
| Paid in capital for noncontrolling interest | — | | | — | | | 5,000 | |
| Fair value of noncontrolling interest at acquisition | — | | | — | | | 3,320 | |
| Net loss attributable to noncontrolling interests | — | | | (335) | | | (9,830) | |
| Change in noncontrolling interest ownership | — | | | 22,625 | | | — | |
| Deconsolidation of subsidiaries | — | | | (84,924) | | | 1,837 | |
| Other | — | | | — | | | (464) | |
| Total equity attributable to noncontrolling interests | $ | — | | | $ | — | | | $ | 62,634 | |
| | | | | |
| Total stockholders' equity | $ | 645,826 | | | $ | 744,386 | | | $ | 436,326 | |
See accompanying notes to consolidated financial statements.
| | |
Overstock.com, Inc. Consolidated Statements of Cash Flows (in thousands) |
| | | | | | | | | | | | | | | | | | | |
| | Year ended December 31, |
| | 2022 | | 2021 | | 2020 | | |
| Cash flows from operating activities: | | | | | | | |
| Consolidated net income (loss) | $ | (35,236) | | | $ | 389,037 | | | $ | 46,171 | | | |
| (Income) loss from discontinued operations, net of income taxes | — | | | (217,246) | | | 48,956 | | | |
| Adjustments to reconcile consolidated net income (loss) to net cash provided by (used in) operating activities: | | | | | | | |
| | | | | | | |
| | | | | | | |
| Depreciation and amortization | 16,706 | | | 18,564 | | | 21,776 | | | |
| Non-cash operating lease cost | 5,304 | | | 5,021 | | | 4,971 | | | |
| Stock-based compensation to employees and directors | 18,318 | | | 11,133 | | | 7,841 | | | |
| (Increase) decrease in deferred tax assets, net | (1,404) | | | (53,829) | | | 35 | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| (Income) loss from equity method securities | 63,923 | | | (12,585) | | | — | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Other non-cash adjustments | 185 | | | 1,537 | | | (542) | | | |
| Changes in operating assets and liabilities: | | | | | | | |
| | | | | | | |
| Accounts receivable, net | 3,805 | | | 1,677 | | | (6,715) | | | |
| Inventories | (1,389) | | | 1,106 | | | (403) | | | |
| | | | | | | |
| Prepaids and other current assets | 4,076 | | | 2,958 | | | (5,358) | | | |
| Other long-term assets, net | (1,116) | | | (1,755) | | | (264) | | | |
| Accounts payable | (28,821) | | | (7,787) | | | 34,428 | | | |
| Accrued liabilities | (36,625) | | | (21,595) | | | 48,907 | | | |
| Unearned revenue | (14,907) | | | (12,778) | | | 31,049 | | | |
| Operating lease liabilities | (5,527) | | | (5,261) | | | (5,995) | | | |
| Other long-term liabilities | 173 | | | (150) | | | 1,769 | | | |
| Net cash provided by (used in) continuing operating activities | (12,535) | | | 98,047 | | | 226,626 | | | |
| Net cash used in discontinued operating activities | — | | | (17,128) | | | (30,152) | | | |
| Net cash provided by (used in) operating activities | (12,535) | | | 80,919 | | | 196,474 | | | |
| Cash flows from investing activities: | | | | | | | |
| Purchase of equity securities | (18,920) | | | — | | | — | | | |
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| Contributions for capital calls | — | | | (41,122) | | | — | | | |
| Capital distribution from investment | 1,224 | | | — | | | — | | | |
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| Expenditures for property and equipment | (14,899) | | | (13,617) | | | (14,874) | | | |
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| Other investing activities, net | (439) | | | (1,694) | | | (397) | | | |
| Net cash used in continuing investing activities | (33,034) | | | (56,433) | | | (15,271) | | | |
| Net cash used in discontinued investing activities | — | | | (29,703) | | | (8,284) | | | |
| Net cash used in investing activities | (33,034) | | | (86,136) | | | (23,555) | | | |
| | |
| Continued on the following page | | |
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Overstock.com, Inc. Consolidated Statements of Cash Flows (in thousands) | | |
| Year ended December 31, | | |
| 2022 | | 2021 | | 2020 | | |
| Cash flows from financing activities: | | | | | | | |
| | | | | | | |
| | | | | | | |
| Repurchase of shares | (80,117) | | | — | | | — | | | |
| | | | | | | |
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| Payments on long-term debt | (3,447) | | | (3,030) | | | (2,635) | | | |
| Proceeds from long-term debt | — | | | — | | | 47,500 | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Proceeds from sale of common stock, net of offering costs | — | | | — | | | 195,540 | | | |
| | | | | | | |
| | | | | | | |
| Payments of taxes withheld upon vesting of employee stock awards | (3,700) | | | (8,279) | | | (2,592) | | | |
| Proceeds from employee stock purchase plan | 924 | | | — | | | — | | | |
| Other financing activities, net | — | | | (1,374) | | | (6,449) | | | |
| Net cash provided by (used in) continuing financing activities | (86,340) | | | (12,683) | | | 231,364 | | | |
| Net cash provided by discontinued financing activities | — | | | 2,085 | | | — | | | |
| Net cash provided by (used in) financing activities | (86,340) | | | (10,598) | | | 231,364 | | | |
| Net increase (decrease) in cash, cash equivalents, and restricted cash | (131,909) | | | (15,815) | | | 404,283 | | | |
| Cash, cash equivalents, and restricted cash, beginning of year, inclusive of cash balances of discontinued operations | 503,366 | | | 519,181 | | | 114,898 | | | |
| Cash, cash equivalents, and restricted cash, end of year, inclusive of cash balances of discontinued operations | 371,457 | | | 503,366 | | | 519,181 | | | |
| Less: Cash, cash equivalents, and restricted cash of discontinued operations | — | | | — | | | 22,559 | | | |
| Cash, cash equivalents, and restricted cash, end of year | $ | 371,457 | | | $ | 503,366 | | | $ | 496,622 | | | |
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See accompanying notes to consolidated financial statements.
Overstock.com, Inc.
Notes to Consolidated Financial Statements
1. BASIS OF PRESENTATION
Business and organization
As used herein, "Overstock," "Overstock.com," "the Company," "we," "our" and similar terms include Overstock.com, Inc. and our majority-owned subsidiaries, unless the context indicates otherwise. We were formed on May 5, 1997 as D2-Discounts Direct, a limited liability company ("LLC"). On December 30, 1998, we were reorganized as a C Corporation in the State of Utah and reincorporated in Delaware in May 2002. On October 25, 1999, we changed our name to Overstock.com, Inc.
We are an online retailer and advancer of blockchain technology. Through our online retail business, we offer a broad rangewide selection of price-competitive products, includingquality furniture, home decor,décor, area rugs, bedding and bath, home improvement, outdoor, and housewares,kitchen and dining items, among other products.others. We sell our products and services through our Internet websites located at www.overstock.com, www.o.co, www.overstock.ca, and www.o.bizwww.overstockgovernment.com (referred to collectively as the "Website"). and through our mobile app. Although our threefour websites are located at different domain addresses, the technology, equipment, and processes supporting the Website and the process of order fulfillment described herein are the same for all threefour websites.
In late 2014, we began working on initiatives to develop and advance blockchain technology, which initiatives we refer to collectively as Medici. Our Medici business initiatives seek to leverage the security, transparency and immutability of cryptographically protected and distributed ledgers, such as blockchains, and are focused on solving important problems, including financial transaction issues, particularly in the area of securities settlement. Our Medici business initiatives include our wholly-owned subsidiary, Medici Ventures, Inc. ("Medici Ventures"), which conducts a 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 equity interests in several 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.
Basis of presentation
We have prepared the accompanying consolidated financial statements pursuant to generally accepted accounting principles in the United States ("GAAP"). Preparing financial statements requires us to make estimates and assumptions that affect the amounts that are reported in the consolidated financial statements and accompanying disclosures. Although these estimates are based on our best knowledge of current events and actions that we may undertake in the future, our actual results may be different from our estimates. The results of operations presented herein are not necessarily indicative of our results for any future period.
For purposesUnless otherwise specified, disclosures in these consolidated financial statements reflect continuing operations only. The operating results for Medici Ventures Inc. ("Medici Ventures") and tZERO Group, Inc. ("tZERO"), our former subsidiaries, for the periods prior to their deconsolidation have been reflected in our consolidated statements of comparability, weoperations as discontinued operations for all periods presented. Certain prior period data, primarily related to discontinued operations, have been reclassified certain immaterial amounts in the prior periods presentedconsolidated financial statements and accompanying notes to conform withto the current yearperiod presentation. See Note 4—Discontinued Operations for further information.
2. ACCOUNTING POLICIES AND SUPPLEMENTAL DISCLOSURES
Principles of consolidation
The accompanying consolidated financial statements include our accounts and the accounts of our wholly-owned subsidiaries and subsidiaries for which we exercise control.subsidiaries. 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 date of acquisition on February 12, 2018, and Mac Warehouse, LLC from the date of acquisition on June 25, 2018.
Use of estimates
The preparation of financial statements in conformity with generally accepted accounting principlesGAAP requires estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent liabilities in our consolidated financial statements and accompanying notes. Estimates are used for, but not limited to, receivables valuation, revenue recognition, Club O and gift card breakage, sales returns, vendor incentive discount offers,
inventory valuation, depreciable lives, of fixed assets and internally-developed software, goodwill valuation, intangible asset valuation, equity securitysecurities 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, to the extent there are differences between these estimates and actual results, could differour consolidated financial statements may be materially from these estimates.affected.
Supplemental cash flow information
The following table shows supplemental cash flow information (in thousands):
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
| Supplemental disclosures of cash flow information: | | | | | |
| Cash paid during the period: | | | | | |
| Interest paid, net of amounts capitalized | $ | 1,777 | | | $ | 1,775 | | | $ | 1,808 | |
| Income taxes paid, net | 2,562 | | | 2,262 | | | 1,452 | |
| Non-cash investing and financing activities: | | | | | |
| Purchases of property and equipment included in accounts payable and accrued liabilities | $ | 2,527 | | | $ | 508 | | | $ | 336 | |
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See also Note 11—Leases for additional supplemental disclosures of cash flow information related to our leases.
Cash equivalents
We classify all highly liquid instruments, including instruments with a remainingan original maturity of three months or less at the time of purchase, as cash equivalents. Cash equivalents were $2.8 million and $3.1 million at December 31, 2019 and 2018, respectively.
Restricted cash
We consider cash that is legally restricted and cash that is held as compensating balances for credit arrangements 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, certainour equity securities under ASC 321, 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 equity securities under ASC 323 accounted for under the fair value option are measured on a recurring basis using unobservable inputs (level 3). 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 under ASC 323, 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 December 31, 2019 and 2018, as indicated (in thousands):
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| | Fair Value Measurements at December 31, 2019 |
| | Total | | Level 1 | | Level 2 | | Level 3 |
| Assets: | |
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| Cash equivalents—Money market mutual funds | $ | 2,799 |
| | $ | 2,799 |
| | $ | — |
| | $ | — |
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| Investment in equity securities, at fair value | 823 |
| | 823 |
| | — |
| | — |
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| Investment in marketable securities, at fair value | 10,308 |
| | 10,308 |
| | — |
| | — |
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| Trading securities held in a "rabbi trust" (1) | 116 |
| | 116 |
| | — |
| | — |
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| Total assets | $ | 14,046 |
| | $ | 14,046 |
| | $ | — |
| | $ | — |
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| Liabilities: | |
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| Deferred compensation accrual "rabbi trust" (2) | $ | 116 |
| | $ | 116 |
| | $ | — |
| | $ | — |
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| Total liabilities | $ | 116 |
| | $ | 116 |
| | $ | — |
| | $ | — |
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| | Fair Value Measurements at December 31, 2018 |
| | Total | | Level 1 | | Level 2 | | Level 3 |
| Assets: | |
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| Cash equivalents—Money market mutual funds | $ | 3,135 |
| | $ | 3,135 |
| | $ | — |
| | $ | — |
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| Investment in equity securities, at fair value | 2,636 |
| | 2,636 |
| | — |
| | — |
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| Trading securities held in a "rabbi trust" (1) | 84 |
| | 84 |
| | — |
| | — |
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| Total assets | $ | 5,855 |
| | $ | 5,855 |
| | $ | — |
| | $ | — |
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| Liabilities: | |
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| Deferred compensation accrual "rabbi trust" (2) | 85 |
| | 85 |
| | — |
| | — |
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| Total liabilities | $ | 85 |
| | $ | 85 |
| | $ | — |
| | $ | — |
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(1) | — Trading securities held in a rabbi trust are included in Prepaids and other current assets and Other long-term assets, net in the consolidated balance sheets.
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(2) | — Non-qualified deferred compensation in a rabbi trust is included in Accrued liabilities and Other long-term liabilities in the consolidated balance sheets. |
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 receivablereceivables 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 receivableexpected credit losses based upon our business customers' financial condition and payment history, and our historical collection experience, and any future expected collectability of accounts receivable. The allowance for doubtful accounts receivable was $2.5 million and $2.1 million at December 31, 2019 and 2018, respectively.economic conditions.
Concentration of credit risk
At December 31, 2019 and 2018, one bank held the majority of our cash and cash equivalents. 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
Inventories net
Inventories, net include merchandise purchasedacquired for resale and processed returns 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, 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.
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 $2.6 million and $2.4 million at December 31, 2019 and 2018, respectively, and are recorded at cost less impairment.
We recognize impairment on these assets caused by decreases in market value, determined by taking quoted prices from various digital currency exchanges with active markets, whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. See Fair value of financial instruments above. Such impairment in the value of our cryptocurrencies is recorded in General and administrative expense in our consolidated statements of operations.
Impairments on cryptocurrencies were $334,000, $10.5 million, and $0 during the years ended December 31, 2019, 2018 and 2017, respectively.
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 tZERO's offering of tZERO's Preferred Equity Tokens, Series A ("TZROP") are also presented as an adjustment to reconcile Consolidated net loss to Net cash used in operating activities in our consolidated statements of cash flows. Further, the proceeds from the sale of cryptocurrencies received through tZERO's offering of TZROP 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 tZERO's offering of TZROP. Realized gains on sale of cryptocurrencies were $569,000, $8.4 million, and $0 during the years ended December 31, 2019, 2018, and 2017, respectively.
Property and equipment, net
Property and equipment are recorded at cost and stated net of depreciation and amortization. Property and equipment are depreciated using the straight-line method over the estimated useful lives of the related assets or the term of the related finance lease, whichever is shorter, as follows:
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| Life
(years)
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| 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 years ended December 31, 2019, 2018, and 2017, we capitalized $13.0 million, $19.3 million, and $9.6 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 for the years ended December 31, 2019, 2018, and 2017 was $12.9 million, $13.8 million, and $15.9 million, respectively.
Depreciation expense is classified within the corresponding operating expense categories in the consolidated statements of operations as follows (in thousands):
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| | Year ended December 31, |
| | 2019 | | 2018 | | 2017 |
| Cost of goods sold—retail | $ | 687 |
| | $ | 354 |
| | $ | 307 |
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| Technology | 20,798 |
| | 21,894 |
| | 24,604 |
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| General and administrative | 4,777 |
| | 4,163 |
| | 3,937 |
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| Total depreciation | $ | 26,262 |
| | $ | 26,411 |
| | $ | 28,848 |
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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.
Initial valuation of retained noncontrolling interest in former subsidiaries
During the second quarter of 2021, we measured our retained noncontrolling interest in former subsidiaries at fair value at the date of deconsolidation. In the absence of quoted market prices (since the equity of these entities is not traded on a public market), the fair value was determined in good faith under our valuation policy and process using generally accepted valuation approaches. We utilized an independent third party valuation firm to assist us in determining the fair values of our retained noncontrolling interest in former subsidiaries using a combination of a market approach and income approach. The market approach relied upon a comparison with guideline public companies or guideline transactions and entails selecting relevant financial information of the subject company, and capitalizing those amounts using valuation multiples that are based on empirical market observations. The income approach relied upon an analysis of its projected economic earnings discounted to present value (discounted cash flows). The fair value determination of our retained noncontrolling interest required the use of significant unobservable inputs (Level 3 inputs) as shown in the table within Note 4—Discontinued Operations. Due to the inherent uncertainty of determining the fair value of Level 3 securities that do not have a readily available market value, the determination of fair value required significant judgment or estimation and changes in the estimates and assumptions used in the valuation models could materially affect the determination of fair value for these assets. See Note 4—Discontinued Operations for further information.
Equity securities and marketable securities under ASC 321
At December 31, 2019,2022, we held minority interests (less than 20%) in certain public and privately held entities, accounted for under ASC Topic 321, Investments—Investments—Equity Securities ("ASC 321"), which are included in Equity securities and Marketable securitiesat fair value in our consolidated balance sheets. We measure our ASC 321 equity securities and marketable securities at fair value unless there is no readily determinable(based on Level 1 inputs) with changes in fair value for the underlying security. Where there is no readily determinable fair value, we have elected the measurement alternative describedrecorded in ASC 321 and below.Other income (expense), net in our consolidated statements of operations. Dividends received are reported in earnings if and when received.
Equity securities accounted for under the equity method under ASC 323
At December 31, 2022, we held minority interests in privately held entities, Medici Ventures, L.P., tZERO, and SpeedRoute, LLC ("SpeedRoute"), accounted for under the equity method under ASC Topic 323, Investments—Equity Method and Joint Ventures ("ASC 323"), which are included in Equity securities in our consolidated balance sheets. We reviewcan exercise significant influence, but not control, over these entities through holding more than a 20% voting interest.
Based on the nature of our securities individuallyownership interests and the extent of our contributed capital, we held a variable interest in Medici Ventures, L.P. and SpeedRoute, both of which meet the definition of variable interest entities; however, we are not the primary beneficiary of these entities for impairment by evaluating ifpurposes of consolidation as we do not have the power (either explicit or implicit), through voting rights or otherwise, to direct the activities of Medici Ventures, L.P. and SpeedRoute that most significantly impact their economic performance. Our investments in these variable interest entities totaled $217.4 million as of December 31, 2022, representing our maximum exposures to loss.
We record our proportionate share of Medici Ventures, L.P.'s net assets assuming the entity (i) liquidated its net assets at their book values and (ii) distributed the proceeds to the investors based on the distribution waterfall in the investment agreement, which reflects the fair value changes of the underlying investments of the entity, any investor-level adjustments, and any other operating income or losses of the entity, in Other income (expense), net in our consolidated statements of operations with corresponding adjustments to the carrying value of the asset. If such events or circumstances have occurred that may indicate the fair value of the securityour equity interest is less than its carrying value. If such events or circumstances have occurred,value, we estimate the fair value of the securityour equity interest and recognize an impairment loss equal to the difference between the fair value of the security and its carrying value which is recorded in Other income (expense), net in our consolidated statements of operations. In such cases,There is no difference between the estimated fair value of the security 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, valuation, as well as inability to raise additional capital which may be necessary for the liquidity needed to support their operations.
Certain of our equity securities lack readily determinable fair values and therefore the securities are measured at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or similar equity securities of the same issuer. The carrying amount of our investment in the entity and the amount of underlying equity securities without readily determinablewe have in the entity's net assets.
We have elected to apply the fair values was approximately $3.9 millionvalue option for valuing our direct minority interests in tZERO and $17.7 million at December 31, 2019 and 2018, respectively. Cumulative downward adjustments for price changes and impairmentsSpeedRoute as we determined that accounting for our equity securities without readily determinabledirect minority interests in tZERO and SpeedRoute under the fair values held at December 31, 2019 were $6.2 million,value option would approximate the same valuation approach used by Medici Ventures, L.P. for valuing our indirect interest in tZERO and SpeedRoute and would be the cumulative upward adjustmentsmost meaningful and transparent option for price changesevaluating our continued exposure to equity securities were $958,000 asthe economics of December 31, 2019.tZERO and SpeedRoute. The impairmentsfair value was determined in good faith under our valuation policy and downward adjustments forprocess using generally accepted valuation approaches through the period related to equity securities without readily determinable fair values at December 31, 2019, 2018use of a third-party valuation firm. Our assessment includes a review of recent operating results and 2017 is as follows (in thousands):
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| | Year ended December 31, |
| | 2019 | | 2018 | | 2017 |
| Impairments and downward adjustments of equity securities without readily determinable fair values | $ | (5,708 | ) | | $ | (536 | ) | | $ | (5,487 | ) |
| Upward adjustments of equity securities without readily determinable fair values | $ | — |
| | $ | 958 |
| | $ | — |
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Certaintrends, recent sales/acquisitions of thesethe equity securities, and our marketable securities, which had a carrying value of $11.1 million at December 31, 2019 and $2.6 million at December 31, 2018, respectively, are carried at fair value based on Level 1 inputs. See Fair value of financial instruments above. The portion of unrealized gains and losses for the period related to equity securities with readily determinable fair value still held at December 31, 2019, 2018 and 2017 is as calculated as follows (in thousands):other publicly available data.
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| | Year ended December 31, |
| | 2019 |
| 2018 |
| 2017 |
| Net gains recognized during the period on equity securities and marketable securities | $ | 3,336 |
| | $ | 136 |
| | $ | — |
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| Less: Net gains recognized during the period on equity securities and marketable securities sold | 848 |
| | — |
| | — |
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| Unrealized gains recognized during the reporting period on equity securities and marketable securities still held at the reporting period | $ | 2,488 |
| | $ | 136 |
| | $ | — |
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Equity securities accounted for under the equity method under ASC 323
At December 31, 2019, we held minority interests in privately held entities, accounted for under the equity method under ASC Topic 323, Investments—Equity Method and Joint Ventures ("ASC 323"), which are included in Equity securities in our consolidated balance sheets. We can exercise significant influence, but not control, over these entities through either holding more than a 20% voting interest in the entity or through our representation on the entity's board of directors. For certain of these entities, we provide developer services. For the years ended December 31, 2019, 2018 and 2017 we recognized $2.7 million, $2.4 million and $159,000 of developer service revenue, respectively, in Other revenue on our consolidated statements of operations.
The following table includes our equity securities accounted for under the equity methodmethods and related ownership interest as of December 31, 2019:
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| |
| Ownership
interest
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Bitt Inc. | 21% |
Boston Security Token Exchange LLC | 50% |
Chainstone Labs, Inc. | 29% |
FinClusive Capital, Inc. | 10% |
GrainChain, Inc. | 18% |
Minds, Inc. | 24% |
PeerNova, Inc. | 11% |
SettleMint NV | 29% |
Spera, Inc. | 19% |
VinX Network Ltd. | 29% |
Voatz, Inc. | 20% |
Based on the nature of our ownership interests and the extent of our contributed capital, we have variable interests in certain of these entities. However, we have insufficient voting rights or other meanssignificant assumptions to influence the investee such that we do not have power to direct the investee's activities that most significantly impact the economic performance of each entity. Further, we are not the investee's primary beneficiary and we therefore do not consolidate the investee in our financial statements. Our investments, plus any loans, off-balance sheet commitments, and other subordinated financial support related to these variable interest entities totaled $24.2 million and $25.9 million as of December 31, 2019 and 2018, respectively, representing our maximum exposures to loss.
The carrying amount of our equity method securities was approximately $37.3 million and $40.1 million at December 31, 2019 and 2018, respectively. The carrying value of our equity method securities exceeded the amount of the underlying equity in net assets of our equity method securities and the difference was primarily related to goodwill and the fair value of intangible assets. The basis difference attributable to amortizable intangible assets is amortized over their estimated useful lives. We record our proportionate share of the net income or loss from our equity method securities and the amortization of the basis difference related to intangible assets in Other income (expense), net in our consolidated statements of operations with corresponding adjustments to the carrying value of the asset. We review our securities individually for impairment by evaluating if events or circumstances have occurred that may indicate the fair value of the security is less than its carrying value. If such events or circumstances have occurred, we estimate the fair value of our direct minority interests in tZERO under the security and recognize an impairment loss equalfair value option include using a market approach. The market approach relied upon market transaction valuations of the subject company, adjusted for enterprise value changes in guideline public companies. Due to the difference betweennew Series B financing round led by the Intercontinental Exchange, the valuation approach used for valuing our direct interest in tZERO changed to a market approach using a transaction backsolve with an option pricing model valuation technique in the current period compared to a market approach with guideline public companies and income approach valuation technique in the prior period. The methods and significant assumptions to estimate the fair value of our direct minority interests in SpeedRoute under the security and its carryingfair value which is recorded in Other income (expense), net in our consolidated statements of operations.option include using a market approach based on recent market transaction valuations.
The following table summarizes the net losses recognized onvaluation techniques and significant unobservable inputs used in the fair value measurement of our Level 3 equity method securities recordedsecurities:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Investment | | Fair Value | | Valuation technique | | Unobservable inputs | | Inputs |
| tZERO | | $ | 78,867 | | | Market approach - transaction backsolve with an option pricing model | | Term to liquidity | | 5.0 years |
| | | | | | Volatility | | 125% |
| | | | | | Percentage change in enterprise value for guideline public companies | | (32.4)% |
| SpeedRoute | | 3,920 | | | Market approach - recent transactions | | N/A | | N/A |
| Total | | $ | 82,787 | | | | | | | |
A significant change in Other income (expense), netthe term to liquidity, volatility, or percentage change in our consolidated statements of operationsenterprise value for guideline public companies inputs could result in a significant change in the years ended December 31, 2019, 2018 and 2017 (in thousands):fair value measurement.
|
| | | | | | | | | | | |
| | Year ended December 31, |
| | 2019 | | 2018 | | 2017 |
| Net loss recognized on our proportionate share of the net losses of our equity method securities and amortization of the basis difference | $ | 7,734 |
| | $ | 3,869 |
| | $ | 508 |
|
| Impairments on equity method securities | 1,382 |
| | — |
| | — |
|
| Net loss recognized during the period on equity method securities sold | 524 |
| | — |
| | — |
|
Noncontrolling interests
Our wholly-owned subsidiary, Medici Ventures, Inc. ("Medici Ventures"), conducts its primary business through its majority-owned subsidiaries, tZERO Group, Inc. ("tZERO"), formerly tØ.com, Inc., which includes a financial technology company, two related registered broker-dealers, an accredited investor verification company, and certain strategic interests in other entities which support or align with tZERO's objectives and strategies, and Medici Land Governance Inc. ("MLG"). Medici Ventures, tZERO, MLG, and their respective consolidated subsidiaries are included in our consolidated financial statements. Intercompany transactions have been eliminated and the amounts of contributions and gains or losses that are attributable to the noncontrolling interests are disclosed in our consolidated financial statements.
Leases
We determine if an arrangement is a lease at inception. We account for lease agreements as either operating or finance leases depending on certain defined criteria. Operating leases are recognized in Operating lease right-of-use ("ROU") assets, Operating lease liabilities, current, and Operating lease liabilities, non-current on our consolidated balance sheets. Finance leases are included in Other long-term assets, net, Other current liabilities, and Other long-term liabilities on our consolidated balance sheets. Lease assets and liabilities are recognized based on the present value of the future minimum lease payments over the lease term at the 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 the commencement date in determining the present value of future payments. In certain of our lease agreements, we receive rent holidays and other incentives. We recognize lease costs on a straight-line basis over the lease term without regard to deferred payment terms, such as rent holidays, that defer the commencement date of required payments. Our lease terms may include options to extend or terminate the lease, and we adjust our measurement of the lease when it is reasonably certain that we will exercise that option. Lease payments used in measurement of the lease liability typically do not include executory costs, such as taxes, insurance, and maintenance, unless those costs can be reasonably estimated at lease commencement. Leasehold improvements are capitalized at cost and amortized over the lesser of their expected useful life or the life of the lease, without assuming renewal features, if any, are exercised. We do not separate lease and non-lease components for our leases.
Treasury stock
We account for treasury stock of our common shares under the cost method and include treasury stock as a component of stockholders' equity.
Goodwill
Goodwill represents the excess of the purchase price paid over the fair value of the net assets acquired in business combinations (See Note 3. Business Combinations).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 years ended December 31, 2019, 20182022, 2021 and 2017.
The following table provides information about2020 and no other changes into the carrying amount of goodwill forduring the periods presented (in thousands):
|
| | | |
| | Amount |
| Balances as of December 31, 2017 (1) | $ | 14,698 |
|
| Goodwill acquired during year | 8,197 |
|
| Balances as of December 31, 2018 (2) | 22,895 |
|
| Goodwill acquired during year | 1,685 |
|
| Purchase price adjustment | 2,540 |
|
| Balances as of December 31, 2019 (3) | $ | 27,120 |
|
(1), (2), (3) — Goodwillyears ended December 31, 2022 and 2021. Our goodwill balance of $6.2 million as of December 31, 2022 and 2021 is net of accumulated impairment losslosses and other adjustments of $3.3 million.
Intangible assets other than goodwill
We capitalize and amortize intangible assets other than goodwill over their estimated useful lives unless such lives are indefinite. Intangible assets other than goodwill acquired separately from third-parties are capitalized at cost while such assets acquired as part of a business combination are capitalized at their acquisition-date fair value. Definite lived intangible assets are amortized using the straight-line method of amortization over their useful lives, with the exception of certain intangibles (such as acquired technology, customer relationships, and trade names) which are amortized using an accelerated method of amortization based on cash flows. These definite lived intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that their carrying amount may not be recoverable as described below under Impairment of long-lived assets.
Intangible assets, net consist of the following (in thousands):
|
| | | | | | | |
| | December 31, |
| | 2019 | | 2018 |
| Intangible assets subject to amortization, gross (1) | $ | 30,284 |
| | $ | 29,099 |
|
| Less: accumulated amortization of intangible assets subject to amortization | (18,528 | ) | | (15,729 | ) |
| Total intangible assets, net | $ | 11,756 |
| | $ | 13,370 |
|
___________________________________________
(1) — At December 31, 2019, the weighted average remaining useful life for intangible assets subject to amortization was 5.55 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):
|
| | | | | | | | | | | |
| | Year ended December 31, |
| | 2019 | | 2018 | | 2017 |
| Technology | $ | 3,726 |
| | $ | 3,424 |
| | $ | 3,620 |
|
| Sales and marketing | 64 |
| | 460 |
| | 83 |
|
| General and administrative | (458 | ) | | 1,402 |
| | 296 |
|
| Total amortization | $ | 3,332 |
| | $ | 5,286 |
| | $ | 3,999 |
|
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: $3.7 million in 2020, $3.3 million in 2021, $2.1 million in 2022, $1.6 million in 2023, $804,000 in 2024 and $323,000 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 a 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.
For the year ended December 31, 2019, we realized a $1.4 million impairment loss included in General and administrative expense in our consolidated statements of operations related to certain patents held by our Medici Ventures segment. The estimated fair value of the patents were determined based on Level 3 inputs, which were unobservable (see the Fair value of financial instruments section above), including market participant assumptions for similar assets in an inactive market. For the year ended December 31, 2018, we realized a $6.0 million loss included in General and administrative expense in our consolidated statements of operations related to certain patents held by our Medici Ventures segment. The estimated fair value of the patents were determined based on Level 3 inputs, which were unobservable (see the Fair value of financial instruments section above), including market participant assumptions for similar assets in an inactive market. In conjunction
with our annual assessment, we concluded the remaining useful life of these licenses were zero based on current contractual arrangements. There were no impairments to long-lived assets recorded during the yearyears ended December 31, 2017.2022, 2021 and 2020.
Other long-term assets, net
Other long-term assets, net consist primarily of long-term prepaid expenses deposits, and assets acquired under finance leases.deposits.
Revenue recognition
Revenue is recognized when, or as, control of a promised product or service transfers to a customer, in an amount that reflects the consideration to which the Company expects to be entitled in exchange for transferring those products or services. Revenue excludes taxes that have been assessed by governmental authorities and that are directly imposed on revenue-producing transactions between the Company and its customers, including sales and use taxes. Revenue recognition is evaluated through the following five-step process:
1) identification of the contract with a customer;
2) identification of the performance obligations in the contract;
3) determination of the transaction price;
4) allocation of the transaction price to the performance obligations in the contract; and
5) recognition of revenue when or as a performance obligation is satisfied.
Product Revenue
We derive our revenue primarily from our retail business through our Website but may also derive revenue from sales of merchandise through offline and other channels. Our Retail revenue is derived primarily from merchandise sold at a point in time and shipped to customers. Merchandise sales are fulfilled with inventory sourced through our partners or from our owned inventory, depending on the most efficient means of fulfilling the customer contract.inventory. The vast 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 deferredunearned 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)PayPal, Apple Pay, Klarna), or verification of receipt of payment, before we ship products to consumers or business purchasers. From time to time we grant credit to our business purchasers with normal credit terms (typically 30 days). We generally receive payments from our customers before our payments to our suppliers are due. We do not recognize assets associated with costs to obtain or fulfill a contract with a customer.
Shipping and handling is considered a fulfillment activity, as it takes place prior to the customer obtaining control of the merchandise, and fees charged to customers are included in net revenue upon completion of our performance obligation. We present revenue net of sales taxes, discounts, and expected refunds.
Our merchandise sales contracts include terms that could cause variability in the transaction price for items such as discounts, credits, or sales returns. Accordingly, the transaction price for product sales includes estimates of variable consideration to the extent it is probable that a significant reversal of revenue recognized will not occur. At the time of sale, we estimate a sales return liability for the variable consideration based on historical experience, which is recorded within Accrued liabilities in the consolidated balance sheet. We record an allowance for returns based on current period revenues and historical returns experience. We analyze actual historical returns, current economic trends and changes in order volume and acceptance of our products when evaluating the adequacy of the sales returns allowance in any accounting period.
We evaluate the criteria outlined in ASC 606-10-55, Principal versus Agent Considerations, in determining whether it is appropriate to record the gross amount of merchandise sales and related costs or the net amount earned as commissions. When we are the principal in a transaction and control the specific good or service before it is transferred to the customer, revenue is recorded gross; otherwise, revenue is recorded on a net basis. Through contractual terms with our partners, we have the ability to control the promised goods or services and as a result record the majority of our retail revenue on a gross basis.
Our Other revenue occurs primarily through our broker-dealer subsidiaries in our tZERO segment. We evaluate the revenue recognition criteria above for our broker-dealer subsidiaries and we recognize revenue based on the gross amount of consideration that we expect to receive on securities transactions (commission revenue) on a trade date basis.
Club O loyalty program
We have a customer loyalty program called Club O for which we sell annual memberships. For Club O memberships, we record membership fees as deferredunearned revenue and we recognize revenue ratably over the membership period.
The Club O loyalty program allows members to earn Club O Reward dollars for qualifying purchases made on our Website. 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 deferredunearned revenue at the time the reward dollars are earned. Club O Reward dollars expire 90 days after the customer's Club O membership expires. We recognize estimated reward dollar breakage, to which we expect to be entitled, over the expected redemption period in proportion to actual redemptions by customers. Upon adoption of Topic 606, Revenue from 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 $4.2 million and $5.6 million for the years ended December 31, 2019 and 2018, respectively. In 2018 we also recognized a cumulative adjustment that reduced Accumulated deficit by approximately $5.0 million upon adoption related to the unredeemed portion of our gift cards and loyalty program rewards.
Our total deferred revenue related to the outstanding Club O Reward dollars was $6.7 million and $6.9 million at December 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 thanapproximately 2% of total net revenues for all periods presented.
Disaggregation of revenue by major product line is included in Segment Information in Note 21. Business Segments.
DeferredUnearned 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 deferredunearned revenue when payment is received prior to delivery of products or services ordered. We record amounts received for Club O membership fees as deferredunearned revenue and we recognize it ratably over the membership period. We record Club O Reward dollars earned from purchases as deferredunearned 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 deferredunearned 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 theThe unredeemed portion of our gift cards and loyalty program rewards, we will recognize Retailare recognized in revenue over the expected redemption period based upon the estimated pattern of rights exercised by the customer.customer, if the gift cards are not subject to escheat laws.
The following table provides information about deferred revenue from contracts with customers, including significant changes in deferred revenue balances during the period (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 | 36,622 |
|
| Decrease due to beginning contract liabilities recognized as revenue | (45,379 | ) |
| Deferred revenue at December 31, 2019 | $ | 41,821 |
|
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, 2016 | $ | 18,176 |
|
| Additions to the allowance | 169,398 |
|
| Deductions from the allowance | (170,183 | ) |
| Allowance for returns at December 31, 2017 | 17,391 |
|
| Additions to the allowance | 174,864 |
|
| Deductions from the allowance | (176,994 | ) |
| Allowance for returns at December 31, 2018 | 15,261 |
|
| Additions to the allowance | 117,040 |
|
| Deductions from the allowance | (121,194 | ) |
| Allowance for returns at December 31, 2019 | $ | 11,107 |
|
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 cardmerchant fees, and is recorded in the same period in which related revenues have been recorded. Our Other cost of goods sold primarily consists of exchange fees, clearing agent fees, and other exchange fees from our broker-dealer subsidiaries in our tZERO segment. These fees are primarily for executing, processing, and settling trades on exchanges and other venues. These fees fluctuate based on changes in trade and share volumes, rate of clearance fees charged by clearing brokers, and exchanges (in thousands, except for percentages). |
| | | | | | | | | | | | | | | | | |
| | Year ended December 31, |
| | 2019 | | 2018 | | 2017 |
| Total revenue, net | $ | 1,459,418 |
| | 100% | | $ | 1,821,592 |
| | 100% | | $ | 1,744,756 |
| | 100% |
| Cost of goods sold | |
| | | | |
| | | | |
| | |
| Product costs and other cost of goods sold | 1,100,351 |
| | 75% | | 1,390,750 |
| | 76% | | 1,328,749 |
| | 76% |
| Fulfillment and related costs | 65,974 |
| | 5% | | 76,934 |
| | 4% | | 75,456 |
| | 4% |
| Total cost of goods sold | 1,166,325 |
| | 80% | | 1,467,684 |
| | 81% | | 1,404,205 |
| | 80% |
| Gross profit | $ | 293,093 |
| | 20% | | $ | 353,908 |
| | 19% | | $ | 340,551 |
| | 20% |
Advertising expense
We expense the costs of producing advertisements the first time the advertising takes place and expense the cost of communicating advertising in the period during which the advertising space or airtime is used. Internet advertising expenses are recognized as incurred based on the terms of the individual agreements, which are generally: 1) a commission for traffic driven to our Website that generates a sale or 2) a referral fee based on the number of clicks on keywords or links to our Website generated during a given period. Advertising expense is included in Sales and marketing expenses and totaled $124.3 million, $249.7 million and $164.6 million during the years ended December 31, 2019, 2018 and 2017, respectively.in our consolidated statements of operations. Prepaid advertising (includedis included in Prepaids and other current assets in the accompanyingour consolidated balance sheets) was $138,000 and $961,000 at December 31, 2019 and 2018, respectively.sheets.
Stock-based compensation
We measure compensation expense for allour outstanding unvested share-basedrestricted stock 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 15. 15—Stock-Based Awards.
We use the Black-Scholes option pricing model to determine the fair value of our employee stock purchase plan shares. The determination of the fair value of stock-based payment awards on the date of grant using an option pricing model is affected by our stock price and assumptions regarding a number of complex and subjective variables. These variables include our expected stock price volatility over the expected term of the awards, actual and projected employee stock option exercise behaviors, a risk-free interest rate and any expected dividends.
Loss contingencies
In the normal course of business, we are involved in legal proceedings and other potential loss contingencies. We accrue a liability for such matters when it is probable that a loss has been incurred and the amount, or range of amounts, can be reasonably estimated. When only a range of probable loss can be estimated, the most probable amount in the range is accrued. If no amount within this range is a better estimate than any other amount within the range, the minimum amount in the range is accrued. We expense legal fees as incurred (see(See Note 12. 12—Commitments and Contingencies).
Income taxes
Income taxes are accounted for under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined on the basis of the differences between the financial statements and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.
We recognize deferred tax assets to the extent that we believe these assets are more likely than not to be realized. In evaluating our ability to recover our deferred tax assets within the jurisdiction from which they arise, we consider all available positive and negative evidence, including projected future taxable income, scheduled reversals of our deferred tax liabilities, tax planning strategies, and results of recent operations.
Our projections of future taxable income are subject to change due to economic outlook, political climate, and other conditions such as supply chain challenges, inflation, rising interest rates, and other macroeconomic conditions, and judgment is required in determining our ability to use our deferred tax assets.
We record uncertain tax positions in accordance with ASC 740 on the basis of a two-step process whereby (1) we determine whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, we recognize the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority. We recognize interest and penalties related to unrecognized tax benefits within the income tax expense line in the accompanying consolidated income statements. Accrued interest and penalties are included within the related tax liability line in our consolidated balance sheets.
Net lossincome (loss) per share
Our Blockchain Voting Series A Preferred Stock, par value $0.0001 per share (the "Series A Preferred"), Digital Voting Series A-1 Preferredpreferred stock par value $0.0001 per share (the "Series A-1 Preferred"), and our Voting Series B Preferredpreferred stock par value $0.0001 per share (the "Series B Preferred" together with the Series A Preferred stock and the Series A-1 Preferred stock, collectively,(collectively, the "Preferred Shares") arewere considered participating securities, and as a result, net lossincome (loss) per share ishas historically been calculated using the two-class method. Under this method, we give effect to preferred dividends and then allocate remainingundistributed net lossincome (loss) attributable to our stockholders to both common shares and participating securities (based on the percentagesweighted average percentage of shares outstanding) in determining net income (loss) attributable to common shares. In periods of net loss, per common share.a determination is also made on whether a participating security holder has an obligation to share in the losses before allocating to participating securities. As of December 31, 2022, there were no participating securities following our preferred stock conversion. See Note 14—Stockholders' Equity, Preferred stock conversion, for further information.
Basic net lossincome (loss) per common share is computed by dividing net lossincome (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 lossincome (loss) per share is computed by dividing net lossincome (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).period. Potential common shares, comprising incremental common shares issuable uponfrom the exercise ofemployee stock options, warrants,purchase plan and restricted stock awards are included in the calculation of diluted net lossincome (loss) per common share to the extent such shares are dilutive. Net loss attributable to common shares is adjusted for options
3. FAIR VALUE MEASUREMENT
The following tables summarize our assets and restricted stock awards issued by our subsidiaries whenliabilities measured at fair value on a recurring basis using the effectfollowing levels of our subsidiary's diluted earnings per share is dilutive.
On July 30, 2019, we announced that our Board of Directors had declared a dividend (the "Dividend") payable in shares of our Series A-1 Preferred stock. The Dividend is payable at a ratio of 1:10, meaning that one share of Series A-1 Preferred stock will be issued for every ten shares of common stock, Series A-1 Preferred stock or Series B Preferred stock held by all holders of such sharesinputs as of the record date for the Dividend. As of December 31, 2019,2022 and 2021, as indicated (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| | Fair Value Measurements at December 31, 2022 |
| | Total | | Level 1 | | Level 2 | | Level 3 |
| Assets: | | | | | | | |
| Cash equivalents—Money market mutual funds | $ | 252,650 | | | $ | 252,650 | | | $ | — | | | $ | — | |
| Equity securities, at fair value | 82,823 | | | 36 | | | — | | | 82,787 | |
| | | | | | | |
| Trading securities held in a "rabbi trust" (1) | 399 | | | 399 | | | — | | | — | |
| Total assets | $ | 335,872 | | | $ | 253,085 | | | $ | — | | | $ | 82,787 | |
| Liabilities: | | | | | | | |
| | | | | | | |
| Deferred compensation accrual "rabbi trust" (2) | $ | 396 | | | $ | 396 | | | $ | — | | | $ | — | |
| Total liabilities | $ | 396 | | | $ | 396 | | | $ | — | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | Fair Value Measurements at December 31, 2021 |
| | Total | | Level 1 | | Level 2 | | Level 3 |
| Assets: | | | | | | | |
| Cash equivalents—Money market mutual funds | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| Equity securities, at fair value | 102,529 | | | 174 | | | — | | | 102,355 | |
| | | | | | | |
| Trading securities held in a "rabbi trust" (1) | 179 | | | 179 | | | — | | | — | |
| Total assets | $ | 102,708 | | | $ | 353 | | | $ | — | | | $ | 102,355 | |
| Liabilities: | | | | | | | |
| | | | | | | |
| Deferred compensation accrual "rabbi trust" (2) | $ | 188 | | | $ | 188 | | | $ | — | | | $ | — | |
| Total liabilities | $ | 188 | | | $ | 188 | | | $ | — | | | $ | — | |
___________________________________________
(1) Trading securities held in a rabbi trust are included in Other long-term assets, net in the Dividend had not been distributed.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.
The following table sets forth the computation of basic and diluted net loss per common shareprovides activity for our Level 3 investments during the periods indicated (in thousands, except per share data):
|
| | | | | | | | | | | |
| | Year ended December 31, |
| | 2019 | | 2018 | | 2017 |
| Net loss attributable to stockholders of Overstock.com, Inc. | $ | (121,841 | ) | | $ | (206,070 | ) | | $ | (109,878 | ) |
| Less: Preferred stock converted to common stock | — |
| | 3,098 |
| | — |
|
| Less: Preferred stock (TZROP) repurchase (gain)/loss | (425 | ) | | — |
| | — |
|
| Less: Preferred stock dividends—declared and accumulated | 894 |
| | 77 |
| | 216 |
|
| Undistributed loss | (122,310 | ) | | (209,245 | ) | | (110,094 | ) |
| Less: Undistributed loss allocated to participating securities | (1,665 | ) | | (4,368 | ) | | (2,960 | ) |
| Net loss attributable to common shares | $ | (120,645 | ) | | $ | (204,877 | ) | | $ | (107,134 | ) |
| Net loss per common share—basic: | |
| | |
| | |
|
| Net loss attributable to common shares—basic | $ | (3.46 | ) | | $ | (6.83 | ) | | $ | (4.28 | ) |
| Weighted average common shares outstanding—basic | 34,865 |
| | 29,976 |
| | 25,044 |
|
| Effect of dilutive securities: | |
| | |
| | |
|
| Stock options and restricted stock awards | — |
| | — |
| | — |
|
| Weighted average common shares outstanding—diluted | 34,865 |
| | 29,976 |
| | 25,044 |
|
| Net loss attributable to common shares—diluted | $ | (3.46 | ) | | $ | (6.83 | ) | | $ | (4.28 | ) |
The following shares were excluded from the calculation of diluted shares outstanding as their effect would have been anti-dilutivepresented (in thousands):
| | | | | |
| Amount |
| Level 3 investments at December 31, 2020 | $ | — | |
| Increase due to acquisition of Level 3 investments | 99,723 | |
| Increase in fair value of Level 3 investments | 2,632 | |
| Level 3 investments at December 31, 2021 | 102,355 | |
| Increase due to purchases of Level 3 investments | 18,920 | |
| Decrease in fair value of Level 3 investments | (38,488) | |
| Level 3 investments at December 31, 2022 | $ | 82,787 | |
|
| | | | | | | | |
| | Year ended December 31, |
| | 2019 | | 2018 | | 2017 |
| Restricted stock units | 1,051 |
| | 543 |
| | 226 |
|
| Common shares issuable under stock warrant | — |
| | 21 |
| | 78 |
|
Recently adopted accounting standards
In May 2014, the FASB issued ASU 2014-09, Revenue from ContractsOn January 25, 2021, we entered into an agreement with Customers (Topic 606)Medici Ventures, Pelion, and Pelion, Inc. (the "Medici Closing"), which requires an entity to recognize the amount of revenuepursuant to which it expectsMedici Ventures converted to be entitleda Delaware limited partnership (the "Partnership") and Pelion became the sole general partner of the Partnership, and we became the limited partner of the Partnership. The term of the Partnership is eight years. A tZERO debt conversion was completed during the quarter ended March 31, 2021, following which Medici Ventures and Overstock held approximately 42% and 41%, respectively, of tZERO's outstanding common stock. On April 23, 2021, we entered into the Limited Partnership Agreement with Pelion, pursuant to which Pelion became the sole general partner, holding a 1% equity interest in the Partnership, and Overstock became a limited partner, holding a 99% equity interest in the Partnership. Our retained equity interest in these entities are classified as equity method securities as we are deemed to have significant influence, but not control, over these entities through holding more than a 20% interest in the entity.
At the Medici Closing, our retained equity interest in the Partnership and our direct minority interest in tZERO had a fair value of $288.8 million, inclusive of $3.4 million of capital calls funded at the Medici Closing. The fair value of these equity securities at the Medici Closing was estimated by taking the mid-point from a valuation range using a weighting of multiple valuation techniques on the underlying components of the equity securities to calculate a fair value for the transferwhole, including discounted cash flow models and market transactional data, both of promised goods or services to customers. We adoptedwhich incorporate significant unobservable inputs (Level 3). Approximately $149.9 million of the new standard on January 1, 2018 with a cumulative adjustmenttotal $288.8 million Level 3 equity securities have been valued using unadjusted inputs that reduced Accumulated deficithave not been internally developed by approximately $5.0 million as opposed to retrospectively adjusting prior periods.management, including third-party transactions and quotations. The adjustment primarily relates to the unredeemed portion of our gift cards and loyalty program rewards, which we will recognize over the expected redemption period, rather than waiting until the likelihood of redemption becomes remote or the rewards expire. We have also updated revenue disclosuressignificant unobservable inputs used in the notes to our financial statements as required under the new standard.
The implementation did not impact our gross and net recognition for our revenue transactions. In addition, we continue to recognize revenue related to merchandise sales upon delivery to our customers. However, we now present breakage on our Club O Rewards and gift cards in Retail revenue in our consolidated statement$288.8 million fair value measurement of operations rather as a component of Other income (expense), net.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which requires lessees to recognize 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 a 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 existingthese Level 3 equity securities at the date of initial application. An entity may choose to use either Medici Closing are summarized as follows:
| | | | | | | | | | | | | | | | | | | | |
| Valuation technique | | Unobservable inputs | | Range (1) | | Weighted average (2) |
| Market approach | | Enterprise value to revenue multiple | | 0.88x | | 0.88x |
| Discounted cash flows - exit multiple | | Discount rate | | 9.0% - 35.0% | | 32.4% |
| Enterprise value to revenue multiple | | 0.75x - 5.00x | | 4.40x |
| Projected terminal year | | 2023 - 2027 | | 2025 |
| Annual revenue growth rate | | 1.3% - 124.0% | | 109.4% |
| Annual EBITDA % of revenues | | 5.2% - 41.2% | | 36.3% |
| Discounted cash flows - perpetual growth | | Discount rate | | 30.0% | | 30.0% |
| Projected terminal year | | 2028 | | 2028 |
| Perpetual revenue growth rate | | 3.0% | | 3.0% |
| Annual revenue growth rate | | 25.7% | | 25.7% |
| Annual EBITDA % of revenues | | 14.9% | | 14.9% |
__________________________________________
(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 standardrange for the comparative periods. We adopted the new standard on January 1, 2019Annual revenue growth rate and thus used the effective date as our dateAnnual EBITDA % of initial application. Consequently, financial information has not been updated and the disclosures required under the new standardrevenues are not provided for dates and periods before January 1, 2019. Upon adoption we recognized cumulative opening 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 statements 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 valueweighted average metrics for the annual periods of the remaining minimum rental payments under current leasingseparate cash flow models for the respective component.
standards for our existing operating leases, discounted(2) — Unobservable inputs were weighted 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 2018-07 did not have a material impact on our consolidated financial statements and related disclosures.
Recently issued accounting standards
In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which revises how entities account for credit losses for most financial assets and certain other instruments that are not measured atrelative fair value through net income. For public entities, ASU 2016-13 is required to be adopted for annual periods beginning after December 15, 2019, including interim periods within those fiscal years. The Company has completed its analysis of the impact of this guidance and the adoption of this standard will not have a material impactbased on our consolidated financial statements and related disclosures.
In December 2019, the FASB issued ASU 2019-12, Income Taxes ("Topic 740")—Simplifying the Accounting for Income Taxes, which removes certain exceptions to the general principles in Topic 740 and amends existing guidance to improve consistent application. For public entities, ASU 2019-12 is required to be adopted for annual periods beginning after December 15, 2020, including interim periods within those fiscal years. Early adoption is permitted. Management is currently evaluating the impact of the adoption of this ASU on our consolidated financial statements and related disclosures.
3. BUSINESS COMBINATIONS
tZERO Crypto, Inc.
Through a series of transactions in 2018, Medici Ventures acquired a 33% equity interest in tZERO Crypto, Inc. ("tZERO Crypto"), formerly Bitsy, Inc., a U.S.-based startup that built a regulatory-compliant bridge between traditional fiat currencies and cryptocurrencies, allowing customers the ability to store, purchase and sell cryptocurrencies. tZERO Crypto was founded by Steve Hopkins, tZERO's former president and Medici Ventures' former chief operating officer and general counsel, who held a significant equity interest in tZERO Crypto. On December 21, 2018, tZERO entered into a stock purchase agreement with the owners of tZERO Crypto to acquire the remaining 67% equity interest for $8.0 million with effective control of tZERO Crypto transferring to tZERO effective January 1, 2019. In connection with the December 2018 stock purchase agreement, Medici Ventures transferred its 33% equity interest in tZERO Crypto to tZERO for a $4.0 million convertible promissory note due December 31, 2020 and an assignment of certain intellectual property to Medici Ventures.
tZERO has expanded the wallet's capabilities and launched it as the tZERO Crypto wallet and exchange service. tZERO plans to offer these services as part of a suite of products that includes a digital wallet and exchange service between traditional fiat currencies and cryptocurrencies.
We estimated the fair value of the acquired assets based on Level 3 inputs, which were unobservable (see Note 2. Accounting Policies, Fair value of financial instruments). These inputs included our estimate of future revenues, operating margins, discount rates, and assumptions aboutunderlying components subjected to the relative competitive environment. As of March 31, 2019, our determination and allocationidentified valuation technique. For projected terminal year, the amount represents the median of the purchase price to net tangibleinputs and intangible assets was basedis not a weighted average.
We recognized a $243.5 million gain upon preliminary estimates. During the quarter ended June 30, 2019, we received the final valuation information and completed our determination and allocationdeconsolidation of the purchase price and recognized adjustmentsthese entities which primarily relates to the provisional values asremeasurement of June 30, 2019, which decreased Intangible assets by $650,000, increased Deferred tax liabilities by $943,000our retained equity method interest in the Partnership and resulted in a corresponding increase to Goodwill of $1.7 million. We recognized an impairment of $1.3 million as a result of remeasuring to fair value our 33% equitydirect minority interest in tZERO Crypto held before the business combinationat fair value, which was based on Level 3 inputs (see Note 2. Accounting Policies, Fair value of financial instruments). The impairment is included in Other income (expense), net in our consolidated statementstatements of operations foras part of Income (loss) from discontinued operations, net of income taxes. We completed the year ended December 31, 2019.entire funding of our $44.6 million capital commitment consistent with our proportional ownership interest, which was completed and funded in the second quarter of 2021.
The fair valuesResults of discontinued operations through the assets acquired and liabilities assumed at the acquisitiontransaction date arewere as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | |
| | | Year ended December 31, |
| | | | | 2022 | | 2021 | | 2020 |
| Net revenue | | | | | $ | — | | | $ | 17,394 | | | $ | 55,868 | |
| Cost of goods sold | | | | | — | | | 13,716 | | | 47,691 | |
| Gross profit | | | | | — | | | 3,678 | | | 8,177 | |
| Operating expenses | | | | | | | | | |
| Technology | | | | | — | | | 7,133 | | | 20,750 | |
| Selling, general, and administrative | | | | | — | | | 13,509 | | | 31,916 | |
| Total operating expenses | | | | | — | | | 20,642 | | | 52,666 | |
| Operating loss from discontinued operations | | | | | — | | | (16,964) | | | (44,489) | |
| Interest income, net | | | | | — | | | 192 | | | 600 | |
| Other income (loss), net | | | | | — | | | 4,081 | | | (5,441) | |
| Gain on deconsolidation | | | | | — | | | 243,541 | | | — | |
| Income (loss) from discontinued operations before income taxes | | | | | — | | | 230,850 | | | (49,330) | |
| Provision (benefit) for income taxes | | | | | — | | | 13,604 | | | (374) | |
| Income (loss) from discontinued operations, net of income taxes | | | | | $ | — | | | $ | 217,246 | | | $ | (48,956) | |
| Less: Net loss attributable to noncontrolling interests from discontinued operations | | | | | — | | | (335) | | | (9,830) | |
| Net income (loss) from discontinued operations attributable to stockholders of Overstock.com, Inc. | | | | | $ | — | | | $ | 217,581 | | | $ | (39,126) | |
|
| | | |
| Purchase Price | Fair Value |
| Cash paid, net of cash acquired | $ | 3,115 |
|
| Fair value of equity interest in tZERO Crypto held before business combination | 3,800 |
|
| Less: Fair value of Overstock.com common stock held by tZERO Crypto at acquisition date | (643 | ) |
| Less: Settlement of receivable due from tZERO at acquisition date | (10 | ) |
| Total transaction consideration, net of cash acquired | $ | 6,262 |
|
| | |
| Allocation | |
| Prepaids and other current assets | $ | 71 |
|
| Property and equipment | 16 |
|
| Intangible assets | 6,093 |
|
| Goodwill | 1,685 |
|
| Deferred tax liability | (943 | ) |
| Other liabilities assumed | (660 | ) |
| Total net assets, net of cash acquired | $ | 6,262 |
|
The following table details the identifiable intangible assets acquired at their fair value and their corresponding useful lives at the acquisition date (in thousands):
|
| | | | | |
| Intangible Assets | Fair Value | | Weighted Average Useful Life (years) |
| Patents | $ | 4,293 |
| | 20 |
| Technology | 1,500 |
| | 5 |
| Licenses | 300 |
| | 1 |
| Total acquired intangible assets as of the acquisition date | $ | 6,093 |
| | |
Acquired intangible assets primarily include patents, technology, and licenses. The acquired assets, liabilities, and associated operating results of tZERO Crypto were consolidated into our financial statements at the acquisition date. The goodwill recognized arises from expected synergies with our tZERO operations that do not qualify for separate recognition as intangible assets and also the deferred tax liabilities arising from the business combination. None of the goodwill recognized is expected to be deductible for tax purposes. Pro forma results of operations have not been presented because the effects of this acquisition were not material to our consolidated results of operations.
Mac Warehouse, LLC
On June 25, 2018, we acquired 100% of the total equity interests of Mac Warehouse, LLC, an electronics retailer of refurbished Apple products, to complement our retail business. As of December 31, 2018, our determination and allocation of the purchase price to net tangible and intangible assets was based upon preliminary estimates. During the quarter ended March 31, 2019, we received the final valuation information and completed our determination and allocation of the purchase price and recognized adjustments to the provisional values as of March 31, 2019, which decreased the recognized Intangibles assets by $2.8 million, increased Accrued liabilities by $527,000, decreased Deferred tax liabilities by $837,000 and resulted in a corresponding increase to Goodwill of $2.5 million. Additionally, the change to the provisional amount resulted in a decrease in amortization expense and accumulated depreciation of $1.4 million, of which $981,000 relates to the year ended December 31, 2018, and a $459,000 increase in Other Income related to the Accrued Liabilities that were expensed in 2018. We estimated the fair value of the acquired assets and liabilities based on Level 3 inputs, which were unobservable (see Note 2. Accounting Policies—Fair value of financial instruments). These inputs included our estimate of future revenues, operating margins, discount rates, royalty rates, and assumptions about the relative competitive environment.
The fair values of the assets acquired and liabilities assumed at the acquisition date are as follows (in thousands):
|
| | | |
| Purchase Price | Fair Value |
| Cash paid, net of cash acquired | $ | 1,143 |
|
| Allocation | |
| Accounts receivable, net | $ | 399 |
|
| Inventories, net | 1,033 |
|
| Prepaids and other current assets | 29 |
|
| Property and equipment | 154 |
|
| Intangible assets | 653 |
|
| Goodwill | 3,376 |
|
| Accounts payable and accrued liabilities | (1,432 | ) |
| Long-term debt, net | (3,069 | ) |
| Total net assets, net of cash acquired | $ | 1,143 |
|
4.5. ACCOUNTS RECEIVABLE, NET
Accounts receivable, net consist of the following (in thousands):
| | | | | | | | | | | |
| | December 31, |
| | 2022 | | 2021 |
| Credit card receivables, trade | $ | 10,595 | | | $ | 14,148 | |
| Accounts receivable, trade | 5,760 | | | 6,501 | |
| Other receivables | 4,561 | | | 2,970 | |
| | | |
| 20,916 | | | 23,619 | |
| Less: allowance for credit losses | (3,223) | | | (2,429) | |
| Total accounts receivable, net | $ | 17,693 | | | $ | 21,190 | |
|
| | | | | | | | |
| | | December 31, |
| | | 2019 | | 2018 |
| Accounts receivable, trade | | $ | 10,553 |
| | $ | 10,380 |
|
| Credit card receivables, trade | | 10,515 |
| | 12,141 |
|
| Other receivables | | 6,134 |
| | 3,796 |
|
| Freight rebates receivable | | — |
| | 11,729 |
|
| | | 27,202 |
| | 38,046 |
|
| Less: allowance for doubtful accounts | | (2,474 | ) | | (2,116 | ) |
| Total accounts receivable, net | | $ | 24,728 |
| | $ | 35,930 |
|
5. INVENTORIES, NET
Inventories, net consist of the following (in thousands):
|
| | | | | | | | |
| | | December 31, |
| | | 2019 | | 2018 |
| Product inventories, net | | $ | 3,469 |
| | $ | 10,520 |
|
| Inventory in-transit | | 2,371 |
| | 3,588 |
|
| Total inventories, net | | $ | 5,840 |
| | $ | 14,108 |
|
6. PREPAIDS AND OTHER CURRENT ASSETS
Prepaids and other current assets consist of the following (in thousands):
| | | | | | | | | | | |
| | December 31, |
| | 2022 | | 2021 |
| Prepaid maintenance | $ | 8,767 | | | $ | 10,780 | |
| Other current assets | 5,467 | | | 5,071 | |
| | | |
| Prepaid other | 4,599 | | | 6,246 | |
| | | |
| | | |
| Total prepaids and other current assets | $ | 18,833 | | | $ | 22,097 | |
|
| | | | | | | | |
| | | December 31, |
| | | 2019 | | 2018 |
| Prepaid maintenance | | $ | 6,577 |
| | $ | 7,373 |
|
| Prepaid other | | 4,434 |
| | 7,573 |
|
| Prepaid insurance | | 4,241 |
| | 2,341 |
|
| Other current assets | | 3,088 |
| | 2,963 |
|
| Prepaid advertising | | 138 |
| | 961 |
|
| Prepaid inventories | | — |
| | 845 |
|
| Total prepaids and other current assets | | $ | 18,478 |
| | $ | 22,056 |
|
7. PROPERTY AND EQUIPMENT, NET
Property and equipment, net consist of the following (in thousands):
| | | | | | | | | | | |
| | December 31, |
| | 2022 | | 2021 |
| Computer hardware and software, including internal-use software and website development | $ | 240,148 | | | $ | 225,256 | |
| Building | 69,350 | | | 69,293 | |
| Land | 12,781 | | | 12,781 | |
| Furniture and equipment | 12,642 | | | 12,067 | |
| Building machinery and equipment | 9,791 | | | 9,809 | |
| Land improvements | 7,060 | | | 7,025 | |
| Leasehold improvements | 2,904 | | | 2,601 | |
| 354,676 | | | 338,832 | |
| Less: accumulated depreciation | (244,770) | | | (229,353) | |
| Total property and equipment, net | $ | 109,906 | | | $ | 109,479 | |
|
| | | | | | | | |
| | | December 31, |
| | | 2019 | | 2018 |
| Computer hardware and software, including internal-use software and website development | | $ | 223,309 |
| | $ | 215,412 |
|
| Building | | 69,266 |
| | 69,266 |
|
| Furniture and equipment | | 17,739 |
| | 17,066 |
|
| Land | | 12,781 |
| | 12,781 |
|
| Leasehold improvements | | 11,921 |
| | 8,379 |
|
| Building machinery and equipment | | 9,796 |
| | 9,713 |
|
| Land improvements | | 7,003 |
| | 6,972 |
|
| | | 351,815 |
| | 339,589 |
|
| Less: accumulated depreciation | | (221,787 | ) | | (204,902 | ) |
| Total property and equipment, net | | $ | 130,028 |
| | $ | 134,687 |
|
DepreciationCapitalized costs associated with internal-use software and website development, both developed internally and acquired externally, and depreciation of property and equipment totaled $26.3 million, $26.4 million, and $28.8 millioncosts for the years ended December 31, 2019, 2018same periods associated with internal-use software and 2017, respectively. During the years ended December 31, 2019 and 2018, we retired $8.2 million and $8.0 million, respectively, of fully depreciated property and equipment that were removed from service in 2019 and 2018.
8. OTHER LONG-TERM ASSETS, NET
Other long-term assets, netwebsite development consist of the following (in thousands):
| | | | | | | | | | | | | | | | | |
| Year ended December 31, |
| 2022 | | 2021 | | 2020 |
| Capitalized internal-use software and website development | $ | 7,915 | | | $ | 6,126 | | | $ | 10,246 | |
| Depreciation of internal-use software and website development | 6,571 | | | 7,237 | | | 10,262 | |
Depreciation expense is classified within the corresponding operating expense categories in the consolidated statements of operations as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| Year ended December 31, |
| | 2022 | | 2021 | | 2020 |
| Cost of goods sold | $ | 682 | | | $ | 605 | | | $ | 680 | |
| Technology | 12,233 | | | 13,801 | | | 15,708 | |
| | | | | |
| General and administrative | 3,742 | | | 4,064 | | | 5,279 | |
| Total depreciation | $ | 16,657 | | | $ | 18,470 | | | $ | 21,667 | |
8. EQUITY SECURITIES
Equity securities consist of the following (in thousands):
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
| Equity securities accounted for under the equity method under ASC 323 | $ | 213,494 | | | $ | 240,153 | |
| Equity securities accounted for under the equity method under the fair value option | 82,787 | | | 102,355 | |
| Equity securities under ASC 321 | 36 | | | 174 | |
| Total equity securities | $ | 296,317 | | | $ | 342,682 | |
|
| | | | | | | | |
| | | December 31, |
| | | 2019 | | 2018 |
| Other long-term assets | | $ | 3,166 |
| | $ | 4,419 |
|
| Prepaid expenses, long-term portion | | 867 |
| | 2,154 |
|
| Deposit on purchase of a business | | — |
| | 8,000 |
|
| Total other long-term assets, net | | $ | 4,033 |
| | $ | 14,573 |
|
| | | | | |
| Ownership
interest |
| Medici Ventures, L.P. | 99% |
| tZERO Group, Inc. | 29% |
| SpeedRoute, LLC | 49% |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
During the year ended December 31, 2022, we completed our investment of an additional $15.0 million in tZERO through their Series B financing round led by the Intercontinental Exchange. We also acquired an equity interest in SpeedRoute, LLC ("SpeedRoute"), a former subsidiary of tZERO, which provides connectivity to tZERO's registered broker-dealer clients to U.S. equity exchanges and off-exchange sources of liquidity for $3.9 million.
The carrying amount of our equity method securities was $296.3 million at December 31, 2022, which is included in Equity securities on our consolidated balance sheets, of which $82.8 million is valued under the fair value option (tZERO and SpeedRoute). These investments are valued using Level 3 inputs, which represents 24.6% of assets measured at fair value. For our investments in Medici Ventures, L.P., tZERO, and SpeedRoute there is no difference in the carrying amount of the assets and liabilities and our maximum exposure to loss, and there is no difference between the carrying amount of our investment in Medici Ventures, L.P. and the amount of underlying equity we have in the entity's net assets.
The following table summarizes the net gain (loss) recognized on equity method securities recorded in Other income (expense), net in our consolidated statements of operations (in thousands):
| | | | | | | | | | | | | |
| Years ended December 31, |
| 2022 | | 2021 | | |
| Net gain (loss) recognized on our proportionate share of the net assets of our equity method securities | $ | (25,435) | | | $ | 9,953 | | | |
| Increase (decrease) in fair value of equity method securities held under fair value option | (38,488) | | | 2,632 | | | |
| | | | | |
Regulation S-X Rules 4-08(g) and 3-09
In accordance with SEC Rules 4-08(g) and 3-09 of Regulation S-X, we must determine which, if any, of our equity method securities is a "significant subsidiary". Regulation S-X mandates the use of three different tests to determine if any of our equity securities are significant subsidiaries: the investment test, the asset test, and the income test. The table below provides the summarized financial informationrequired by Rule 4-08(g) for those equity method securities in aggregate that have met the significance criteria (in thousands):
| | | | | | | | | | | |
| December 31, |
| Balance Sheet (1) | 2022 | | 2021 |
| Assets | $ | 122,015 | | | $ | 76,192 | |
| Liabilities | (25,055) | | | (21,683) | |
| Equity | $ | (96,960) | | | $ | (54,509) | |
| | | | | | | | | | | | | | | | | |
| Years ended December 31, |
| Results of Operations (1) | 2022 | | 2021 | | 2020 |
| Revenues | $ | 31,187 | | | $ | 20,800 | | | $ | 4,788 | |
| Pre-tax loss | (37,619) | | | (24,528) | | | (36,533) | |
| Net loss | (37,477) | | | (24,590) | | | (36,625) | |
___________________________________________
(1) The balance sheet and results of operations in the summarized financial information above excludes the financial information for the periods subsequent to the date an equity method investee ceased being accounted for under the equity method and only includes the financial information for the periods subsequent to the date an investee became an equity method investment and was accounted for under the equity method.
In accordance with Rule 3-09 of Regulation S-X, separate audited financial statements of Medici Ventures, L.P. for the periods ended September 30, 2022, and 2021, their fiscal year-ends, are being filed herewith as Exhibit 99.2 and Exhibit 99.1, respectively, and as such are excluded from the table above. In addition, tZERO was not deemed significant for the years ended December 31, 2021 and 2020 but was significant for the year ended December 31, 2022. In accordance with Rule 3-09 of Regulation S-X, separate audited financial statements for tZERO for the year ended December 31, 2022 will be filed subsequently as an amendment to this Form 10-K.
9. ACCRUED LIABILITIES
Accrued liabilities consist of the following (in thousands):
| | | | | | | | | | | |
| | December 31, |
| | 2022 | | 2021 |
| | | |
| Accounts payable accruals | $ | 14,343 | | | $ | 25,571 | |
| Accrued compensation and other related costs | 12,018 | | | 21,910 | |
| Allowance for returns | 10,222 | | | 13,923 | |
| Accrued marketing expenses | 9,670 | | | 15,317 | |
| Accrued freight | 7,880 | | | 10,982 | |
| Sales and other taxes payable | 5,288 | | | 8,756 | |
| Other accrued expenses | 4,193 | | | 5,443 | |
| Total accrued liabilities | $ | 63,614 | | | $ | 101,902 | |
|
| | | | | | | | |
| | | December 31, |
| | | 2019 | | 2018 |
| Accounts payable accruals | | $ | 15,692 |
| | $ | 15,872 |
|
| Accrued marketing expenses | | 13,063 |
| | 14,150 |
|
| Accrued compensation and other related costs | | 13,012 |
| | 12,099 |
|
| Allowance for returns | | 11,107 |
| | 15,261 |
|
| Sales and other taxes payable | | 10,105 |
| | 9,923 |
|
| Other accrued expenses | | 9,714 |
| | 4,270 |
|
| Accrued loss contingencies | | 9,550 |
| | 10,940 |
|
| Accrued freight | | 5,954 |
| | 5,343 |
|
| Total accrued liabilities | | $ | 88,197 |
| | $ | 87,858 |
|
10. DEFERRED REVENUEBORROWINGS
Deferred revenue consists2020 loan agreements
In March 2020, we entered into two loan agreements. The loan agreements provide a $34.5 million Senior Note, carrying interest at an annual rate of 4.242%, and a $13.0 million Mezzanine Note, carrying interest at an annual rate of 5.002%. The loans carry a blended annual interest rate of 4.45%. The Senior Note is for a 10-year term (stated maturity date is March 6, 2030) and requires interest only payments, with the principal amount and any then unpaid interest due and payable at the end of the following10-year term. The Mezzanine Note has a stated 10-year term, though the agreement requires principal and interest payments monthly over approximately a 46-month payment period. Our debt issuance costs and debt discount are amortized using the straight-line basis which approximates the effective interest method.
As of December 31, 2022, the total outstanding debt on these loans was $38.0 million, net of $404,000 in capitalized debt issuance costs, and the total amount of the current portion of these loans included in Other current liabilities on our consolidated balance sheets was $3.5 million.
Both loans include certain financial and non-financial covenants and are secured by our corporate headquarters and the related land and rank senior to stockholders. The financial covenants require that Overstock maintain a net worth in excess of $30 million and minimum liquid assets of $3 million for so long as the Mezzanine Note is outstanding and is reduced to maintaining a net worth in excess of $15 million and minimum liquid assets of $1 million for the remainder of the term that the Senior Note is outstanding. We are in compliance with our debt covenants and continue to monitor our ongoing compliance with our debt covenants.
Future principal payments on our total debt as of December 31, 2022, are as follows (in thousands):
| | | | | | | | |
| Payments due by period | | |
| 2023 | | $ | 3,606 | |
| 2024 | | 282 | |
| 2025 | | — | |
| 2026 | | — | |
| 2027 | | — | |
| Thereafter | | 34,500 | |
| | $ | 38,388 | |
|
| | | | | | | | |
| | | December 31, |
| | | 2019 | | 2018 |
| Payments received prior to product delivery | | $ | 21,951 |
| | $ | 30,033 |
|
| Club O membership fees and reward points | | 11,363 |
| | 11,709 |
|
| In store credits | | 6,338 |
| | 4,707 |
|
| Other | | 1,214 |
| | 730 |
|
| Unredeemed gift cards | | 955 |
| | 3,399 |
|
| Total deferred revenue | | $ | 41,821 |
| | $ | 50,578 |
|
11. LEASES
We have operating and finance leases for warehouses, office space, and data centers, and certain equipment.centers. Our leases have remaining lease terms of 1one year to 11five years, some of which may include options to extend the leases perpetually, and some of which may include options to terminate the leases within 1one year. We note our finance leases are immaterial to our financial statements as a whole and thus are not discussed below. Variable lease costs include executory costs, such as taxes, insurance, and maintenance.
The following table provides a summary of leases by balance sheet location as of December 31, 2019 (in thousands):
|
| | | |
| | December 31, 2019 |
| Operating right-of-use assets | $ | 25,384 |
|
| Operating lease liability—current | 6,603 |
|
| Operating lease liability—non-current | 21,554 |
|
The components of lease expense for the year ended December 31, 2019 were as follows (in thousands):
| | | | | | | | | | | | | | | | | | |
| Years ended December 31, | |
| 2022 | | 2021 | | 2020 | |
| Operating lease cost | $ | 5,975 | | | $ | 6,583 | | | $ | 6,352 | | |
| | | | | | |
| Variable lease cost | 1,489 | | | 1,702 | | | 1,536 | | |
|
| | | |
| | December 31, 2019 |
| Operating lease cost | $ | 9,765 |
|
| Short-term lease cost | 96 |
|
| Variable lease cost | 1,848 |
|
The following tables provides a summary of other information related to leases for the year ended December 31, 2019 (in thousands, apart from weighted-average lease term and weighted average discount rate)thousands):
| | | | | | | | | | | | | | | | | |
| Years ended December 31, |
| 2022 | | 2021 | | 2020 |
| Cash payments included in operating cash flows from lease arrangements | $ | 6,237 | | | $ | 6,478 | | | $ | 7,224 | |
| Right-of-use assets obtained in exchange for new operating lease liabilities | 437 | | | 835 | | | 5,316 | |
| Derecognition of right-of-use assets due to reassessment of lease term | 257 | | | 527 | | | 666 | |
|
| | | |
| | December 31, 2019 |
| Cash paid for amounts included in the measurement of lease liabilities: | |
| Operating cash flows used in operating leases | $ | (10,925 | ) |
| Right-of-use assets obtained in exchange for new operating lease liabilities | $ | 17,947 |
|
| Derecognition of right-of-use assets due to reassessment of lease term | $ | 16,855 |
|
| Weighted-average remaining lease term—operating leases | 5.86 years |
|
| Weighted-average discount rate—operating leases | 8 | % |
The following table provides a summary of balance sheet information related to leases:
During the three months ended December 31, 2019, we elected the early termination option for one of our existing warehouse leases, resulting in the derecognition of a portion of our right-of-use asset, with a corresponding decrease in our cumulative lease liability. | | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
| Weighted-average remaining lease term—operating leases | 2.04 years | | 2.72 years |
| Weighted-average discount rate—operating leases | 7 | % | | 7 | % |
Maturity of lease liabilities under our non-cancellable operating leases as of December 31, 2019,2022, are as follows (in thousands): |
| | | | |
| Payments due by period | | |
| 2020 | | $ | 8,639 |
|
| 2021 | | 5,758 |
|
| 2022 | | 5,624 |
|
| 2023 | | 4,684 |
|
| 2024 | | 3,486 |
|
| Thereafter | | 7,361 |
|
| Total lease payments | | 35,552 |
|
| Less interest | | (7,395 | ) |
| Present value of lease liabilities | | $ | 28,157 |
|
| | | | | | | | |
| Payments due by period | | |
| 2023 | | $ | 4,816 | |
| 2024 | | 2,880 | |
| 2025 | | 689 | |
| 2026 | | 250 | |
| 2027 | | 83 | |
| Thereafter | | — | |
| Total lease payments | | 8,718 | |
| Less interest | | 682 | |
| Present value of lease liabilities | | $ | 8,036 | |
Information for our leases for the year ended December 31, 2018 under ASC Topic 840, Leases, follows for comparative purposes.
Minimum future payments under all operating leases as of December 31, 2018, were as follows (in thousands):
|
| | | | |
| Payments due by period | | |
| 2019 | | $ | 8,822 |
|
| 2020 | | 7,414 |
|
| 2021 | | 7,654 |
|
| 2022 | | 7,579 |
|
| 2023 | | 6,677 |
|
| Thereafter | | 19,571 |
|
| Total lease payments | | $ | 57,717 |
|
Rental expense for operating leases totaled $7.8 million and $9.3 million for the years ended December 31, 2018 and 2017, respectively.
12. 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.
In June 2013, William French ("French") and the State of Delaware ("Delaware") sued us, along with numerous other defendants, in the Superior Court of the State of Delaware for alleged violations of Delaware's unclaimed property laws. French and Delaware alleged that we knowingly refused to fulfill obligations under Delaware's Abandoned Property Law by failing to report and deliver unclaimed gift card funds to the State of Delaware, and knowingly made, used or caused to be made or used, false statements and records to conceal, avoid or decrease an obligation to pay or transmit money to Delaware in violation of the Delaware False Claims and Reporting Act. On June 28, 2019, the court entered a judgment against us in the amount of approximately $7.3 million (for certain unredeemed gift card balances, treble damages, and penalties) as a result of a jury verdict which was returned September 20, 2018. On October 23, 2019, the court entered an award of attorneys' fees and costs of $1.3 million and entered final judgment in the amount of $8.6 million. We have commenced an appeal and filed our appellate brief. Our estimated liability for these amounts was included in Accrued liabilities at December 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.
In February 2018, the Division of Enforcement of the SEC informed tZERO and subsequently informed us that it is conducting an investigation and requested that we and tZERO voluntarily provide certain information and documents related to tZERO and the tZERO security token offering in connection with its investigation. In December 2018, we received a follow-up request from the SEC relating to its investigation. As previously disclosed, onin October 7, 2019, we received a subpoena from the SEC requestingrequiring us to produce documents and other information related to the DividendSeries A-1 Preferred stock dividend we announced to stockholders in June 2019 and requesting 10b-5-1copies of 10b5-1 plans of ourentered into by certain officers and directors that were in effect during the period of January 1, 2018 through October 7, 2019. Ondirectors. In December 9, 2019, we received a subpoena from the SEC requesting documents related to the GSR transaction and the alternative trading system run by tZERO ATS, LLC, formerly known as Pro Securities, LLC. On December 19, 2019, we received a subpoena from the SEC requesting our insider trading policies as well asand certain employment and consulting agreements. We have also previously received requests from the SEC regardingfor our communications with our former chief executive officerChief Executive Officer and director,Director, Patrick Byrne, and the matters referenced in the December 2019 subpoenas. In January 2021, we received a subpoena from the SEC requesting information regarding our retail guidance in 2019 and certain communications with current and former executives, board members, and investors. We are in regular, active communicationcontinue to cooperate with the SEC and are cooperating fully with it in connection with its investigations and information requests.on these matters.
tZERO's broker-dealer subsidiaries are subject to extensive regulatory requirements under federal and state laws and regulations and self-regulatory organization ("SRO") rules. Each of SpeedRoute LLC ("SpeedRoute") and tZERO ATS, LLC is registered with the SEC as a broker-dealer under the Securities Exchange Act of 1934 ("Exchange Act") and in the states in which it conducts securities business and is a member of FINRA and other SROs (as applicable). In addition, tZERO ATS, LLC owns and operates an alternative trading system registered with the SEC. Each of SpeedRoute and tZERO ATS, LLC is subject to regulation, examination, investigation, and disciplinary action by the SEC, FINRA, and state securities regulators, as well as other governmental authorities and SROs with which it is registered or licensed or of which it is a member. Moreover, as a result of tZERO's projects seeking to apply distributed ledger technologies to the capital markets, tZERO's subsidiaries have
been, and remain involved in, ongoing oral and written communications with regulatory authorities. As previously disclosed, tZERO's broker-dealer subsidiaries are currently undergoing various examinations, inquiries, and/or investigations undertaken by various regulatory authorities, which may result in financial and other settlements or penalties. Any significant failure by tZERO's broker-dealer subsidiaries to satisfy regulatory authorities that they are in compliance with all applicable rules and regulations could have a material adverse effect on tZERO and on us. In addition, a further tZERO subsidiary, tZERO Markets, LLC ("tZERO Markets"), has applied for and is in process of seeking regulatory approvals to operate as a broker-dealer in a variety of areas, including retail activities. The approval process involves satisfying the regulatory authorities that tZERO Markets can operate in the manner it proposes and, in addition, if approval is granted, tZERO Markets will be subject to a number of legal and regulatory requirements, some of which will be new to tZERO's broker-dealer subsidiaries.
tZERO's subsidiary, tZERO Crypto, Inc., formerly known as Bitsy, Inc., is registered as or is applying to become a money transmitter (or its equivalent) in many states and is subject to extensive regulatory requirements applicable to money services businesses, including the requirements of the Financial Crimes Enforcement Network of the U.S. Department of the Treasury ("FinCEN"), anti-money laundering requirements, know-your-customer requirements, record-keeping, reporting and capital and bonding requirements, and inspection by state and federal regulatory agencies. Compliance with these requirements requires the dedication of significant resources and any material failure by tZERO Crypto, Inc. to remain in compliance with the applicable regulatory requirements could subject it to liability or limit the services it may offer.
On September 27, 2019, a purported securities class action lawsuit was filed against us and our former chief executive officerChief Executive Officer and former chief financial officerChief Financial Officer in the United States District Court in the Central District of Utah, alleging violations under Section 10(b), Rule 10b-5, Section 20(a), and Section 20(A)20A of the Securities Exchange Act.Act of 1934, as amended (the "Exchange Act"). On October 8, 2019, October 17, 2019, October 31, 2019, and November 20, 2019, four similar lawsuits were filed in the same court also naming the Companyus and the above referenced former executives as defendants, bringing similar claims under the Exchange Act, and seeking similar relief. These cases were consolidated into a single lawsuit in December 2019. The Court appointed The Mangrove Partners Master Fund Ltd. as lead plaintiff in January 2020. In March 2020, an amended consolidated complaint was filed against us, our President, our former Chief Executive Officer, and our former Chief Financial Officer. We filed a motion to dismiss and, on December 19, 2019.September 28, 2020, the court granted our motion and entered judgment in our favor. The plaintiffs filed a motion to amend their complaint on October 23, 2020. The United States District Court of Utah granted the plaintiffs' motion to amend their complaint on January 6, 2021. The plaintiffs filed their amended complaint on January 11, 2021. We filed a motion to dismiss plaintiffs' amended complaint, and on September 20, 2021, the court granted our motion and entered judgment in our favor. On October 18, 2021, the plaintiffs filed a Notice of Appeal, appealing the ruling of the district court to the United States Court of Appeals for the Tenth Circuit. We are awaiting a ruling from the Tenth Circuit that heard oral argument on the appeal on February 9, 2023. No estimates of the possible losses or range of losses can be made at this time. We intend to continue to vigorously defend this consolidated action.
On November 22, 2019, a shareholder derivative suit was filed against us and certain past and present directors and officers of the Companyours in the United States District Court for the District of Delaware, with allegations that include: (i) breach of fiduciary duties, (ii) unjust enrichment, (iii) insider selling and misappropriation of the company'sCompany's information, and (iv) contribution under Sections 10(b) and 21D of the Exchange Act. On December 17, 2019, a similar lawsuit was filed in the same court, naming the same defendants, bringing similar claims, and seeking similar relief. These cases were consolidated into a single lawsuit in January 2020. In March 2020, the court entered a stay on litigation, pending the outcome of the securities class action motion to dismiss. The case remains stayed pending the outcome of the plaintiffs' appeal to the Tenth Circuit in the securities class action. No estimates of the possible losses or range of losses can be made at this time. We intend to vigorously defend these actions.
On April 23, 2020, a putative class action lawsuit was filed against us in the Circuit Court of the County of St. Louis, State of Missouri, alleging that we over-collected taxes on products sold into the state of Missouri. We removed the case to United States District Court, Eastern District of Missouri on May 22, 2020, and on February 9, 2021, the case against us was dismissed. On March 1, 2021, a putative class action lawsuit was filed against us in the Circuit Court of the County of St. Louis, State of Missouri, alleging similar allegations to the April 23, 2020 putative class action lawsuit that was dismissed, that we over-collected taxes on products sold into the state of Missouri. We filed a motion to compel arbitration, which was denied on October 13, 2021. We filed a motion to dismiss, which was denied on March 16, 2022. No estimates of the possible losses or range of losses can be made at this time. We intend to vigorously defend this action.
We establish liabilities when a particular contingency is probable and estimable. At December 31, 2019 and 2018, we have accrued $9.6 million and $10.3 million, respectively,estimable which are included in accruedAccrued liabilities in our consolidated balance sheets. It is reasonably possible that the actual losses may exceedAt December 31, 2022 and 2021, our accrued liabilities.established liabilities were not material.
13. 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 we entered into in favor of Loan Core Capital Funding Corporation LLC under our building loan agreements,
various lessors in connection with facility leases for certain claims arising from such facility or lease, the environmental indemnity we entered into in favor of the lenders under our prior loan agreements, customary indemnification arrangements in underwriting agreements and similar agreements, and indemnities to our directors and officers to the maximum extent permitted under the laws of the State of Delaware. The duration of these indemnities, commitments, and guarantees varies, and in certain cases, is indefinite. In addition, the majority of these indemnities, commitments, and guarantees do not provide for any limitation of the maximum potential future payments we could be obligated to make. As such, we are unable to estimate with any reasonableness our potential exposure under these items. We have not recorded any liability for these indemnities, commitments, and guarantees in the accompanying consolidated balance sheets. We do, however, accrue for losses for any known contingent liability, including those that may arise from indemnification provisions, when future payment is both probable and reasonably estimable.
14. STOCKHOLDERS' EQUITY
Common Stock
Each share of common stock has the right to one vote. The holders of common stock are also entitled to receive dividends declared by the Board of Directors out of funds legally available, subject to prior rights of holders of all classes of stock outstanding having priority rights as to dividends.
Preferred stock conversion
On July 30, 2019, we announcedMay 12, 2022, Overstock shareholders voted to approve separate proposals to approve the amendment of the Company's Amended and Restated Certificate of Designation for both classes of its preferred stock to provide that our Board of Directors had declared the Dividend payable in shareseach share of our Series A-1 Preferred stock. On September 18, 2019, we announced our intent to register theand Series A-1 PreferredB preferred stock to be issued pursuant to the Dividend under the Securities Actautomatically converted into 0.90 of 1933 and postponed the previously announced record and distribution dates for the Dividend. On October 28, 2019, we announced that we would seek a stockholder vote at a stockholder special meeting to allow us to amend the certificates of designation for our preferred shares and removing certain restrictions, to facilitate issuance of the Dividend. On February 13, 2020, a special meeting of stockholders was held, where the stockholders approved amendments to our certificate of designation allowing us to proceed with issuing the Dividend. As of the date of this filing, we have not declared a record date for the Dividend, nor have we distributed the Dividend.
Preferred Stock
On May 1, 2019, we informed holdersshare of our Series A Preferredcommon stock of an opportunity to exchange (the "Exchange""Conversion") outstanding Series A Preferred stock for newly-issued shares of the Company's Series A-1 Preferred stock.. On June 26, 2019, the Exchange was completed for participating stockholders. In connection with the Exchange, 122,526 shares of Series A Preferred stock were validly tendered and accepted for exchange by the Company and the Company issued 122,526 shares of Series A-1 Preferred stock in exchange.
On June 26, 2019,10, 2022, in connection with the completion of the Exchange, 1,144Conversion, the Company issued 4,097,697 shares of our common stock in exchange for the outstanding Series A Preferred stock were converted into shares ofA-1 and Series B Preferredpreferred stock (such transaction,on that date. As the "Conversion").fair value of our common stock issued exceeded the fair value of the Series A-1 and Series B preferred stock exchanged on the Conversion date, we recognized a non-cash deemed dividend to our preferred stockholders of $1.7 million due to the excess fair value per share compared to the conversion ratio. Following the Conversion, 2,895 shares of Series A Preferred stock remained outstanding as of June 30, 2019 and in July 2019, 2,020 of those remaining shares were exchanged for shares of Series A-1 Preferred stock and 875 of those remaining shares were converted into shares of Series B Preferred stock. Following that time, the Company eliminated the Series A PreferredA-1 and Series B preferred stock classes by filing a CertificateCertificates of Elimination with the Delaware Secretary of State.
Except as required by law, the preferred shares are intended to have voting and dividend rights similar to those of one share of common stock. Preferred shares rank senior to common stock with respect to dividends. Holders of the preferred shares are entitled to an annual cash dividend of $0.16 per share, in preference to any dividend payment to the holders of the common stock, out of funds of the Company legally available for payment of dividends and subject to declaration by our Board of Directors. Holders of the preferred shares are also entitled to participate in any cash dividends we pay to the holders of the common stock and are also entitled to participate in non-cash dividends we pay to holders of the common stock, subject to potentially different treatment if we effect a stock dividend, stock split or combination of the common stock. There are no arrearages in cumulative preferred dividends. We declared and paid a cash dividend of $0.16 per share on our preferred stock during 2018 and 2019.
Neither the Series A-1 Preferred stock nor Series B Preferred stock is required to be converted into or exchanged for shares of our common stock or any other entity; however, at our sole discretion, we may convert the Series A-1 Preferred stock into Series B Preferred stock at any time on a one-to-one basis. In the event of any liquidation, any amount available for distribution to stockholders after payment of all liabilities will be distributed proportionately, with each share of Series A-1 Preferred stock and each share of Series B Preferred stock being treated as though it were a share of our common stock. If we are party to any merger or consolidation in which our common stock is changed into or exchanged for stock or other securities of any other person (or the Company) or cash or any other property (or a right to receive the foregoing), we will use all commercially reasonable efforts to cause each outstanding share of the Preferred Stock to be treated as if such share were an additional outstanding share of common stock in connection with any such transaction. Neither the Series A-1 Preferred stock nor the Series B Preferred stock is registered under the Securities Exchange Act of 1934, as amended.
JonesTrading Sales Agreement
We entered into aan Amended and Restated Capital on DemandTM Sales agreementAgreement (the "Sales Agreement") dated August 9, 2018 (which was subsequently amended on March 15, 2019 and November 12, 2019)June 26, 2020 with JonesTrading Institutional Services LLC ("JonesTrading") and D.A. Davidson & Co. ("D.A. Davidson"), under which we conductedmay conduct "at the market" public offerings of our common stock. Under the sales agreement,Sales Agreement, JonesTrading and D.A. Davidson, acting as our agent,
agents, may offer our common stock in the market on a daily basis or otherwise as we request from time to time. We have no obligation to sell additional shares under the sales agreement,Sales Agreement, but expect towe may do so from time to time. For the yearyears ended December 31, 2019,2022 and 2021, we sold 7,590,498did not sell any shares of our common stock pursuant to the sales agreement and have recognized $85.8 million in proceeds, includingSales Agreement. For the year ended December 31, 2020, we received $2.8 million of proceeds that was included in Accounts receivable, net on our consolidated balance sheet net of $2.0 million of offering costs, including commissions paid to JonesTrading. For the year endedat December 31, 2018,2019 for the sale of an aggregate 415,904 shares of our common stock under the prior iteration of the agreement that were executed in late December 2019. As of December 31, 2022, we sold 2,883,344had $150.0 million available under our "at the market" sales program.
Common Stock Offering
We completed a public offering of our common stock on August 14, 2020 and issued 2,415,000 shares of our common stock pursuant to the salesan underwriting agreement, and received $94.6dated August 11, 2020, for proceeds totaling $192.7 million, net of $11.4 million in proceeds, net of $2.6 million of offering costs, including commissions paid to JonesTrading.costs.
Common and Preferred Stock Repurchase Program
On December 18, 2017, tZERO launched an offering (the "TZROP offering") of the right to acquire tZERO's Preferred Equity Tokens, Series A ("TZROP") through a Simple Agreement for Future Equity ("SAFE"). The TZROP offering closed on August 6, 2018, and on October 12, 2018 tZERO issued the TZROP in settlement of the SAFEs. TZROP 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 TZROP offering documents) for the most recently completed fiscal quarter, if declared by tZERO's17, 2021, we announced that our Board of Directors had approved a stock repurchase program (the “Repurchase Program”), pursuant to be paid outwhich we may, from time to time, purchase shares of funds lawfully available on a quarterly basis. TZROP holders are not entitled to participate in any dividends paid to the holders of tZERO'sour outstanding common stock havefor an aggregate repurchase price not to exceed $100.0 million at any time through December 31, 2023. Repurchases under the Repurchase Program may be effected through open market purchases. The Repurchase Committee designated by the Board of Directors will determine the actual timing, number, and value of any shares repurchased under the Repurchase Program in its discretion using factors including, but not limited to, our stock price and trading volume, general market conditions, and the ongoing assessment of our capital needs. There is no rights to vote, and have no rights to the undistributed earnings of tZERO and are not entitled to any utility functionality as partassurance of the TZROP. Any remaining undistributed earningsnumber or lossesaggregate price of tZERO for a period shallany shares that we will ultimately repurchase under the Repurchase Program, which may be allocated to the noncontrolling interest heldextended, suspended, or terminated at any time by the TZROP holders based onBoard of Directors.
For the contractual participation rights of the security to share in those earnings as if all the earnings for the period had been distributed. In the event of any liquidation, dissolution or winding up of tZERO, the TZROP holders will be entitled to the limited preferential liquidation rights equal to USD $0.10 per token to the extent funds are available.
Atyear ended December 31, 2018, cumulative proceeds since December 18, 2017 from the TZROP offering totaling $104.8 million, net of $22.02022, we repurchased $79.8 million of withdrawals, were classified as a componentour common stock and $306,000 of noncontrolling interest within our consolidated financial statements.Series A-1 preferred stock under the Repurchase Program at average prices of $32.41 and $42.16 per share, respectively. As of December 31, 2018, tZERO incurred $21.52022, we had $19.9 million of offering costs associated with the TZROP offering that are classified as a reduction in proceeds within noncontrolling interest inavailable for future share repurchases under our consolidated financial statements.
GSR Agreement
In August 2018, Overstock signed a Token Purchase Agreement with GSR Capital Ltd., a Cayman Islands exempted company ("GSR"). The Token Purchase Agreement sets forth the terms on which GSR had agreed to purchase, for $30 million, on May 6, 2019 or such other date as agreed by the parties, security tokens at a price of $6.67 per security token. On May 8, 2019, the parties executed an Investment Agreement to replace the Token Purchase Agreement under which GSR agreed to purchase 508,710 shares of tZERO common stock, representing approximately 0.5% of the issued and outstanding common stock of tZERO. In exchange, GSR agreed to transfer to tZERO a total $5.0 million in consideration. On September 16, 2019, in recognition of GSR's remaining obligations under the Investment Agreement, tZERO and GSR entered into a Promissory Note under which GSR promised to pay the remaining consideration due to tZERO under the Investment Agreement in the form of U.S. dollars in multiple installments by December 6, 2019. As ofcurrent repurchase authorization through December 31, 2019, GSR had provided $4.4 million U.S. dollars, which represents principal, interest, and late payments fees pursuant to2023. For the Investment Agreement and Promissory Note, and such amount is included in Accrued liabilities. Approximately $911,000 of principal and accrued interest remained unpaid as ofyear ended December 31, 2019.
Warrants
On November 8, 2017,2022, we issued warrants to purchase up to a combined aggregate of 3,722,188retired 7,244 shares of our commonSeries A-1 preferred stock to two purchasers in privately negotiated transactions, for an aggregate warrant purchase price of $6.5 million, net of issuance costs.treasury stock which had been previously repurchased under the Repurchase Program. 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.retirement increased Accumulated deficit by $306,000.
15. STOCK BASEDSTOCK-BASED AWARDS
We have equity incentive and compensatory plans that provide for the grant of stock-based awards, including restricted stock, to employees and board members and provide employees the ability to purchase shares of stock-based awards, includingour common stock options and restricted stock.through an employee stock purchase plan. Employee accounting applies to awardsequity incentives and compensation granted by the Company or subsidiary in the company or subsidiary's shares only to its own employees, respectively. No sibling or upstream awards have been granted. employees. 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.
Stock-based compensation expense wasis classified within the corresponding operating expense categories on our consolidated statements of operations as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| Years ended December 31, |
| | 2022 | | 2021 | | 2020 |
| Cost of goods sold | $ | 132 | | | $ | 102 | | | $ | 169 | |
| Sales and marketing | 693 | | | 987 | | | 799 | |
| Technology | 7,659 | | | 3,799 | | | 1,654 | |
| General and administrative | 9,834 | | | 6,245 | | | 5,219 | |
| Total stock-based compensation expense | $ | 18,318 | | | $ | 11,133 | | | $ | 7,841 | |
|
| | | | | | | | | | | |
| | Years ended December 31, |
| | 2019 | | 2018 | | 2017 |
| Overstock restricted stock awards | $ | 16,160 |
| | $ | 9,096 |
| | $ | 4,056 |
|
| Medici Ventures stock options | 1,214 |
| | 412 |
| | 21 |
|
| tZERO equity awards | 855 |
| | 4,848 |
| | — |
|
| Total stock-based compensation expense | $ | 18,229 |
| | $ | 14,356 |
| | $ | 4,077 |
|
Overstock restricted stock awards
The Overstock.com, Inc. Amended and Restated 2005 Equity Incentive Plan (the "Plan") provides for the grant of incentiverestricted stock optionsunits to employees and directors of the Company and non-qualified stock options to consultants, as well as restricted stock units and other types of equity awards of the Company. For the years ended December 31, 2019, 2018 and 2017, theThe Compensation Committee of the Board of Directors approvedapproves grants of 982,000, 387,000 and 310,000 restricted stock awards respectively, 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%33.4% at the end of the third year; subject to the recipient's continuing service to us. In addition to our traditional equity awards, during the quarter ended March 31, 2019, we granted 502,765 restricted stock awards with a cumulative grant date fair value of $8.6 million which vest over a one-year period, which awards are included in the 982,000 total grants above. At December 31, 2019, there were 1,051,000 unvested restricted stock awards that remained outstanding. At December 31, 2019, 1.02022, 1.3 million shares of stock remained available for future grants under the Plan.
The cost of restricted stock units is determined using the fair value of our common stock on the date of the grant and compensation expense is either recognized on a straight-line basis over the vesting schedule or on an accelerated schedule when vesting of restricted stock awards exceeds a straight-line basis. The cumulative amount of compensation expense recognized at any point in time is at least equal to the portion of the grant date fair value of the award that is vested at that date. The weighted average grant date fair value of restricted stock awards granted during the years ended December 31, 2019, 2018 and 2017 was $17.80, $65.42 and $17.75, respectively.
The following table summarizes restricted stock award activity (in thousands, except fair value data):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2022 | | 2021 | | 2020 |
| | Units | | Weighted
Average
Grant Date
Fair Value | | Units | | Weighted
Average
Grant Date
Fair Value | | Units | | Weighted
Average
Grant Date
Fair Value |
| Outstanding—beginning of year | 663 | | | $ | 56.37 | | | 639 | | | $ | 17.98 | | 1,051 | | | $ | 26.22 |
| Granted at fair value | 618 | | | 42.75 | | | 415 | | | 92.29 | | 484 | | | 10.39 |
| Vested | (295) | | | 43.32 | | | (294) | | | 24.88 | | (710) | | | 23.58 |
| Forfeited | (205) | | | 57.77 | | | (97) | | | 52.26 | | (186) | | | 23.43 |
| Outstanding—end of year | 781 | | | $ | 50.17 | | | 663 | | | $ | 56.37 | | 639 | | | $ | 17.98 |
|
| | | | | | | | | | | | | | | | | | | | |
| | 2019 | | 2018 | | 2017 |
| | Units | | Weighted
Average
Grant Date
Fair Value | | Units | | Weighted
Average
Grant Date
Fair Value | | Units | | Weighted
Average
Grant Date
Fair Value |
| Outstanding—beginning of year | 559 |
| | $ | 44.08 |
| | 540 |
| | $ | 17.05 |
| | 560 |
| | $ | 17.46 |
|
| Granted at fair value | 982 |
| | 17.80 |
| | 387 |
| | 65.42 |
| | 310 |
| | 17.75 |
|
| Vested | (270 | ) | | 34.92 |
| | (234 | ) | | 17.68 |
| | (212 | ) | | 19.58 |
|
| Forfeited | (220 | ) | | 23.36 |
| | (134 | ) | | 42.85 |
| | (118 | ) | | 16.21 |
|
| Outstanding—end of year | 1,051 |
| | $ | 26.22 |
| | 559 |
| | $ | 44.08 |
| | 540 |
| | $ | 17.05 |
|
Employee Stock Purchase Plan
Medici Ventures stock options
The Medici Ventures,Overstock.com, Inc. 20172021 Employee Stock OptionPurchase Plan as amended,(the "ESPP") grants our eligible employees a right to purchase shares of our common stock at a discount through payroll deductions of up to 25% of eligible compensation, subject to a cap of $21,250 in any calendar year. The ESPP provides for consecutive 24-month offering periods beginning March 1 and September 1 of each year. Each offering period shall consist of four consecutive six-month purchase periods. The first offering period under the grantESPP commenced on September 1, 2021, with the first purchase date occurring on February 28, 2022.
On each purchase date, participating employees will purchase shares of optionsour common stock at a price per share equal to employees and directors of and consultants to Medici Ventures to acquire up to 9%85% of the authorizedlesser of the fair market value of our common stock on (i) the offering date of the offering period or (ii) the purchase date (the "look-back" period). If the stock price of our common stock on any purchase date in an offering period is lower than the stock price on the offering date of that offering period, every participant in the offering will automatically be withdrawn from the offering after the purchase of shares on such purchase date and automatically enrolled in a new offering period commencing immediately subsequent to such purchase date.
The maximum number of shares of Medici Ventures' common stock. Medici Ventures authorized 1.5stock that may be issued under the ESPP in aggregate is 3.0 million shares, 900,000 of which are issued and outstanding to Overstock, and 130,000 of which are subject to the 2017 Stock Option Plan. The remaining 470,000 are authorized but unissued. Options vested under this plan expire at the end of ten years. Duringshares. For the year ended December 31, 2019, Medici Ventures granted 27,5502022, 83,570 shares were purchased at an average price per share of $35.41. At December 31, 2022, approximately 2.9 million shares of common stock options withremained available under the ESPP.
The ESPP is considered a cumulative grant datecompensatory plan and the fair value of $2.4 million which vestthe discount and the look-back period will be estimated using the Black-Scholes option pricing model and expense will be recognized straight-line over a three-yearthe 24-month offering period. DuringFor the year ended December 31, 2018, Medici Ventures granted 94,4502022, we recognized $2.4 million in share-based compensation expense related to the ESPP, which is included in the stock options to certain Medici Ventures and Overstock employeescompensation expense table above combined with a
cumulative grant date fair value of $1.8 million, which will be expensed on a straight-line basis over the vesting period of three years.
tZERO equity awards
The tZERO Group, Inc. 2017 Equity Incentive Plan, as amended, provides for grant of options andexpense associated with our restricted stock to employees and directors of and consultants to tZERO to acquire up to 5% of the authorized shares of tZERO's common stock. In January 2018, tZERO granted 2,000,000 restricted stock awards (post-stock split) with a cumulative grant date fair value of $4.0 million under the equity incentive plan, all of which vested on January 23, 2018. Accordingly, there is no expense to be recognized in future periods related to these awards. As a result of these vested awards, our indirect ownership interest in tZERO was reduced from 81% to approximately 80%. During the year ended December 31, 2019, tZERO granted options to acquire 3,477,760 shares (post-stock split) of its stock with a cumulative grant date fair value of $521,000 which will be expensed on a straight-line basis over the vesting period of three years. Options vested under this plan expire at the end of ten years. Additionally, during the year ended December 31, 2019, tZERO granted 260,500 restricted stock awards with a cumulative grant date fair value of $795,000 which will be expensed on a straight-line basis over a cliff vesting period of two years. During the year ended December 31, 2018, tZERO granted options to acquire 5,590,000 shares (post-stock split) of its stock with a cumulative grant date fair value of $4.6 million which will be expensed on a straight-line basis over the vesting period of two to three years.units.
16. EMPLOYEE RETIREMENT PLAN
We have a 401(k) defined contribution plan which permits participating employees to defer a portion of their compensation, subject to limitations established by the Internal Revenue Code. During the years ended December 31, 2019, 20182022, 2021 and 2017,2020, employees who completed 3 months of service and are 21 years of age or older are qualified to participate in the plan which matches 100% of the first 6% of each participant's contributions to the plan subject to IRS limits. Matching contributions vest immediately. Participant contributions also vest immediately. Our matching contribution totaled $5.8$5.7 million, $5.5$5.2 million and $4.1$4.9 million for the years ended December 31, 2019, 20182022, 2021 and 2017,2020, respectively. We made no discretionary contributions to eligible participants for the years ended December 31, 2019, 20182022, 2021 and 2017,2020, respectively.
17. REVENUE AND CONTRACT LIABILITY
Unearned revenue
Unearned revenue consists of the following (in thousands):
| | | | | | | | | | | |
| | December 31, |
| | 2022 | | 2021 |
| Club O membership fees and reward points | $ | 16,795 | | | $ | 16,701 | |
| In store credits | 12,046 | | | 11,777 | |
| Unearned product revenue on undelivered product | 10,932 | | | 20,689 | |
| Unearned product revenue on unshipped orders | 3,536 | | | 9,107 | |
| Other | 1,171 | | | 1,113 | |
| Total unearned revenue | $ | 44,480 | | | $ | 59,387 | |
The following table provides information about unearned revenue from contracts with customers, including significant changes in unearned revenue balances during the period (in thousands):
| | | | | |
| Amount |
| Unearned revenue at December 31, 2020 | $ | 72,165 | |
| Increase due to deferral of revenue at period end, net | 51,384 | |
| Decrease due to beginning contract liabilities recognized as revenue | (64,162) | |
| Unearned revenue at December 31, 2021 | 59,387 | |
| Increase due to deferral of revenue at period end, net | 32,993 | |
| Decrease due to beginning contract liabilities recognized as revenue | (47,900) | |
| Unearned revenue at December 31, 2022 | $ | 44,480 | |
Our total unearned revenue related to outstanding Club O Reward dollars was $10.9 million and $10.0 million at December 31, 2022 and 2021, respectively. Breakage income related to Club O Reward dollars and gift cards is recognized in Net revenue in our consolidated statements of operations. Breakage included in revenue was $4.4 million, $6.9 million, and $5.4 million for the years ended December 31, 2022, 2021, and 2020, respectively. The timing of revenue recognition of these reward dollars is driven by actual customer activities, such as redemptions and expirations.
Sales returns allowance
The following table provides additions to and deduction from the sales returns allowance, which is included in our Accrued liabilities balance in our consolidated balance sheets (in thousands):
| | | | | |
| Amount |
| Allowance for returns at December 31, 2019 | $ | 11,106 | |
| Additions to the allowance | 204,810 | |
| Deductions from the allowance | (196,726) | |
| Allowance for returns at December 31, 2020 | 19,190 | |
| Additions to the allowance | 237,622 | |
| Deductions from the allowance | (242,889) | |
| Allowance for returns at December 31, 2021 | 13,923 | |
| Additions to the allowance | 161,492 | |
| Deductions from the allowance | (165,193) | |
| Allowance for returns at December 31, 2022 | $ | 10,222 | |
18. OTHER INCOME (EXPENSE), NET
Other income (expense), net consisted of the following (in thousands):
| | | | | | | | | | | | | | | | | |
| | Years ended December 31, |
| | 2022 | | 2021 | | 2020 |
| | | | | |
| Income (loss) from equity method securities | $ | (63,923) | | | $ | 12,585 | | | $ | — | |
| | | | | |
| | | | | |
| Gain (loss) on equity securities | (137) | | | (1,238) | | | 305 | |
| | | | | |
| | | | | |
| | | | | |
| Other | 235 | | | 1,153 | | | 308 | |
| Total other income (expense), net | $ | (63,825) | | | $ | 12,500 | | | $ | 613 | |
|
| | | | | | | | | | | | |
| | | Years ended December 31, |
| | | 2019 | | 2018 | | 2017 |
| Unrealized gain on equity securities and marketable securities | | $ | 2,488 |
| | $ | 1,084 |
| | $ | — |
|
| Gift card and Club-O rewards breakage | | — |
| | — |
| | 2,742 |
|
| Gain on investment in precious metals | | — |
| | — |
| | 1,971 |
|
| Equity method losses | | (7,734 | ) | | (3,869 | ) | | (508 | ) |
| Impairment of equity securities | | (7,090 | ) | | (536 | ) | | (5,487 | ) |
| Impairment of notes receivable | | (1,282 | ) | | — |
| | — |
|
| Loss on sale of equity securities and marketable securities | | (130 | ) | | — |
| | — |
|
| Other | | 1,247 |
| | (167 | ) | | 2,460 |
|
| Total other income (expense), net | | $ | (12,501 | ) | | $ | (3,488 | ) | | $ | 1,178 |
|
18.19. INCOME TAXES
For financial reporting purposes, income (loss) from continuing operations before income taxes includes the following components (in thousands):
| | | | | | | | | | | | | | | | | |
| | Years ended December 31, |
| | 2022 | | 2021 | | 2020 |
| United States income (loss) | $ | (35,272) | | | $ | 121,180 | | | $ | 95,115 | |
| Foreign income | 1,420 | | | 1,836 | | | 1,375 | |
| Total income (loss) from continuing operations before income taxes | $ | (33,852) | | | $ | 123,016 | | | $ | 96,490 | |
|
| | | | | | | | | | | | |
| | | Years ended December 31, |
| | | 2019 | | 2018 | | 2017 |
| United States loss | | $ | (134,934 | ) | | $ | (219,585 | ) | | $ | (48,039 | ) |
| Foreign income (loss) | | 399 |
| | (369 | ) | | 305 |
|
| Total loss before income taxes | | $ | (134,535 | ) | | $ | (219,954 | ) | | $ | (47,734 | ) |
The provision (benefit) for income taxes for 2019, 20182022, 2021 and 20172020 consists of the following (in thousands):
| | | | | | | | | | | | | | | | | |
| | Years ended December 31, |
| | 2022 | | 2021 | | 2020 |
| Current: | | | | | |
| Federal | $ | 802 | | | $ | 532 | | | $ | — | |
| State | 1,874 | | | 4,344 | | | 1,316 | |
| Foreign | 112 | | | 183 | | | 68 | |
| Total current | 2,788 | | | 5,059 | | | 1,384 | |
| Deferred: | | | | | |
| Federal | (1,275) | | | (49,045) | | | — | |
| State | (50) | | | (4,763) | | | — | |
| Foreign | (79) | | | (26) | | | (21) | |
| Total deferred | (1,404) | | | (53,834) | | | (21) | |
| Total provision (benefit) for income taxes | $ | 1,384 | | | $ | (48,775) | | | $ | 1,363 | |
|
| | | | | | | | | | | | |
| | | Years ended December 31, |
| | | 2019 | | 2018 | | 2017 |
| Current: | | | | | | |
| Federal | | $ | (49 | ) | | $ | (57 | ) | | $ | 365 |
|
| State | | 195 |
| | (141 | ) | | 280 |
|
| Foreign | | 158 |
| | 44 |
| | 57 |
|
| Total current | | 304 |
| | (154 | ) | | 702 |
|
| Deferred: | | | | | | |
| Federal | | (99 | ) | | (1,583 | ) | | 56,350 |
|
| State | | (18 | ) | | (645 | ) | | 7,146 |
|
| Foreign | | (2 | ) | | (2 | ) | | (10 | ) |
| Total deferred | | (119 | ) | | (2,230 | ) | | 63,486 |
|
| Total provision (benefit) for income taxes | | $ | 185 |
| | $ | (2,384 | ) | | $ | 64,188 |
|
The provision (benefit) for income taxes for 2019, 20182022, 2021 and 20172020 differ from the amounts computed by applying the U.S. federal income tax rate of 21% for 2019 and 2018 and 35% for 2017 to lossincome (loss) before income taxes for the following reasons (in thousands):
| | | | | | | | | | | | | | | | | |
| | Year ended December 31, |
| | 2022 | | 2021 | | 2020 |
| U.S. federal income tax provision (benefit) at statutory rate | $ | (7,109) | | | $ | 25,833 | | | $ | 20,263 | |
| State income tax expense, net of federal benefit | (1,170) | | | 5,734 | | | 3,224 | |
| | | | | |
| Global intangible low-tax income | 919 | | | 143 | | | 229 | |
| Non-deductible executive compensation | 905 | | | 1,908 | | | 147 | |
| Stock based compensation expense | 219 | | | (3,851) | | | 1,839 | |
| Other, net | (67) | | | (33) | | | (34) | |
| Delaware gift card litigation reversal | — | | | — | | | (1,022) | |
| Research and development credit | (2,956) | | | (1,419) | | | (1,266) | |
| Change in valuation allowance | 10,643 | | | (77,090) | | | (22,017) | |
| Total provision (benefit) for income taxes | $ | 1,384 | | | $ | (48,775) | | | $ | 1,363 | |
|
| | | | | | | | | | | | |
| | | Year ended December 31, |
| | | 2019 | | 2018 | | 2017 |
| U.S. federal income tax provision (benefit) at statutory rate | | $ | (28,252 | ) | | $ | (46,190 | ) | | $ | (16,707 | ) |
| State income tax expense, net of federal benefit | | (4,952 | ) | | (8,289 | ) | | (2,480 | ) |
| Research and development credit | | (2,014 | ) | | (1,734 | ) | | (1,696 | ) |
| Stock based compensation expense | | 1,440 |
| | (1,260 | ) | | 164 |
|
| Other | | 1,437 |
| | 1,652 |
| | 581 |
|
| Gain on subsidiary stock | | 193 |
| | 2,192 |
| | — |
|
| Reduction in federal rate | | — |
| | — |
| | 25,287 |
|
| Change in valuation allowance | | 32,333 |
| | 51,245 |
| | 59,039 |
|
| Total provision (benefit) for income taxes | | $ | 185 |
| | $ | (2,384 | ) | | $ | 64,188 |
|
The components of our deferred tax assets and liabilities as of December 31, 20192022 and 20182021 are as follows (in thousands):
| | | | | | | | | | | |
| | December 31, |
| | 2022 | | 2021 |
| Deferred tax assets: | | | |
| Net operating loss carryforwards | $ | 20,711 | | | $ | 35,247 | |
| Research and development tax credits | 20,549 | | | 19,551 | |
| Basis difference in equity securities | 15,302 | | | 6,092 | |
| Capitalized software development | 12,604 | | | — | |
| Unearned revenue | 5,694 | | | 5,431 | |
| Accrued expenses | 4,259 | | | 5,750 | |
| Reserves and other | 2,592 | | | 2,835 | |
| Operating lease liabilities | 1,844 | | | 3,128 | |
| Other tax credits and carryforwards | 288 | | | 207 | |
| Intangible assets | 208 | | | 135 | |
| Gross deferred tax assets | 84,051 | | | 78,376 | |
| Valuation allowance | (21,459) | | | (11,384) | |
| Total deferred tax assets | 62,592 | | | 66,992 | |
| Deferred tax liabilities: | | | |
| Basis difference in equity securities | (15,072) | | | (20,831) | |
| Operating lease right-of-use assets | (1,702) | | | (3,077) | |
| Fixed assets | (3,730) | | | (2,264) | |
| Prepaid expenses | (649) | | | (785) | |
| | | |
| Total deferred tax liabilities | (21,153) | | | (26,957) | |
| Total deferred tax assets (liabilities), net | $ | 41,439 | | | $ | 40,035 | |
For tax years beginning on or after January 1, 2022, the Tax Cuts and Jobs Act of 2017 eliminated the option to deduct research and development expenditures, including software development, as defined under IRC Section 174, in the year incurred. Instead, taxpayers are required to amortize such expenditures over five years if incurred in the U.S. and over fifteen years if incurred in a foreign jurisdiction. This new requirement caused us to utilize significant federal and state tax net operating loss carryforwards in the current year. We will continue to utilize federal and state tax attributes at a faster rate than our financial statement earnings in the future and there may be increases to cash taxes paid unless legislation is passed that would defer, repeal, or otherwise modify these new requirements. This change also impacted certain other computations within our tax provision, such as our global intangible low-tax income and our research and development credit, increasing both items over prior years.
|
| | | | | | | | |
| | | December 31, |
| | | 2019 | | 2018 |
| Deferred tax assets: | | | | |
| Net operating loss carryforwards | | $ | 104,153 |
| | $ | 79,820 |
|
| Research and development tax credits | | 17,922 |
| | 15,382 |
|
| Accrued expenses | | 9,893 |
| | 7,898 |
|
| Basis difference in equity securities | | 7,075 |
| | 4,857 |
|
| Operating lease liabilities | | 6,970 |
| | — |
|
| Intangible assets | | 4,130 |
| | 2,234 |
|
| Reserves and other | | 4,018 |
| | 5,345 |
|
| Interest expense carryforward | | 677 |
| | — |
|
| Fixed assets | | 608 |
| | 259 |
|
| Other tax credits and carryforwards | | 300 |
| | 206 |
|
| Gross deferred tax assets | | 155,746 |
| | 116,001 |
|
| Valuation allowance | | (146,856 | ) | | (114,523 | ) |
| Total deferred tax assets | | 8,890 |
| | 1,478 |
|
| Deferred tax liabilities: | | | | |
| Operating lease right-of-use assets | | (6,263 | ) | | — |
|
| Marketable securities | | (1,068 | ) | | — |
|
| Prepaid expenses | | (810 | ) | | (880 | ) |
| Goodwill | | (677 | ) | | (489 | ) |
| Total deferred tax liabilities | | (8,818 | ) | | (1,369 | ) |
| Total deferred tax assets, net | | $ | 72 |
| | $ | 109 |
|
At December 31, 2019,2022, we have federal net operating loss carryforwards with no expiration date of approximately $261.5$73.6 million; the utilization of these net operating loss carryforwards is limited to 80% of taxable income in any given year. We also have federal net operating loss carryforwards of approximately $2.4 million which expire in 2020 and $149.9 million which expire between 2026 and 2037. We have state net operating loss carryforwards with no expiration date of approximately $119.7 million;$37.4 million primarily in the state of Utah; the utilization of these net operating loss carryforwards is limited to 80% of taxable income in those statesthe state in any given year. We also have state net operating loss carryforwards of approximately $86.0 million which expire in 2021, $16.2 million which expire in 2022, and $145.8$68.9 million that expire between 20232026 and 2039. We have foreign net operating loss carryforwards of $1.2 million that expire primarily between 2023 and 2024.
At December 31, 2019,2022, we have federal research credit carryforwards of approximately $19.2$23.2 million that expire between 20272032 and 2039.2042. We also have state research credit carryforwards of approximately $7.9$9.8 million that expire between 20212023 and 2033.2036. Ownership changes under Internal Revenue Code Section 382 could limit the amount of net operating losses or credit carryforwards that can be used in the future.
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 limitedno 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 and future reversals of taxable temporary differences, to support their realizability. We have establishedmaintain a valuation allowance foragainst our deferred tax assets for capital losses and the state of Utah where not supported by carryback ability orfuture reversals of taxable temporary differences, primarily due tobecause of the uncertainty regarding our future taxable income. We have considered, among other things, the cumulative loss incurred over the three-year period ended December 31, 2019, as a significant piecerealizability of objective negative evidence. We intend to continue maintaining a valuation allowance on our netthese 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.assets. We will continue to monitor the need for a valuation allowance against our remaining deferred tax assets on a quarterly basis.
A reconciliation of the beginning and ending unrecognized tax benefits, excluding interest and penalties, as of December 31, 2019, 20182022, 2021 and 20172020 is as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| | Year ended December 31, |
| | 2022 | | 2021 | | 2020 |
| Beginning balance | $ | 11,961 | | | $ | 9,638 | | | $ | 9,058 | |
| Additions for tax positions related to the current year | 1,083 | | | 1,992 | | | 971 | |
| Additions (reductions) for tax positions taken in prior years | 444 | | | 331 | | | (35) | |
| Reduction due to settlements | — | | | — | | | (301) | |
| Reduction due to cash payments | — | | | — | | | (55) | |
| Ending balance | $ | 13,488 | | | $ | 11,961 | | | $ | 9,638 | |
|
| | | | | | | | | | | | |
| | | Year ended December 31, |
| | | 2019 | | 2018 | | 2017 |
| Beginning balance | | $ | 7,974 |
| | $ | 6,964 |
| | $ | 7,333 |
|
| Additions for tax positions related to the current year | | 1,064 |
| | 1,013 |
| | 881 |
|
| Additions (reductions) for tax positions taken in prior years | | 20 |
| | 332 |
| | 230 |
|
| Reduction for tax positions settled by utilizing tax attributes | | — |
| | (335 | ) | | (1,480 | ) |
| Ending balance | | $ | 9,058 |
| | $ | 7,974 |
| | $ | 6,964 |
|
Included in the balance of unrecognized tax benefits as of December 31, 2019, 20182022, 2021 and 2017,2020, are approximately $9.1$13.5 million, $8.0$12.0 million, and $7.0$9.6 million, respectively, of tax benefits that, if recognized, and the valuation allowance against our net deferred tax assets were released, would affect the effective tax rate. We believe it is reasonably possible that these unrecognized tax benefits will continue to increase in the future.
Accrued interest and penalties on unrecognized tax benefits as of December 31, 20192022 and 20182021 were $567,000$1.1 million and $499,000,$753,000, respectively.
We are subject to taxation in the United States and various state and foreign jurisdictions. Tax years beginning in 20152018 are subject to examination by taxing authorities, although net operating loss and credit carryforwards from all years are subject to examinations and adjustments for at least three years following the year in which the attributes are used. An audit by the Ireland Revenue Agency for the calendar year 2016 was finalized during 2019 with no assessment.
We have indefinitely reinvested foreign earnings of $2.5$7.1 million at December 31, 2019.2022. We would need to accrue and pay various taxes on this amount if repatriated. We do not intend to repatriate these earnings.
19. RELATED PARTY TRANSACTIONS
PCL L.L.C. term loan repayment
On November 6, 2017, we entered into a loan agreement with PCL L.L.C., an entity directly or indirectly wholly-owned by the mother and brother of our former President and Chief Executive Officer and former member of our Board of Directors, Dr. Patrick M. Byrne ("Dr. Byrne"). The agreement provides for a $40.0 million term loan (the "PCL Loan") which carries an annual interest rate of 8.0%. On May 8, 2018, our Board of Directors approved a prepayment of the PCL Loan and we repaid the entire outstanding balance under the loan plus accrued interest.
SiteHelix
On June 28, 2018, we entered into and concurrently closed a stock purchase agreement with the stockholders of SiteHelix, Inc., a Delaware corporation ("SiteHelix") pursuant to which we purchased all of the common stock of SiteHelix for $500,000 plus 100,000 shares of Overstock common stock with a transaction date fair value of $2.9 million for an aggregate purchase price of $3.4 million. The transaction was accounted for as an asset purchase consisting primarily of internal-use software designed to provide a customized user experience for visitors to our Website. Saum Noursalehi, who owned approximately 62% of the SiteHelix common stock, was a member of our Board of Directors and served as President of Overstock until May 8, 2018, when he became Chief Executive Officer of tZERO.
tZERO Crypto Agreement
In July 2018, Medici Ventures entered into a stock purchase agreement with tZERO Crypto, Inc. ("tZERO Crypto"), formerly Bitsy, Inc. On December 21, 2018, tZERO entered into a stock purchase agreement with the owners of tZERO Crypto to acquire the remaining equity interest with effective control of tZERO Crypto transferring to tZERO effective January 1, 2019. See Note 3. Business Combinations for further discussion.
Chainstone Labs
In September 2018, Medici Ventures entered into a stock purchase agreement with Chainstone Labs, Inc. ("Chainstone") to acquire a 29% equity interest in Chainstone for $3.6 million. Chainstone is a U.S.-based startup company founded and 71% owned by a former Board member of Medici Ventures, Bruce Fenton. Chainstone is focused on blockchain, tokenization of securities, and decentralized asset management. Our equity interest is included in our equity securities on our consolidated balance sheets.
Medici Land Governance
Medici Land Governance Inc., a Delaware public benefit corporation ("MLG"), was formed by Medici Ventures with Dr. Byrne. Pursuant to the Subscription Agreements dated September 21, 2018, Medici Ventures contributed certain of its assets, including intellectual property relating to technologies regarding land governance and property rights, to MLG in exchange for 510,000 shares of MLG common stock and at the same time Dr. Byrne personally contributed $6.7 million in cash to MLG in exchange for 390,000 shares of MLG common stock. At the same time MLG, Medici Ventures, and Dr. Byrne entered into a Stockholders Agreement dated September 21, 2018 regarding MLG (the "MLG Stockholder Agreement"). The MLG Stockholder Agreement restricts the transfer of the shares held by Medici Ventures and Dr. Byrne, creates rights of first refusal in favor of MLG, Medici Ventures, and Dr. Byrne to acquire shares to be sold by Medici Ventures or Dr. Byrne, creates purchase rights in favor of MLG and Medici Ventures in the event of the death or incapacity of Dr. Byrne, creates preemptive rights in favor of MLG and Medici Ventures if MLG proposes to sell capital stock to any other person (subject to certain exceptions), provides for voting for board members, and requires a supermajority consent of the stockholders for any sale of MLG or substantially all of its assets, merger, consolidation, or other transaction having substantially the same effect.
As a result of the transactions described above, Medici Ventures holds approximately 57% of the outstanding capital stock of MLG, and Dr. Byrne holds approximately 43% of the outstanding capital stock of MLG. The financial results of MLG are included in our consolidated financial statements.
20. BROKER-DEALERSNET INCOME (LOSS) PER SHARE
tZERO wholly owns two broker-dealers, SpeedRouteThe following table sets forth the computation of basic and tZERO ATS, LLC, whichdiluted net income (loss) per common share for the periods indicated (in thousands, except per share data):
| | | | | | | | | | | | | | | | | |
| | Year ended December 31, |
| | 2022 | | 2021 | | 2020 |
| Numerator: | | | | | |
| Income (loss) from continuing operations | $ | (35,236) | | | $ | 171,791 | | | $ | 95,127 | |
| | | | | |
| | | | | |
| Less: Preferred stock dividends—declared and accumulated | 1,697 | | | 729 | | | 731 | |
| Undistributed income (loss) from continuing operations | (36,933) | | | 171,062 | | | 94,396 | |
| Less: Undistributed income (loss) allocated to participating securities | — | | | 16,409 | | | 6,427 | |
| Net income (loss) from continuing operations attributable to common stockholders | $ | (36,933) | | | $ | 154,653 | | | $ | 87,969 | |
| | | | | |
| Income (loss) from discontinued operations | $ | — | | | $ | 217,581 | | | $ | (39,126) | |
| | | | | |
| | | | | |
| Less: Undistributed income (loss) allocated to participating securities | — | | | 20,870 | | | (2,664) | |
| Net income (loss) from discontinued operations attributable to common stockholders | — | | | 196,711 | | | (36,462) | |
| Net income (loss) attributable to common stockholders | $ | (36,933) | | | $ | 351,364 | | | $ | 51,507 | |
| | | | | |
| Denominator: | | | | | |
| | | | | |
| | | | | |
| Weighted average shares of common shares outstanding—basic | 44,323 | | | 42,981 | | | 41,217 | |
| Effect of dilutive securities: | | | | | |
| Restricted stock awards | — | | | 351 | | | 390 | |
| Weighted average shares of common shares outstanding—diluted | 44,323 | | | 43,332 | | | 41,607 | |
| | | | | |
| Net income (loss) from continuing operations per share of common stock: | | | | | |
| Basic | $ | (0.83) | | | $ | 3.60 | | | $ | 2.13 | |
| Diluted | $ | (0.83) | | | $ | 3.57 | | | $ | 2.12 | |
| Net income (loss) from discontinued operations per share of common stock: | | | | | |
| Basic | $ | — | | | $ | 4.58 | | | $ | (0.88) | |
| Diluted | $ | — | | | $ | 4.54 | | | $ | (0.88) | |
| Net income (loss) per share of common stock: | | | | | |
| Basic | $ | (0.83) | | | $ | 8.18 | | | $ | 1.25 | |
| Diluted | $ | (0.83) | | | $ | 8.11 | | | $ | 1.24 | |
The following shares were acquired in January 2016.excluded from the calculation of diluted shares outstanding as their effect would have been anti-dilutive (in thousands):
| | | | | | | | | | | | | | | | | |
| | Year ended December 31, |
| | 2022 | | 2021 | | 2020 |
| Restricted stock units | 781 | | | 170 | | | 228 | |
| Employee stock purchase plan | 116 | | | 24 | | | — | |
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.
tZERO ATS, LLC is a FINRA-registered broker-dealer that owns and operates the tZERO ATS, an alternative trading system registered with the SEC. The tZERO ATS is a trading system that is not regulated as an exchange but is a licensed venue for matching buy and sell orders for securities. The tZERO ATS is a closed system available only to its broker-dealer subscribers. The tZERO ATS does not accept orders from non-broker-dealers, nor does it hold, own, or sell securities.
SpeedRoute and tZERO ATS, LLC 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 December 31, 2019, SpeedRoute had net capital of $850,024, which was $705,031 in excess of its required net capital of $144,993 and SpeedRoute's net capital ratio was 2.56 to 1. At December 31, 2019, tZERO ATS, LLC had net capital of $109,515, which was $104,515 in excess of its required net capital of $5,000 and tZERO ATS, LLC's net capital ratio was 0.27 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, tZERO ATS, LLC had net capital of $13,958, which was $8,958 in excess of its required net capital of $5,000 and tZERO ATS, LLC's net capital ratio was 2 to 1.
SpeedRoute and tZERO ATS, LLC did not have any securities owned or securities sold, not yet purchased at December 31, 2019 and 2018.
21. BUSINESS SEGMENTS
Segment information has been preparedWe evaluated our reportable segments in accordance with ASC Topic 280 Segment Reporting. We determined our segments based on how we manage our business. Beginning inAt the first quarterconclusion of 2019,this evaluation, we began allocatingconcluded that we have one reportable segment, Retail, which primarily consists of amounts earned through e-commerce product sales through our Website. All corporate support costs (administrative functions such as finance, human resources, and legal) 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 remainare allocated to our Retailsingle reportable segment. Our Medici business includes two reportable segments, tZERO and the unconsolidated financial information for Medici Ventures ("MVI"). MVI was identifiedThe results of that segment are shown on our consolidated statements of operations as a reportable segment separate from Other during 2019. We have recast prior period segment information to conform with current year presentation. MVI consists of the Medici business not associated with tZERO or MLG. We use pre-tax net income (loss) as the measure to determine our reportable segments. As a result, the MLG portion of our Medici Business is not significant as compared to our Retail, tZERO, and MVI segments. Other consists of MLG and our unallocated corporate support costs.continuing operations.
Our Retail segment primarily consists of amounts earned through e-commerce sales through our Website, excluding intercompany transactions eliminated in consolidation.
Our tZERO segment primarily consists of amounts earned through securities transaction through our broker-dealers and costs incurred to execute our tZERO business initiatives, excluding intercompany transactions eliminated in consolidation.
Our MVI segment primarily consists of costs incurred to create or foster a set of products and solutions that leverage blockchain technology to generate efficiencies and increase security and control, excluding intercompany transactions eliminated in consolidation.
We do not allocate assets between our segments for our internal management purposes, and as such, they are not presented here. There were no significant inter-segment sales or transfers during the years ended December 31, 2019, 2018 and 2017.
The following table summarizes information about reportable segments and a reconciliation to consolidated net income (loss) for the years ended December 31, 2019, 2018 and 2017 (in thousands):
|
| | | | | | | | | | | | | | | | | | | |
| | Retail | | tZERO | | MVI | | Other | | Total |
| 2019 | | | | | | | | | |
|
| Revenue, net | $ | 1,434,974 |
| | $ | 21,582 |
| | $ | 2,749 |
| | $ | 113 |
| | $ | 1,459,418 |
|
| Cost of goods sold | 1,147,025 |
| | 16,551 |
| | 2,749 |
| | — |
| | 1,166,325 |
|
| Gross profit | 287,949 |
| | 5,031 |
| | — |
| | 113 |
| | 293,093 |
|
| Operating expenses (1) | 332,372 |
| | 54,911 |
| | 14,778 |
| | 14,521 |
| | 416,582 |
|
| Interest and other income (expense), net (2) | 559 |
| | 2,442 |
| | (14,039 | ) | | (8 | ) | | (11,046 | ) |
| Pre-tax loss | $ | (43,864 | ) | | $ | (47,438 | ) | | $ | (28,817 | ) | | $ | (14,416 | ) | | (134,535 | ) |
| Provision for income taxes | | | | | | | | | 185 |
|
| Net loss (3) | | | | | | | | | $ | (134,720 | ) |
| | | | | | | | | | |
| 2018 | | | | | | | | | |
|
| Revenue, net | $ | 1,800,187 |
| | $ | 19,043 |
| | $ | 2,362 |
| | $ | — |
| | $ | 1,821,592 |
|
| Cost of goods sold | 1,452,195 |
| | 13,127 |
| | 2,362 |
| | — |
| | 1,467,684 |
|
| Gross profit | 347,992 |
| | 5,916 |
| | — |
| | — |
| | 353,908 |
|
| Operating expenses | 506,113 |
| | 47,006 |
| | 8,316 |
| | 9,679 |
| | 571,114 |
|
| Interest and other income (expense), net (2) | (476 | ) | | 233 |
| | (2,498 | ) | | (7 | ) | | (2,748 | ) |
| Pre-tax loss | $ | (158,597 | ) | | $ | (40,857 | ) | | $ | (10,814 | ) | | $ | (9,686 | ) | | (219,954 | ) |
| Benefit for income taxes | | | | | | | | | (2,384 | ) |
| Net loss (3) | | | | | | | | | $ | (217,570 | ) |
| | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | |
| | Retail | | tZERO | | MVI | | Other | | Total |
| 2017 | | | | | | | | | |
|
| Revenue, net | $ | 1,728,104 |
| | $ | 16,493 |
| | $ | 159 |
| | $ | — |
| | $ | 1,744,756 |
|
| Cost of goods sold | 1,392,558 |
| | 11,647 |
| | — |
| | — |
| | 1,404,205 |
|
| Gross profit | 335,546 |
| | 4,846 |
| | 159 |
| | — |
| | 340,551 |
|
| Operating expenses | 365,648 |
| | 17,101 |
| | 4,436 |
| | — |
| | 387,185 |
|
| Interest and other income (expense), net (2) | 4,680 |
| | — |
| | (5,780 | ) | | — |
| | (1,100 | ) |
| Pre-tax loss | $ | (25,422 | ) | | $ | (12,255 | ) | | $ | (10,057 | ) | | $ | — |
| | (47,734 | ) |
| Provision for income taxes | | | | | | | | | 64,188 |
|
| Net loss (3) | | | | | | | | | $ | (111,922 | ) |
___________________________________________
| |
(1) | — Corporate support costs for the year ended December 31, 2019 have been allocated $42.0 million, $6.0 million, $4.2 million, and $7.8 million, to Retail, tZERO, MVI, and Other, respectively. Unallocated corporate support costs of $6.0 million are included in Other. |
| |
(2) | — Excludes intercompany transactions eliminated in consolidation, which consist primarily of service fees and interest. The net amounts of these intercompany transactions were $2.7 million, $3.5 million, and $2.0 million for the years ended December 31, 2019, 2018 and 2017, respectively. |
| |
(3) | — Net loss presented for segment reporting purposes is before any adjustments attributable to noncontrolling interests. |
For the years ended December 31, 2019, 20182022, 2021 and 2017,2020, substantially all our sales revenues were attributable to customers in the United States. At December 31, 20192022 and 2018,2021, substantially all our fixed assetsproperty and equipment were located in the United States.
22. QUARTERLY RESULTS OF OPERATIONS (unaudited)(UNAUDITED)
The following tables set forth our unaudited quarterly results of operations data for the eight most recent quarters for the period ended December 31, 2019.2022. We have prepared this information on the same basis as the consolidated statements of operations and the information includes all adjustments that we consider necessary for a fair statement of its financial position and operating results for the quarters presented.
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended |
| | March 31, 2022 | | June 30, 2022 | | September 30, 2022 | | December 31, 2022 |
| | (in thousands, except per share data) |
| Consolidated Statement of Operations Data: | | | | | | | |
| Net revenue | $ | 536,037 | | | $ | 528,122 | | | $ | 460,279 | | | $ | 404,896 | |
| Cost of goods sold | 410,825 | | | 407,017 | | | 352,807 | | | 315,341 | |
| Gross profit | 125,212 | | | 121,105 | | | 107,472 | | | 89,555 | |
| Operating expenses: | | | | | | | |
| Sales and marketing | 58,513 | | | 57,940 | | | 53,520 | | | 45,504 | |
| Technology | 32,989 | | | 30,542 | | | 29,628 | | | 27,999 | |
| General and administrative | 21,256 | | | 21,081 | | | 18,665 | | | 18,699 | |
| | | | | | | |
| Total operating expenses | 112,758 | | | 109,563 | | | 101,813 | | | 92,202 | |
| Operating income (loss) | 12,454 | | | 11,542 | | | 5,659 | | | (2,647) | |
| Interest income (expense), net | (125) | | | 115 | | | 976 | | | 1,999 | |
| Other expense, net | (114) | | | (1,981) | | | (46,283) | | | (15,447) | |
| Income (loss) before income taxes from continuing operations | 12,215 | | | 9,676 | | | (39,648) | | | (16,095) | |
| Provision (benefit) for income taxes | 2,092 | | | 2,529 | | | (2,653) | | | (584) | |
| Income (loss) from continuing operations | 10,123 | | | 7,147 | | | (36,995) | | | (15,511) | |
| Income (loss) from discontinued operations, net of income taxes | — | | | — | | | — | | | — | |
| Consolidated net income (loss) | $ | 10,123 | | | $ | 7,147 | | | $ | (36,995) | | | $ | (15,511) | |
| Less: Net loss attributable to noncontrolling interests - discontinued operations | — | | | — | | | — | | | — | |
| Net income (loss) attributable to stockholders of Overstock.com, Inc. | $ | 10,123 | | | $ | 7,147 | | | $ | (36,995) | | | $ | (15,511) | |
| | | | | | | |
| Net income (loss) attributable to common shares—basic | | | | | | | |
| Continuing operations | $ | 0.21 | | | $ | 0.12 | | | $ | (0.81) | | | $ | (0.34) | |
| Discontinued operations | — | | | — | | | — | | | — | |
| Total | $ | 0.21 | | | $ | 0.12 | | | $ | (0.81) | | | $ | (0.34) | |
| Net income (loss) attributable to common shares—diluted | | | | | | | |
| Continuing operations | $ | 0.21 | | | $ | 0.12 | | | $ | (0.81) | | | $ | (0.34) | |
| Discontinued operations | — | | | — | | | — | | | — | |
| Total | $ | 0.21 | | | $ | 0.12 | | | $ | (0.81) | | | $ | (0.34) | |
| Weighted average shares of common stock outstanding: | | | | | | | |
| Basic | 43,052 | | | 43,072 | | | 45,708 | | | 45,420 | |
| Diluted | 43,282 | | | 43,159 | | | 45,708 | | | 45,420 | |
|
| | | | | | | | | | | | | | | | |
| | | Three Months Ended |
| | | March 31, 2019 | | June 30, 2019 | | September 30, 2019 | | December 31,
2019 |
| | | (in thousands, except per share data) |
| Consolidated Statement of Operations Data: | | | | | | | | |
| Revenue, net | | | | | | | | |
| Retail | | $ | 362,625 |
| | $ | 367,475 |
| | $ | 340,798 |
| | $ | 364,076 |
|
| Other | | 5,104 |
| | 6,234 |
| | 6,301 |
| | 6,805 |
|
| Total net revenue | | 367,729 |
| | 373,709 |
| | 347,099 |
| | 370,881 |
|
| Cost of goods sold | | | | | | | | |
| Retail | | 290,640 |
| | 294,984 |
| | 272,545 |
| | 288,856 |
|
| Other | | 3,965 |
| | 4,826 |
| | 5,006 |
| | 5,503 |
|
| Total cost of goods sold | | 294,605 |
| | 299,810 |
| | 277,551 |
| | 294,359 |
|
| Gross profit | | 73,124 |
| | 73,899 |
| | 69,548 |
| | 76,522 |
|
| Operating expenses: | | | | | | | | |
| Sales and marketing | | 33,477 |
| | 34,560 |
| | 34,215 |
| | 40,868 |
|
| Technology | | 35,433 |
| | 33,153 |
| | 32,782 |
| | 33,970 |
|
| General and administrative | | 40,232 |
| | 31,964 |
| | 32,681 |
| | 33,247 |
|
| Total operating expenses | | 109,142 |
| | 99,677 |
| | 99,678 |
| | 108,085 |
|
| Operating loss | | (36,018 | ) | | (25,778 | ) | | (30,130 | ) | | (31,563 | ) |
| Interest income | | 403 |
| | 630 |
| | 449 |
| | 315 |
|
| Interest expense | | (127 | ) | | (105 | ) | | (57 | ) | | (53 | ) |
| Other income (expense), net | | (6,272 | ) | | (2,995 | ) | | (4,781 | ) | | 1,547 |
|
| Loss before income taxes | | (42,014 | ) | | (28,248 | ) | | (34,519 | ) | | (29,754 | ) |
| Provision (benefit) for income taxes | | 878 |
| | (622 | ) | | 23 |
| | (94 | ) |
| Net loss | | (42,892 | ) | | (27,626 | ) | | (34,542 | ) | | (29,660 | ) |
| Less: Net loss attributable to noncontrolling interests | | (3,648 | ) | | (2,945 | ) | | (3,604 | ) | | (2,682 | ) |
| Net loss attributable to stockholders of Overstock.com, Inc. | | $ | (39,244 | ) | | $ | (24,681 | ) | | $ | (30,938 | ) | | $ | (26,978 | ) |
| Net loss per common share—basic: | | | | | | | | |
| Net loss attributable to common shares—basic | | $ | (1.18 | ) | | $ | (0.69 | ) | | $ | (0.89 | ) | | $ | (0.73 | ) |
| Weighted average common shares outstanding—basic | | 32,370 |
| | 35,225 |
| | 35,241 |
| | 36,573 |
|
| Net loss per common share—diluted: | | | | | | | | |
| Net loss attributable to common shares—diluted | | $ | (1.18 | ) | | $ | (0.69 | ) | | $ | (0.89 | ) | | $ | (0.73 | ) |
| Weighted average common shares outstanding—diluted | | 32,370 |
| | 35,225 |
| | 35,241 |
| | 36,573 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended |
| | March 31, 2021 | | June 30, 2021 | | September 30, 2021 | | December 31, 2021 |
| | (in thousands, except per share data) |
| Consolidated Statement of Operations Data: | | | | | | | |
| | | | | | | |
| Net revenue | $ | 659,861 | | | $ | 794,536 | | | $ | 689,390 | | | $ | 612,659 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Cost of goods sold | 506,337 | | | 619,710 | | | 532,682 | | | 473,815 | |
| | | | | | | |
| | | | | | | |
| Gross profit | 153,524 | | | 174,826 | | | 156,708 | | | 138,844 | |
| Operating expenses: | | | | | | | |
| Sales and marketing | 73,538 | | | 85,272 | | | 75,650 | | | 67,970 | |
| Technology | 30,523 | | | 30,383 | | | 31,178 | | | 30,917 | |
| General and administrative | 22,871 | | | 22,660 | | | 21,031 | | | 20,837 | |
| | | | | | | |
| Total operating expenses | 126,932 | | | 138,315 | | | 127,859 | | | 119,724 | |
| Operating income | 26,592 | | | 36,511 | | | 28,849 | | | 19,120 | |
| Interest expense, net | (155) | | | (130) | | | (139) | | | (132) | |
| Other income (expense), net | (226) | | | 298 | | | (79) | | | 12,507 | |
| Income before income taxes from continuing operations | 26,211 | | | 36,679 | | | 28,631 | | | 31,495 | |
| Provision (benefit) for income taxes | 193 | | | (45,726) | | | (1,795) | | | (1,447) | |
| Income from continuing operations | 26,018 | | | 82,405 | | | 30,426 | | | 32,942 | |
| Income (loss) from discontinued operations, net of income taxes | (10,126) | | | 227,372 | | | — | | | — | |
| Consolidated net income | $ | 15,892 | | | $ | 309,777 | | | $ | 30,426 | | | $ | 32,942 | |
| Less: Net loss attributable to noncontrolling interests - discontinued operations | (201) | | | (134) | | | — | | | — | |
| Net income attributable to stockholders of Overstock.com, Inc. | $ | 16,093 | | | $ | 309,911 | | | $ | 30,426 | | | $ | 32,942 | |
| | | | | | | |
| Net income (loss) attributable to common shares—basic | | | | | | | |
| Continuing operations | $ | 0.57 | | | $ | 1.73 | | | $ | 0.64 | | | $ | 0.69 | |
| Discontinued operations | (0.23) | | | 4.78 | | | — | | | — | |
| Total | $ | 0.34 | | | $ | 6.51 | | | $ | 0.64 | | | $ | 0.69 | |
| Net income (loss) attributable to common shares—diluted | | | | | | | |
| Continuing operations | $ | 0.56 | | | $ | 1.72 | | | $ | 0.63 | | | $ | 0.68 | |
| Discontinued operations | (0.23) | | | 4.75 | | | — | | | — | |
| Total | $ | 0.33 | | | $ | 6.47 | | | $ | 0.63 | | | $ | 0.68 | |
| Weighted average shares of common stock outstanding: | | | | | | | |
| Basic | 42,885 | | | 43,009 | | | 43,014 | | | 43,016 | |
| Diluted | 43,320 | | | 43,314 | | | 43,324 | | | 43,370 | |
|
| | | | | | | | | | | | | | | | |
| | | Three Months Ended |
| | | March 31, 2018 | | June 30, 2018 | | September 30, 2018 | | December 31,
2018 |
| | | (in thousands, except per share data) |
| Consolidated Statement of Operations Data: | | | | | | | | |
| Revenue, net | | | | | | | | |
| Retail | | $ | 439,996 |
| | $ | 477,683 |
| | $ | 435,775 |
| | $ | 446,733 |
|
| Other | | 5,335 |
| | 5,450 |
| | 4,805 |
| | 5,815 |
|
| Total net revenue | | 445,331 |
| | 483,133 |
| | 440,580 |
| | 452,548 |
|
| Cost of goods sold | | | | | | | | |
| Retail | | 347,580 |
| | 387,252 |
| | 350,651 |
| | 366,712 |
|
| Other | | 3,882 |
| | 4,138 |
| | 3,213 |
| | 4,256 |
|
| Total cost of goods sold | | 351,462 |
| | 391,390 |
| | 353,864 |
| | 370,968 |
|
| Gross profit | | 93,869 |
| | 91,743 |
| | 86,716 |
| | 81,580 |
|
| Operating expenses: | | | | | | | | |
| Sales and marketing | | 77,214 |
| | 94,416 |
| | 55,312 |
| | 47,537 |
|
| Technology | | 31,294 |
| | 32,423 |
| | 33,880 |
| | 34,557 |
|
| General and administrative | | 39,755 |
| | 31,440 |
| | 45,356 |
| | 47,930 |
|
| Total operating expenses | | 148,263 |
| | 158,279 |
| | 134,548 |
| | 130,024 |
|
| Operating loss | | (54,394 | ) | | (66,536 | ) | | (47,832 | ) | | (48,444 | ) |
| Interest income | | 544 |
| | 620 |
| | 383 |
| | 661 |
|
| Interest expense | | (874 | ) | | (395 | ) | | (101 | ) | | (98 | ) |
| Other income (expense), net | | (9 | ) | | 368 |
| | (1,848 | ) | | (1,999 | ) |
| Loss before income taxes | | (54,733 | ) | | (65,943 | ) | | (49,398 | ) | | (49,880 | ) |
| Benefit for income taxes | | (277 | ) | | (27 | ) | | (141 | ) | | (1,939 | ) |
| Net loss | | (54,456 | ) | | (65,916 | ) | | (49,257 | ) | | (47,941 | ) |
| Less: Net loss attributable to noncontrolling interests | | (3,547 | ) | | (1,005 | ) | | (1,334 | ) | | (5,614 | ) |
| Net loss attributable to stockholders of Overstock.com, Inc. | | $ | (50,909 | ) | | $ | (64,911 | ) | | $ | (47,923 | ) | | $ | (42,327 | ) |
| Net loss per common share—basic: | | | | | | | | |
| Net loss attributable to common shares—basic | | $ | (1.74 | ) | | $ | (2.20 | ) | | $ | (1.55 | ) | | $ | (1.39 | ) |
| Weighted average common shares outstanding—basic | | 28,566 |
| | 28,903 |
| | 30,279 |
| | 32,112 |
|
| Net loss per common share—diluted: | | | | | | | | |
| Net loss attributable to common shares—diluted | | $ | (1.74 | ) | | $ | (2.20 | ) | | $ | (1.55 | ) | | $ | (1.39 | ) |
| Weighted average common shares outstanding—diluted | | 28,566 |
| | 28,903 |
| | 30,279 |
| | 32,112 |
|
23. SUBSEQUENT EVENTS
Medici Land Governance
In February 2020, Medici Land Governance,January 2023, we invested $10 million through a convertible promissory note from GrainChain, Inc. ("MLG"), a majority owned-subsidiary of Medici Ventures, sold and issued shares of common stock in MLG to an unrelated third-party which reduced Medici Ventures' equityThe convertible promissory note bears interest in MLG from 57% to 35%.
New loan agreements
In March 2020, we entered into two loan agreements with Loan Core Capital Funding Corporation LLC. The loan agreements provide a $34.5 million Senior Note and a $13.0 million Mezzanine Note. The loans carryat an annual interest rate of 4.45%5%. The Senior Note is forconvertible promissory note has a 10-year term and requires interest only payments, withmaturity date of January 3, 2025 at which time the outstanding principal amountbalance and any then unpaid accrued interest due and payable at the endwill automatically convert into shares of the 10-year term. The Mezzanine Note is for approximately a 46-month term and requires principal and interest payments monthly over the lifenewly created series of the loan. Both loans are securedPreferred Stock issued by our corporate headquarters and the related land. We incurred insignificant debt issuance costs with the new loan agreements.GrainChain, Inc.
Schedule II
Valuation and Qualifying Accounts
(in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance at
Beginning of
Year | | Charged to
Expense | | Deductions / (Other Additions) | | | | Balance at
End of Year |
| Year ended December 31, 2022 | | | | | | | | | |
| Deferred tax valuation allowance | $ | 11,384 | | | $ | 10,075 | | | $ | — | | | | | $ | 21,459 | |
| Allowance for sales returns | 13,923 | | | 161,492 | | | 165,193 | | | | | 10,222 | |
| Allowance for doubtful accounts | 2,429 | | | 794 | | | — | | | | | 3,223 | |
| Year ended December 31, 2021 | | | | | | | | | |
Deferred tax valuation allowance (1) | $ | 134,305 | | | $ | (77,090) | | | $ | 45,831 | | | | | $ | 11,384 | |
| Allowance for sales returns | 19,190 | | | 237,622 | | | 242,889 | | | | | 13,923 | |
| Allowance for doubtful accounts | 1,417 | | | 1,012 | | | — | | | | | 2,429 | |
| Year ended December 31, 2020 | | | | | | | | | |
Deferred tax valuation allowance (1) | $ | 146,856 | | | $ | (13,066) | | | $ | (515) | | | | | $ | 134,305 | |
| Allowance for sales returns | 11,106 | | | 204,810 | | | 196,726 | | | | | 19,190 | |
| Allowance for doubtful accounts | 2,443 | | | 1,008 | | | 2,034 | | | | | 1,417 | |
(1) Amounts contain continuing and discontinued operations
|
| | | | | | | | | | | | | | | | |
| | | Balance at Beginning of Year | | Charged to Expense | | Deductions | | Balance at End of Year |
| Year ended December 31, 2019 | | | | | | | | |
| Deferred tax valuation allowance | | $ | 114,523 |
| | $ | 32,333 |
| | $ | — |
| | $ | 146,856 |
|
| Allowance for sales returns | | 15,261 |
| | 117,040 |
| | 121,194 |
| | 11,107 |
|
| Allowance for doubtful accounts | | 2,116 |
| | 659 |
| | 301 |
| | 2,474 |
|
| Year ended December 31, 2018 | | | | | | | | |
| Deferred tax valuation allowance | | $ | 63,278 |
| | $ | 51,245 |
| | $ | — |
| | $ | 114,523 |
|
| Allowance for sales returns | | 17,391 |
| | 174,864 |
| | 176,994 |
| | 15,261 |
|
| Allowance for doubtful accounts | | 1,253 |
| | 883 |
| | 20 |
| | 2,116 |
|
| Year ended December 31, 2017 | | | | | | | | |
| Deferred tax valuation allowance | | $ | 4,239 |
| | $ | 59,039 |
| | $ | — |
| | $ | 63,278 |
|
| Allowance for sales returns | | 18,176 |
| | 169,398 |
| | 170,183 |
| | 17,391 |
|
| Allowance for doubtful accounts | | 1,999 |
| | 309 |
| | 1,055 |
| | 1,253 |
|
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
We maintain disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The term disclosure controls and procedures means controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission's rules and forms.
Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer's management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Evaluation of Disclosure Controls and Procedures
We carried out an evaluation required by the Exchange Act under the supervision and with the participation of our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rule 13a-15(e) of the Exchange Act, as of the end of the period covered by this report. Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and to provide reasonable assurance that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
Limitations on Disclosure Controls and Procedures and Internal Control over Financing Reporting
Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives as specified above. Management does not expect, however, that our disclosure controls and procedures will prevent or detect all error and fraud. Any control system, no matter how well designed and operated, is based upon certain assumptions and can provide only reasonable, not absolute, assurance that its objectives will be met. Further, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected.
Changes in Disclosure Controls and Procedures and Internal Control Over Financialover Financing Reporting
During the fiscal quarter ended December 31, 2019,2022, we evaluated and replaced the design of certain internal controls supporting the valuation of our equity method securities as a result of a change in the valuation approach used for valuing our equity method securities. Except for these replacements, there has not occurred any changewere no other changes in either our disclosure controls and procedures or our internal control over financial reporting that hasoccurred during the quarter ended December 31, 2022, that have materially affected, or isare reasonably likely to materially affect, our disclosure controls and procedures or our internal control over financial reporting.
Management's Report on Internal Control over Financial Reporting
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act.
Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness of internal control over financial reporting to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management has assessed the effectiveness of our internal control over financial reporting as of December 31, 2019.2022. In making our assessment of the effectiveness of internal control over financial reporting, management used the criteria set forth in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO"). Based on this assessment, management has concluded that, as of December 31, 2019,2022, our internal control over financial reporting was effective.
Our internal control over financial reporting is designed to provide reasonable assurance of achieving its objectives as specified above. Management does not expect, however, that our internal control over financial reporting will prevent or detect all error and fraud. Any control system, no matter how well designed and operated, is based upon certain assumptions and can provide only reasonable, not absolute, assurance that its objectives will be met. Further, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected.
The effectiveness of our internal control over financial reporting as of December 31, 20192022 has been audited by KPMG LLP, an independent registered public accounting firm, as stated in their report which is included below.
Independent Registered Public Accounting Firm's Report on Internal Control Over Financial Reporting
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
Overstock.com, Inc.:
Opinion on Internal Control Over Financial Reporting
We have audited Overstock.com, Inc. and subsidiaries' (the Company) internal control over financial reporting as of December 31, 2019,2022, based on criteria established in Internal Control—Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019,2022, based on criteria established in Internal Control—Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 20192022 and 2018,2021, the related consolidated statements of operations, comprehensive loss,income (loss), changes in stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2019,2022, and the related notes and financial statement schedule II (collectively, the consolidated financial statements), and our report dated March 13, 2020February 24, 2023 expressed an unqualified opinion on those consolidated financial statements.
Basis for Opinion
The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ KPMG LLP
Salt Lake City, Utah
March 13, 2020February 24, 2023
ITEM 9B. OTHER INFORMATION
None.
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
Not applicable.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information regarding our Executive Officers required by Item 10 of Part III is set forth in Item 1 of Part I under "Business—Executive Officers of the Registrant." Information required by Item 10 of Part III regarding our Board of Directors and any material changes to the process by which security holders may recommend nominees to the Board of Directors will be included in our definitive proxy statement for our 20202023 annual meeting of stockholders and is incorporated herein by reference. Information relating to compliance with Section 16(a) of the 1934 Act will be set forth in our definitive proxy statement for our 20202023 annual meeting of stockholders and is incorporated herein by reference.
We have adopted a Code of Business Conduct and Ethics ("Code"), which applies to all employees of the Company, including our principal executive officer, principal financial officer, and principal accounting officer. We intend to disclose any amendments to the Code and any waivers granted to our principal executive officer, principal financial officer or principal accounting officer or other persons to the extent required by applicable rules or regulations in the Investor Relations section of our Website, www.overstock.com. We will provide a copy of the Code to any person without any charge upon request in writing addressed to Overstock.com. Attn: Investor Relations, 799 West Coliseum Way, Midvale, UT 84047.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to our definitive proxy statement for the 20202023 annual meeting of stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Except as set forth herein, theThe information required by this Item is incorporated by reference to our definitive proxy statement for the 20202023 annual meeting of stockholders.
Securities authorized for issuance under equity compensation plans
Our Board of Directors adopted the 2005 Equity Incentive Plan, which was most recently amended and restated and re-approved by the stockholders on May 9, 2017 (as so amended and restated, the "Plan"). Under the Plan, the Board of Directors may issue incentive stock options to our employees and directors and non-qualified stock options to consultants, as well as restricted stock units and other types of equity awards of the Company.
Options granted under the Plan generally expire at the end of ten years and vest in accordance with a vesting schedule determined by our Board of Directors, usually over four years from the grant date. We have not granted compensatory stock options since 2008, and no stock options are outstanding under the Plan. At December 31, 2019, no options were outstanding under the Plan.
Restricted stock units granted in 2019, 2018, and 2017 vest over three years at 33.3% at the end of each of the first, second and third year. In addition to our traditional equity awards, during the year ended December 31, 2019, we granted 502,765 restricted stock awards which vest over a one-year period. Each restricted stock unit represents the right to one share of common stock upon vesting.
The following is a summary of restricted stock unit activity (amounts in thousands, except per share data):
|
| | | | | | | | | | | | | | | | | | | | | |
| | | 2019 | | 2018 | | 2017 |
| | | Units | | Weighted
Average
Grant Date
Fair Value | | Units | | Weighted
Average
Grant Date
Fair Value | | Units | | Weighted
Average
Grant Date
Fair Value |
| Outstanding—beginning of year | | 559 |
| | $ | 44.08 |
| | 540 |
| | $ | 17.05 |
| | 560 |
| | $ | 17.46 |
|
| Granted at fair value | | 982 |
| | 17.80 |
| | 387 |
| | 65.42 |
| | 310 |
| | 17.75 |
|
| Vested | | (270 | ) | | 34.92 |
| | (234 | ) | | 17.68 |
| | (212 | ) | | 19.58 |
|
| Forfeited | | (220 | ) | | 23.36 |
| | (134 | ) | | 42.85 |
| | (118 | ) | | 16.21 |
|
| Outstanding—end of year | | 1,051 |
| | $ | 26.22 |
| | 559 |
| | $ | 44.08 |
| | 540 |
| | $ | 17.05 |
|
At December 31, 2019, 1.0 million shares of stock remained available for future grants under the Plan.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this Item is incorporated by reference to our definitive proxy statement for the 20202023 annual meeting of stockholders.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Our independent registered public accounting firm is KPMG LLP, Salt Lake City, Utah, Auditor Firm ID: 185.
The information required by this Item is incorporated by reference to our definitive proxy statement for the 20202023 annual meeting of stockholders.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as part of this Annual Report on Form 10-K:
(1) Financial Statements:
The financial statements are filed as part of this Annual Report on Form 10-K under "Item 8. Financial Statements and Supplementary Data."
(2) Financial Statement Schedules:
Schedule II Valuation and Qualifying Accounts is provided in "Item 8. Financial Statements and Supplementary Data." Other schedules have been omitted as they are either not required, not applicable, or the information has otherwise been shown in the consolidated financial statements or notes thereto under "Item 8. Financial Statements and Supplementary Data."
(3) Exhibits:
See exhibits listed under Part (b) below.
(b) Exhibits
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Exhibit Number | | Exhibit Description | | Form | | File No. | | Exhibit | | Filing Date | | Filed Herewith |
| 3.1 | | | | 10-Q | | 000-49799 | | 3.1 | | July 29, 2014 | | |
| | | | | | | | | | | | |
| 3.2 | | | | 8-K | | 000-49799 | | 3.1 | | August 12, 2022 | | |
| | | | | | | | | | | | |
| 3.3 | | | | 8-K | | 000-49799 | | 3.2 | | July 30, 2019 | | |
| | | | | | | | | | | | |
| 3.4 | | | | 10-Q | | 000-49799 | | 3.1 | | May 7, 2020 | | |
| | | | | | | | | | | | |
| 3.5 | | | | 8-K | | 000-49799 | | 3.1 | | June 14, 2022 | | |
| | | | | | | | | | | | |
| 3.6 | | | | 8-K | | 000-49799 | | 3.3 | | June 14, 2022 | | |
| | | | | | | | | | | | |
| 3.7 | | | | 10-Q | | 000-49799 | | 3.2 | | May 7, 2020 | | |
| | | | | | | | | | | | |
| 3.8 | | | | 8-K | | 000-49799 | | 3.2 | | June 14, 2022 | | |
| | | | | | | | | | | | |
|
| | | | | | | | | | | | |
| Exhibit Number | | Exhibit Description | | Form | | File No. | | Exhibit | | Filing Date | | Filed Herewith |
| 3.1 | | | | 10-Q | | 000-49799 | | 3.1 | | July 29, 2014 | | |
| | | | | | | | | | | | | |
| 3.2 | | | | 10-Q | | 000-49799 | | 3.1 | | May 4, 2017 | | |
| | | | | | | | | | | | | |
| 3.3 | | | | 8-K | | 000-49799 | | 3.2 | | July 30, 2019 | | |
| | | | | | | | | | | | | |
| 3.4 | | | | 8-K | | 000-49799 | | 3.1 | | June 27, 2019 | | |
| | | | | | | | | | | | | |
| 3.5 | | | | 8-K | | 000-49799 | | 3.2 | | December 15, 2016 | | |
| | | | | | | | | | | | | |
| 4.1 | | | | S-1/A | | 333-83728 | | 4.1 | | May 6, 2002 | | |
| | | | | | | | | | | | | |
| 4.2 | | | | 8-K | | 000-49799 | | 4.2 | | November 14, 2016 | | |
| | | | | | | | | | | | | |
| 4.3 | | Certificate of Designation of Digital Voting Series A-1 Preferred Stock of Overstock.com, Inc. (see Exhibit 3.4) | | | | | | | | | | |
| | | | | | | | | | | | | |
| 4.4 | | Certificate of Designation for the Voting Series B Preferred Stock of Overstock.com, Inc. (see Exhibit 3.5) | | | | | | | | | | |
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| Exhibit Number | | Exhibit Description | | Form | | File No. | | Exhibit | | Filing Date | | Filed Herewith |
| 3.9 | | | | 8-K | | 000-49799 | | 3.4 | | June 14, 2022 | | |
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| 4.1 | | | | S-1/A | | 333-83728 | | 4.1 | | May 6, 2002 | | |
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| 4.2 | | | | | | | | | | | | X |
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10.1(a) | | | | 10-K | | 000-49799 | | 10.1 | | March 18, 2019 | | |
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10.2(a) | | | | 10-K | | 000-49799 | | 10.2 | | February 26, 2021 | | |
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10.3(a) | | | | | | | | | | | | X |
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10.4(a) | | | | 10-K | | 000-49799 | | 10.12 | | February 21, 2013 | | |
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| 10.5 | | | | 8-K | | 000-49799 | | 10.1 | | May 7, 2014 | | |
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| 10.6 | | | | 8-K | | 000-49799 | | 10.1 | | August 6, 2014 | | |
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| 10.7 | | | | 8-K | | 000-49799 | | 10.1 | | September 8, 2014 | | |
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| 10.8 | | | | 8-K | | 000-49799 | | 10.2 | | May 7, 2014 | | |
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| 10.9 | | | | 8-K | | 000-49799 | | 10.1 | | September 23, 2014 | | |
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| Exhibit Number | | Exhibit Description | | Form | | File No. | | Exhibit | | Filing Date | | Filed Herewith |
| 10.10 | | | | 8-K | | 000-49799 | | 10.19 | | October 28, 2014 | | |
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10.11(a) | | | | 10-K | | 000-49799 | | 10.16 | | March 13, 2020 | | |
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| 10.12 | | | | 8-K | | 000-49799 | | 1.1 | | June 29, 2020 | | |
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| 10.13 | | | | 8-K | | 000-49799 | | 10.1 | | March 12, 2020 | | |
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| 10.14 | | | | 8-K | | 000-49799 | | 10.2 | | March 12, 2020 | | |
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| 10.15 | | | | 8-K | | 000-49799 | | 10.3 | | March 12, 2020 | | |
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| 10.16 | | | | 8-K | | 000-49799 | | 10.4 | | March 12, 2020 | | |
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10.17(a) | | | | 8-K | | 000-49799 | | 10.1 | | April 17, 2020 | | |
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| 10.18 | | Transaction Agreement, dated as of January 25, 2021, by and among Overstock.com, Inc., Medici Ventures, Inc., Pelion MV GP, L.L.C. and Pelion, Inc., as guarantor | | 8-K | | 000-49799 | | 10.1 | | January 25, 2021 | | |
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| 10.19 | | | | 8-K | | 000-49799 | | 10.1 | | April 26, 2021 | | |
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| 10.20 | | First Amendment, dated August 30, 2021, to the Medici Ventures, L.P. Limited Partnership Agreement, dated April 23, 2021, between Overstock.com, Inc., and Pelion MV GP, L.L.C. | | 10-Q | | 000-49799 | | 10.1 | | November 4, 2021 | | |
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| 10.21 | | | | DEF 14A | | 000-49799 | | Annex A | | March 25, 2021 | | |
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| 21 | | | | | | | | | | | | X |
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| Exhibit Number | | Exhibit Description | | Form | | File No. | | Exhibit | | Filing Date | | Filed Herewith |
| 23 | | | | | | | | | | | | X |
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Exhibit Number24 | | Exhibit DescriptionPowers of Attorney (see signature page) | | Form | | File No. | | Exhibit | | Filing Date | | Filed Herewith |
4.5 | | | | | | | | | | | | X |
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4.6(a)
| | | | 8-K | | 000-49799 | | 4.1 | | December 15, 2016 | | |
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4.7 | | Form of Participating Affiliate Agreement (included in Exhibit 4.3) | | | | | | | | | | |
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4.8(a)
| | | | 10-Q | | 000-49799 | | 4.2 | | May 4, 2017 | | |
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4.9(a)
| | | | 10-Q | | 000-49799 | | 4.1 | | August 3, 2017 | | |
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10.1(a)
| | | | 10-K | | 000-49799 | | 10.1 | | March 18, 2019 | | |
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10.2(a)
| | | | 8-K | | 000-49799 | | 10.1 | | May 15, 2017 | | |
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10.3(a)
| | | | 10-K | | 000-49799 | | 10.12 | | February 21, 2013 | | |
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10.4(a)
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10.5(a)
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10.6(a)
| | | | 8-K | | 000-49799 | | 10.1 | | August 1, 2017 | | |
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10.7(a)
| | | | 8-K | | 000-49799 | | 10.1 | | April 22, 2019 | | |
10.8(a)
| | | | 10-K | | 000-49799 | | 10.36 | | March 18, 2019 | | |
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10.9(a)
| | | | 8-K | | 000-49799 | | 10.1 | | May 6, 2019 | | |
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| Exhibit Number | | Exhibit Description | | Form | | File No. | | Exhibit | | Filing Date | | Filed Herewith |
10.10(a) | | | | 10-K | | 000-49799 | | 10.16 | | March 18, 2019 | | |
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| 10.11 | | | | 8-K | | 000-49799 | | 10.1 | | May 7, 2014 | | |
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| 10.12 | | | | 8-K | | 000-49799 | | 10.1 | | August 6, 2014 | | |
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| 10.13 | | | | 8-K | | 000-49799 | | 10.1 | | September 8, 2014 | | |
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| 10.14 | | | | 8-K | | 000-49799 | | 10.2 | | May 7, 2014 | | |
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| 10.15 | | | | 8-K | | 000-49799 | | 10.1 | | September 23, 2014 | | |
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| 10.16 | | | | 8-K | | 000-49799 | | 10.19 | | October 28, 2014 | | |
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| 10.16(a) | | | | | | | | | | | | X |
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| 10.17 | | | | S-3 | | 333- 226729 | | 1.1 | | August 9, 2018 | | |
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| 10.18 | | | | | | | | | | | | X |
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| 10.19 | | | | 8-K | | 000-49799 | | 1.1 | | November 12, 2019 | | |
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Exhibit Number31.1 | | Exhibit Description | | Form | | File No. | | Exhibit | | Filing Date | | Filed Herewith |
10.20(a)
| | | | 8-K | | 000-49799 | | 10.1 | | September 26, 2018 | | |
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10.21(a)
| | | | 10-Q | | 000-49799 | | 10.2 | | August 9, 2018 | | |
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10.22(a)
| | | | 10-Q | | 000-49799 | | 10.4 | | August 9, 2018 | | |
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10.23(a)
| | | | 10-Q | | 000-49799 | | 10.5 | | August 9, 2018 | | |
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10.24(a)
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21 | | | | | | | | | | | | X |
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23 | | | | | | | | | | | | X |
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24 | | Powers of Attorney (see signature page) | | | | | | | | | | |
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31.1 | | | | | | | | | | | | X |
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31.2 | | | | | | | | | | | | X |
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32.1 | | | | | | | | | | | | X |
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32.2 | | | | | | | | | | | | X |
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Exhibit Number31.2 | | Exhibit Description | | Form | | File No. | | Exhibit | | Filing Date | | Filed HerewithX |
101 | | Attached | | | | | | | | | | |
| 32.1 | | | | | | | | | | | | X |
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| 32.2 | | | | | | | | | | | | X |
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| 99.1 | | | | | | | | | | | | X |
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| 99.2 | | | | | | | | | | | | X |
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| 99.3 | | | | | | | | | | | | X |
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| 101 | | The following documentsfinancial statements from the Company's Annual Report on Form 10-K for the year ended December 31, 2022 formatted in XBRL (Extensible Business Reporting Language):Inline XBRL: (i) Consolidated Balance Sheets at December 31, 20192022 and 2018;2021; (ii) Consolidated Statements of Operations for the years ended December 31, 2019, 2018,2022, 2021, and 2017;2020; (iii) Consolidated Statements of Comprehensive LossIncome (Loss) for the years ended December 31, 2019, 2018,2022, 2021, and 2017;2020; (iv) Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 2019, 2018,2022, 2021, and 2017;2020; (v) Consolidated Statements of Cash Flows for the years ended December 31, 2019, 2018,2022, 2021, and 2017;2020; and (vi) Notes to Consolidated Financial Statements | | | | | | | | | | X |
| 104 | | The cover page from the Company's Annual Report on Form 10-K for the year ended December 31, 2022, formatted in Inline XBRL (included as Exhibit 101) | | | | | | | | | | X |
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(a) | Management contract or compensatory plan or arrangement. |
(a)Management contract or compensatory plan or arrangement.
ITEM 16. FORM 10-K SUMMARY
Not applicable.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 13, 2020.
|
| | | | | | | | | | | | | |
| | OVERSTOCK.COM, INC. |
| | By: | | /s/ JONATHAN E. JOHNSON III |
| | | | Jonathan E. Johnson III |
| | | | Chief Executive Officer
(Principal Executive Officer)
|
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints each of Jonathan E. Johnson III and Anthony D. Strong,Adrianne B. Lee, his or her attorneys-in-fact, each with the power of substitution, for him or her in any and all capacities, to sign any amendments to this Annual Report on Form 10-K and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and conforming all that said attorney-in-fact, or his or their substitute or substitutes, may do or cause to be done by virtue hereof.
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| Signature | | Title | | Date |
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| /s/ JONATHAN E. JOHNSON III | | Chief Executive Officer and Director (Principal Executive Officer) | | 2/24/2023 |
| Jonathan E. Johnson III | | | |
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Signature | | Title | | Date |
| | | | |
/s/ JONATHAN E. JOHNSON III | | Chief Executive Officer, President, Medici Ventures, and Director (Principal Executive Officer) | | 3/13/2020 |
Jonathan E. Johnson III | | | |
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| /s/ ALLISON H. ABRAHAM | | Chairwoman of the Board | | 3/13/20202/24/2023 |
| Allison H. Abraham | | | |
| | | | |
/s/ ANTHONY D. STRONGADRIANNE B. LEE | | Acting Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) | | 3/13/20202/24/2023 |
Anthony D. StrongAdrianne B. Lee | | | |
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| /s/ BARBARA H. MESSING | | Director | | 2/24/2023 |
| Barbara H. Messing | | | |
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| /s/ BARCLAY F. CORBUS | | Director | | 3/13/20202/24/2023 |
| Barclay F. Corbus | | | |
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| /s/ JOSEPH J. TABACCO, JR. | | Director | | 3/13/20202/24/2023 |
| Joseph J. Tabacco, Jr. | | | |
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| /s/ ROBERT J. SHAPIRO | | Director | | 3/13/20202/24/2023 |
| Robert J. Shapiro | | | |
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| /s/ WILLIAM B. NETTLES, JR. | | Director | | 2/24/2023 |
| William B. Nettles, Jr. | | | |
