UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2018
Or
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)
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification Number)
Delaware
87-0634302
799 West Coliseum Way, Midvale, UT
(Address of principal executive offices)
84047
(Zip code)
(801) 947-3100
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Common Stock, $0.0001 par value
Securities registered pursuant to Section 12(g) of the Act: None
Name of Each Exchange on Which Registered
Nasdaq Global Market
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No
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 No
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), (2) has been subject to such filing requirements for the past 90
days. Yes No
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 No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best
of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K, or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an
emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2
of the Exchange Act.
Large accelerated filer
Non-accelerated filer
Emerging growth company
Accelerated filer
Smaller reporting company
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.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the act). Yes No
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, 2018), was approximately $689.3 million 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 32,252,029 shares of the Registrant's common stock, par value $0.0001, outstanding on March 13, 2019.
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 2019 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.
TABLE OF CONTENTS
Special Cautionary Note Regarding Forward-Looking Statements ...............................................................
Item 1.
Part I
Business .........................................................................................................................................................
Item 1A. Risk Factors ...................................................................................................................................................
Item 1B. Unresolved Staff Comments ..........................................................................................................................
Item 2.
Properties .......................................................................................................................................................
Item 3.
Legal Proceedings ..........................................................................................................................................
Item 4. Mine Safety Disclosures ................................................................................................................................
Part II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities ........................................................................................................................................................
Item 6.
Selected Financial Data ..................................................................................................................................
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ..........................
Item 7A. Quantitative and Qualitative Disclosures About Market Risk........................................................................
Item 8.
Financial Statements and Supplementary Data ..............................................................................................
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure .........................
Item 9A. Controls and Procedures ................................................................................................................................
Item 9B. Other Information ..........................................................................................................................................
Part III
Item 10. Directors, Executive Officers and Corporate Governance .............................................................................
Item 11. Executive Compensation ................................................................................................................................
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters .......
Item 13. Certain Relationships and Related Transactions, and Director Independence ...............................................
Item 14. Principal Accounting Fees and Services ........................................................................................................
Item 15. Exhibits, Financial Statement Schedules .......................................................................................................
Item 16. Form 10-K Summary .....................................................................................................................................
Part IV
Signatures ........................................................................................................................................................................
Financial Statements ......................................................................................................................................................
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O, Overstock.com, O.com, Club O, Main Street Revolution, and Worldstock are registered trademarks of
Overstock.com, Inc. O.biz and Space Shift are also 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.
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SPECIAL CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Report on Form 10-K and the documents incorporated herein by reference, as well as our other public documents
and statements our officers and representatives may make from time to time, contain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. These statements are therefore entitled to the protection of the safe harbor provisions of these laws. These forward-
looking statements involve risks and uncertainties, and relate to future events or our future financial or operating performance.
The forward-looking statements include all statements other than statements of historical fact, including, without limitation, all
statements regarding:
• our estimates of our financial results for the quarter ending March 31, 2019, and all other estimates regarding
the quarter ending March 31, 2019;
• our strategies and plans for our retail business and our Medici businesses, including our tZERO initiatives;
•
the possibility that we will sell or attempt to sell our retail business or pursue or attempt to pursue one or more
other strategic alternatives that could change our business dramatically, as well as the possibility that we will
determine not to sell or attempt to sell our retail business or pursue any other strategic alternative at all in the
foreseeable future;
the possibility that we may sell our retail business and all statements about the potential effects of any such sale;
•
• whether we would or would not submit any sale of our retail business to a vote of our stockholders;
• whether we would or would not distribute any proceeds of any sale of our retail business to our stockholders by
any means or use those proceeds in our blockchain initiatives;
• our expectations regarding the costs, benefits and risks of Medici Ventures' and tZERO's initiatives, including
their acquisitions or purchases of interests in other companies;
• potential negotiated equity investments in Overstock and/or tZERO;
•
the plans of tZERO and Medici Ventures and the costs, benefits and risks of their initiatives, including those of
tZERO's ownership of SpeedRoute and PRO Securities;
• our expectations regarding the costs, benefits and risks of the recently-completed tZERO security token 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 Medici Land Governance Inc., a newly-formed public benefit corporation;
• our efforts to improve our natural search results in our retail business;
• our future operating or financial results, or other GAAP or non-GAAP financial measures or amounts or
anticipated changes in any of them;
• our capital requirements and our ability to fund them;
•
•
• our plans and expectations regarding the costs, benefits, and risks of attempting to develop technology
the adequacy of our liquidity and our ability, if any, to increase our liquidity or capital resources;
tZERO's plans, including without limitation its plans regarding its Token Trading Systems;
applications including applications using or relating to blockchain technology and our plans to commercialize
any of these potential applications;
the competition we currently face and anticipate;
the effects of current and future government regulation;
•
•
• our expectations for our international sales efforts and the anticipated results of our international operations;
• our plans for further changes to our business;
• our expectations regarding our emphasis on home and garden product offerings;
• our expectations regarding our potential liabilities or exposure to claims under Delaware's Abandoned Property
Law;
• our expectations regarding the actual costs of our employees' health insurance claims for which we may be liable;
and
• our other statements about the anticipated benefits and risks of our business and plans.
Further, in some cases, you can identify forward-looking statements by terminology such as may, will, could, should,
likely, expect, plan, seek, intend, anticipate, project, believe, estimate, predict, potential, goal, strategy, future or continue, the
negative of such terms or other comparable terminology. These statements are only predictions. Actual events or results may
differ materially from those contemplated by our forward-looking statements for a variety of reasons, including among others:
• any changes we may make to our business as a result of our current ongoing review of potential strategic
alternatives, which could involve a sale of our retail business and/or additional equity or debt financings;
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•
•
•
•
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 $1.8 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 possibility that our well-publicized review of potential strategic alternatives including the potential sale of our
retail business may distract our management and other employees, may cause members of our management
and/or other key employees to seek employment elsewhere, and may have adverse effects on our business and
financial results;
the technical, operational, financial, regulatory, legal, reputational, marketing and other obstacles we face in
trying to create a profitable business from our blockchain initiatives;
• our ability to reach a definitive agreement or complete a capital raising transaction for tZERO on the terms
contemplated by the previously-disclosed memorandum of understanding we recently signed with GSR Capital
and Makara Capital;
the possibility that the proceeds of the security token offering recently completed by tZERO might be treated as
income to us for federal income tax purposes;
•
• difficulties we have encountered and continue to encounter with changes that Google has made to its natural
search engine algorithms, which have periodically resulted in lower rankings of our products and may continue to
do so, and future changes that Google and other search engine companies may make to their natural search
engine algorithms, which may have similar effects on us;
increasing competition, including from Amazon, from well-funded companies willing to incur substantial losses in
order to build market share, and from others including competitors with delivery capabilities that we cannot
currently match and do not expect to be able to match in the foreseeable future;
•
• difficulties we may encounter in connection with our efforts to offer services to our customers outside of our retail
business;
• difficulties, including expense and any operational or regulatory issues we may encounter in connection with
•
•
•
tZERO or its subsidiaries;
technical, operational, regulatory or other difficulties we may encounter with our Medici or tZERO blockchain
and financial technology initiatives, including any difficulties we may have marketing any products or services
tZERO may offer, whether due to lack of market size or acceptance or as a result of competition from any of the
numerous competitors seeking to develop competing technologies or systems or as a result of patents that may be
granted to other companies or persons, and losses we may continue to incur in connection with our Medici and
tZERO blockchain and technology initiatives;
the difficulties tZERO will face in attempting to generate revenues from blockchain-based applications of any
nature, including its potential DLR software product;
impairment charges we may recognize with respect to assets or businesses that we, Medici Ventures or tZERO
have acquired or may acquire;
• any liability or expense we may incur as a result of our interests in other companies, whether as a result of
regulatory issues or otherwise;
• any downturn in the U.S. housing industry or other changes in U.S. and global economic conditions or U.S.
•
consumer spending;
the imposition of tariffs or occurrence of other factors that increase the price of importing into the U.S. the types
of merchandise we sell in our retail business;
• modifications we may make to our business model from time to time;
•
• any claims we may face regarding cyber security issues or data breaches or difficulties we encounter regarding
the mix of products purchased by our customers and changes to that mix;
Internet or other infrastructure or communications impairment problems or the costs of preventing or responding
to any such problems;
• any problems with or affecting our payment card processors, including cyber-attacks, Internet or other
infrastructure or communications impairment or other events that could interrupt the normal operation of the
payment card processors or any difficulties we may have maintaining compliance with the rules of the payment
card processors;
the possibility that we will be unable to raise additional capital or obtain financing adequate to enable us to
continue our operations;
•
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• 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 losses or issues we may encounter as a consequence of accepting or holding bitcoin or other
cryptocurrencies, whether as a result of regulatory, tax or other legal issues, technological issues, value
fluctuations, lack of widespread adoption of bitcoin or other cryptocurrencies as an acceptable medium of
exchange or otherwise;
• any difficulties we may encounter as a result of our reliance on numerous third parties that we do not control for
the performance of critical functions material to our business;
• difficulties we may encounter in connection with our efforts to emphasize our home and garden product offerings
and to brand ourselves as a home and garden shopping destination, including the risk that our sales of home and
garden product offerings could decrease substantially as a result of a significant downturn in some or all of the
U.S. housing market;
• difficulties we may encounter in connection with our efforts to expand internationally, including claims we may
face and liabilities we may incur in connection with those efforts;
• adverse results in legal proceedings, investigations or other claims;
• any difficulties we may have optimizing our warehouse operations;
• any decrease in the volume of retail sales, particularly in home goods, and the occurrence of any event that would
adversely affect e-commerce or discourage or prevent consumers from shopping online or via mobile apps;
the possibility that our liability for our employees' health insurance claims increases as a result of more claims or
larger claims than we expect and/or increases in the costs of healthcare generally; and
the other risks described in this report or in our other public filings.
•
•
In evaluating all forward-looking statements, you should specifically consider the risks outlined above and in this
Report, especially under the headings "Risk Factors," "Legal Proceedings," and "Management's Discussion and Analysis of
Financial Condition and Results of Operations." These factors may cause our actual results to differ materially from those
contemplated by any forward-looking statement. 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.
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ITEM 1. BUSINESS
PART I
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, bedding and bath, and housewares, among other products.
We sell our products and services through our Internet websites located at www.overstock.com, www.o.co and www.o.biz
(referred to collectively as the "Website"). Although our three websites are located at different domain addresses, the
technology and equipment and processes supporting the Website and the process of order fulfillment described herein are the
same for all three websites. Our retail business initiatives are described in more detail below under "Our Retail Business."
Our Medici business initiatives seek to develop and advance the concepts of "Government as a Service" and a
"Technology Stack for Civilization" by creating or fostering a set of products and solutions that leverage the transparency and
immutability of blockchain technology to generate efficiencies and increase security and control in six areas of civilizational
necessity: identity management, property rights and management, central banking and currencies, capital markets, supply
chains and commerce, and voting systems. Our Medici business initiatives include our wholly-owned subsidiary, Medici
Ventures, Inc. ("Medici Ventures"), which conducts the majority of its business through its majority-owned subsidiary tZERO
Group, Inc. ("tZERO"), formerly tØ.com, Inc., a financial technology company pursuing potential financial applications of
blockchain technologies as well as non-blockchain businesses. Medici Ventures currently holds minority equity interests in
several technology companies whose focuses include the areas mentioned above. Our Medici business initiatives are described
in more detail below under "Our Medici Business" and our tZERO business initiatives are described in more detail below under
"Our tZERO Business Initiatives."
We are considering a range of potential transactions, including a sale of our retail business and additional equity or
debt financings. Our Board of Directors continually discusses a variety of potential strategic and financial options and other
changes to our business, but has not approved or made any determination to consummate any strategic transaction, and may not
do so in the foreseeable future or at all. Our strategic initiatives are described in more detail below under “Strategic Initiatives.”
Our company, based near Salt Lake City, Utah, was founded in 1997. We launched our initial website in March 1999
and were re-incorporated in Delaware in 2002. As used herein, "Overstock," "Overstock.com,", "O.co," "we," "our" and similar
terms include Overstock.com, Inc. and our majority-owned subsidiaries, unless the context indicates otherwise.
Our Retail Business
Our retail business generates nearly all of our net revenues. In our retail business, our goal is to provide goods to
furnish and accessorize "dream homes" for our target customers—consumers who seek quality, stylish merchandise at bargain
prices. At December 31, 2018, we offered 4.9 million products (8.9 million SKUs), of which over 99% were in-line products
(products in active production), including more than 25,000 private label products offered under eleven private label brands. We
believe that the furniture and home goods market, which is highly fragmented and has traditionally been served by brick and
mortar stores, will continue transitioning to online sales, particularly as Millennial consumers (which we define as those aged
20-36), who are generally comfortable shopping online, start families and move into new homes. We regularly change our
product assortment to meet the evolving preferences of our customers and current trends. Our products include, among others,
furniture, home décor including rugs, bedding and bath, home improvement, and kitchen items. We compete primarily based
on:
• Quality customer experience with an emphasis on price, value, and a wide assortment of products delivered in a
personalized format with the convenience of our mobile app, and with the benefits of our award-winning customer
care;
• Proprietary technologies which we believe help us provide our customers with a quality shopping experience;
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• Logistics capabilities tailored to the furniture and home goods category and developed over our many years of e-
commerce experience;
• Long-term mutually beneficial relationships with our partners, which currently number approximately 4,000; and
• Our Club O Loyalty Program, which we believe increases customer engagement and retention.
For 2018, nearly all our retail sales through our Website were from transactions in which we fulfilled orders through
our network of approximately 4,000 third-party manufacturers, distributors and other suppliers ("partners") selling on our
Website. Our use of the term "partner" does not mean that we have formed any legal partnerships with any of our retail partners.
We provide our partners with access to a large customer base and convenient services for order fulfillment, customer service,
returns handling, and other services. Our supply chain allows us to ship directly to our customers from our suppliers or from our
warehouses. Our retail sales also include direct sales of our own inventory shipped from our warehouses. Our warehouses
primarily fulfill orders from direct sales of our own inventory, including some customer returns of partner products. Our
warehouses generally ship between 1,500 and 3,000 packages per day and up to approximately 6,000 packages per day during
peak periods.
During the years ended December 31, 2018, 2017 and 2016 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.
• Our international business where we offer products to customers outside the United States using third party
logistics providers;
• Worldstock Fair Trade, a store within our Website that offers handcrafted products made by artisans all over the
world to help improve the lives of people in emerging economies;
• Pet Adoptions, a free service and portal within our Website that leverages our technology to display pets available
for adoption from shelters across the United States;
• Overstock Hotels, portal within our Website that enables customers to search and book hundreds of thousands of
properties worldwide, including big box brands, modern boutiques, and more;
• Supplier Oasis, a single integration point through which our partners can manage their products, inventory and
sales channels, and also obtain multi-channel fulfillment services through our distribution network; and
• Businesses advertising products or services on our Website.
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 allotment 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 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.
Customer Service
We are committed to providing superior customer service. We staff our customer service department with dedicated in-
house and outsourced professionals who respond to phone, instant online chat, and e-mail inquiries on products, ordering,
shipping status, returns, and other areas of customer inquiry.
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Technology
We use our internally developed Website and a combination of proprietary 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 located in a data center in
Utah. We also have other data centers which we use for backups, redundancy, development, testing, disaster recovery, and
corporate systems infrastructure.
Competition
Internet retail is intensely competitive and has relatively low barriers to entry. We believe that competition in this
industry is based predominantly on:
shopping convenience;
• price;
• product quality and assortment;
•
• website organization and load speed;
• order processing and fulfillment;
• order delivery time;
customer service;
•
• website functionality on mobile devices;
• brand recognition; and
• brand reputation.
We compete with other online retailers, traditional retailers, and liquidation "brokers" which may specifically adopt
our methods and target our customers. We currently or potentially compete with a variety of companies that can be divided into
several broad categories:
• online discount general retailers;
• online private sale sites;
• online specialty retailers;
• online liquidators;
• online retailers who have or are developing significant "brick and mortar" capabilities; and
•
traditional general merchandise and specialty retailers and liquidators, many of which have a significant online
presence.
Many of our current and potential e-commerce competitors 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 website 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.
Seasonality
Our retail business is affected by seasonality because of the holiday season, which historically has resulted in higher
sales volume during our fourth quarter, which ends December 31. We recognized 24.8%, 26.2%, and 29.2% of our annual
revenue during the fourth quarter of 2018, 2017, and 2016, respectively. While we had lower sales volume during Q4 2018, we
anticipate the trend of higher sales volume during our fourth quarter to continue for the foreseeable future.
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
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reportable segment. As described below, our Medici business is comprised of many components or operating segments,
including our tZERO reportable segment. We use pre-tax net income (loss) as the measure to determine our reportable
segments. As a result, tZERO is the only reportable segment of our Medici business as it is quantitatively significant. The
remaining Medici business operating segments are not significant and are 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. As of December 31, 2018, we have spent approximately $209.6
million in our Medici business since its inception, with the majority of that being spent in tZERO.
Medici Ventures
Medici Ventures' strategy is to develop and advance the concepts of "Government as a Service" and a "Technology
Stack for Civilization" by creating or fostering a set of products and solutions that leverage blockchain technology to generate
efficiencies and increase security and control in six areas of civilizational necessity: identity management, property rights and
management, central banking and currencies, capital markets, supply chains and commerce, and voting systems. A blockchain
is a cryptographically secured, distributed infrastructure, or network, which may be accessed and, in some cases, maintained by
each member of the network. Medici Ventures has a team of approximately 37 software engineers, developers and other
technologists who work in blockchain development and deployment and enterprise level software development and
deployment. Medici Ventures provides the services of its software engineers, developers, or other technologists to other
blockchain companies. Medici Ventures also owns strategic minority equity interests in several blockchain-related companies,
each of which focuses on at least one of the Government as a Service areas mentioned above. Medici Ventures takes an active
interest in and holds seats on the boards of some of these companies. These companies include technology companies whose
focuses include commercial blockchain applications for identity and social media, property and land, money and banking,
capital markets, supply chain, and voting. All of the companies in which Medici Ventures holds strategic equity interests are
startup businesses, businesses in the development stage, or businesses with a short operating history. The majority of Medici
Ventures' business is its 80% interest in tZERO, which, as described below, is a financial technology company pursuing
potential financial applications for blockchain technologies.
See "Risk Factors-Additional Risks Relating to Our Medici Business."
tZERO
Medici Ventures' majority-owned subsidiary tZERO is a financial technology company pursuing potential financial
applications of blockchain technologies as well as non-blockchain businesses. tZERO has a team of approximately 50 software
engineers, developers and other technologists who focus on developing and exploring opportunities for novel applications of
blockchain technology. As a result of its early stage of development, tZERO has not yet generated revenue from any
commercially available blockchain-based applications. tZERO is currently involved in, among other things, the following:
• Blockchain Services - Token Trading Systems. In connection with Overstock's 2016 SEC-registered offering of
Blockchain Voting Series A Preferred Stock (the "Series A Preferred"), tZERO developed a suite of software and
technologies referred to as the tZERO Issuance and Trading Platform (the "tZERO Platform"). The Series A
Shares trade exclusively on the PRO Securities ATS, which utilizes the tZERO Platform. tZERO has been
leveraging its experience and expertise from developing the tZERO Platform for the Series A Preferred to develop
trading systems that are capable of trading tZERO's Preferred Equity Tokens ("tZERO Security Tokens"), issued
in a private placement completed in October 2018, and, ultimately, other issuer's digital securities (such systems,
the "Token Trading Systems"). First, in January 2019, the PRO Securities ATS, utilizing the tZERO Platform,
partnering with Dinosaur Financial Group, LLC ("Dino") and Electronic Transaction Clearing, Inc. ("ETC"), each
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SEC-registered broker-dealers and FINRA members, began facilitating private placement resales of tZERO
Security Tokens to accredited investors in reliance upon an exemption from registration under Section 4(a)(7) of
the Securities Act. Second, in June 2018, tZERO and BOX Digital Markets LLC ("BOX Digital") announced that
they had entered into a joint venture, named Boston Security Token Exchange LLC, intended to develop a U.S.
national securities exchange (the "Exchange") with regulatory approvals that would enable the Exchange to trade
digital securities. The Exchange will require approval from the U.S. Securities and Exchange Commission prior to
beginning operations. tZERO is creating the necessary technology, and will manage the ongoing technology
implementation, administration, maintenance and support. BOX Digital is providing executive leadership and
regulatory expertise. Subject to obtaining SEC approval, tZERO and Box Digital intend for the Exchange to
operate as a facility of BOX Options Exchange, an existing registered U.S. securities exchange. We have been
informed that the management of the joint venture continues to work with the Staff of the SEC, and anticipates
filing the proposed trading rules of the Exchange in the second quarter of 2019. The commencement of operations
of the Exchange would be subject to approval by the SEC of the trading rules and other matters. tZERO continues
to explore the viability of other Token Trading Systems, any of which may be developed as an additional
functionality of the PRO Securities ATS, as a functionality of another U.S. alternative trading system, as a
functionality of a non-U.S. trading system or a non-U.S. exchange that tZERO may operate or designate, or any
other format, wherever situated.
•
tZERO Preferred Equity Tokens. tZERO issued the tZERO Security Tokens on October 12, 2018, and in January
2019, tZERO began secondary trading of tZERO security tokens by accredited investors using digital securities
brokerage accounts at Dino, which is serving as the introducing broker-dealer in connection with the PRO
Securities ATS.
• Blockchain Services - Digital Locate Receipts ("DLR") software. The "digital locate receipt" software (the "DLR
Software") is currently in customer production testing, which is being conducted by a third party, and tZERO has
not yet entered into any commercial licenses with any licensees. The DLR Software is intended to help broker-
dealer licensees with stock inventory to both load and manage their inventory in order to assist short sellers of
public securities in establishing that they have located available shares in the U.S. public securities market prior to
effecting short sales. The DLR Software is intended to enable licensees to create a blockchain-based record of the
shares that the licensee has made available for "locates" using customizable DLR Software functionality and of
the daily purchases of the right to "locate" specifically identified shares for purposes of compliance with
regulatory requirements. The broker-dealer licensees of DLR Software are the parties responsible for ensuring that
locates issued using the DLR Software comply with all applicable regulations, and the commercial viability of the
DLR Software is dependent on the ability of broker-dealer licensees to establish locates using the DLR Software
as an effective means of satisfying regulatory obligations in connection with effecting short sales.
• Blockchain Services - Bitsy, Inc. Effective January 1, 2019, tZERO acquired 100% of the equity interest in Bitsy,
Inc. by purchasing the 67% equity interest in Bitsy held by Steve Hopkins, Medici Ventures' former chief
operating officer and general counsel, and current president of tZERO, and affiliates for $8.0 million in cash, and
purchasing the remaining 33% of the Bitsy common stock from Medici Ventures for a $4.0 million convertible
promissory note due December 31, 2020 and an assignment of certain intellectual property to Medici Ventures. In
September 2018, Bitsy announced that it had begun a limited beta launch of a digital wallet service intended to
create a bridge between traditional fiat currencies and cryptocurrencies.
• Non-blockchain services - SpeedRoute and PRO Securities. tZERO wholly owns two registered broker-dealers,
SpeedRoute, LLC ("SpeedRoute") and PRO Securities, LLC ("PRO Securities"). SpeedRoute is an electronic,
agency-only Financial Industry Regulatory Authority, Inc. ("FINRA")-registered broker-dealer that provides
connectivity for its customers to U.S. equity exchanges as well as off-exchange sources of liquidity such as dark
pools. All of SpeedRoute's customers are registered broker-dealers. SpeedRoute does not hold, own or sell
securities. PRO Securities is a FINRA-registered broker-dealer that owns and operates the PRO Securities
alternative trading system (the "PRO Securities ATS"), which has filed a Form ATS with the Securities and
Exchange Commission ("SEC") notifying the SEC of its activities as an alternative trading system, or ATS. The
PRO Securities ATS is a closed system available only to its broker dealer subscribers. PRO Securities does not
accept orders from non-broker dealers, nor does it hold, own or sell securities.
• Non-blockchain services - Verify Investor, LLC. tZERO purchased 81.0% of Verify Investor, LLC, an accredited
investor verification company, for $12 million in cash, in February 2018. Verify Investor, LLC, through its website
VerifyInvestor.com, provides a fast, easy, and cost-effective method of compliance for companies seeking to
verify their investors as accredited investors.
10
tZERO is no longer offering automated investment advisory services through tZERO Advisors or electronic discount
trading through Muriel Siebert & Co., Inc. (Member: FINRA & SIPC) under the FinanceHub tab on our Website. On January
18, 2019, tZERO sold its entire equity interest in StockCross Financial Services, Inc. to StockCross Financial Services, Inc. and
Muriel Siebert & Co., Inc. for an amount equal to our original purchase price.
In January 2019, tZERO obtained a patent from the United States Patent and Trademark Office for a system that can
take orders to trade “digital transactional items” such as securities, tokens, shares, cash, and other assets from broker dealers
and then translate the orders into crypto orders on a digital trading platform or exchange. The patent was recently awarded and
to date has not had any effects on tZERO’s business. tZERO believes that the patent will assist in protecting tZERO's
proprietary technologies as competitors begin to develop their own trading platforms.
In March 2019, we disclosed that we had executed a Memorandum of Understanding regarding a potential equity
investment of up to $100 million in tZERO to be co-led by GSR Capital and Makara Capital, subject to due diligence,
negotiation of binding contracts and regulatory approval. We are in continuing discussions regarding the potential investment,
but have not yet entered into any definitive agreement.
We believe that a number of organizations are or may be working to develop trading systems utilizing distributed
ledger or blockchain technologies or other novel technologies that may be competitive with tZERO's technology, including its
patented technology. Although it is difficult to obtain reliable information about blockchain activities by companies that may be
our competitors, they may include companies such as SharesPost, OpenFinance Network, Templum Inc., Coinbase, KoreConX,
Blocktrade AG, Smart Valor, the Nasdaq Stock Market, Intercontinental Exchange, Circle, Ideanomics, CrowdEngine,
Securitize, Harbor, Polymath, and other entities that are operating trading venues offshore or otherwise structured in an effort to
avoid aspects of U.S. regulation.
To the extent that tZERO attempts to market its DLR Software, 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.
SpeedRoute and Pro Securities compete with a large number of broker dealers, many of which are substantially larger
and have substantially greater financial resources than SpeedRoute, Pro Securities, tZERO or Overstock.
See "Risk Factors-Additional Risks Relating to Our tZERO Initiatives."
Strategic Initiatives
We have engaged Guggenheim Securities, LLC to help us identify and evaluate certain strategic initiatives. We are
considering a range of potential transactions, including a sale of our retail business and additional equity or debt financings. Our
Board of Directors continually discusses a variety of potential strategic and financial options and other changes to our business,
but has not approved or made any determination to consummate any strategic transaction, and may choose not to do so in the
foreseeable future or at all.
If we sell our retail business, the sale may not require approval by our stockholders under Delaware law. If we enter
into an agreement to sell our retail business and determine that no vote of our stockholders is required, we do not expect to
submit it to a vote. If we sell our retail business, we currently expect to retain all or substantially all of the after-tax proceeds of
the sale for use in our blockchain 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
11
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
We are subject to a wide variety of laws, rules 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 business, 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 as regulations and laws specifically
governing the 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 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. expose 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 Medici and tZERO businesses are subject to general business regulations 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 requirements of the Financial Crimes
Enforcement Network of the U.S. Department of the Treasury ("FinCEN"), cryptocurrencies, public benefit corporations,
provisions 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 securities tokens and other digital assets 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.
The Token Trading System launched in January 2019 is subject to or affected by numerous laws and regulations. The
Token Trading System relies on the PRO Securities ATS, which is subject to Regulation ATS as well as other regulations, and
which utilizes the tZERO Platform, partnering with broker-dealers that are also subject to regulation by the SEC and FINRA, in
order to facilitate private placement resales of tZERO Security Tokens to accredited investors in reliance upon an exemption
from registration under Section 4(a)(7) of the Securities Act. The joint venture that tZERO and BOX Digital announced in June
2018 is seeking regulatory approvals that would enable the parties to operate a national securities exchange to trade security
tokens. A national securities exchange, which will require approval from the U.S. Securities and Exchange Commission prior to
beginning operations, will be subject to provisions of the Securities Exchange Act of 1934 and regulation substantially greater
than that applicable to tZERO's current operations. In addition, depending on the digital assets traded, the U.S. Commodity
Futures Trading Commission may consider the assets to be commodities or derivatives and subject to additional regulation.
Certain aspects of our Medici business, including Bitsy's operations which were subsequently acquired by tZERO, are or may
be subject to the state and federal laws and regulations applicable to money service businesses, including the requirements of
FinCEN.
12
See Item 1A—"Risk Factors—Additional Risks Relating to Our Medici Business" and "Additional Risks Relating to
Our tZERO Initiatives."
Employees
At December 31, 2018, we had approximately 2,060 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 relationships to be
good. Competition for qualified personnel in our industry is intense, particularly for software engineers and other technical
staff.
Executive Officers of the Registrant
The following persons were executive officers of Overstock as of March 13, 2019:
Executive Officers
Patrick M. Byrne
Jonathan E. Johnson III
Saum Noursalehi
Carter P. Lee
Dave Nielsen
Gregory J. Iverson
John Paul "J.P." Knab
Kamelia Aryafar
Nate F. Auwerda
Seth A. Moore
Sumit Goyal
Age
56
53
40
49
49
43
38
33
38
36
34
Position
Chief Executive Officer, President, and Director
President of Medici Ventures, Inc. and Director
Chief Executive Officer of tZERO Group, Inc. and Director
Chief Administrative Officer
Chief Sourcing & Operations Officer
Chief Financial Officer
Chief Marketing Officer
Chief Customer & Algorithms Officer
Chief Technology Officer
Chief Strategy Officer
Chief Digital Officer
Dr. Patrick M. Byrne has served as our Chief Executive Officer (principal executive officer) and as a Director since
1999, President since May 2018, and as Chairman of the Board of Directors from 2001 through 2005 and 2006 through 2014.
Dr. Byrne also served as the Chief Executive Officer of tZERO, a subsidiary of Overstock, from July 2015 through May 2018
and also has served as Co-chairman of the Board of Directors for tZERO since October 2017. Dr. Byrne founded Overstock in
1999. From 1994 to the present, Dr. Byrne has served as a Manager of the Haverford Group, an investment company and an
affiliate of Overstock. Dr. Byrne holds a bachelor's degree in Chinese studies from Dartmouth College, a master's degree from
Cambridge University as a Marshall Scholar, and a doctorate in philosophy from Stanford University.
Mr. Jonathan E. Johnson III has served as President of Medici Ventures since August 2016 and as a Director since
2013. Mr. Johnson also served as our 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 University and
received his law degree from the J. Reuben Clark, Jr. Law School at Brigham Young University.
Mr. Saum Noursalehi has served as the Chief Executive Officer of tZERO since May 2018. Mr. Noursalehi also served
as our President of Retail from August 2016 through May 2018 and as a Director since May 2017. Mr. Noursalehi joined
Overstock in 2005 and previously served as Chief Revenue Officer and Senior Vice President, Vice President of OLabs, Vice
President of Product Development, and held roles in website, mobile and search engine optimization. Mr. Noursalehi holds a
bachelor's degree in Computer Science from the University of Utah.
Mr. Carter P. Lee has served as our Senior Vice President of Technology and People Care since 2015 and was
appointed as our Chief Administrative Officer during 2018. Mr. Lee joined Overstock in Overstock in 2001 and previously
served as Vice President of Technology Operations and held other roles including Director of Internal Systems. 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.
Mr. Dave Nielsen joined Overstock as our Chief Sourcing and Operations Officer in October 2018, having returned to
Overstock after serving for three and half years as the Chief Executive Officer for Global Access. Mr. Nielsen originally joined
Overstock in 2009 and previously served as our Senior Vice President of Business Development, Co-President, and Senior Vice
13
President and General Merchandise Manager. 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. Gregory J. Iverson (principal financial and accounting officer) joined Overstock as our Chief Financial Officer in
April 2018. Prior to joining Overstock, Mr. Iverson spent eleven years at Apollo Education Group, Inc. (AEG), a global private-
sector education company, culminating with his role as Chief Financial Officer. Mr. Iverson also served as the Director of
Financial Reporting at US Airways Group, Inc. (subsequently acquired by American Airlines), and began his career in the audit
and advisory practices of Arthur Andersen, LLP and Deloitte & Touche, LLP, in Phoenix, Arizona. Mr. Iverson graduated with a
B.S. in business from the University of Idaho and is a Certified Public Accountant.
Mr. John Paul "J.P." Knab has served as our Senior Vice President of Marketing since March 2016, having returned to
Overstock after serving for one-year as the Senior Vice President of Marketing, Merchandising and Business Development for
U.S. Water Filters in St. Paul, Minnesota, and was appointed as our Chief Marketing 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.
Dr. Kamelia Aryafar has served as our Chief Algorithms Officer since September 2018. Dr. Aryafar joined Overstock
in 2017 and previously served as our Vice President, Head of Machine Learning, Data Science and AI, and Director of
Engineering. Dr. Aryafar transitioned from academia to the industry as a senior machine learning scientist and lead at Etsy in
2013. Dr. Aryafar holds a Ph.D. and M.Sc. in computer science and machine learning from Drexel University and has published
several papers in scientific journals.
Mr. Nate F. Auwerda was appointed as our Chief Technology Officer in November 2018. Mr. Auwerda joined
Overstock in 2004 and previously served as Vice President of Technology, Senior Director of Technology, Director of Website
Operations, Senior Manager of IT Security & Infrastructure as well as various other positions.
Mr. Seth A. Moore was appointed as our Senior Vice President of Analytics in February 2017 and later appointed as
Senior Vice President of Strategy in December 2017, Chief of Staff to the CEO in October 2017, and later appointed Chief
Strategy Officer during 2018. Mr. Moore joined Overstock in 2006 and previously served as Vice President of OLabs, Vice
President of Analytics, and Vice President of Website Marketing. Mr. Moore holds a bachelor's degree in Political Science from
Brigham Young University.
Mr. Sumit Goyal was appointed as our Chief Digital Officer in November 2018. Mr. Goyal joined Overstock in 2011
and previously served as our Chief Technology Officer as well as various other positions in technology and software
development. Before joining Overstock.com, Mr. Goyal held software engineering and programmer positions at
eHarmony.com, eBay, Goldman Sachs, and IBM. Mr. Goyal holds a bachelor's degree in Computer Science from the National
Institute of Technology Kurukshetra.
None of our officers has an employment agreement or any specific term of office.
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.
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.
14
ITEM 1A. RISK FACTORS
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 read all of the risk factors below carefully before making any decision to acquire or hold our common stock or preferred
stock. Virtually all of the risks of holding our common stock are also risks for holding our Series A Preferred Stock and our
Series B Preferred Stock.
Holders of, and potential investors in, our Series A Preferred Stock should also read "Additional Risks Related
Primarily to our Series A Preferred Stock," and "Additional Risks Related to our Series A 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 our
Series A Preferred Stock and our Series B Preferred Stock," below.
Holders of, and potential investors in, the tZERO Security Tokens issued by tZERO Group, Inc. should also read
"Additional Risks Related to our tZERO Security Tokens," below.
Any investment in our securities involves a high degree of risk. Investors should consider carefully the risks and
uncertainties described below, and all other information in this Form 10-K and in any reports we file with the SEC 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 in this Form 10-K 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.
Risks Relating to Our Company and to Our Current Review of Strategic Initiatives
We have a history of significant losses. If we do not achieve profitability or generate positive cash flow from operations in
the near future, 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.
We have a history of significant losses and our losses have accelerated in recent years, particularly 2018, and we
expect to incur operating and net losses in the foreseeable future. Net cash used in operating activities were $138.9 million
during 2018, and at December 31, 2018 our accumulated deficit was $458.9 million. Our losses have accelerated in recent
years, particularly in 2018, and we may not be able to achieve profitability promptly or at all. We are working to improve the
efficiency of our operations but may be unable to do so. Recent staff reductions we have made and additional cost reductions
we may implement in the future may 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 $26.2 million at December 31, 2018
compared to a positive $50.5 million at December 31, 2017. 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.
15
We do not have access to any credit facility or other arrangement for borrowing funds.
We currently do not have access to a credit facility or to the proceeds of any mortgage indebtedness or other secured or
unsecured indebtedness for borrowed money. We may be unable to obtain financing on favorable terms, or at all. Our lack of
any credit facility or other ready access to borrowed funds could have a material adverse effect on our ability to fund additional
losses in the near future, or to respond to unexpected cash requirements or other liquidity issues that we may face from time to
time. Our inability to generate sufficient cash flow from operations or obtain financing on acceptable terms would have a
material adverse effect on our financial results, business and prospects.
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, hold or 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
developments with respect to our ownership of certain of our subsidiaries, could result in us inadvertently becoming an
investment company. 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.
In February of 2018, we and tZERO each received notice that the staff of the SEC's Division of Enforcement is conducting
an investigation and has requested information regarding the tZERO security token offering.
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 our affiliates, including Medici Ventures 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 for information. We are cooperating fully with the SEC in
connection with its investigation, which will require the time and attention of tZERO and our personnel and may have an
adverse effect on our ability to focus attention on our businesses and our ability to raise capital. In addition, the outcome of the
investigation could result in negative publicity for tZERO or us and may have a material adverse effect on us or on the current
and future business ventures of tZERO.
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 a sale of our retail business and 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 the Company and its 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 recent reduction in workforce may prevent us from executing 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
our recent reduction in workforce could prevent us from engaging in certain initiatives we had previously considered and could
prevent us from executing such initiatives effectively. At December 31, 2018, our workforce consisted of approximately 2,060
employees. At March 5, 2019, our workforce had been reduced by approximately 250, or approximately 12%, and consisted of
16
1,810 employees. The reduction in our workforce could prevent us from engaging in certain initiatives to improve the
performance of our retail business, due to an insufficiency of workforce size or an insufficiency of certain required skills, and
could prevent us from executing initiatives effectively, which could have a material adverse effect on our financial results,
business and prospects.
If we sell our retail business, our revenues will decrease substantially, we will need to develop new businesses and sources of
revenue, and our business, financial results and prospects may be materially adversely affected.
If we sell our retail business in order to focus on our efforts on our Medici initiatives, our revenues would decrease to
an insignificant amount. 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.
If we sell our retail business, we do not expect to make any distribution to stockholders.
If we sell our retail business for cash, we currently expect to retain all of the after-tax proceeds of the sale for use in
our blockchain initiatives. The decision to retain all of the after-tax proceeds, or to declare a dividend, implement a stock
repurchase program, make one or more issuer tender offers or take any other similar action, would be subject to the discretion
of our Board of Directors, and would depend on the factors the Board deems relevant at the time. Relevant factors would likely
include our capital resources, liquidity, operating results, internal projections and plans at the time. We have incurred significant
losses recently, and we have utilized a significant amount of cash in funding of our Medici and tZERO initiatives. We also have
plans for Medici and tZERO that will require significant additional funding, and we do not currently expect to make any
distribution to stockholders even if we sell the retail business. As a result, the market price of our securities could decrease
substantially.
A sale of our retail business might not be subject to a stockholder vote.
Whether a sale of our retail business would be subject to a stockholder vote would depend primarily on whether a vote
is required by applicable law and whether a buyer would require us to submit it to a vote regardless of the requirements of
applicable law. If we make a decision to sell our retail business, we and our Board will evaluate the applicable requirements and
other factors we and our Board then deem relevant, but 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. If we sell our retail business without submitting
the transaction to a vote, we may face claims asserting that we should have submitted it to a vote. In addition, we may not sell
our retail business in the foreseeable future or at all. Any developments, lack of developments (or announcements about any
developments or lack of developments) could cause the trading prices of our securities to decrease.
If we sell our retail business, we could incur a substantial corporate level income tax liability.
If we sell our retail business in a transaction taxable to the Company, the corporate level income tax liability to the
Company would depend in part on the sales price but could be substantial. If we experience an ownership change due to stock
sales by our significant stockholders, the amount of net operating losses or credits that can be used to offset the tax on any gain
may be limited. Depending on the sales price and limits that are triggered by an ownership change, any net operating losses and
credits we have that might be used to reduce the income tax liability to the Company may be unlikely to reduce the tax liability
by a significant amount.
If we sell our retail business, our Compensation Committee may accelerate the vesting, in whole or in part, of some or all
outstanding restricted stock units under our Equity Incentive Plan.
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. Any such
determination would be subject to the discretion of the Compensation Committee and such factors as the Compensation
Committee might then deem relevant. Any such acceleration would result in an increase in the number of shares outstanding
and would dilute stockholders' ownership of our company.
17
Our discussions with potential bidders for our retail business could result in the compromise of our intellectual property.
As a consequence of our discussions with potential bidders for our retail business, it may be possible for potential
bidders to misappropriate intellectual property and other confidential information from us, which could have a material adverse
effect on our financial results, business and prospects.
If we sell our retail business in order to focus on our blockchain initiatives and related efforts, risks relating to our Medici
businesses, including our tZERO initiatives, that may be immaterial to us now would likely each become a material risk to
us.
If we sell our retail business in order to focus on our blockchain initiatives and related efforts, we would immediately
become a much smaller company than we are now. Consequently, risks relating to our Medici businesses, including our tZERO
initiatives, which may currently be immaterial to us, would in all likelihood each become material risks to us. See "Additional
Risks Relating to Our Medici Business," and "Additional Risks Relating to Our tZERO Initiatives" below.
We engage in related party transactions, which could result in conflicts of interest involving our management.
We engage in related party transactions with members of our management and Board of Directors, including with
Patrick Byrne and Saum Noursalehi and their affiliates. We also own interests in businesses, including tZERO, in which one or
more of our directors, officers and other employees own interests. Related party transactions present conflicts of interest which
could have a material adverse effect on our financial results, business and prospects.
Our ownership of less than 100% of tZERO and other subsidiaries may cause conflicts of interest.
Our wholly-owned subsidiary Medici Ventures owns 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 engage in capital raising activities in the future that could further
dilute our ownership interest. To that end, in March 2019, we disclosed that we have executed a Memorandum of
Understanding regarding a potential transaction involving an equity investment of up to $100 million in tZERO by GSR Capital
and Makara Capital, and are in continuing discussions in furtherance thereof. We cannot be sure that we will be able to
complete any such transaction on the contemplated terms or on the desired timeframe, if at all. Medici Ventures also has issued
employee stock options that may result in our owning less than 100% of Medici Ventures in the future, which would also
reduce our effective interest in tZERO. The boards of directors of tZERO and Medici Ventures must consider the interests of all
of their stockholders, and the interests of the individual stockholders may differ from our interests. Any significant divergence
between our interests and the interests of other stockholders, who are also likely to be employees, of our majority owned
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 and the options granted by tZERO could reduce our effective ownership of each of
them significantly.
Medici Ventures has granted compensatory options under its stock option plan and sold warrants to purchase Medici
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 90%.
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 76%.
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 69%.
An equity financing by tZERO, whether involving GSR Capital and/or Makara Capital or otherwise, could accelerate the
vesting of the options granted by tZERO.
The tZERO equity incentive plan requires the administrator of the plan to accelerate, vest, or cause the lapse of
restrictions applicable to awards outstanding under the plan upon a “change in control” as defined in the plan. For purposes of
the tZERO plan, a “change in control” includes Overstock and any entity or entities directly or indirectly controlled by
Overstock becoming the legal or beneficial owner of tZERO shares having less than a majority of the total voting power of the
outstanding stock of tZERO. As a result, a sale of tZERO shares, whether involving GSR Capital and/or Makara Capital or
18
otherwise, could accelerate the vesting of the options granted by tZERO. Further, the exercise of options or warrants issued by
Medici Ventures and/or the exercise of vested options issued by tZERO could contribute to or cause the accelerated vesting of
any then unvested tZERO options.
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.
MLG does not have a proven business model, does not have revenues or profits, and may require additional capital.
MLG was formed in mid-2018 and is an early stage company that currently does not generate revenues or profits. Its
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 revenues and profits in the future, it has not yet developed a business
model. If MLG cannot generate revenues and profits, MLG will require additional capital, which may have a material adverse
effect on our financial results, business and prospects.
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.
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.
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. 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.
The potential investment in tZERO contemplated by the Memorandum of Understanding we announced in March 2019 with
GSR Capital and Makara Capital may not occur.
In March 2019, we disclosed that we had executed a Memorandum of Understanding regarding a potential equity
investment of up to $100 million in tZERO to be co-led by GSR Capital and Makara Capital, subject to due diligence,
negotiation of binding contracts and regulatory approval. We may not be able to reach agreement on the terms of any such
investment. Even if we are able to reach agreement on the terms and enter into a definitive agreement regarding the potential
investment, the transaction may not close. Our efforts to reach an agreement and close a transaction will continue to take time
and attention from our senior executives, which may have an adverse effect on our business, and if the transaction fails to occur,
it may have a material adverse effect on our financial results, business and prospects.
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We may have additional exposure to claims under Delaware's Abandoned Property Law.
In September 2018 we lost a jury trial in Delaware brought on Delaware's behalf alleging that we had violated
Delaware's unclaimed property laws by failing to report and turn over to Delaware certain unused gift card balances. The time
period covered by the lawsuit was 2004 through 2007. The jury returned a verdict, which we expect to result in a judgment
against us of approximately $7.3 million plus attorneys' fees and costs. We may have additional exposure for the time period
2008 through 2014.
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. 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 it, 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 similar to 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 asserts that 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 recent 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. If any jurisdiction where we did not collect sales or other taxes successfully asserts
that we should have done so, it could have a material adverse effect on our business, regardless of the ultimate outcome.
A subsidiary of ours owns the land on which we built our headquarters, and we may incur environmental expense and
liabilities.
In 2014, our wholly-owned subsidiary O.com Land, LLC purchased land near Salt Lake City, Utah on which we have
built our new headquarters. The land is part of the Midvale SLAG Superfund Site ("Site"), a former Comprehensive
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Environmental Response, Compensation and Liability Act ("CERCLA") superfund site. O.com Land, LLC is required to follow
certain requirements of CERCLA and the consent decree governing remediation of the Site, and its failure to do so could
expose us to material environmental liabilities.
Additional Risks Relating to Our tZERO Initiatives
Risks Related to tZERO's Business
tZERO has a limited operating history, which makes it hard to evaluate its ability to generate revenue through operations,
and at the date of this filing, tZERO has not generated revenue from any commercially available blockchain-based
application.
tZERO was formed in 2014 to develop blockchain and financial technology as part of Overstock's Medici initiatives.
tZERO's limited operating history makes 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 regulatory landscape and developing new products. tZERO's
current operating model may require changes in order for it to scale its operations efficiently. 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 on developing its business and
exploring opportunities for novel applications of blockchain technology. tZERO has not generated revenue from any
commercially available blockchain-based applications. tZERO has generated limited revenue and has accumulated losses since
its inception. As such, tZERO's 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.
tZERO may not successfully develop, launch, market, or sell its DLR Software.
tZERO anticipates that its first commercially available blockchain-based product will be its DLR Software. The DLR
Software is currently in customer production testing, which is being conducted by a third party, and tZERO has not yet entered
into any commercial licenses with any licensees. The DLR Software is intended to help broker-dealer licensees with stock
inventory to both load and manage their inventory in order to assist short sellers of public securities in establishing that they
have located available shares in the U.S. public securities market prior to effecting short sales. The DLR Software is intended to
enable licensees to create a blockchain-based record of the shares that the licensee has made available for "locates" using
customizable DLR Software functionality and of the daily purchases of the right to "locate" specifically identified shares for
purposes of compliance with regulatory requirements. Although tZERO believes that the DLR Software provides broker-dealers
with a better solution than the system currently in use for identifying "locates," the existing system is firmly entrenched and is
controlled by firms with substantially greater resources than tZERO or Overstock. tZERO may not successfully develop,
launch, market or sell its DLR Software.
The commercial viability of the DLR Software is dependent on the ability of broker-dealer licensees to offer the DLR
Software as an effective means of satisfying the regulatory obligations of those effecting short sales. Regulation SHO under the
Exchange Act ("Regulation SHO"), as interpreted and implemented by the SEC, is the principal regulation governing short
sales. In preliminary discussions with regulators regarding the application of DLR Software, certain members of the SEC Staff
(the "Staff") have expressed concerns regarding whether locates issued utilizing the DLR Software would provide customers of
broker-dealer licensees with a valid locate for purposes of Regulation SHO unless certain conditions were satisfied by the
issuing broker-dealers. The broker-dealer licensees of DLR Software, as the parties issuing locates for purposes of Regulation
SHO, will be responsible for ensuring that locates issued using the DLR Software comply with all applicable regulations and
satisfy the requirements of Regulation SHO. In the event that compliance with regulatory obligations in utilizing DLR Software
proves too burdensome to broker-dealer licensees, the DLR Software may not gain market acceptance among broker-dealers.
In addition, the SEC and other regulatory and self-regulatory authorities may in the future adopt additional rules and
regulations, adopt new or modified interpretations of existing regulations, or take other actions, that may impact those engaging
in short selling activity or adversely affect the ability of short-selling customers of broker-dealer licensees to rely on locates
generated by the DLR Software in effect at the time. Any governmental or regulatory action that restricts the ability of investors
to effect short sales, or to do so in reliance on locates generated by the tZERO DLR Software, could adversely affect the
commercial viability of the DLR Software.
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Moreover, tZERO will need to devote significant resources to license sales and marketing efforts in order to convince
broker-dealers that licensing the DLR Software will increase their revenues from their stock lending operations and to persuade
large pension funds and other entities that hold large amounts of publicly traded securities that providing inventory supply to
broker-dealers utilizing the DLR Software will provide access to additional revenue opportunities. tZERO will need to build a
sales and marketing function and staff to effectively market the DLR Software. tZERO may be unable to do so, and any sales
and marketing function and staff it builds may be unable to successfully market the DLR Software. Further, tZERO may have
overestimated the size of the pension crisis and the potential market for the DLR Software, the potential demand for the DLR
Software, and the possibility that it will be able to market the DLR Software to potential licensees.
Once the DLR Software is released for commercial licensing, tZERO may need to make changes to the specifications
of the DLR Software for any number of reasons. In the event that tZERO is unable to develop the DLR Software in a way that
realizes those specifications, it is possible that the DLR Software may never generate significant revenue or become profitable
for tZERO. Furthermore, despite good faith efforts to develop and complete the launch of the DLR Software and subsequently
to maintain it, it is still possible that the DLR Software will experience malfunctions or otherwise fail to be adequately
developed or maintained, which may negatively impact sales and marketing efforts. There can be no assurance that the DLR
Software will ever generate significant revenue or become profitable for tZERO.
tZERO continues to develop new and existing trading platforms for the Series A Preferred, the tZERO Security Tokens and,
ultimately, other issuer's digital securities, but to date has only two Token Trading Systems in operation, both by PRO
Securities.
tZERO continues to develop new and existing Token Trading Systems to trade digital securities, including the Series A
Preferred, the tZERO Security Tokens, and, ultimately, other issuer's securities tokens. At the date of this filing, only two Token
Trading Systems are operational-in December 2016, the PRO Securities ATS, utilizing the tZERO Platform, partnering with
Keystone Capital Corporation ("Keystone") and ETC, each SEC-registered broker-dealers and FINRA members, began
facilitating trading in the Series A Preferred, and in January 2019, the PRO Securities ATS, again utilizing the tZERO Platform,
partnering with Dino and ETC, each SEC-registered broker-dealers and FINRA members, began facilitating private placement
resales of tZERO Security Tokens to accredited investors in reliance upon an exemption from registration under Section 4(a)(7)
of the Securities Act. Separately, in June 2018, tZERO and BOX Digital announced that they had entered into a joint venture
intended to develop the Exchange with regulatory approvals that would enable the Exchange to trade security tokens. The
Exchange will require approval from the U.S. Securities and Exchange Commission prior to beginning operations. The
development of these and any other Token Trading Systems implicates complex technological considerations and raises
numerous legal and regulatory issues that will need to be addressed-likely, in consultation with tZERO's broker-dealer
subsidiaries' regulators. As a result of these technological, legal and regulatory considerations, new Token Trading Systems may
never be developed and, if developed, may (as may any existing Token Trading System), for a variety of technological, legal
and regulatory reasons, never become (or remain) operational. If tZERO is unable to successfully develop viable Token Trading
Systems, tZERO's business plans would be materially adversely affected. See "Risks Related to the Development of the Token
Trading Systems" below.
tZERO intends to offer services to companies considering or pursuing initial security token offerings but has not yet been
engaged to do so.
tZERO intends to offer services ("issuer services"), including offering an issuer services platform, to companies
considering or pursuing initial security token offerings. To date, tZERO has not been engaged to provide issuer services to any
other company considering or pursuing an initial security token offering, and there can be no assurance that tZERO will launch
its issuer services platform or be engaged to provide any issuer services in the future or that any issuer services, if provided,
will be profitable. If tZERO is engaged to provide any issuer services, tZERO could face claims from any dissatisfied clients
and could incur liabilities in rendering any issuer services, any of which could also damage our reputation and adversely affect
other parts of our business.
PRO Securities 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. PRO Securities and SpeedRoute 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.
In addition, PRO Securities owns and operates the PRO Securities ATS, which has filed a Form ATS with the SEC notifying the
SEC of its activities as an alternative trading system. PRO Securities and SpeedRoute are subject to regulation, examination,
22
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.
PRO Securities and SpeedRoute currently generate substantially all of tZERO's revenues. Any failure of PRO
Securities or SpeedRoute to comply 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 broker dealers and tZERO are involved in ongoing discussions with regulatory authorities.
Our broker dealers, PRO Securities 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. Any
failure of our broker dealers or tZERO to satisfy FINRA, the SEC, or any other regulatory authority with which they must
comply could have a material adverse effect on tZERO's operations and financial condition and a material adverse effect on us.
Technology on which tZERO relies for its operations, including the technology underlying the Token Trading Systems, may
not function properly.
The technology on which tZERO and its licensees rely, including the technology underlying the Token Trading
Systems, may not function properly, which would have a material adverse effect on tZERO's plans, operations and financial
condition. Although the tZERO Platform has worked for the Series A shares and the tZERO Security Tokens, trading in these
securities has been extremely limited, and consequently the tZERO Platform has not been tested with significant trading
volume. If the technology does not work as anticipated, there may be no alternative available. The importance of the 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 blockchain applications. The technology may malfunction because of internal
problems or as a result of cyber-attacks or external security breaches. Any such technological problems would have a material
adverse effect on tZERO's prospects.
Acquisitions tZERO has made and may make will increase costs and regulatory and integration risks.
From time to time tZERO has purchased interests in or acquired other businesses or the assets of other businesses and
may do so again in the future. Integrating an acquired business or its assets involves a number of risks and financial, managerial
and operational challenges. tZERO may incur significant expenses in connection with purchases or acquisitions it has made in
the past or may make in the future. Further, acquisitions may also create a need for additional accounting, tax, compliance,
documentation, risk management and internal control procedures, and may require tZERO to hire additional personnel to
implement, perform and/or monitor such procedures. To the extent tZERO's 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. The occurrence of any of the foregoing could have a material adverse effect on our
financial results and business.
tZERO's acquisition of Bitsy Inc. may expose us to additional risks.
Effective January 2019, tZERO purchased the remaining 67% interest in Bitsy, Inc. for $8 million, bringing our total
equity interest in Bitsy, Inc. to 100%. Bitsy, Inc., is a U.S.-based company founded and partially owned by Medici Ventures'
former chief operating officer and general counsel, and current president of tZERO, Steve Hopkins. In September 2018, Bitsy
announced that it had begun a limited beta launch of a digital wallet service intended to create a bridge between traditional fiat
currencies and cryptocurrencies. Various aspects of the business that Bitsy is engaging in are heavily regulated. 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 other states it is not clear whether or how the
existing laws and regulations apply to digital currency activities. 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. Bitsy has registered with FinCEN
and intends to obtain all licenses it is required to obtain. 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.
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Additional Risks Related to our tZERO Security Tokens
The IRS may disagree with our characterization of the tZERO Security Token offering, which would have a material
adverse effect on us.
Although we have taken the position that the sale of the tZERO Security Tokens in the security token 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 by approximately
$104.8 million as a result of the security token 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.
We are subject to the risks of holding tZERO Security Tokens and the risk that we will be unable to sell the tZERO Security
Tokens.
As part of tZERO's Security Token offering, we elected to accept tZERO Security Tokens in payment of $30 million of
tZERO's indebtedness to us. As a holder of restricted securities, we therefore are subject to all of the risks of holding the tZERO
Security Tokens, including the risk that we will be unable to publicly resell any of the tZERO Security Tokens unless tZERO
registers our resale for us under the Securities Act of 1933, as amended. We do not have any contractual rights to require
tZERO to do so.
The tZERO Security Tokens may be subject to registration under the Exchange Act if tZERO has assets above $10 million
and more than a statutory amount 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 that class
of equity securities with the SEC under the Exchange Act. If tZERO is required to register the tZERO Security Tokens with the
SEC under the Exchange Act, it would be a laborious and expensive process. Furthermore, if such registration takes place,
tZERO would have materially higher compliance and reporting costs going forward.
Risks Related to the Development of the Token Trading Systems
Development of Token Trading Systems pose financial, technological, and regulatory challenges and tZERO may not be
able to successfully develop, market and launch any particular Token Trading System.
The development of a Token Trading System requires significant capital funding, expertise of tZERO's management
and time and effort in order to be successful. For any particular Token Trading System, tZERO may have to make changes to
the specifications for any number of reasons or tZERO may be unable to develop the Token Trading System in a way that
realizes those specifications or any form of a functioning network. A Token Trading System, even if successfully developed and
maintained, may not meet investor expectations-for example, there can be no assurance that a Token Trading System will
provide less expensive or more efficient trading than is possible on currently available trading platforms for traditional
securities (or even other Token Trading Systems for digital securities). Furthermore, a Token Trading System may experience
malfunctions or otherwise fail to be adequately developed or maintained, which may negatively impact that Token Trading
System and the digital securities traded on that Token Trading System.
tZERO may not have or may not be able to obtain the technical skills, expertise, or regulatory approvals needed to
successfully develop any particular Token Trading System and progress it to a successful launch. While tZERO has sought to
retain and continue to competitively recruit experts, there may, from time to time, be a general scarcity of management,
technical, scientific, research and marketing personnel with appropriate training to develop and maintain development of Token
Trading Systems. In addition, there are significant legal and regulatory considerations that will need to be addressed in order to
develop and maintain each Token Trading System, including the qualifications of licensees operating each Token Trading
system, and addressing such considerations will require significant time and resources. There can be no assurance that tZERO
will be able to develop Token Trading Systems that fully achieve tZERO's goals and satisfy the complex regulatory
requirements applicable to SEC-registered exchanges and/or permitted alternative trading systems. If tZERO is not successful
in its efforts to develop Token Trading Systems that are compliant with all regulatory and legal requirements and to demonstrate
to users the utility and value of Token Trading Systems, it may be impermissible to launch a particular Token Trading System or
there may not be sufficient demand for the digital securities required for a particular Token Trading System to be commercially
viable, and tZERO's business would be materially adversely affected, which could have a material adverse effect on us.
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Regulatory authorities may never permit a Token Trading System to become operational.
Depending on the particular Token Trading System, numerous regulatory authorities, including FINRA and the SEC,
may need to permit the Token Trading System to become operational. If FINRA, the SEC or any other regulatory authority
objected to the Token Trading System or to aspects of the Token Trading System, such regulatory authorities could prevent the
Token Trading System from ever becoming operational. The regulatory landscape that tZERO, its broker-dealer subsidiaries,
and its partners need to navigate in order to achieve an operational Token Trading System is complex, and tZERO may never be
able to do so successfully for a particular Token Trading System. Any such regulatory issues would have a material adverse
impact on tZERO's business.
Token Trading Systems may not be widely adopted and may have limited users.
It is possible that Token Trading Systems will not be used by a large number of issuers, broker-dealers or holders of
security tokens or that there will be limited public interest in the continued creation and development of Token Trading
Systems. In addition, legal and regulatory developments could render any of the Token Trading Systems obsolete or
impermissible. Such a lack of use or interest could negatively impact the continued development of Token Trading Systems and
the business and financial position of tZERO and have a material adverse effect on us.
Alternative networks may be established that compete with or are more widely used than the Token Trading Systems.
It is possible that alternative networks could be established that utilize the same or similar protocols as those
underlying the Token Trading Systems or that facilitate services that are materially similar to the Token Trading Systems'
services. The Token Trading Systems may face competition from any such alternative networks, which could negatively impact
the Token Trading Systems and have a material adverse effect on tZERO and on us.
The tZERO Platform and the Token Trading Systems, and any blockchain technology on which they rely, may be the target
of cyber-attacks or may contain exploitable flaws in its underlying code, which may result in security breaches and the loss
or theft of securities that trade on the Token Trading Systems. If such attacks occur or security is compromised, this could
expose us to liability and reputational harm and could seriously curtail the utilization of security tokens and cause a decline
in the market price of the affected securities and could result in claims against tZERO or us.
The Token Trading Systems, its structural foundation (including the tZERO Platform), and the software applications
and other interfaces or applications upon which they rely (including blockchain technology), are unproven, and there can be no
assurances that the Token Trading Systems and the creating, transfer or storage of securities on that system will be
uninterrupted or fully secure, which may result in impermissible transfers, a complete loss of investors' securities on that system
or an unwillingness of market participants to access, adopt and utilize security tokens or the Token Trading Systems. Further,
the tZERO Platform, the Token Trading Systems and any technology, including blockchain technology, on which they rely, may
also be the target of cyber-attacks (such as "double-spend" attacks or "51%" attacks) seeking to identify and exploit
weaknesses, which may result in the loss or theft of securities, which, in turn, may materially and adversely affect the Token
Trading Systems, tZERO, and us.
Some market participants may oppose the development of distributed ledger or 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 utilize distributed ledger and blockchain-based systems. 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.
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Risks Related to Blockchain Technology
The regulatory regime governing blockchain technologies, cryptocurrencies, digital assets, the tZERO Platform and
offerings of digital assets is uncertain, and new regulations or policies may materially adversely affect the development and
the value of such cryptocurrencies and assets.
Regulation of digital assets, like the tZERO Security Tokens, as well as cryptocurrencies, blockchain technologies,
cryptocurrency exchanges, and the Token Trading Systems, is currently undeveloped and likely to rapidly evolve as government
agencies take greater interest in them. Regulation also varies significantly among international, federal, state and local
jurisdictions and is subject to significant uncertainty. 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
permissibility of tokens generally and the technology behind them or the means of transaction or in transferring them. Failure
by tZERO and its Token Trading System partners to comply with any laws, rules and regulations, 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.
Cryptocurrency networks, distributed ledger technologies, and coin and token offerings also face an uncertain
regulatory landscape in many foreign jurisdictions such as the European Union, China and Russia. Various foreign jurisdictions
may, in the near future, adopt laws, regulations or directives that may conflict with those of the United States or may directly
and negatively impact tZERO's business. The effect of any future regulatory change is impossible to predict, but such change
could be substantial and materially adverse to tZERO's business.
The further development and acceptance of blockchain networks, 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 networks and blockchain assets would have a material adverse effect on tZERO's business plans and could have
a material adverse effect on us.
The growth of the blockchain industry in general, as well as the blockchain networks on which the tZERO Security
Tokens will rely, is subject to a high degree of uncertainty. The factors affecting the further development of the cryptocurrency
and digital security industry, as well as blockchain networks, include, without limitation:
• worldwide growth in the adoption and use of cryptocurrencies, digital securities, and other blockchain
technologies;
• government and quasi-government regulation of cryptocurrencies, digital securities, and other blockchain assets
•
•
•
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 cryptocurrency or digital securities
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;
• general economic conditions and the regulatory environment relating to cryptocurrencies and digital securities;
and
a decline in the popularity or acceptance of cryptocurrencies or other blockchain-based tokens.
•
The cryptocurrency and digital securities industries as a whole have 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 and blockchain assets may materially
adversely affect tZERO's business plans.
The prices of digital assets are extremely volatile. Fluctuations in the price of digital assets could materially and adversely
affect tZERO's business.
The prices of cryptocurrencies, such as Bitcoin and Ether, and other digital assets have historically been subject to
dramatic fluctuations and are highly volatile. A decrease in the price of a single digital asset may cause volatility in the entire
digital asset and security token industry. For example, a security breach that affects purchaser or user confidence in Bitcoin or
Ether may affect the industry as a whole. This volatility may adversely affect interest in and demand for the Token Trading
System, which would materially adversely affect tZERO's business.
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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, blockchain technology, 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 appropriate policies and procedures designed 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 its 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 popularity of cryptocurrencies and digital securities offerings may decrease in the future, which could have a material
adverse effect on the cryptocurrency and digital securities industry and tZERO's operations and financial condition.
tZERO was founded to develop and commercialize financial technology based on the use of digital assets, digital
securities and blockchain technology. In recent years, cryptocurrencies and digital securities have become more widely
accepted among investors and financial institutions but have been also faced increasingly complex legal and regulatory
challenges and, to date, have not benefited from widespread adoption by governments, central banks or established financial
institutions. However, any significant decrease in the acceptance or popularity of cryptocurrency or digital security offerings
may have a material adverse effect on tZERO's operations and financial condition and a material adverse effect on us.
To date, tZERO's primary source of revenues has been revenues from its wholly owned subsidiaries, SpeedRoute and PRO
Securities, and a large percentage of these firms' revenues come from a small number of major customers, making tZERO
vulnerable to changes in the business and financial condition of, or demand for SpeedRoute's and PRO Securities' services
by, such customers.
To date, tZERO's primary source of revenues has been revenues from its wholly owned subsidiaries, SpeedRoute and
PRO Securities. These firms' revenues primarily have come from three major customers, making tZERO vulnerable to changes
in the business and financial condition of, or demand for services by, such customers of SpeedRoute and PRO Securities.
During the year ended December 31, 2018, revenue passed through to tZERO from the broker-dealers attributable to these three
customers accounted for, respectively, 23%, 15% and 11% of tZERO's revenues. 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 SpeedRoute or PRO Securities customers.
The tZERO Platform and any current or future Token Trading Systems have 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 Platform, and any current or future Token Trading System, including technology and intellectual property
involved in their creation and operation, have been or will be, as applicable, developed primarily by a small number of key
technology employees of tZERO and its affiliates. 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 Platform or the Token Trading Systems. If
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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.
The occurrence of any of the foregoing could result in claims against tZERO and us and could have a material adverse
effect on us and the holders of our securities.
The development and operation of tZERO's business, including the tZERO Platform and any Token Trading System
requires, will likely require, technology and intellectual property rights.
The ability of tZERO to develop tZERO Platform and any Token Trading System that may be developed in the future
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 the tZERO Platform or any Token Trading System requires,
they would be unable to operate, 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 a number of 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 Platform or any Token Trading
System.
We believe that a number of organizations are or may be working to develop trading systems utilizing distributed
ledger or blockchain technologies or other novel technologies that may be competitive with tZERO's own technology, including
its patented technology. Although it is difficult to obtain reliable information about blockchain activities by companies that may
be our competitors, they may include companies such as SharesPost, OpenFinance Network, Templum Inc., Coinbase,
KoreConX, Blocktrade AG, Smart Valor, the Nasdaq Stock Market, Intercontinental Exchange, Circle, Ideanomics,
CrowdEngine, Securitize, Harbor, and Polymath. As our industry matures, we expect that larger existing companies in the
financial services and technology industry, including companies offering services and products related to e-commerce, cloud
computing, artificial intelligence, online advertising, search engines, software, and hardware may enter the digital securities
secondary trading and digital securities exchange areas of our current business and other areas of our potential business related
to distributed ledger or blockchain technologies and compete. Any or all of them may compete with us now or in the near future
not only for potential business, but for the time and attention of regulators and for the services of persons with the expertise we
need. Some or all of such organizations may have substantially greater technological expertise, experience with distributed
ledger technologies 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 and/or their respective purchasers may be
attempting to patent. If one or more other persons, companies or organizations obtains a valid patent covering technology
critical to the tZERO Platform or any Token Trading System, the tZERO partners that need the relevant technology in order to
enable the tZERO Platform or any Token Trading System to operate as intended might be unable or unwilling to license the
technology, and it could become impossible for the tZERO Platform or any Token Trading System to operate, which could have
a material adverse effect on tZERO's operations and financial condition and a material adverse effect on us. Further, tZERO’s
subsidiaries may also face competition in the areas of their respective businesses including accredited investor verification
services, money services, or broker dealer services, and these competitors may include Early IQ, InvestReady.com,
CharlesSchwab, the New York Stock Exchange, the Nasdaq Stock Market, CBOE, Clearpool Group, Dash Financial
Technologies, Coinbase, SpectroCoin, Robinhood, Cash App, Abra, and Kraken. Any or all of them may compete with
tZERO’s subsidiaries now for current business or in the near future for potential business.
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. Substantially all 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
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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.
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. If the changes we believe Google made in 2017 prevent us from regaining our prior rankings in Google's natural search
engine, we will have to utilize more expensive marketing channels or otherwise compensate for the loss of some of the natural
search traffic, and if we are unable to do so, our financial results may suffer and the changes may have a material adverse effect
on our business. 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.
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.
Some shoppers may not utilize the search engines at all, and we may be unable to reach some of those shoppers.
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. Further, some shoppers may begin their searches at a competitor's website and may not utilize traditional search
engines at all. Our inability to place products on or access these sites may have a material adverse effect on our 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.
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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. 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 or other measures that increase the effective price of 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 other measures that directly or indirectly
increase the price of products we or they import and that we offer on our Website, the increased prices could have a material
adverse effect on our financial results, business and prospects.
Economic factors, including our increasing exposure to the U.S. housing industry, may 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.
Decreases in discretionary consumer spending may adversely affect us.
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.
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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; 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. 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.
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 a large number of other 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 a large number of other 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 a number of 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.
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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.
In addition to our efforts to transition from our historical business as an e-commerce retailer to a blockchain-focused
company, we have an evolving e-commerce business model, which increases the complexity of our retail business.
In addition to our efforts to transition from our historical business as an e-commerce retailer to a blockchain-focused
company as described in this report, our retail business model has evolved in the past and continues to do so. 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. 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. Future additions to or modifications of our business are likely to have similar effects. Further, any new business 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.
Our plans to end our Club O Rewards Mastercard could adversely affect us.
We are planning to end our Overstock Club O Rewards Mastercard which offers cardholders a complimentary Club O
Rewards membership with a higher reward earning percentage (8%). We anticipate larger than normal rewards redemption from
these members during the immediate 60-day grace period following the closure on March 29, 2019 which could have a material
adverse effect on our financial results in Q2 2019.
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 reserved 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 reserves, which could have a material adverse effect on our financial results,
business and prospects.
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Additional Risks Relating to Our Medici Business
The businesses that we are pursuing through our Medici initiatives are novel and subject to technical, operational,
financial, regulatory, legal, reputational and marketing risks.
In August 2015, we acquired the assets and business of a financial technology ("fintech") company and in January
2016, we acquired two registered broker-dealers (our "broker-dealer subsidiaries") that were affiliated with the fintech
company. We have limited experience with the operation of fintech companies or of broker-dealers. In December 2016, we
issued publicly-traded securities traded exclusively on a registered alternative trading system operated by one of our majority-
owned broker-dealer subsidiaries, the ownership of which is tracked on a blockchain. Our majority-owned subsidiary tZERO is
working on other potential financial applications of blockchain technology, including the potential development of a trading
platform for digital "tokens" or "coins" treated as securities. See "Additional Risks Relating to Our tZERO Initiatives" below.
These 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 could have a material adverse
effect on our financial results and business.
We may be required to write off amounts relating to our interests in startup businesses.
At December 31, 2018, Overstock and its subsidiaries held minority interests totaling approximately $60.4 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. 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.
Our ownership interest in digital currency transfer and payment businesses may expose us to additional risks.
Medici has acquired equity interests in startup companies which are pursuing a variety of digital currency transfer and
payment businesses. 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 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. If Bitt, Spera, 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. Any such penalties, or even the allegation of criminal or other illegal activities, could have a material
adverse effect on us and on our financial results and business.
If we do not keep pace with technological 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. 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 changes or operate effectively with future network
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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
If we determine not to sell our retail business or make other fundamental changes to our business, the trading prices of our
securities may decrease significantly. The trading prices of our securities may also decrease significantly if we determine to
take any such actions.
The trading prices of our common stock and other securities have been and may continue to be volatile. Our stock
price fluctuations may be due in part to our disclosures about our exploration of strategic alternatives. 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 alternatives, and by any announcements we may make regarding any such matters, any of which could cause the
trading prices of our securities to 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.
The trading prices of our securities may be adversely affected by short-selling activities involving our common stock.
The trading prices of our common stock and other securities have 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.
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.
We do not intend to pay dividends on our common stock and you may lose the entire amount of your investment in our
common stock.
We have never declared or paid any cash dividends on our common stock and do not intend to pay dividends on our
common stock for the foreseeable future. We intend to invest our future earnings, if any, to fund our growth. Therefore, holders
of our common stock will not receive any funds without selling their shares. You may not receive a positive return on your
investment, and you may lose your entire investment.
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Sales by our significant stockholders could have an adverse effect on the market price of our common and preferred stock.
A small number of our stockholders own a significant percentage of our common stock. Our Chief Executive Officer
Patrick Byrne is the beneficial owner of approximately 18% of our common stock and approximately 50% of our Series A
preferred stock. Various trusts related to his mother Dorothy Byrne are the beneficial owners of an additional aggregate of
approximately 5.0% of our common stock. In addition, according to public filings with the SEC, at December 31, 2018, a small
number 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. Dr. Byrne
and/or entities he controls, including High Plains Investments LLC, may sell shares of our common stock in the future and/or
may enter into a Rule 10b5-1 plan for the sale of shares of our common stock in the future. In addition, the transfer of
ownership of a significant portion of our outstanding shares within a three-year period could adversely affect our ability to use
our net operating losses to offset future taxable net income. Any of the foregoing could have a material adverse effect on the
holders of our securities.
Pledges of our shares by officers and directors and significant stockholders could have an adverse effect on us and on the
market price of our common and preferred stock.
We do not prohibit or restrict our officers, directors, significant stockholders or others from pledging shares of our
company owned by any of them, by holding them in a margin account or otherwise. Patrick Byrne, who is our Chief Executive
Officer, a member of our Board and our largest stockholder (directly and indirectly through High Plains Investments LLC), has
pledged approximately 1.9 million of the approximately 5.8 million shares he beneficially owns to one or more banks to secure
a credit facility for High Plains Investments LLC and a personal loan. Any margin call or similar action by a lender that results
in a forced sale of shares pledged by any of our officers, directors or significant stockholders could have an adverse effect on us
and could have an adverse effect on the market price of our securities.
Our quarterly operating results are volatile and may adversely affect the market prices of our common stock and preferred
stock, and you may lose all or a part of your investment.
We have experienced 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 varied in the past and may continue to vary significantly from quarter to quarter due to a
number of other factors, many 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 prices of our common stock and preferred stock include:
increases in the cost of advertising and changes in our 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;
•
•
• our inability to manage distribution operations or provide adequate levels of customer service;
•
• our inability to implement technology changes or integrate operations and technologies from acquisitions or other
the amount and timing of operating costs and capital expenditures;
the amount and timing of our purchases of inventory;
increases in the cost of fuel, transportation or distribution;
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.
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Our outstanding preferred stock could adversely affect the holders of our common stock in some circumstances.
We have two series of preferred stock outstanding. The preferred stock could adversely affect the holders of 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, 2018, the 481,259 outstanding shares of preferred
stock constituted approximately 1.5% of the total number of shares of the preferred stock and the common stock, taken
together. The preferred stock ranks senior to the common stock with respect to dividends, is entitled to an annual cash dividend
of $0.16 per share in preference to any dividend on the common stock and is 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. Generally, in a business combination, each share of the preferred stock would 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.
We may issue additional preferred stock without further stockholder approval, for purposes of a stockholder rights plan or
for other purposes, and any such preferred stock could entitle the holders to rights superior to those of the holders of our
common stock.
Our amended and restated certificate of incorporation authorizes our board to designate and issue preferred stock on
such terms as may be approved by the board without further stockholder approval. Our board could do so in connection with
the adoption of a stockholder rights plan or for other reasons. Preferred stock could be issued with rights, preferences and
privileges superior to those of our common stock. In addition, the issuance of preferred stock could have the effect of making
an acquisition of our Company more difficult or costly. We currently have 1.0 million authorized shares of preferred stock
undesignated as to series, and we could cause shares currently designated as to series but not outstanding to become
undesignated and available for issuance as a series of preferred stock to be designated in the future.
Our Board of Directors or the compensation committee could accelerate the vesting of outstanding restricted stock units
upon a sale of the Company or otherwise, which could result in an increase in the number of shares outstanding.
The compensation committee of our board has granted and expects to grant additional restricted stock units ("RSUs")
to certain of our employees and directors. Upon vesting, we issue one share of common stock for every RSU held. The board or
the compensation committee could determine to accelerate the vesting of RSUs in the event of our sale of our retail business or
otherwise, which would result in an increase in the number of shares outstanding and would dilute stockholders' ownership of
our company. Although the number of RSUs outstanding changes frequently, if all RSUs outstanding were vested as of
December 31, 2018, the RSUs would convert into approximately 559,000 shares of our common stock, or approximately 2.0%
of the number of shares of common stock currently outstanding.
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 as 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:
•
authorizing "blank check" preferred stock, which could be issued by our Board of Directors without stockholder
approval and may contain voting, liquidation, dividend and other rights superior to our common stock;
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;
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•
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.
Additional Risks Related Primarily to our Series A Preferred Stock
Our Series A Preferred shares are substantially different from other securities traded in the U.S. public markets and are
subject to a variety of unusual restrictions and material risks.
Our Series A Preferred can trade only on the PRO Securities ATS utilizing the tZERO Platform. Trades of the Series A
Preferred settle on the trade date. The Series A Preferred is not and will not be listed on any securities exchange or any other
market of any kind. The Series A Preferred is extraordinarily illiquid. Only approximately ten trades in the Series A Preferred
have taken place since we issued the Series A Preferred in December 2016. Shares of Series A Preferred can be held only in an
online brokerage account with Keystone and cannot be held in any other account or manner. Only certain persons and types of
entities may purchase Series A Preferred. As a result of these and other matters, the market for the Series A Preferred is likely to
remain extraordinarily illiquid and it may be impossible to sell any shares of the Series A Preferred.
The technology on which the tZERO Platform depends has been developed by our majority-owned subsidiary, tZERO, and is
licensed by its subsidiary, PRO Securities, and the Series A Preferred depends on both tZERO and on PRO Securities,
neither of which has substantial resources.
tZERO is a majority-owned subsidiary of ours and owns 100% of the equity interest in PRO Securities. tZERO
licenses the tZERO Platform to PRO Securities, and PRO Securities operates the PRO Securities ATS. Neither tZERO nor PRO
Securities has substantial resources or any commitment from any person, including the Company, to contribute additional
capital or to make any loan to either of them. If any one or more of the Company, tZERO or PRO Securities 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, PRO Securities might be unable to continue to operate the tZERO Platform, and the Series A Preferred could be
materially adversely affected. In any such event, or if the PRO Securities ATS or the tZERO Platform were to be unable to
operate as a result of intellectual property issues or fail to operate as intended for any other reason, holders of our capital stock,
including the Series A Preferred, could lose their entire investment in our capital stock, including all amounts invested in the
Series A Preferred.
Accounts for the Series A Preferred are held directly in the customer's name, rather than in "street name," and the complete
trading history of each digital wallet is available to the general public and it may be possible for members of the public to
determine the identity of the holders of wallets.
The Series A Preferred shares are directly recorded on our stockholder books and records maintained by
Computershare Trust Company, N.A. ("Computershare"), and cannot be held in "street name". The tZERO Platform makes
trade data publicly available shortly after each trade. The publicly available information includes the digital wallet address of
each holder of Series A Preferred and the entire trading history of each wallet, including the price of each trade and the balance
of the securities held. In addition, because all holders of the Series A Preferred are holders of record, all of them are subject to
the risk of loss of their anonymity.
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The Series A Preferred depends on both Keystone and its clearing broker, ETC.
The Series A Preferred depends on both Keystone and Electronic Transaction Clearing, Inc. ("ETC"). Keystone is the
only broker dealer authorized to provide the accounts required to trade the Series A Preferred, and ETC is the clearing broker
for Keystone with respect to the Series A Preferred. Any failure of either Keystone or ETC to continue operating or to
satisfactorily perform its obligations could make it impossible to trade the Series A Preferred.
In the event of the insolvency of Keystone or ETC, the Securities Investor Protection Corporation might not provide any
protection to the holders of Series A Preferred.
The Securities Investor Protection Corporation ("SIPC") oversees the liquidation of member broker dealers that close
when the broker dealer is bankrupt or in financial trouble, and customer assets are missing. SIPC normally provides limited
protection to customers. However, if Keystone or ETC were to become insolvent, the structure of the trading system for the
Series A Preferred could mean that SIPC would provide no protection to holders at all, which could have a material adverse
effect on holders of Series A Preferred.
Transactions involving the Series A Preferred could result in errors, which may be impossible to correct.
Some transactions in the Series A Preferred could require manual intervention, which could result in errors, and
because trades on in the Series A Preferred settle on the trade date, it may be impossible to correct any error, regardless of the
source of the error, which could have a material adverse effect on holders of Series A Preferred.
The Series A Preferred depends on Computershare as the transfer agent for the Series A Preferred.
Computershare serves as the transfer agent for the Series A Preferred. If Computershare were unable or unwilling for
any reason to serve as such, trading in the Series A Preferred would be impossible unless we were able to substitute another
transfer agent, which would have a material adverse effect on the holders of the Series A Preferred.
The potential application of U.S. laws regarding traditional investment securities to the Series A Preferred is unclear.
Because of the differences between the Series A Preferred and traditional investment securities, there is a risk that
issues that might easily be resolved by existing law if traditional securities were involved may not be easily resolved for the
Series A Preferred. The occurrence of any such issue or dispute could have a material adverse effect on the holders of Series A
Preferred.
The potential application of U.S. laws regarding virtual currencies and money transmission to PRO Securities' use of the
Ethereum blockchain is unclear.
The tZERO Platform uses the Ethereum blockchain for certain purposes. None of the parties involved in the operation
of the tZERO Platform 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 the operation of the tZERO Platform requires such
licensing or registration, it could have a material adverse effect on the holders of the Series A Preferred.
We have the right to convert the outstanding shares of Series A Preferred into shares of Series B Preferred at any time.
We have the right to convert the Series A Preferred into Series B Preferred at any time, and the terms of the Series B
Preferred may be amended at any time without the consent of the holders of the Series A Preferred. Any such conversion and
any such amendment of the Series B Preferred could have a material adverse effect on holders of Series A Preferred.
The restrictions on the tax reporting of holder's cost basis in shares of Series A Preferred will not allow normal tax planning
in the sale of shares of Series A Preferred and may result in disadvantageous tax consequences to a seller of Series A
Preferred.
Only one method of cost basis reporting (the first-in, first-out, or FIFO, method) is available for the Series A Preferred.
As a result, sellers of Series A Preferred 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 a material adverse effect on the holders of
Series A Preferred.
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Additional Risks Related to both our Series A Preferred Stock and our Series B Preferred Stock
We do not intend to issue any additional shares of either Series A Preferred or Series B Preferred, which is expected to
continue to result in very limited trading in each series.
We do not intend to issue any additional shares of Series A Preferred or of Series B Preferred, and we expect trading in
the Series A Preferred and the Series B Preferred to continue to be very limited.
We do not expect there to be any market makers to develop a trading market in the Series A Preferred, and there is only one
market maker in the Series B Preferred.
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. Currently, to our knowledge, there is only one market maker in the Series B Preferred. Further, we do
not believe that the Series A Preferred 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 Preferred and in the Series B Preferred, which could have a material adverse
effect on holders' ability to trade either of them.
Rule 144 is not available for resales of "restricted shares" of Series A Preferred, and Rule 144 volume limitations on resales
of Series B Preferred are very low.
Persons, including non-affiliates of a public company such as the Company, who acquire shares directly or indirectly
from the public company, or from an affiliate of the public company, in a transaction or chain of transactions not involving any
public offering, or otherwise as described in Rule 144, acquire "restricted shares" for purposes of Rule 144. Although Rule 144
permits public sales of "restricted shares" subject to certain conditions, Rule 144 is not available for any sales of Series A
Preferred, and the sale of any such shares may be difficult or impossible. Further, because of the limited number of shares of
Series B Preferred outstanding, the volume limitations of Rule 144 would severely limit sales of Series B Preferred under Rule
144.
We will have an economic incentive to repurchase Series A Preferred and Series B Preferred at prices below the redemption
price, and our doing so could cause the trading prices of Series A Preferred and Series B Preferred, as applicable, to
decrease further.
We do not intend to repurchase any shares of the Series A Preferred or Series B Preferred, but if we do, we would do
so only at or below the prices at which we could redeem the shares. If we repurchase or redeem shares of either Series A
Preferred or Series B Preferred, the trading market for the shares would become less liquid, which could cause the trading
prices to decrease further, giving us an economic incentive to repurchase additional shares. The occurrence of the foregoing
could have a material adverse effect on holders of Series A Preferred, Series B Preferred, or both.
A share of Series A Preferred and/or Series B Preferred may have a substantially lower market value than a share of our
common stock.
The trading prices of the Series A Preferred and the Series B Preferred have been and may continue to be substantially
lower than the trading price of our common stock, which could have a material adverse effect on holders of Series A Preferred
and holders of Series B Preferred.
Holders of Series A Preferred and/or Series B Preferred have no rights with respect to our common stock, but they may be
adversely affected by certain events or changes made with respect to our common stock.
Holders of our Series A Preferred and our Series B Preferred have no rights with respect to our common stock, and no
right to convert their shares into common stock or to exchange their shares for common stock, except that such holders have the
right to vote with the common stock. Holders of Preferred Stock do not have other rights of the holders of the common stock,
including the right to respond to common stock tender offers, if any, and their investment in the Series A Preferred and/or the
Series B Preferred may be materially negatively affected by any such event. Holders' lack of any such rights, or the occurrence
of any such event, could have a material adverse effect on holders of Series A Preferred and holders of Series B Preferred.
39
Voting rights of holders of Preferred Stock generally will be limited to voting together with the holders of the common stock
as a single class, and the holders of the Series A Preferred and the holders of the Series B Preferred collectively will have
only a small percentage of the voting power on any matter submitted to the holders of the common stock and the Series A
Preferred and Series B Preferred, voting together as a single class.
Voting rights of holders of Preferred Stock generally will be limited to voting together with the holders of the common
stock as a single class. Neither the holders of the Series A Preferred nor the holders of the Series B Preferred have any right by
themselves, either together or as separate classes, to elect any members of our Board of Directors. As of December 31, 2018,
the 481,259 shares of Preferred Stock that remained outstanding constituted approximately 1.5% of the total number of shares
of the Preferred Stock and the common stock, taken together. If an amendment requiring stockholder approval is proposed to
our Amended and Restated Certificate of Incorporation or our Amended and Restated Bylaws, the holders of the Series A
Preferred and the holders of the Series B Preferred will vote together with the holders of the common stock as a single class, but
neither the holders of the Series A Preferred nor the holders of the Series B Preferred 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 Preferred or Series B Preferred, respectively. Holders' limited voting rights and any of the foregoing
events could have a material adverse effect on holders of Series A Preferred and holders of Series B.
The Series A Preferred and the Series B Preferred rank junior to all of our and our subsidiaries' liabilities, as well as the
capital stock of our subsidiaries held by third parties, 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, any assets will be available to make payments to holders of
Series A Preferred and to holders of Series B Preferred only after all of our liabilities have been paid, and neither the Series A
Preferred nor the Series B Preferred will have any preference over the common stock in the event of our bankruptcy, liquidation
or winding up. In addition, the Series A Preferred and Series B Preferred will rank structurally junior to all existing and future
liabilities of our subsidiaries, as well as the capital stock of our subsidiaries held by third parties, including employees holding
shares of our majority-owned subsidiary tZERO and employees holding shares of any other direct or indirect subsidiary of ours,
whether now existing or created in the future. Any bankruptcy, liquidation or winding up of the Company or any of its wholly
or partially owned subsidiaries would have a material adverse effect on holders of Series A Preferred and holders of Series B
Preferred.
Our obligation to pay dividends on the Series A Preferred or on the Series B Preferred is limited, and our ability to pay
dividends on the Series A Preferred and on the Series B Preferred may be limited.
Our obligation to pay preferential dividends on the Series A Preferred and the Series B Preferred is subject to our
Board of Directors declaring such dividend payments, and our failure to pay preferential dividends on the Series A Preferred
and on the Series B Preferred might have no legal effect on us at all, although it could adversely affect the trading prices of the
Series A Preferred and of the Series B Preferred. Further, our payment of any dividends will be subject to contractual and legal
restrictions and other factors the board deems relevant, including agreements governing any future indebtedness of ours. Any of
the foregoing could have a material adverse effect on the holders of the Series A Preferred and the holders of the Series B
Preferred.
Purchasers of the Series A Preferred and of the Series B Preferred may be adversely affected by our issuance of any
subsequent series of preferred stock.
Neither the terms of the Series A Preferred nor the terms of the Series B Preferred restrict our ability to issue one or
more additional new series of preferred stock, any or all of which may rank equally with or have preferences over the Series A
Preferred and the Series B Preferred as to dividend payments, voting rights, rights upon liquidation or other types of rights. We
will have no obligation to consider the specific interests of the holders of Series A Preferred or the specific interests of the
holders of Series B Preferred in creating any such new series of preferred stock or engaging in any such offering or transaction.
Our creation of any such new series of preferred stock or our engaging in any such offering or transaction could have a material
adverse effect on the holders of Series A Preferred and the holders of Series B Preferred.
It is uncertain whether the IRS will treat the Series A Preferred and Series B Preferred as common stock or preferred stock
for U.S. federal income tax purposes.
We intend to treat the Series A Preferred and Series B Preferred as common stock for U.S. federal income tax
purposes. Nevertheless, it is unclear whether the IRS will treat the Series A Preferred and Series B Preferred as common stock
for U.S. federal income tax purposes. If the IRS were not to treat either the Series A Preferred or the Series B Preferred as
40
common stock for U.S. federal income tax purposes, it could have a material adverse effect on the holders of Series A Preferred
and the holders of Series B Preferred.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
As of December 31, 2018, we operated the following facilities in our retail business segments, unless otherwise indicated:
Corporate office space
• We own approximately 236,000 square feet of office space in Midvale, Utah, which consists of our corporate
headquarters, and which is primarily used for our retail business segment, with a small portion of the space used by
our Medici business, including our tZERO segment.
• We lease approximately 12,000 square feet of additional office space in the United States for tZERO's main office.
• We lease approximately 6,000 square feet of additional office space in Ireland for developers which are primarily used
for our retail business segment.
Warehouse, fulfillment and customer service space
• We lease approximately 1.5 million square feet in the United States for warehouse, fulfillment, customer service, and
other operations.
Data centers
• We lease approximately 3,300 square feet in the United States for various data centers.
ITEM 3. LEGAL PROCEEDINGS
The information set forth under Item 15 of Part IV, "Financial Statements—Note 12. Commitments and Contingencies,
subheading Legal Proceedings," contained in the "Notes to Consolidated Financial Statements" of this Annual Report on
Form 10-K is incorporated by reference in answer to this Item.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
41
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."
Stock Performance Graph
The stock performance graph is included in Part III, Item 12.
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, or incorporated therein
by reference to our definitive proxy statement for the 2019 annual meeting of stockholders.
Holders
As of March 13, 2019, there were 120 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. We 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 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, 2018 we had 481,259 shares of our preferred stock (the "Preferred Stock") outstanding. The
Preferred Stock ranks senior to our common stock with respect to dividends. Holders of the Preferred Stock are entitled to an
annual cash dividend of $0.16 per share (1.0% of the subscription price), 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 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.
Recent sales of unregistered securities
None.
Issuer purchases of equity securities
None.
Preferred Stock
In December 2016, we issued 695,898 shares of our 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 Voting Series B Preferred Stock (the
"Series B Preferred" and together with the Series A Preferred, the "Preferred Stock"), in a public offering registered under the
Securities Act of 1933, as amended. As of December 31, 2018, the 481,259 shares of Preferred Stock that remained outstanding
constituted approximately 1.5% of the total number of shares of the Preferred Stock and the common stock, taken together.
Neither the Series A Preferred Stock nor the Series B Preferred Stock is registered under the Securities Exchange Act of 1934,
as amended. The Series A Preferred are digital securities that trade exclusively on a registered alternative trading system
42
("ATS") operated by tZERO's wholly-owned subsidiary, PRO Securities, LLC (the "PRO Securities ATS"), utilizing software
technology known as the tZERO® Issuance and Trading Platform (the "tZERO Platform"). The Series B Preferred are non-
digital securities that trade in the over-the-counter market and are quoted on the OTCQX market operated by OTC Markets
Group.
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 Preferred shares into Series B
Preferred shares at any time on a one-to-one basis. Until the third anniversary of the Original Issuance Date, we may redeem, at
our discretion, either or both the Series A and Series B Preferred shares for an amount equal to the highest of the following: (1)
the subscription price plus any accrued but unpaid dividends, (2) 105% of the average trading price of our common stock
during a five-trading-day period and (3) 105% of the average trading price of the series of preferred shares during the same
five-day-trading period. Except as required by law, the Preferred Stock vote with the common stock on all matters. Holders of
the Preferred Stock have one vote for each share held. The Preferred Stock ranks senior to the common stock with respect to
dividends. Holders of the Preferred Stock are entitled to an annual cash dividend equal to 1.0% of the subscription price for the
Preferred Stock, rounded to the nearest $0.01, 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 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 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, with each share of Series A Preferred and each
share of Series B Preferred being treated as though it were a share of our common stock. 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
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, 2018, no options were outstanding
under the Plan.
Restricted stock units granted in 2018, 2017, and 2016 vest over three years at 33.3% at the end of each of the first,
second and third year. 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):
2018
2017
2016
Weighted
Average
Grant Date
Fair Value
Units
Weighted
Average
Grant Date
Fair Value
Units
Units
Outstanding—beginning of year
Granted at fair value
Vested
Forfeited
Outstanding—end of year
540 $
387
(234 )
(134 )
559 $
17.05
65.42
17.68
42.85
44.08
560 $
310
(212 )
(118 )
540 $
17.46
17.75
19.58
16.21
17.05
Weighted
Average
Grant Date
Fair Value
24.80
14.52
22.57
16.52
17.46
349 $
541
(219 )
(111 )
560 $
At December 31, 2018, 1.8 million shares of stock remained available for future grants under the Plan.
43
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."
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.
Consolidated Statement of Operations Data:
Revenue, net
Year ended December 31,
2018
2017
2016
2015
2014
(in thousands, except per share data)
Retail
Other
Total net revenue
Cost of goods sold
Retail
Other
Total cost of goods sold
Gross profit
Operating expenses:
Sales and marketing
Technology
General and administrative
Litigation settlement
Restructuring
Total operating expenses
Operating income (loss)
Interest income
Interest expense
Other income (expense), net
Income (loss) before income taxes
Provision (benefit) for income taxes
Consolidated net income (loss)
Less: Net loss attributable to noncontrolling interests
Net income (loss) attributable to stockholders of
Overstock.com, Inc.
Net income (loss) per common share—basic:
Net income (loss) attributable to common shares—basic
Weighted average common shares outstanding—basic
Net income (loss) per common share—diluted:
Net income (loss) attributable to common shares—diluted
Weighted average common shares outstanding—diluted
$ 1,800,187 $ 1,728,104 $ 1,784,782 $ 1,655,908 $ 1,497,103
—
1,821,592 1,744,756 1,799,963 1,657,838 1,497,103
15,181
16,652
21,405
1,930
15,489
1,452,195 1,392,558 1,458,411 1,353,184 1,218,044
—
1,467,684 1,404,205 1,468,614 1,353,184 1,218,044
279,059
10,203
11,647
340,551
304,654
353,908
331,349
—
274,479
132,154
164,481
—
—
571,114
(217,206 )
2,208
(1,468 )
(3,488 )
(219,954 )
(2,384 )
180,589
115,878
90,718
—
—
387,185
(46,634 )
659
(2,937 )
1,178
(47,734 )
64,188
$ (217,570 ) $ (111,922 ) $
(11,500 )
(2,044 )
147,896
106,760
89,298
(19,520 )
—
324,434
6,915
326
(877 )
14,181
20,545
9,297
11,248 $
(1,274 )
124,468
98,533
82,187
—
—
305,188
(534 )
155
(140 )
3,634
3,115
1,895
1,220 $
(1,226 )
109,461
86,258
71,777
—
(360 )
267,136
11,923
152
(39 )
1,169
13,205
4,404
8,801
(53 )
$ (206,070 ) $ (109,878 ) $
12,522
$
2,446
$
8,854
$
(6.83 ) $
(4.28 ) $
0.49 $
0.10 $
29,976
25,044
25,342
24,612
$
(6.83 ) $
(4.28 ) $
0.49 $
0.10 $
29,976
25,044
25,426
24,703
0.37
23,999
0.36
24,317
See the footnotes beneath the balance sheet data on the following page.
44
Balance Sheet Data:
Cash and cash equivalents
Restricted cash
Working capital
Total assets
Total liabilities
Stockholders' equity
As of December 31,
2018
2017
2016
2015
2014
(in thousands)
$ 141,512 $ 203,215 $ 183,098 $ 170,262 $ 181,641
580
15,260
376,865
247,645
129,220
455
50,534
433,815
261,692
172,123
1,302
(26,219 )
461,219
250,513
210,706
430
(10,308 )
428,389
279,028
149,361
430
(4,843 )
485,076
312,116
172,960
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-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
elsewhere in this Annual Report on Form 10-K. In addition, our future results may be significantly different from our historical
results. 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."
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, bedding and bath, and housewares, among other products.
We sell our products and services through our Internet websites located at www.overstock.com, www.o.co and www.o.biz
(referred to collectively as the "Website"). Although our three websites are located at different domain addresses, the
technology and equipment and processes supporting the Website and the process of order fulfillment described herein are the
same for all three websites. Our retail business initiatives are described in more detail below under "Our Retail Business."
Our Medici business initiatives seek to develop and advance the concepts of "Government as a Service" and a
"Technology Stack for Civilization" by creating or fostering a set of products and solutions that leverage the transparency and
immutability of blockchain technology to generate efficiencies and increase security and control in six areas of civilizational
necessity: identity management, property rights and management, central banking and currencies, capital markets, supply
chains and commerce, and voting systems. Our Medici business initiatives include our wholly-owned subsidiary, Medici
Ventures, Inc. ("Medici Ventures"), which conducts the majority of its business through its majority-owned subsidiary tZERO
Group, Inc. ("tZERO"), formerly tØ.com, Inc., a financial technology company pursuing potential financial applications of
blockchain technologies as well as non-blockchain businesses. Medici Ventures currently holds minority equity interests in
several technology companies whose focuses include the areas mentioned above. Our Medici business initiatives are described
in more detail below under "Our Medici Business" and our tZERO business initiatives are described in more detail below under
"Our tZERO Business Initiatives."
We have engaged Guggenheim Securities, LLC to help us identify and evaluate certain strategic initiatives. We are
considering a range of potential transactions, including a sale of our retail business and additional equity or debt financings. Our
Board of Directors continually discusses a variety of potential strategic and financial options and other changes to our business,
but has not approved or made any determination to consummate any strategic transaction, and may choose not to do so in the
foreseeable future or at all.
45
Our Retail Business
Our retail business, through December 31, 2018, generated nearly all of our net revenues. In our retail business, our
goal is to provide goods to furnish and accessorize "dream homes" for our target customers—consumers who seek quality,
stylish merchandise at bargain prices. At December 31, 2018, we offered 4.9 million products (8.9 million SKUs), of which
over 99% were in-line products (products in active production), including more than 25,000 private label products offered
under eleven private label brands. We believe that the furniture and home goods market, which is highly fragmented and has
traditionally been served by brick and mortar stores, will continue transitioning to online sales, particularly as Millennial
consumers (defined as those aged 20-36), who are generally comfortable shopping online, start families and move into new
homes. We regularly change our product assortment to meet the evolving preferences of our customers and current trends. Our
products include, among others, furniture, home décor including rugs, bedding and bath, home improvement, and kitchen items.
We compete primarily based on:
• Quality customer experience with an emphasis on price, value, and a wide assortment of products delivered in a
personalized format with the convenience of our mobile app, and with the benefits of our award-winning customer
care;
• Proprietary technologies which we believe help us provide our customers with a quality shopping experience;
• Logistics capabilities tailored to the furniture and home goods category and developed over our many years of e-
commerce experience;
• Long-term mutually beneficial relationships with our partners, which currently number approximately 4,000; and
• Our Club O Loyalty Program, which we believe increases customer engagement and retention.
For 2018, nearly all our retail sales through our Website were from transactions in which we fulfilled orders through
our network of approximately 4,000 third-party manufacturers, distributors and other suppliers ("partners") selling on our
Website. Our use of the term "partner" does not mean that we have formed any legal partnerships with any of our retail partners.
We provide our partners with access to a large customer base and convenient services for order fulfillment, customer service,
returns handling, and other services. Our supply chain allows us to ship directly to our customers from our suppliers or from our
warehouses. Our retail sales also includes direct sales of our own inventory shipped from our warehouses, including some
customer returns of partner products. Our warehouses primarily fulfill orders from direct sales of our own inventory. Our
warehouses generally ship between 1,500 and 3,000 packages per day and up to approximately 6,000 packages per day during
peak periods.
During the years ended December 31, 2018, 2017 and 2016 our sales were almost entirely to customers located in the
United States and no single customer accounted for more than 1% of our total net revenue.
Additional Offerings
We offer additional products or services that may complement our primary retail offerings, but are not significant to
our retail revenues. These include:
• Our international business where we offer products to customers outside the United States using third party
logistics providers;
• Worldstock Fair Trade, a store within our Website that offers handcrafted products made by artisans all over the
world to help improve the lives of people in emerging economies;
• Pet Adoptions, a free service and portal within our Website that leverages our technology to display pets available
for adoption from shelters across the United States;
• Overstock Hotels, portal within our Website that enables customers to search and book hundreds of thousands of
properties worldwide, including big box brands, modern boutiques, and more;
• Supplier Oasis, a single integration point through which our partners can manage their products, inventory and
sales channels, and also obtain multi-channel fulfillment services through our distribution network; and
• Businesses advertising products or services on our Website.
Our Retail revenues are seasonal, with revenues historically being the highest in the fourth quarter, which ends
December 31, reflecting higher consumer holiday spending. While we had lower sales volume during Q4 2018, we anticipate
the trend of higher sales volume during our fourth quarter to continue for the foreseeable future. To the extent possible we
maintain supplier relationships, and seek new supplier relationships for our retail businesses, and also use our working capital,
to ensure a continuous allotment of product offerings for our customers.
46
Strategies for Our Retail Business
Our strategies for our Retail business include:
Improve the shopping experience and improve our organic search rankings - We have developed and implemented
initiatives intended to enhance the shopping experience both for how customers and search engines experience our site. Over
the last four months we have begun to see improvements in our organic search engine rankings. We believe we have found a set
of initiatives that appears to be fueling this recovery. We intend to continue to focus on supporting these initiatives so that we
may drive more organic traffic and improved conversion rates on our website.
Leverage new personalization tech stack in Marketing - Over the course of the past 18-months, we have created a new
marketing tech stack that allows for more real-time relational marketing. We believe this platform is improving relevance of ads
to customers and enhancing their interactions with our business.
Expand Club O rewards program to enhance customer loyalty - We believe that membership in our Club O rewards
program increases customer engagement. We have also seen strong program growth in 2018 and we intend to make additional
enhancements in the program, primarily to increase the attractiveness of the program to customers, including increasing
member benefits and developing additional personalization programs.
Improve our delivery experience by expanding distribution facilities and third-party logistics services - We offer third-
party logistics services to our partners, and in 2018 we added a third distribution facility to speed shipping and improve our
overall customer experience. Partners participating in this program store products in one or more of our warehouses, which
benefits our customers by providing same-day order fulfillment and quicker delivery, as well as reduced cost.
Expand technology platforms - We are building platforms that automate vendor management, product pricing, website
personalization and search relevance. We intend to make additional enhancements in automation, technology, and engineering
resources in order to further improve our customers' shopping experience.
Improve product content for our private label program - We launched our private label initiative in the third quarter of
2017. We have developed and are currently offering several private label brands and have more than 25,000 private label
products available on our Website. We are working to improve the quality of content and photography on those products to
enhance the shopping experience. We believe that private label brands can generate significant brand equity and customer
loyalty.
Our ability to pursue some or all of these plans, 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. See
Item 7 of Part II, "Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and
Capital Resources."
Medici Business Initiatives
Our Medici business initiatives seek to develop and advance the concepts of "Government as a Service" and a
"Technology Stack for Civilization" by creating or fostering a set of products and solutions that leverage the transparency and
immutability of blockchain technology to generate efficiencies and increase security and control in six areas of civilizational
necessity: identity management, property rights and management, central banking and currencies, capital markets, supply
chains and commerce, and voting systems. Our wholly-owned subsidiary, Medici Ventures, conducts a majority of its business
through its majority-owned subsidiary tZERO, a financial technology company pursuing potential financial applications of
blockchain technologies as well as non-blockchain businesses. Medici Ventures also holds minority equity interests in several
technology companies, each of which focuses on at least one of the Government as a Service areas mentioned above.
tZERO Business Initiatives
tZERO is a financial technology company pursuing potential financial applications of blockchain technologies as well
as non-blockchain businesses. tZERO’s primary focus at present is on its recent launch of a facility for the trading of digital
securities tokens and on its joint venture with BOX Digital Markets LLC ("BOX Digital") intended to develop a U.S. national
securities exchange (the "Exchange") with regulatory approvals that would enable the Exchange to trade digital securities.
tZERO continues to identify, evaluate and pursue various opportunities for strategic acquisitions or purchases of
interests to add to the services and expertise it offers its customers. Subject to board approval, tZERO's management exercises
47
substantial discretion in identifying appropriate strategic transactions and negotiating the terms of such transactions.
Management's determinations are based on numerous financial, strategic and operational assumptions, and there can be no
assurance that such assumptions will prove to be true. Moreover, such strategic transactions may fail to produce the benefits
expected at the time of tZERO's acquisitions or purchases of interests.
The businesses, products, and services that tZERO is pursuing or contemplating will require substantial additional
funding, initially for technology development and regulatory compliance, as well as for working capital, marketing and sales,
and other substantial costs of developing new products and businesses in emerging areas of technology. These costs have been
and are expected to continue to be material, both to tZERO and to Overstock.
Business Segments
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 many components or operating segments,
including our tZERO reportable segment. We use pre-tax net income (loss) as the measure to determine our reportable
segments. As a result, tZERO is the only reportable segment of our Medici business as it is quantitatively significant. The
remaining Medici business operating segments are not significant and are included in Other. See Item 15 of Part IV, "Financial
Statements"—Note 21. Business Segments for information regarding our business segments and geographical areas.
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") 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 15 of Part IV, "Financial Statements"—Note 2. Accounting
Policies. Although we believe that our estimates, assumptions, and judgments are reasonable, they are based upon information
presently available. Actual results may differ significantly from these estimates. Our critical accounting policies are as follows:
•
•
revenue recognition; and
accounting for the tZERO security token offering.
Revenue recognition
We derive our revenue primarily from our retail business through our Website from merchandise sold at a point in time
and shipped to customers. 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.
Revenue is recognized when control of the product passes to the customer, typically at the date of delivery of the
merchandise to the customer or the date a service is provided, and is recognized in an amount that reflects the expected
consideration to be received in exchange for such goods or services. As such, customer orders are recorded as deferred revenue
prior to delivery of products or services ordered.
As we ship high volumes of packages through multiple carriers, 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.
48
The following table shows the effect that hypothetical changes in the estimate of average shipping transit times would
have had on the reported amount of revenue and income before taxes for the year ended December 31, 2018 (in thousands):
Change in the Estimate of Average Transit Times (Days)
2
1
As reported
(1)
(2)
Year Ended
December 31, 2018
Increase (Decrease)
Revenue
Increase (Decrease)
Income Before Tax
$
$
$
$
(8,258 ) $
(4,246 ) $
As reported
5,750 $
10,458 $
(1,263 )
(645 )
As reported
900
1,620
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 variability in the transaction price 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 security token offering
The Simple Agreements for Future Equity ("SAFEs") offered through the tZERO security token offering 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 tZERO Preferred Equity Tokens ("tZERO Security Tokens") represent a
form of preferred stock and are classified as a component of noncontrolling interest within our consolidated financial
statements.
For information about recent accounting pronouncements, see Item 15 of Part IV, "Financial Statements"—Note 2.
Accounting Policies.
Financial Outlook for the Quarter ending March 31, 2019
During 2018, we increased spending, especially in our sales and marketing, primarily due to our effort to aggressively
pursue increased revenue and new customers in our retail business. This effort resulted in significantly increased spending in
the sponsored search, display ads on social media, and television marketing channels, which continued through early August
2018 when we began reducing our sales and marketing spend as we sought to return to our past strategy which seeks to
optimize the near-term return on our sales and marketing expenditures.
Beginning in January 2019, we began implementing plans to further improve the efficiency of our operations,
including staff reductions, reducing third party expenses, and process streamlining. Additionally, we intend to further reduce our
general and administrative costs throughout 2019.
In Q1 2019, as a result of our return to a disciplined approach to marketing, we expect a decline in our consolidated
net revenues compared to the same period in the prior year of 17% to 19%. In addition, excluding severance costs and any other
special items, we expect to incur a total pre-tax loss of approximately $36 million in Q1 2019 ($20 million Retail, $11 million
tZERO, and $5 million Other).
49
Our estimated results for the quarter ended March 31, 2019 are preliminary and subject to substantial uncertainty and
numerous risks including those outlined in Item 1A of Part I, "Risk Factors". We caution you that our estimates are forward-
looking statements and are not guarantees of future performance or outcomes and that actual results may differ materially.
Comparison of Years Ended December 31, 2018 and 2017
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 increased 4% in 2018 compared to 2017. This increase was primarily driven by increased marketing expenses
as we more aggressively pursued revenue growth and new customers, a retail marketing strategy that we continued through
early August 2018. This resulted in a 2% increase in orders for the year, and we also saw a 5% increase in average order size
(excluding promotional activities) primarily due to a continued sales mix shift into higher priced products. These increases were
partially offset by increased promotional activities, including coupons and site sales (which we recognize as a reduction of
revenue), due to our driving a higher proportion of our sales using such promotions, and an increase in marketplace sales (for
which we record only our commission as revenue). While we have seen improvements in our natural search rankings, we
continue to face challenges in our natural search marketing, which have significantly limited our efforts to grow revenue
efficiently.
Gross profit in 2018 increased 4% compared to 2017 primarily as a result of increased revenue. Gross margin
decreased to 19.4% in 2018, compared to 19.5% in 2017. The decrease in gross margin was primarily due to increased
promotional activities, partially offset by a continued shift in sales mix into higher margin products and an increase in
marketplace sales (for which we record only our commission as revenue).
Sales and marketing expenses as a percentage of revenue increased from 10.4% to 15.1% in 2018 as compared to
2017, primarily due to our effort to aggressively pursue increased revenue and new customers. This effort consisted of
significantly increased spending in the sponsored search, display ads on social media, and television marketing channels, and
continued through early August when we shifted our retail strategy to reduce these expenses. We also had an $8.3 million
increase in staff-related costs, including $2.9 million at tZERO for employee severance and a special restricted stock grant
which fully vested during Q1 2018.
Technology expenses in 2018 increased $16.3 million compared to 2017 primarily due to an $11.8 million increase in
staff-related costs, and a $9.5 million increase in technology licenses. These increases were partially offset by a $2.9 million
decrease in depreciation expense and a $2.7 million decrease in maintenance costs.
General and administrative expenses in 2018 increased $73.8 million compared to 2017, primarily due to a $20.7
million increase in legal costs largely related to our gift card escheatment case in Delaware and costs related to the tZERO SEC
investigation and pursuing our strategic alternatives, a $20.4 million increase in staff-related costs, and a $12.8 million increase
in consulting and outside services expenses. In addition, we had a $6.0 million increase in impairments on indefinite-lived
intangible assets, and a $3.6 million increase in losses on the disposal of various businesses and assets.
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 will cause us to incur losses in the foreseeable future. These losses, additional expenses, acquisitions, or purchases
may be material, and, coupled with existing marketing expense trends and strategic changes in our retail business, may lead to
increased consolidated losses in some periods, and to reduced liquidity. Additionally, we may recognize additional impairment
charges from our ownership interest in other entities.
50
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, 2018, our pre-tax loss in our Medici Ventures business, excluding our loss in our tZERO business, was
$20.5 million, and we expect to continue to incur significant losses in our Medici Ventures business during 2019. As of
December 31, 2018, we have spent approximately $209.6 million in our Medici business since its inception, with the majority
of that being spent in tZERO.
Additional commentary related to tZERO
To date, tZERO has focused on developing its non-blockchain and blockchain businesses and exploring opportunities
for novel applications of blockchain technology. tZERO does not yet have customers or backlog orders and has not yet
generated revenue from any commercially available blockchain-based applications. 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, 2018, our pre-tax loss in our tZERO
business, excluding our loss in the non-tZERO portion of our Medici business, was $40.9 million, and we expect to continue to
incur significant losses in our Medici Ventures business during 2019. As of December 31, 2018, we have spent approximately
$143.5 million in our tZERO business since its inception. The costs have been and are expected to continue to be material, both
to tZERO and to Overstock.
Results of Operations
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. "Retail" includes retail revenue and costs of goods sold from both
"Direct" and "Partner" transactions. "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.
51
The following table sets forth our results of operations expressed as a percentage of total net revenue for the years
ended December 31, 2018, 2017 and 2016:
Revenue, net
Retail
Other
Total net revenue
Cost of goods sold
Retail
Other
Total cost of goods sold
Gross profit
Operating expenses:
Sales and marketing
Technology
General and administrative
Litigation settlement
Total operating expenses
Operating income (loss)
Interest income
Interest expense
Other income (expense), net
Income (loss) before income taxes
Provision (benefit) for income taxes
Consolidated net income (loss)
Revenue
Year ended December 31
2018
2017
2016
(as a percentage of total revenue)
98.8 %
1.2
100.0
99.0 %
1.0
100.0
99.2 %
0.8
100.0
79.7
0.9
80.6
19.4
15.1
7.3
9.0
—
31.4
(11.9 )
0.1
(0.1 )
(0.2 )
(12.1 )
(0.1 )
(11.9 )%
79.8
0.7
80.5
19.5
10.4
6.6
5.2
—
22.2
(2.7 )
—
(0.2 )
0.1
(2.7 )
3.7
(6.5 )%
81.0
0.6
81.6
18.4
8.2
5.9
5.0
(1.1 )
18.0
0.4
—
—
0.8
1.2
0.5
0.7 %
The following table reflects our net revenue for the years ended December 31, 2018 and 2017 (in thousands):
Revenue, net
Retail
Other
Total revenue, net
Year ended
December 31,
2018
2017
$ Change
% Change
$ 1,800,187 $ 1,728,104 $
21,405
16,652
$ 1,821,592 $ 1,744,756 $
72,083
4,753
76,836
4.2 %
28.5 %
4.4 %
The increased total net revenue for the twelve months ended December 31, 2018, as compared to the same period in
2017, was primarily driven by increased marketing expenses as we more aggressively pursued revenue growth and new
customers, a retail marketing strategy that we continued through early August 2018. This resulted in a 2% increase in orders for
the year, and we also saw a 5% increase in average order size (excluding promotional activities) primarily due to a continued
sales mix shift into higher-priced products. These increases were partially offset by increased promotional activities, including
coupons and site sales (which we recognize as a reduction of revenue), due to our driving a higher proportion of our sales using
such promotions, and an increase in marketplace sales (for which we record only our commission as revenue). While we have
seen improvements in our natural search rankings, we continue to face challenges in our natural search marketing, which have
significantly limited our efforts to grow revenue efficiently.
52
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.
The products and product lines we offer, and their respective percentages of our revenue, are based on many factors
including customer demand, our marketing efforts, promotional pricing, joint-marketing offered by our suppliers, the types of
inventory we are able to obtain and the number of SKUs we offer. These factors change frequently and can affect the mix of the
product lines we sell. We have experienced a trend toward our home and garden category in recent years and we have recently
focused our marketing and branding efforts towards our home and garden products. We are also working to increase the number
of SKUs we offer. While we do not currently expect any material shifts in our product line mix, the relative amounts of the
product lines we sell, and the revenue we earn from those product lines, is generally an economic result of the factors described
above, which may change from time to time.
International sales were less than 3% of total net revenues for 2018 and 2017.
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,
2018 and 2017 (in thousands):
Revenue, net
Retail
Other
Total net revenue
Cost of goods sold
Retail
Other
Total cost of goods sold
Gross Profit
Retail
Other
Total gross profit
Year ended December 31,
2018
2017
$ Change
% Change
$ 1,800,187 $ 1,728,104 $
21,405
1,821,592
16,652
1,744,756
1,452,195
15,489
1,467,684
1,392,558
11,647
1,404,205
347,992
5,916
353,908 $
335,546
5,005
340,551 $
$
72,083
4,753
76,836
59,637
3,842
63,479
12,446
911
13,357
4.2 %
28.5 %
4.4 %
4.3 %
33.0 %
4.5 %
3.7 %
18.2 %
3.9 %
Gross margins for the past eight quarterly periods and years ending December 31, 2018 and 2017 were:
Retail
Other
Combined
Retail
Other
Combined
Q1 2018
Q2 2018
Q3 2018
Q4 2018
FY 2018
21.0 %
27.2 %
21.1 %
18.9 %
24.1 %
19.0 %
19.5 %
33.1 %
19.7 %
17.9 %
26.8 %
18.0 %
19.3 %
27.6 %
19.4 %
Q1 2017
Q2 2017
Q3 2017
Q4 2017
FY 2017
20.0 %
24.8 %
20.1 %
19.4 %
30.8 %
19.5 %
19.6 %
33.2 %
19.7 %
18.7 %
31.7 %
18.8 %
19.4 %
30.1 %
19.5 %
Gross profit for the twelve months ended December 31, 2018 increased 4% compared to the same period in 2017
primarily as a result of increased revenue. Gross margin decreased to 19.4% for the twelve months ended December 31, 2018,
compared to 19.5% for the same period in 2017. The decrease in gross margin was primarily due to increased promotional
53
activities, partially offset by a continued shift in sales mix into higher margin products and an increase in marketplace sales (for
which we record only our commission as revenue).
Cost of goods sold includes stock-based compensation expense of $201,000 and $183,000 for the years ended
December 31, 2018 and 2017, respectively.
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):
Total revenue, net
Cost of goods sold
Product costs and other cost of goods sold
Fulfillment and related costs
Total cost of goods sold
Gross profit
Year ended December 31,
2018
$ 1,821,592 100%
2017
$ 1,744,756 100%
1,390,750 76.3%
76,934
4.2%
1,467,684 80.6%
$
353,908 19.4% $
75,456
1,328,749 76.2%
4.3%
1,404,205 80.5%
340,551 19.5%
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, 2018 as compared to 2017.
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, 2018 and 2017 (in
thousands):
Sales and marketing expenses
Year ended
December 31,
2018
$ 274,479
2017
$ 180,589
$ Change
% Change
$
93,890
52.0 %
Sales and marketing expenses as a percent of net revenues
15.1 %
10.4 %
The 472 basis point increase in sales and marketing expenses as a percentage of revenue for the twelve months ended
December 31, 2018, as compared to the same period in 2017, was primarily due to our effort to aggressively pursue increased
revenue and new customers. This effort consisted of significantly increased spending in the sponsored search, display ads on
social media, and television marketing channels, and continued through early August when we shifted our retail strategy to
54
reduce these expenses. We also had an $8.3 million increase in staff-related costs, including $2.9 million at tZERO for
employee severance and a special restricted stock grant which fully vested during Q1 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. While
we may not choose to match their levels of spending, this has increased our marketing costs in recent quarters. We expect this
trend to continue. However, we do have a number of important digital marketing initiatives that we are testing and
implementing that we believe will improve our competitive position in this area.
Sales and marketing expenses include stock-based compensation expense of $1.7 million and $415,000 for the years
ended December 31, 2018 and 2017, respectively.
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 technology to enhance the customer experience, improve our process
efficiency and support and expand our logistics infrastructure. We may 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, 2018 and 2017 (in thousands):
Technology expenses
Year ended
December 31,
2018
$ 132,154
2017
$ Change
% Change
$ 115,878
$
16,276
14.0 %
Technology expenses as a percent of net revenues
7.3 %
6.6 %
The $16.3 million increase in technology costs for the twelve months ended December 31, 2018, as compared to the same
period in 2017, was primarily due to an $11.8 million increase in staff-related costs, and a $9.5 million increase in technology
licenses, partially offset by a $2.9 million decrease in depreciation expense and a $2.7 million decrease in maintenance costs.
Technology expenses include stock-based compensation expense of $2.1 million and $649,000 for the years ended
December 31, 2018 and 2017, respectively.
General and administrative expenses
The following table reflects our general and administrative expenses ("G&A") for the years ended December 31, 2018
and 2017 (in thousands):
General and administrative expenses
Year ended
December 31,
2018
$ 164,481
$
2017
90,718
$ Change
% Change
$
73,763
81.3 %
General and administrative expenses as a percent of net revenues
9.0 %
5.2 %
The $73.8 million increase in general and administrative expenses for the twelve months ended December 31, 2018, as
compared to the same period in 2017, was primarily due to a $20.7 million increase in legal costs and accrued contingencies largely
related to our gift card escheatment case in Delaware and costs related to the tZERO SEC investigation and pursuing our strategic
55
alternatives, a $20.4 million increase in staff-related costs, and a $12.8 million increase in consulting and outside services expenses.
In addition, we had a $6.0 million increase in impairments on indefinite-lived intangible assets, and a $3.6 million increase in losses
on the disposal of various businesses and assets.
G&A expenses include stock-based compensation expense of approximately $10.4 million and $2.8 million for the
years ended December 31, 2018 and 2017, respectively.
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
cause us to incur losses in the foreseeable future. These losses, additional expenses, acquisitions, or purchases may be material,
and, coupled with existing marketing expense trends and strategic changes in our retail business, may lead to increased
consolidated losses in some periods, and to reduced liquidity. Additionally, we may recognize additional impairment charges
from our ownership interest in other entities.
Litigation settlement
In Q1 2016, we entered into a settlement agreement in our prime broker litigation which concluded the litigation in its
entirety and we recognized settlement proceeds of $19.5 million. Related costs associated with the litigation and settlement of
approximately $1.0 million were included in G&A expenses during Q1 2016.
Depreciation and amortization expense
Depreciation expense is classified within the corresponding operating expense categories in the consolidated
statements of operations as follows (in thousands):
Cost of goods sold - retail
Technology
General and administrative
Total depreciation, including internal-use software and website development
Year ended
December 31,
2018
2017
354 $
21,894
4,163
26,411 $
307
24,604
3,937
28,848
$
$
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):
Technology
Sales and marketing
General and administrative
Total amortization
Non-operating income (expense)
Interest expense
Year ended
December 31,
2018
2017
3,424 $
460
1,402
5,286 $
3,620
83
296
3,999
$
$
Total interest expense decreased $1.5 million, from $2.9 million for the twelve months ended December 31, 2017 to $1.5
million for the twelve months ended December 31, 2018. The decrease in interest expense is primarily due to paying off the PCL
Loan in May 2018.
Other income (expense), net
Other income (expense), net for the twelve months ended December 31, 2018 was ($3.5 million) as compared to $1.2
million in 2017. The decrease is primarily due to a $4.6 million increase in losses on equity holdings and other assets, and a $2.7
56
million decrease in Club O and gift card breakage, which we began recognizing as a component of revenue in 2018 following the
adoption of ASC 606, partially offset by a $2.2 million decrease in debt retirement charges.
Income taxes
Our effective tax rate for the years ended December 31, 2018 and 2017 was 1.1% and (134.5)%, 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. The decrease in the 2018 effective tax rate relative to the 2017
effective tax rate is primarily attributable to our valuation allowance against our net deferred tax assets which was established at the
end of 2017, the act of which caused a significant change in the 2017 rate.
We have indefinitely reinvested foreign earnings of $1.4 million at December 31, 2018. We would need to accrue and pay
various taxes on this amount if repatriated. We do not intend to repatriate these earnings.
Seasonality
Based upon our historical experience, revenue typically increases during the fourth quarter because of the holiday
retail season and gross margin decreases due to increased sales of certain lower margin products, such as electronics. Revenue
typically decreases in the following quarter(s), as shown in the table below. The actual quarterly results for each quarter could
differ materially depending upon consumer preferences, availability of product and competition, among other risks and
uncertainties. Accordingly, there can be no assurances that seasonal variations will not materially affect our results of operations
in the future.
The following table reflects our total net revenues for each of the quarters in 2018, 2017 and 2016 (in thousands):
2018
2017
2016
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
$
$
$
445,331 $
432,435 $
413,677 $
483,133 $
432,024 $
418,540 $
440,580 $
424,007 $
441,564 $
452,548
456,290
526,182
Comparison of Years Ended December 31, 2017 and 2016
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."
Our $111.9 million consolidated net loss in 2017 was the result primarily of our $46.6 million operating loss in 2017
and our $64.2 million income tax expense in 2017. The operating loss was caused primarily by changes that Google made in its
natural search engine algorithms and an increasingly competitive digital marketing landscape. The income tax expense included
$25.3 million of expense caused by the enactment in late December 2017 of the TCJA and $59.0 million of expense caused by
our establishment of a valuation allowance against our net deferred tax assets at December 31, 2017. These matters are
discussed in more detail below.
Revenues in 2017 decreased 3% compared to 2016. Beginning in mid-2017 and continuing in the fourth quarter of
2017, we experienced difficulties which we believe were due in part to changes that Google, Inc. ("Google") has made in its
natural search engine algorithms. This decrease to revenue was partially offset by efforts to increase revenue in other marketing
channels such as sponsored search and email.
Gross profit in 2017 increased 3% compared to 2016 primarily as a result of increased gross margin. Gross margin
increased to 19.5% in 2017 compared to 18.4% in 2016. The increase in gross margin was primarily due to a continued shift in sales
57
mix into higher margin products and an increase in marketplace sales (which we recognize on a net basis), partially offset by
increased promotional activities, including coupons and site sales due to our driving a higher proportion of our sales using such
promotions.
Sales and marketing expenses as a percentage of revenue increased from 8.2% to 10.4% in 2017 as compared to 2016,
primarily due to increased spending in the sponsored search and display ads on social media marketing channels, due in part to our
seeking to increase revenue in these channels to partially offset the effects of the Google algorithm changes described above.
Technology expenses in 2017 increased $9.1 million compared to 2016 primarily due to an increase in staff related costs of
$4.9 million, and an increase in technology licenses and maintenance costs of $4.0 million.
General and administrative expenses in 2017 increased $1.4 million compared to 2016, primarily due to an increase in staff
related costs of $4.9 million, partially offset by a decrease in legal fees of $3.0 million, and a decrease in bad debt expense of $1.1
million.
Our provision for income taxes totaled $64.2 million and $9.3 million for 2017 and 2016, respectively. The increase in 2017
expense compared to 2016 is primarily attributable to our decision to establish a valuation allowance against our net deferred tax
assets, as well as the impact of the TCJA. On December 22, 2017, the President signed into law the TCJA. Among many other
changes, the new law lowers the corporate tax rate from 35% to 21% for tax years beginning in 2018. Therefore, we re-valued our
deferred tax assets in 2017 due to the federal rate reduction, which resulted in an increase in our 2017 income tax expense of $25.3
million. Additionally, each quarter we assess available positive and negative evidence to estimate whether we will generate sufficient
future taxable income to use our existing deferred tax assets. Due to losses incurred in 2017 and the potential for future losses, we
have recorded a valuation allowance on our deferred tax assets, net of deferred tax liabilities, which further increased our 2017
income tax expense by $59.0 million.
The balance of our Management's Discussion and Analysis of Financial Condition and Results of Operations provides
further information about the matters discussed above and other important matters affecting our business.
Results of Operations
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. "Retail" includes retail revenue and costs of goods sold from both
"Direct" and "Partner" transactions. "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.
58
The following table sets forth our results of operations expressed as a percentage of total net revenue for the years
ended December 31, 2017, 2016 and 2015:
Revenue, net
Retail
Other
Total net revenue
Cost of goods sold
Retail
Other
Total cost of goods sold
Gross profit
Operating expenses:
Sales and marketing
Technology
General and administrative
Litigation settlement
Total operating expenses
Operating income (loss)
Interest income
Interest expense
Other income, net
Income (loss) before income taxes
Provision for income taxes
Consolidated net income (loss)
Revenue
Year ended December 31
2017
2016
2015
(as a percentage of total revenue)
99.0 %
1.0
100.0
99.2 %
0.8
100.0
99.9 %
0.1
100.0
79.8
0.7
80.5
19.5
10.4
6.6
5.2
—
22.2
(2.7 )
—
(0.2 )
0.1
(2.8 )
3.7
(6.5 )%
81.0
0.6
81.6
18.4
8.2
5.9
5.0
(1.1 )
18.0
0.4
—
—
0.8
1.2
0.5
0.7 %
81.6
—
81.6
18.4
7.5
5.9
5.0
—
18.4
—
—
—
0.2
0.2
0.1
0.1 %
The following table reflects our net revenue for the years ended December 31, 2017 and 2016 (in thousands):
Revenue, net
Retail
Other
Total revenue, net
Year ended
December 31,
2017
2016
$ Change
% Change
$ 1,728,104 $ 1,784,782 $
16,652
15,181
$ 1,744,756 $ 1,799,963 $
(56,678 )
1,471
(55,207 )
(3.2 )%
9.7 %
(3.1 )%
The decrease in total net revenue for the year ended December 31, 2017, as compared to the same period in 2016, was due
in part to changes that we believe Google has made in its natural search engine algorithms. In addition, we had an increase in
product sales for which we record only our commission as revenue, and an increase in promotional activities, including coupons and
site sales due to our driving a higher proportion of our sales using such promotions.
The products and product lines we offer, and their respective percentages of our revenue, are based on many factors
including customer demand, our marketing efforts, promotional pricing, joint-marketing offered by our suppliers, the types of
inventory we are able to obtain and the number of SKUs we offer. These factors change frequently and can affect the mix of the
product lines we sell. We have experienced a trend toward our home and garden category in recent years and we have recently
focused our marketing and branding efforts towards our home and garden products. We are also working to increase the number
of SKUs we offer. While we do not currently expect any material shifts in our product line mix, the relative amounts of the
59
product lines we sell, and the revenue we earn from those product lines, is generally an economic result of the factors described
above, which may change from time to time.
International sales were less than 3% of total net revenues for 2017 and 2016.
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,
2017 and 2016 (in thousands):
Revenue, net
Retail
Other
Total net revenue
Cost of goods sold
Retail
Other
Total cost of goods sold
Gross Profit
Retail
Other
Total gross profit
Year ended December 31,
2017
2016
$ Change
% Change
$ 1,728,104 $ 1,784,782 $
16,652
1,744,756
15,181
1,799,963
1,392,558
11,647
1,404,205
1,458,411
10,203
1,468,614
(56,678 )
1,471
(55,207 )
(65,853 )
1,444
(64,409 )
335,546
5,005
340,551 $
326,371
4,978
331,349 $
$
9,175
27
9,202
(3.2 )%
9.7 %
(3.1 )%
(4.5 )%
14.2 %
(4.4 )%
2.8 %
0.5 %
2.8 %
Gross margins for the past eight quarterly periods and years ending December 31, 2017 and 2016 were:
Retail
Other
Combined
Retail
Other
Combined
Q1 2017
Q2 2017
Q3 2017
Q4 2017
FY 2017
20.0 %
24.8 %
20.1 %
19.4 %
30.8 %
19.5 %
19.6 %
33.2 %
19.7 %
18.7 %
31.7 %
18.8 %
19.4 %
30.1 %
19.5 %
Q1 2016
Q2 2016
Q3 2016
Q4 2016
FY 2016
18.5 %
39.5 %
18.7 %
18.1 %
33.8 %
18.2 %
17.9 %
35.1 %
18.1 %
18.6 %
26.0 %
18.6 %
18.3 %
32.8 %
18.4 %
Gross profit for the year ended December 31, 2017 increased 3% compared to the same period in 2016 primarily as a result
of increased gross margin. Gross margin increased to 19.5% for the year ended December 31, 2017 compared to 18.4% for the same
period in 2016. This increase in gross margin was primarily due to a continued shift in sales mix into higher margin products and an
increase in marketplace sales (which we recognize on a net basis), partially offset by increased promotional activities, including
coupons and site sales due to our driving a higher proportion of our sales using such promotions.
Cost of goods sold includes stock-based compensation expense of $183,000 and $266,000 for the years ended
December 31, 2017 and 2016, respectively.
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
60
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):
Total revenue, net
Cost of goods sold
Product costs and other cost of goods sold
Fulfillment and related costs
Total cost of goods sold
Gross profit
Year ended December 31,
2017
$ 1,744,756 100%
2016
$ 1,799,963 100%
1,328,749 76.2%
75,456
4.3%
1,404,205 80.5%
$
340,551 19.5% $
76,878
1,391,736 77.3%
4.3%
1,468,614 81.6%
331,349 18.4%
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, 2017 as compared to 2016.
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, 2017 and 2016 (in
thousands):
Sales and marketing expenses
Year ended
December 31,
2017
$ 180,589
2016
$ 147,896
$ Change
% Change
$
32,693
22.1 %
Sales and marketing expenses as a percent of net revenues
10.4 %
8.2 %
The 220 basis point increase in sales and marketing expenses as a percentage of revenue for the year ended December
31, 2017, as compared to the same period in 2016, was primarily due to increased spending in sponsored search and display ads
on social media, and television marketing channels, and increased staff related costs.
Sales and marketing expenses include stock-based compensation expense of $415,000 and $249,000 for the years
ended December 31, 2017 and 2016, respectively.
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.
61
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 technology to enhance the customer experience, improve our process
efficiency and support and expand our logistics infrastructure.
The following table reflects our technology expenses for the years ended December 31, 2017 and 2016 (in thousands):
Technology expenses
Year ended
December 31,
2017
$ 115,878
2016
$ Change
% Change
$ 106,760
$
9,118
8.5 %
Technology expenses as a percent of net revenues
6.6 %
5.9 %
The $9.1 million increase in technology costs for the year ended December 31, 2017, as compared to the same period in
2016, was primarily due to an increase in staff related costs of $4.9 million, and an increase in technology licenses and maintenance
of $4.0 million.
Technology expenses include stock-based compensation expense of $649,000 and $777,000 for the years ended
December 31, 2017 and 2016, respectively.
General and administrative expenses
The following table reflects our general and administrative expenses ("G&A") for the years ended December 31, 2017
and 2016 (in thousands):
General and administrative expenses
Year ended
December 31,
2017
90,718
$
2016
89,298
$
$ Change
% Change
$
1,420
1.6 %
General and administrative expenses as a percent of net revenues
5.2 %
5.0 %
The $1.4 million increase in general and administrative expenses ("G&A") for the year ended December 31, 2017, as
compared to the same period in 2016, was primarily due to an increase in staff related costs of $4.9 million, partially offset by a
decrease in legal fees of $3.0 million, and a decrease in bad debt expense of $1.1 million.
G&A expenses include stock-based compensation expense of approximately $2.8 million and $3.6 million for the
years ended December 31, 2017 and 2016, respectively.
Litigation settlement
In Q1 2016, we entered into a settlement agreement in our prime broker litigation which concluded the litigation in its
entirety and we recognized settlement proceeds of $19.5 million. Related costs associated with the litigation and settlement of
approximately $1.0 million were included in G&A expenses during Q1 2016.
62
Depreciation and amortization expense
Depreciation expense is classified within the corresponding operating expense categories in the consolidated
statements of operations as follows (in thousands):
Cost of goods sold - retail
Technology
Sales and marketing
General and administrative
$
Total depreciation, including internal-use software and website development
$
Year ended
December 31,
2017
2016
307 $
24,604
—
3,937
28,848 $
310
25,693
124
1,156
27,283
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):
Technology
Sales and marketing
General and administrative
Total amortization
Non-operating income (expense)
Interest expense
Year ended
December 31,
2017
2016
3,620 $
83
296
3,999 $
2,904
1,008
56
3,968
$
$
Total interest expense increased $2.1 million, from $877,000 for the year ended December 31, 2016 to $2.9 million for the
year ended December 31, 2017. The increase in interest expense is primarily due to no longer capitalizing interest on our
headquarters loan due to construction completion.
Other income, net
Other income, net for the year ended December 31, 2017 was $1.2 million as compared to $14.2 million in 2016. The
decrease is primarily due to a decrease in Club O Rewards breakage of $14.2 million due to discontinuing our Club O Silver rewards
program in Q4 2016, an increase in impairment charges of $2.6 million related to cost method investments, and an increase in debt
extinguishment costs of $2.5 million. These decreases were partially offset by an increase in realized gains on sales of non-operating
assets and precious metals of $6.6 million.
Income taxes
Our effective tax rate for the years ended December 31, 2017 and 2016 was (134.5)% and 45.3%, 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. The decrease in the 2017 effective tax rate relative
to the 2016 effective tax rate is primarily attributable to our decision to establish a valuation allowance against our deferred tax
assets, net of deferred tax liabilities, as well as the impact of the TCJA. In our decision to establish a valuation allowance, we
concluded that the negative evidence outweighed the positive evidence and that it was not more likely than not that all our
federal and state deferred tax assets will be realized (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 have indefinitely reinvested foreign earnings of $1.3 million at December 31, 2017. We would need to accrue and
pay various taxes on this amount if repatriated.
63
Seasonality
Based upon our historical experience, revenue typically increases during the fourth quarter because of the holiday
retail season and gross margin decreases due to increased sales of certain lower margin products, such as electronics. Revenue
typically decreases in the following quarter(s), as shown in the table below. The actual quarterly results for each quarter could
differ materially depending upon consumer preferences, availability of product and competition, among other risks and
uncertainties. Accordingly, there can be no assurances that seasonal variations will not materially affect our results of operations
in the future.
The following table reflects our total net revenues for each of the quarters in 2017, 2016 and 2015 (in thousands):
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
$
$
$
432,435 $
413,677 $
398,344 $
432,024 $
418,540 $
388,013 $
424,007 $
441,564 $
391,211 $
456,290
526,182
480,270
2017
2016
2015
Liquidity and Capital Resources
Overview
We are proactively seeking opportunities to improve the efficiency of our operations and are considering a
comprehensive set of actions to do so. During the later end of 2018 we began taking and continue to take significant steps to
realize internal cost savings, including staff reductions, and process streamlining. Additionally, we intend to further reduce costs
in future periods. 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 also believe that we may need to
raise additional capital and/or obtain additional debt financing to be able to fully pursue some or all of our strategies, including
plans for our retail business while also funding our Medici initiatives, beyond the next twelve months.
We have developed and implemented initiatives within our retail business around improving our Club O rewards
program primarily to increase member benefits and to develop additional personalization programs; improving our organic
search engine rankings; additional distribution facilities to speed shipping and improve our customer service; additional
automation, technology and engineering resources to improve our customers' shopping experience; and improving our private
label initiative to generate significant brand equity and customer loyalty. We believe these initiatives will have significant long-
term positive results; however, the expenditures will likely adversely affect our short-term results. See "Strategies for Our
Retail Business" above.
Our Medici initiatives also require substantial funding. Medici Ventures and its majority-owned subsidiary, tZERO,
continue to identify, evaluate and pursue various opportunities for strategic acquisitions or purchases of interests to add to the
services and expertise they offer their customers. See "Medici Business Initiatives" and "tZERO Business Initiatives" above.
Our ability to pursue some or all of these plans, 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.
Current sources of liquidity
Our principal sources of liquidity are existing cash and cash equivalents. At December 31, 2018, we had cash and cash
equivalents of $141.5 million. Our ability to access the liquidity of our subsidiaries may be limited by tax and legal
considerations and other factors.
64
Cash flow information is as follows (in thousands):
Cash provided by (used in):
Operating activities
Investing activities
Financing activities
Year ended
December 31,
2018
2017
$
(138,934 ) $
(110,923 )
189,001
(35,221 )
(17,960 )
73,323
In August 2018, we entered into a sales agreement with JonesTrading Institutional Services LLC ("JonesTrading"),
under which we conducted "at the market" public offerings of our common stock during the second half of 2018 and may
conduct additional "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. We have no
obligation to sell additional shares under the sales agreement, but expect to do so. We will pay JonesTrading up to a 2.0% sales
commission on all sales. The sales agreement contemplates sales of up to $150 million of our common stock over a period of up
to three years. As of December 31, 2018, we had sold 2,883,344 shares of our common stock pursuant to the sales agreement
and have 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 agreed to purchase, for $30 million, on May 6,
2019 or such other date as may be agreed by the parties, security tokens at a price of $6.67 per security token. These security
tokens were issued by tZERO to Overstock in satisfaction of $30 million of tZERO's indebtedness to Overstock. We may be
required to obtain additional tokens in order to fulfill our obligations under the agreement. The agreement states that the
obligations of GSR to complete the transaction described will be subject to conditions, some of which are unidentified.
The previously-announced GSR equity investments in Overstock and tZERO contemplated by the term sheets did not
occur. However, we remain in discussions with GSR Capital and Makara Capital, a key partner of GSR Capital, regarding a
potential transaction. Both have recently signed an memorandum of understanding (“MOU”) with tZERO outlining a
transaction in which Makara and GSR would co-lead an investment of up to $100 million in tZERO common stock and close
the transaction in April subject to due diligence, negotiation of binding contracts and regulatory approval. The investors would
also assist with tZERO’s expansion in Asia and other regions of the world and link them with other key partners from their
portfolios. If a definitive agreement is reached, the terms, including the amount purchased, number of shares, and/or post
money valuation of tZERO, may be less favorable than the terms contemplated under the MOU. There can be no assurance that
tZERO, Makara or GSR will enter into a definitive agreement regarding the proposed transaction.
Free cash flow
"Free Cash Flow" (a non-GAAP measure) for the years ended December 31, 2018 and 2017, was $(167.6) million and
$(58.8) million, respectively. See Non-GAAP Financial Measures below for a reconciliation of Free Cash Flow to net cash
provided by (used in) operating activities.
Cash flows from operating activities
For the years ended December 31, 2018 and 2017, our operating activities resulted in net cash outflow of $138.9
million and $35.2 million, respectively.
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
typically seasonally strong fourth quarter 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
65
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 $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 losses, net of realized gains, recognized on cryptocurrency holdings of $2.1 million,
loss on equity investments, net of $2.8 million, loss on disposal of business and other asset abandonments of $3.6 million, and
impairment on intangible assets of $6.0 million.
The $35.2 million of net cash used in operating activities during the year ended December 31, 2017 was primarily
from a consolidated net loss of $111.9 million, and cash used by operating assets and liabilities of $30.3 million. These were
partially offset by certain non-cash items including deferred income taxes of $65.2 million, depreciation and amortization of
$32.8 million, stock-based compensation of $4.1 million, and loss on equity investments, net of $6.0 million.
Cash flows from investing activities
For the year ended December 31, 2018, investing activities resulted in net cash outflows of $110.9 million, primarily
from purchases of equity investments 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
$8.0 million, and disbursements for loans made of $3.1 million.
For the year ended December 31, 2017, investing activities resulted in net cash outflows of $18.0 million, primarily
from expenditures for fixed assets of $23.6 million and purchases of equity investments of $5.2 million, offset by proceeds
from sale of precious metals of $11.9 million.
Cash flows from financing activities
For the years ended December 31, 2018 and 2017, financing activities resulted in net cash inflows of $189.0 million
and $73.3 million, respectively.
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 tZERO security token offering,
$50.6 million of proceeds from sales and exercises of stock warrants, and $6.7 million of proceeds from sale of subsidiary
shares, offset by $40.0 million of repayments on our PCL term loan and $4.6 million of taxes withheld upon vesting of
restricted stock.
The $73.3 million provided by financing activities during the year ended December 31, 2017 resulted primarily
from $106.5 million of proceeds from sales and exercises of stock warrants, $40.0 million of proceeds from our PCL term loan,
offset by $45.8 million of repayments on our U.S. Bank term loan, $15.3 million of repayments on lease finance obligations
with U.S. Bank, $10.0 million of purchases of treasury stock and $1.2 million of taxes withheld upon vesting of restricted stock.
Contractual Obligations and Commitments
The following table summarizes our contractual obligations as of December 31, 2018 and the effect such obligations
and commitments are expected to have on our liquidity and cash flow in future periods (in thousands):
Payments Due by Period
Contractual Obligations
Operating leases
Purchase obligations
Technology services
High bench senior credit agreement
2019
8,822
2,569
2,031
—
Total contractual cash obligations
$ 13,422 $
2020
7,414
—
1,693
3,069
9,107 $
2021
7,654
—
—
—
7,654 $
2022
7,579
—
—
—
7,579 $
66
2023
6,677
—
—
—
Thereafter
19,571
—
—
—
Total
57,717
2,569
3,724
3,069
6,677 $ 19,571 $ 64,010
Operating leases
From time to time we enter into operating leases for facilities and equipment for use in our operations.
Purchase obligations
The amount of purchase obligations shown above is based on assumptions regarding the legal enforceability against us
of inventory purchase orders we had outstanding at December 31, 2018. Under different assumptions regarding our rights to
cancel our purchase orders or different assumptions regarding the enforceability of the purchase orders under applicable law,
the amount of purchase obligations shown in the table above would be less.
High bench senior credit agreement
We are party to a financing agreement acquired in connection with our acquisition of Mac Warehouse, LLC (see
Borrowings below). The amounts presented reflect our related principal payments.
Technology services
From time to time we enter into long-term contractual agreements for technology services and capital leases for
equipment included in such service agreements.
Tax contingencies
We are involved in various tax matters, the outcomes of which are uncertain. As of December 31, 2018 and 2017, tax
contingencies were $1.5 million and $1.7 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 increase in the
future. 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 ("High Bench Loan"), in connection with our acquisition of Mac Warehouse, LLC. Under the amended
agreement, the loan carries an annual interest rate of 11.0% and a default rate of 18.0%. The High Bench Loan is subject to
monthly interest only payments with the remaining principal amount and any then unpaid interest due and payable on April 18,
2020. The High Bench Loan is subject to mandatory prepayment under certain circumstances, and is prepayable at our election
at any time without penalty or premium. There are no financial covenants associated the High Bench Loan. At December 31,
2018, our outstanding balance on the High Bench Loan was $3.1 million.
Letters of credit
At December 31, 2018 and 2017, letters of credit totaling $280,000 and $355,000, 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, 2018, $48,000 was outstanding and $952,000 was
available under the Purchasing Card. At December 31, 2017, $822,000 was outstanding and $4.2 million was available under
the Purchasing Card.
67
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
We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect
on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital
expenditures or capital resources that would be material to investors.
Non-GAAP Financial Measures
Regulation G, Conditions for Use of Non-GAAP Financial Measures, and other SEC regulations regulate the
disclosure of certain non-GAAP financial information.
Free cash flow
Free cash flow (a non-GAAP financial measure) reflects an additional way of viewing our cash flows and liquidity
that, when viewed with our GAAP results, provides a more complete understanding of factors and trends affecting our cash
flows and liquidity. Free cash flow, which we reconcile below to "Net cash provided by (used in) operating activities," the
nearest GAAP financial measure, is net cash provided by (used in) operating activities reduced by "Expenditures for fixed
assets, including internal-use software and website development." We believe that net cash provided by (used in) operating
activities is an important measure, since it includes both the cash impact of the continuing operations of the business and
changes in the balance sheet that impact cash. We believe free cash flow is a useful measure to evaluate our business since
purchases of fixed assets are a necessary component of ongoing operations and free cash flow measures the amount of cash we
have available for mandatory debt service and financing obligations, changes in our capital structure, and future investments
after purchases of fixed assets. Free cash flow measures have limitations as they omit certain components of the overall
consolidated statement of cash flows and do not represent the residual cash flow available for discretionary expenditures. Free
cash flow should not be considered a substitute for net income or cash flow data prepared in accordance with GAAP and may
not be comparable to similarly titled measures used by other companies. Therefore, we believe it is important to view free cash
flow as a complement to our entire consolidated statements of cash flows as reconciled below (in thousands):
Year ended
December 31,
2018
2017
Net cash provided by (used in) operating activities
$
(138,934 ) $
(35,221 ) $
Expenditures for fixed assets, including internal-use software and
website development
Free cash flow
(28,680 )
(23,586 )
$
(167,614 ) $
(58,807 ) $
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
68
2016
39,564
(72,281 )
(32,717 )
Our financial instruments consist of cash and cash equivalents, trade accounts and contracts receivable, accounts
payable and long-term obligations. We consider highly-liquid instruments with a remaining maturity of 90 days or less at the
date of purchase to be cash equivalents. We currently do not hold any derivative financial instruments or foreign exchange
contracts.
Our exposure to market risk for changes in interest rates relates primarily to our short-term investments and short-term
obligations; thus, fluctuations in interest rates would not have a material impact on the fair value of these securities. However,
the fair values of our investments 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, 2018, we had $141.5 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 $1.4 million on our earnings or loss, or the cash
flows of these instruments.
At December 31, 2018, letters of credit totaling $280,000 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 $3,000 on our earnings or loss if the letters of credit were fully drawn.
At December 31, 2018, we had cryptocurrency-denominated assets totaling $2.4 million. Hypothetically, an increase
or decrease in the market value of one hundred basis points would have an estimated impact of $24,000 on our earnings or loss,
or the recorded value of these instruments. It is generally not our policy to hold material amounts of cryptocurrency because of
volatility and market risk.
At December 31, 2018, our recorded value in equity investments in public and private companies was $60.4 million.
Our equity investments in publicly traded companies represent $2.6 million of our equity investments as of December 31, 2018,
and are recorded at fair value, which is subject to market price volatility. We perform a qualitative assessment for our equity
investments in private companies to identify impairment. If this assessment indicates that an impairment exists, we estimate the
fair value of the investment and, if the fair value is less than carrying value, we write down the investment to fair value. Our
assessment includes a review of recent operating results and trends, recent sales/acquisitions of the investee securities, and other
publicly available data. 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
The financial statements and supplementary data required by this item are included in Part IV, Item 15 of this Annual
Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
(a) 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
69
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.
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.
(b) 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, 2018.
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, 2018, 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, 2018 has been audited by
KPMG LLP, an independent registered public accounting firm, as stated in their report which is in Item 9A(c).
70
(c) 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, 2018, based on criteria established in Internal 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, 2018, based on criteria established in Internal 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, 2018 and 2017, the related consolidated
statements of operations, comprehensive income (loss), changes in stockholders' equity, and cash flows for each of the years in
the three-year period ended December 31, 2018, and the related notes and financial statement schedule II (collectively, the
consolidated financial statements), and our report dated March 18, 2019 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.
Salt Lake City, Utah
March 18, 2019
/s/ KPMG LLP
71
(d) Changes in Internal Control Over Financial Reporting
During the fiscal quarter ended December 31, 2018, there has not occurred any change in our internal control over
financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial
reporting.
ITEM 9B. OTHER INFORMATION
None.
72
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 2019 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
2019 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 2019
annual meeting of stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Except as set forth herein, the information required by this Item is incorporated by reference to our definitive proxy
statement for the 2019 annual meeting of stockholders.
The following graph compares the total cumulative stockholder return, on our common stock with the total cumulative
return of the NASDAQ Market Index—U.S. ("NASDAQ Market Index") and the Morningstar Specialty Retail Index
("Morningstar Group Index") during the period commencing on January 1, 2014 through December 31, 2018. The graph
assumes a $100 investment at the beginning of the period in our common stock, the NASDAQ Market Index and the
Morningstar Group Index, and the reinvestment of any dividends. Historic stock price performance is not necessarily indicative
of future stock price performance.
73
COMPARISON OF YEAR CUMULATIVE TOTAL RETURN
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 2019
annual meeting of stockholders.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this Item is incorporated by reference to our definitive proxy statement for the 2019
annual meeting of stockholders.
74
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
1. Financial Statements
PART IV
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm .................................................................................................. 83
Consolidated Balance Sheets ................................................................................................................................................. 84
Consolidated Statements of Operations ................................................................................................................................. 85
Consolidated Statements of Comprehensive Income (Loss) ................................................................................................. 86
Consolidated Statements of Changes in Stockholders' Equity .............................................................................................. 87
Consolidated Statements of Cash Flows ............................................................................................................................... 89
Notes to Consolidated Financial Statements ......................................................................................................................... 91
Schedule II Valuation and Qualifying Accounts .................................................................................................................... 125
2. Financial Statement Schedule
Schedule II Valuation and Qualifying Accounts listed in (1) above is included herein. Schedules other than those listed
above 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.
3. Exhibits
Exhibit
Number
2.1(b)
2.2(b)
2.3(b)
2.4(b)
Exhibit Description
Asset Purchase Agreement by and
between Cirrus Technologies,
LLC, as Seller, and Cirrus Services
LLC, as Buyer, dated as of August
26, 2015
Pro Securities, LLC Membership
Interest Purchase Agreement by
and among Joseph Cammarata and
John Paul DeVito, as Sellers, and
Medici, Inc., as Buyer, dated as of
August 26, 2015
SpeedRoute LLC Membership
Interest Purchase Agreement by
and among Joseph Cammarata and
John Paul DeVito, as Sellers, and
Medici, Inc., as Buyer, dated as of
August 26, 2015
TraderField Securities, Inc. Stock
Purchase Agreement by and
between Joseph Cammarata, as
Seller, and Medici, Inc., as Buyer,
dated as of August 26, 2015
Form
10-Q
File No.
Exhibit
Filing Date
000-49799
2.1
November 9, 2015
Filed
Herewith
10-Q
000-49799
2.2
November 9, 2015
10-Q
000-49799
2.3
November 9, 2015
10-Q
000-49799
2.4
November 9, 2015
3.1
Amended and Restated Certificate
of Incorporation
10-Q
000-49799
3.1
July 29, 2014
3.2
Amended and Restated Bylaws
10-Q
000-49799
3.1
May 4, 2017
75
Exhibit
Number
3.3
3.4
4.1
4.2
4.3(a)
4.4
4.5(a)
4.6(a)
4.7
4.8
4.9
4.10
4.11
Exhibit Description
Certificate of Designation for
Blockchain Voting Series A
Preferred Stock
Certificate of Designation for
Voting Series B Preferred Stock
Form of specimen common stock
certificate
Form of Stock Certificate for
Voting Series B Preferred Stock
Registration Rights Agreement
dated December 15, 2016 by and
among Overstock.com, Inc. and
Patrick M. Byrne, individually and
as representative of each of the
Participating Affiliates (as defined
therein)
Form of Participating Affiliate
Agreement (included in Exhibit
4.3)
Amendment No. 1 to Registration
Rights Agreement effective March
10, 2017 by and among
Overstock.com, Inc. and Patrick
M. Byrne, individually and in his
representative capacity
Amendment No. 2 to Registration
Rights Agreement effective June
10, 2017 by and among
Overstock.com, Inc. and Patrick
M. Byrne, individually and in his
representative capacity
Certificate of Designation for
Blockchain Voting Series A
Preferred Stock (see Exhibit 3.3)
Certificate of Designation for
Voting Series B Preferred Stock
(see Exhibit 3.4)
Form of Warrant issued to Passport
Special Opportunities Master
Fund, L.P. dated November 8,
2017 (included in Exhibit 10.20)
Amendment dated November 13,
2017 to Warrant issued to Passport
Special Opportunities Master
Fund, L.P. dated November 8,
2017
Form of Warrant issued to
Quantum Partners LP dated
November 8, 2017 (included in
Exhibit 10.21)
Form
8-K
File No.
Exhibit
Filing Date
000-49799
3.1
December 15, 2016
Filed
Herewith
8-K
000-49799
3.2
December 15, 2016
S-1/A
333-83728
4.1
May 6, 2002
8-K
000-49799
4.2
November 14, 2016
8-K
000-49799
4.1
December 15, 2016
10-Q
000-49799
4.2
May 4, 2017
10-Q
000-49799
4.1
August 3, 2017
8-K/A
000-49799
4.1.2
November 13, 2017
76
Exhibit
Number
4.12
10.1(a)
10.2(a)
10.3(a)
10.4
10.5
10.6
10.7
10.8
10.9
Exhibit Description
Amendment dated November 13,
2017 to Warrant issued to
Quantum Partners LP dated
November 8, 2017
Form of Indemnification
Agreement between
Overstock.com, Inc. and each of
its directors and officers
Overstock.com, Inc. Amended and
Restated 2005 Equity Incentive
Plan
Form of Restricted Stock Unit
Grant Notice and Restricted Stock
Agreement under the 2005 Equity
Incentive Plan
Purchase and Sale Agreement
dated May 5, 2014 between
O.Com Land LLC, Gardner
Bingham Junction Holdings, L.C.
and Arbor Bingham Junction
Holdings, L.C.
First Amendment dated July 29,
2014 to Purchase and Sale
Agreement dated May 5, 2014
between O.Com Land LLC,
Gardner Bingham Junction
Holdings, L.C. and Arbor
Bingham Junction Holdings, L.C.
Second Amendment dated
September 3, 2014 to Purchase
and Sale Agreement dated May 5,
2014 between O.Com Land LLC,
Gardner Bingham Junction
Holdings, L.C. and Arbor
Bingham Junction Holdings, L.C.
Project Management Agreement
dated May 5, 2014 between
O.Com Land LLC and Gardner
CMS, L.C.
Purchase and Sale Agreement
dated September 17, 2014 by and
between the Redevelopment
Agency of Midvale City and
O.com Land LLC
Loan Agreement dated November
6, 2017 among O.Com Land, as
Borrower, Overstock as Guarantor,
and PCL as Lender
Form
8-K/A
File No.
000-49799
Exhibit
4.2.2
Filing Date
Filed
Herewith
November 13, 2017
X
8-K
000-49799
10.1
May 15, 2017
10-K
000-49799
10.12
February 21, 2013
8-K
000-49799
10.1
May 7, 2014
8-K
000-49799
10.1
August 6, 2014
8-K
000-49799
10.1
September 8, 2014
8-K
000-49799
10.2
May 7, 2014
8-K
000-49799
10.1
September 23, 2014
8-K
000-49799
10.1
November 13, 2017
10.10
Promissory Note dated November
6, 2017 made by O.Com Land and
payable to the order of PCL
8-K
000-49799
10.2
November 13, 2017
77
Form
8-K
File No.
000-49799
Exhibit
10.3
Filing Date
November 13, 2017
Filed
Herewith
8-K
000-49799
10.4
November 13, 2017
8-K
000-49799
10.5
November 13, 2017
8-K
000-49799
10.6
November 13, 2017
8-K
000-49799
10.1
August 1, 2017
X
8-K
000-49799
10.19
October 28, 2014
8-K
000-49799
10.1
November 2, 2016
8-K
000-49799
10.1
November 4, 2016
8-K
000-49799
10.1
November 13, 2017
8-K
000-49799
10.2
November 13, 2017
Exhibit
Number
10.11
10.12
10.13
10.14
10.15(a)
10.16(a)
10.17
10.18
Exhibit Description
Deed of Trust, Assignment of
Rents, Assignment of Leases,
Security Agreement and Fixture
Filing dated November 6, 2017
made by O.Com Land for the
benefit of PCL
Guaranty of Overstock.com, Inc.
dated November 6, 2017 for the
benefit of PCL
Environmental Indemnity
Agreement made by O.Com Land
dated November 6, 2017 for the
benefit of PCL
Lease Subordination Agreement
dated November 6, 2017 among
O.Com Land, Overstock and PCL
Medici Ventures, Inc. 2017 Stock
Option Plan
Summary of unwritten
compensation arrangements with
Directors
Lease Agreement dated October
24, 2014 between O.com Land,
LLC and Overstock.com Inc.
Dealer-Manager Agreement, dated
as of November 1, 2016, between
Overstock.com, Inc. and Source
Capital Group, Inc.
10.19(a)
Software Licensing Agreement,
dated November 2, 2016 between
Overstock and SiteHelix Inc.
Securities Purchase Agreement,
dated as of November 8, 2017,
between Overstock.com, Inc. and
Passport Special Opportunities
Master Fund, L.P.
Securities Purchase Agreement,
dated as of November 8, 2017,
between Overstock.com, Inc. and
Quantum Partners LP
10.20
10.21
10.22(a)
10.23(a)
10.24(a)
t0.com 2017 Equity Incentive Plan
10-K
000-49799
10.24
March 15, 2018
t0.com, Inc. 2017 Equity Incentive
Plan as amended and restated on
May 21, 2018
Memorandum of Understanding
dated December 27, 2017 by and
among Overstock.com, Inc.,
Medici Ventures, Inc., Patrick
Byrne and Hernando de Soto
8-K
000-49799
10.1
May 25, 2018
10-K
000-49799
10.25
March 15, 2018
78
Exhibit
Number
10.25(a)
Exhibit Description
Notice of Stock Option Grant
effective May 21, 2018 dated June
6, 2018 between t0.com, Inc. and
Saum Noursalehi
Form
10-Q
File No.
000-49799
Exhibit
10.2
Filing Date
August 9, 2018
Filed
Herewith
10.26(a)(b)(c) Stock Purchase Agreement dated
8-K
000-49799
10.1
June 29, 2018
June 28, 2018 between Saum
Noursalehi and the other
stockholders of SiteHelix, Inc.,
and Overstock.com, Inc.
10.27(a)
Description of unwritten
10-Q
000-49799
10.4
August 9, 2018
compensation arrangement with
Saum Noursalehi
10.28(a)
Offer letter dated April 1, 2018
from Overstock.com, Inc. to
Gregory J. Iverson
10.29
10.30
Capital on DemandTM Sales
Agreement with JonesTrading
Institutional Services LLC, as
agent, dated August 9, 2018
Standby Equity Underwriting
Agreement with JonesTrading
Institutional Services LLC, as
underwriter, dated August 9, 2018
10-Q
000-49799
10.5
August 9, 2018
S-3
S-3
333-
226729
333-
226729
1.1
August 9, 2018
1.2
August 9, 2018
10.31(a)
Stockholders Agreement dated
8-K
000-49799
10.1
September 26, 2018
September 21, 2018 by and among
Medici Land Governance, Inc.,
Medici Ventures, Inc. and Patrick
M. Byrne
10.32(a)
Stock Purchase Agreement dated
December 21, 2018 among the
shareholders of Bitsy, Inc.
10.33(a)
10.34(a)
Asset Purchase Agreement dated
as of January 22, 2018 but signed
on February 7, 2018 among Rental
Roost, Inc., Kishore Kumar, Nitin
Shingate, Vikram Raghavan, and
Overstock.com, Inc. (incorporated
by reference to Exhibit 10.1 to our
Current Report on Form 8-K filed
on February 9, 2018 (File No. 000-
49799)).
Asset Purchase Agreement dated
as of January 22, 2018 but signed
on February 7, 2018 among
Houserie, Inc., Kishore Kumar,
Nitin Shingate, Vikram Raghavan,
and Overstock.com, Inc.
(incorporated by reference to
Exhibit 10.2 to our Current Report
on Form 8-K filed on February 9,
2018 (File No. 000-49799)).
8-K
000-49799
10.1
December 28, 2018
8-K
000-49799
10.1
February 9, 2018
8-K
000-49799
10.2
February 9, 2018
79
File No.
000-49799
Exhibit
10.1
Filing Date
April 4, 2018
Filed
Herewith
X
X
X
X
X
X
X
X
X
X
Exhibit
Number
10.35(a)
Form
8-K
Exhibit Description
Amendment 1 dated March 29,
2018 to Memorandum of
Understanding by and among
Overstock.com, Inc., Medici
Ventures, Inc., Patrick M. Byrne
and Hernando de Soto
(incorporated by reference to
Exhibit 10.1 to our Current Report
on Form 8-K filed on April 4,
2018 (File No. 000-49799)).
10.36(a)
Form of Notice of Grant under
Medici Ventures 2017 Stock
Option Plan
10.37(a)
tZERO Group, Inc. 2017 Equity
Incentive Plan, as amended
through March 15, 2019
10.38(a)
Form of Notice of Grant under
tZERO 2017 Equity Incentive Plan
Memorandum of Understanding
dated February 28, 2019 between
tZERO Group, Inc., Makara
Capital Partners Pte. Ltd. and
GoldenSand Capital Ltd.
Subsidiaries of the Registrant
Consent of Independent Registered
Public Accounting Firm
Powers of Attorney (see signature
page)
Certification of Principal
Executive Officer
Certification of Principal Financial
Officer
Section 1350 Certification of
Principal Executive Officer
Section 1350 Certification of
Principal Financial Officer
99.1
21
23
24
31.1
31.2
32.1
32.2
80
Exhibit
Number
Exhibit Description
Form
File No.
Exhibit
Filing Date
Filed
Herewith
101
Attached as Exhibit 101 to this
report are the following documents
formatted in XBRL (Extensible
Business Reporting
Language): (i) Consolidated
Balance Sheets at December 31,
2018 and 2017; (ii) Consolidated
Statements of Income for the years
ended December 31, 2018, 2017,
and 2016; (iii) Consolidated
Statements of Comprehensive
Income for the years ended
December 31, 2018, 2017, and
2016; (iv) Consolidated
Statements of Changes in
Stockholder's Equity for the years
ended December 31, 2018, 2017,
and 2016; (v) Consolidated
Statements of Cash Flows for the
years ended December 31, 2018,
2017, and 2016; and (vi) Notes to
Consolidated Financial Statements
__________________________________________
(a) Management contract or compensatory plan or arrangement.
(b) Schedules have been omitted pursuant to Item 601(b)(2) of Regulation S-K. A copy of any omitted schedule will be
furnished supplementally to the Securities and Exchange Commission upon request.
(c) The representations and warranties of each of the parties contained in the Stock Purchase Agreement and the assertions
embodied in those representations and warranties may not be accurate or complete because they are subject to a
contractual standard of materiality different from those generally applicable to stockholders or were used for the
purpose of allocating risk between the parties rather than establishing matters as facts. Accordingly, investors should
not rely on the representations and warranties contained in the Stock Purchase Agreement as characterizations of the
actual state of facts, or for any other purpose, at the time they were made or otherwise.
ITEM 16. FORM 10-K SUMMARY
Not applicable.
81
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 18, 2019.
SIGNATURES
OVERSTOCK.COM, INC.
By:
/s/ PATRICK M. BYRNE
Patrick M. Byrne
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 Patrick M. Byrne and Gregory J. Iverson, 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.
Signature
Title
/s/ PATRICK M. BYRNE
Patrick M. Byrne
Chief Executive Officer, President, and
Director (Principal Executive Officer)
Date
3/18/2019
/s/ ALLISON H. ABRAHAM
Chairwoman of the Board
3/18/2019
Allison H. Abraham
/s/ GREGORY J. IVERSON
Gregory J. Iverson
/s/ SAUM NOURSALEHI
Saum Noursalehi
Chief Financial Officer (Principal Financial
Officer and Principal Accounting Officer)
Chief Executive Officer of tZERO Group,
Inc. and Director
3/18/2019
3/18/2019
/s/ JONATHAN E. JOHNSON III
President, Medici Ventures and Director
3/18/2019
Jonathan E. Johnson III
/s/ BARCLAY F. CORBUS
Director
Barclay F. Corbus
/s/ KIRTHI KALYANAM
Director
Kirthi Kalyanam
/s/ JOSEPH J. TABACCO, JR.
Director
Joseph J. Tabacco, Jr.
82
3/18/2019
3/18/2019
3/18/2019
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, 2018 and 2017, and the related consolidated statements of operations, comprehensive income (loss), changes in
stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2018, 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, 2018 and
2017, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31,
2018, 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, 2018, based on criteria established in
Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission, and our report dated March 18, 2019 expressed an unqualified opinion on the effectiveness of the Company's
internal control over financial reporting.
Change in Accounting Principle
As discussed in Note 2 to the consolidated financial statements, the Company has changed its method of accounting for revenue
from contracts with customers in 2018 due to the adoption of Financial Accounting Standards Board (FASB) Accounting
Standards Update (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.
We have served as the Company's auditor since 2009.
/s/ KPMG LLP
Salt Lake City, Utah
March 18, 2019
83
Overstock.com, Inc.
Consolidated Balance Sheets
(in thousands)
Assets
Current assets:
Cash and cash equivalents
Restricted cash
Accounts receivable, net
Inventories, net
Prepaids and other current assets
Total current assets
Fixed assets, net
Deferred tax assets, net
Intangible assets, net
Goodwill
Equity investments
Other long-term assets, net
Total assets
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable
Accrued liabilities
Deferred revenue
Other current liabilities, net
Total current liabilities
Long-term debt, net
Long-term debt, net - related party
Other long-term liabilities
Total liabilities
Commitments and contingencies (Note 12)
Stockholders' equity:
Preferred stock, $0.0001 par value, authorized shares - 5,000
Series A, issued and outstanding - 127 and 127
Series B, issued and outstanding - 355 and 555
Common stock, $0.0001 par value
Authorized shares -100,000
Issued shares - 35,346 and 30,632
Outstanding shares - 32,146 and 27,497
Additional paid-in capital
Accumulated deficit
Accumulated other comprehensive loss
Treasury stock:
Shares at cost - 3,200 and 3,135
Equity attributable to stockholders of Overstock.com, Inc.
Equity attributable to noncontrolling interests
Total stockholders' equity
Total liabilities and stockholders' equity
December 31,
2018
December 31,
2017
$
$
$
$
141,512 $
1,302
35,930
14,108
22,415
215,267
134,687
109
13,370
22,895
60,427
14,464
461,219 $
102,574 $
87,858
50,578
476
241,486
3,069
—
5,958
250,513
203,215
455
30,080
13,703
17,744
265,197
129,343
—
7,337
14,698
13,024
4,216
433,815
85,406
82,611
46,468
178
214,663
—
39,909
7,120
261,692
—
—
—
—
3
657,981
(458,897 )
(584 )
(66,757 )
131,746
78,960
210,706
461,219 $
3
494,732
(254,692 )
(599 )
(63,816 )
175,628
(3,505 )
172,123
433,815
See accompanying notes to consolidated financial statements.
84
Overstock.com, Inc.
Consolidated Statements of Operations
(in thousands, except per share data)
Year ended
December 31,
2018
2017
2016
$ 1,800,187 $ 1,728,104 $ 1,784,782
15,181
1,799,963
16,652
1,744,756
21,405
1,821,592
1,452,195
15,489
1,467,684
353,908
1,392,558
11,647
1,404,205
340,551
1,458,411
10,203
1,468,614
331,349
Revenue, net
Retail
Other
Total net revenue
Cost of goods sold
Retail(1)
Other
Total cost of goods sold
Gross profit
Operating expenses:
Sales and marketing(1)
Technology(1)
General and administrative(1)
Litigation settlement
Total operating expenses
Operating income (loss)
Interest income
Interest expense
Other income (loss), net
Income (loss) before income taxes
Provision (benefit) for income taxes
Consolidated net income (loss)
274,479
132,154
164,481
—
571,114
(217,206 )
2,208
(1,468 )
(3,488 )
(219,954 )
(2,384 )
$
(217,570 ) $
180,589
115,878
90,718
—
387,185
(46,634 )
659
(2,937 )
1,178
(47,734 )
64,188
(111,922 ) $
(6.83 ) $
29,976
(4.28 ) $
25,044
(6.83 ) $
29,976
(4.28 ) $
25,044
147,896
106,760
89,298
(19,520 )
324,434
6,915
326
(877 )
14,181
20,545
9,297
11,248
(1,274 )
12,522
0.49
25,342
0.49
25,426
201 $
1,728
2,066
10,361
14,356 $
183 $
415
649
2,830
4,077 $
266
249
777
3,599
4,891
Less: Net loss attributable to noncontrolling interests
(11,500 )
(2,044 )
Net income (loss) attributable to stockholders of Overstock.com, Inc.
$
(206,070 ) $
(109,878 ) $
Net income (loss) per common share—basic:
Net income (loss) attributable to common shares—basic
Weighted average common shares outstanding—basic
Net income (loss) per common share—diluted:
Net income (loss) attributable to common shares—diluted
Weighted average common shares outstanding—diluted
____________________________________________________________
(1) Includes stock-based compensation as follows (Note 15):
Cost of goods sold — retail
Sales and marketing
Technology
General and administrative
Total
$
$
$
$
See accompanying notes to consolidated financial statements.
85
Overstock.com, Inc.
Consolidated Statements of Comprehensive Income (Loss)
(in thousands)
Consolidated net income (loss)
Other comprehensive income (loss):
Unrealized gain (loss) on cash flow hedges, net of benefit (expense) for taxes
of $0, $(689), and $(211)
Other comprehensive income (loss)
Comprehensive income (loss)
Year ended
December 31,
2018
2017
$
(217,570 ) $
(111,922 ) $
2016
11,248
15
15
$
(217,555 ) $
941
941
(110,981 ) $
(110 )
(110 )
11,138
(1,274 )
Less: Comprehensive loss attributable to noncontrolling interests
(11,500 )
(2,044 )
Comprehensive income (loss) attributable to stockholders of Overstock.com,
Inc.
$
(206,055 ) $
(108,937 ) $
12,412
See accompanying notes to consolidated financial statements.
86
Overstock.com, Inc.
Consolidated Statements of Changes in Stockholders' Equity
(in thousands, except per share data)
Equity attributable to stockholders of Overstock.com, Inc.
Number of common shares issued
Balance at beginning of year
Common stock issued upon vesting of restricted stock
Common stock issued for asset purchase
Exercise of stock options
Exercise of stock warrants
Common stock sold through ATM offering
Other
Balance at end of year
Number of treasury stock shares
Balance at beginning of year
Tax withholding upon vesting of restricted stock
Purchases of treasury stock
Balance at end of year
Total number of outstanding shares
Common stock
Number of Series A preferred shares issued and outstanding
Balance at beginning of year
Rights offering
Balance at end of year
Number of Series B preferred shares issued and outstanding
Balance at beginning of year
Rights offering
Other
Balance at end of year
Preferred stock
Additional paid-in capital
Balance at beginning of year
Stock-based compensation to employees and directors
Common stock issued for asset purchase
Exercise of stock options
Exercise of stock warrants
Common stock sold through ATM offering, net
Issuance of stock warrants
Rights offering
Other
Balance at end of year
Accumulated deficit
Balance at beginning of year
Cumulative effect of change in accounting principle
Net income (loss) attributable to stockholders of Overstock.com, Inc.
Declaration and payment of preferred dividends
Other
Balance at end of year
Accumulated other comprehensive loss
Balance at beginning of year
Net other comprehensive income (loss)
Balance at end of year
Treasury stock
Balance at beginning of year
Tax withholding upon vesting of restricted stock
Purchases of treasury stock
Balance at end of year
Total equity attributable to stockholders of Overstock.com, Inc.
Continued on the following page
87
Year ended
December 31,
2018
2017
2016
30,632
234
147
—
1,250
2,883
200
35,346
3,135
65
—
3,200
32,146
3 $
127
—
127
555
—
(200 )
355
— $
494,732 $
10,316
4,430
—
50,562
94,554
26
—
3,361
657,981 $
(254,692 ) $
5,040
(206,070 )
(77 )
(3,098 )
(458,897 ) $
(599 ) $
15
(584 ) $
(63,816 ) $
(2,941 )
—
(66,757 )
131,746 $
27,895
212
—
39
2,472
—
14
30,632
2,463
68
604
3,135
27,497
3 $
127
—
127
569
—
(14 )
555
— $
383,348 $
4,077
—
664
100,000
—
6,462
—
181
494,732 $
(153,898 ) $
9,374
(109,878 )
(109 )
(181 )
(254,692 ) $
(1,540 ) $
941
(599 ) $
(52,587 ) $
(1,229 )
(10,000 )
(63,816 )
175,628 $
27,634
219
—
42
—
—
—
27,895
2,400
63
—
2,463
25,432
3
—
127
127
—
569
—
569
—
370,047
4,891
—
819
—
—
—
7,591
—
383,348
(166,420 )
—
12,522
—
—
(153,898 )
(1,430 )
(110 )
(1,540 )
(51,747 )
(840 )
—
(52,587 )
175,326
$
$
$
$
$
$
$
$
$
$
Overstock.com, Inc.
Consolidated Statements of Changes in Stockholders' Equity
(in thousands, except per share data)
Total equity attributable to stockholders of Overstock.com, Inc.
Equity attributable to noncontrolling interests
Balance at beginning of year
Proceeds from security token offering, net
Stock-based compensation to employees and directors
Tax withholding upon vesting of restricted stock
Paid in capital for noncontrolling interest
Fair value of noncontrolling interest at acquisition
Net loss attributable to noncontrolling interests
Other
Total equity attributable to noncontrolling interests
Total stockholders' equity
Year ended
December 31,
2018
131,746 $
2017
175,628 $
2016
175,326
(3,505 ) $
82,354
4,040
(1,681 )
5,932
4,468
(11,500 )
(1,148 )
78,960 $
210,706 $
(2,366 ) $
905
—
—
—
—
(2,044 )
—
(3,505 ) $
172,123 $
(1,092 )
—
—
—
—
—
(1,274 )
—
(2,366 )
172,960
$
$
$
$
See accompanying notes to consolidated financial statements.
88
Overstock.com, Inc.
Consolidated Statements of Cash Flows
(in thousands)
Cash flows from operating activities:
Year ended December 31,
2017
2016
2018
Consolidated net income (loss)
$
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation of fixed assets
Amortization of intangible assets
Stock-based compensation to employees and directors
Deferred income taxes, net
Gain on investment in precious metals
Gain on sale of cryptocurrencies
Impairment of cryptocurrencies
Loss on equity investments, net
Loss on disposal of business and other asset abandonments
Impairment on indefinite-lived intangible assets
Early extinguishment costs of long-term debts
Other
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable, net
Inventories, net
Prepaids and other current assets
Other long-term assets, net
Accounts payable
Accrued liabilities
Deferred revenue
Other long-term liabilities
Net cash provided by (used in) operating activities
Cash flows from investing activities:
Proceeds from sale of precious metals
Investment in precious metals
Purchase of intangible assets
Investment in equity securities
Disbursement of note receivable
Acquisitions of businesses, net of cash acquired
Deposit on purchase of a business
Expenditures for fixed assets, including internal-use software and website development
Other
Net cash used in investing activities
Cash flows from financing activities:
Payments on capital lease obligations
Paydown on direct financing arrangement
Payments on finance obligations
Payments on interest swap
Proceeds from finance obligations
Payments on long-term debt
Proceeds from long-term debt
Payments of preferred dividends
Proceeds from issuance and exercise of stock warrants
Proceeds from exercise of stock options
Proceeds from rights offering, net of offering costs
Proceeds from security token offering, net of offering costs and withdrawals
Proceeds from sale of common stock, net of offering costs
Paid in capital for noncontrolling interest
Purchase of treasury stock
Payments of taxes withheld upon vesting of restricted stock
Payment of debt issuance costs
Net cash provided by financing activities
Net increase (decrease) in cash and cash equivalents
Cash, cash equivalents and restricted cash, beginning of year
Cash, cash equivalents and restricted cash, end of year
$
Continued on the following page
89
(217,570 ) $
(111,922 ) $
26,411
5,286
14,356
(2,386 )
—
(8,370 )
10,463
2,828
3,565
6,000
283
711
(5,558 )
628
(3,622 )
(2,870 )
16,499
5,661
9,150
(399 )
(138,934 )
—
—
(9,597 )
(48,731 )
(3,059 )
(12,912 )
(8,000 )
(28,680 )
56
(110,923 )
(496 )
—
—
—
—
(40,000 )
—
(77 )
50,588
—
—
82,354
94,554
6,700
—
(4,622 )
—
189,001
(60,856 )
203,670
142,814 $
28,848
3,999
4,077
65,199
(1,971 )
(1,995 )
—
5,995
—
—
2,464
368
(1,938 )
5,234
(2,799 )
(2,307 )
(20,995 )
(12,311 )
4,688
145
(35,221 )
11,917
—
(423 )
(5,188 )
(750 )
—
—
(23,586 )
70
(17,960 )
(83 )
—
(15,316 )
(1,535 )
—
(45,766 )
40,000
(109 )
106,462
664
—
905
—
—
(10,000 )
(1,229 )
(670 )
73,323
20,142
183,528
203,670 $
11,248
27,283
3,968
4,891
7,719
(201 )
—
—
2,850
—
—
—
356
(10,006 )
1,105
1,588
(786 )
(18,823 )
16,936
(9,164 )
600
39,564
1,610
(1,633 )
—
(4,750 )
(3,668 )
1,248
—
(72,281 )
27
(79,447 )
—
(54 )
(1,906 )
(563 )
11,399
—
36,273
—
—
819
7,591
—
—
—
—
(840 )
—
52,719
12,836
170,692
183,528
Overstock.com, Inc.
Consolidated Statements of Cash Flows
(Continued)
(in thousands)
Supplemental disclosures of cash flow information:
Cash paid during the period:
Interest paid, net of amounts capitalized
Income taxes paid (refunded), net
Non-cash investing and financing activities:
Fixed assets, including internal-use software and website development costs, financed
through accounts payable and accrued liabilities
Equipment acquired under capital lease obligations
Capitalized interest cost
Acquisition of assets through stock issuance
Change in fair value of cash flow hedge
Note receivable converted to equity investment
Year ended December 31,
2018
2017
2016
$
$
1,319 $
(726 )
2,940 $
487
$
139
—
—
4,430
—
200
$
989
1,421
—
—
(1,738 )
1,368
1,269
1,338
2,219
—
105
—
(659 )
2,850
See accompanying notes to consolidated financial statements.
90
Overstock.com, Inc.
Notes to Consolidated Financial Statements
1. BASIS OF PRESENTATION
Business and organization
As used herein, "Overstock," "Overstock.com," "O.co," "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. 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
range of price-competitive products, including furniture, home decor, bedding and bath, and housewares, among other products.
We sell our products and services through our Internet websites located at www.overstock.com, www.o.co and www.o.biz
(referred to collectively as the "Website"). Although our three websites are located at different domain addresses, the
technology, equipment, and processes supporting the Website and the process of order fulfillment described herein are the same
for all three 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.
In December 2017 we engaged Guggenheim Securities, LLC to help us identify and evaluate certain strategic
initiatives. We are considering a range of potential transactions, including a sale of our retail business and additional equity or
debt financings. Our Board continually discusses a variety of potential strategic and financial options and other changes to our
business, but has not approved or made any determination to consummate any strategic transaction, and may choose not to do
so in the foreseeable future or at all.
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.
In the fourth quarter of 2018, we completed our annual review of our segment reporting and in light of a strategic shift
in our Chief Operating Decision Maker's long-term strategic focus for our organization, we no longer consider the split of retail
direct and retail partner as a distinct and relevant measure of our business. Accordingly, revenues and cost of goods sold
recorded in "Direct" and "Partner and Other" are now split between "Retail" and "Other" on the consolidated statements of
operations. "Retail" includes retail revenue and costs of goods sold from both "Direct" and "Partner" transactions. Our revenues
and costs of goods sold related to our Medici business remains in "Other". In addition, we have recast the prior period revenues
and cost of goods sold to conform with current year presentation. Direct and Partner are no longer considered separate
reportable segments in our Business Segment disclosures. In addition, tZERO has been identified as a reportable segment
separate from Other.
For purposes of comparability, we reclassified other certain immaterial amounts in the prior periods presented to
conform with the current year presentation. We also retrospectively applied certain accounting standard updates as discussed in
Note 2—Accounting Policies, Recently adopted accounting standards.
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2. ACCOUNTING POLICIES
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. All intercompany account balances and transactions have been
eliminated in consolidation. The financial results of Verify Investor, LLC have been included in our consolidated financial
statements from the date of acquisition on February 12, 2018. The financial results of Mac Warehouse, LLC have been included
in our consolidated financial statements from the date of acquisition on June 25, 2018.
Use of estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires estimates
and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of
contingent liabilities in our consolidated financial statements and accompanying notes. Estimates are used for, but not limited
to, receivables valuation, revenue recognition, Club O and gift card breakage, sales returns, incentive discount offers, inventory
valuation, depreciable lives of fixed assets and internally-developed software, goodwill valuation, intangible asset valuation,
equity investment valuation, income taxes, stock-based compensation, performance-based compensation, self-funded health
insurance liabilities, and contingencies. Although these estimates are based on our best knowledge of current events and actions
that we may undertake in the future, actual results could differ materially from these estimates.
Cash equivalents
We classify all highly liquid instruments, including instruments with a remaining maturity of three months or less at
the time of purchase, as cash equivalents. Cash equivalents were $3.1 million and $25.5 million at December 31, 2018 and
2017, 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, certain equity
securities, and deferred compensation liabilities, which fair values are determined using quoted market prices from daily
exchange traded markets on the closing price as of the balance sheet date and are classified as Level 1. Our other financial
instruments, including cash, restricted cash, accounts receivable, accounts payable, accrued liabilities, finance obligations, and
debt are carried at cost, which approximates their fair value. Certain assets, including long-lived assets, certain equity securities,
goodwill, cryptocurrencies, and other intangible assets, are measured at fair value on a nonrecurring basis; that is, the assets are
not measured at fair value on an ongoing basis, but are subject to fair value adjustments using fair value measurements with
unobservable inputs (level 3), apart from cryptocurrencies which use quoted prices from various digital currency exchanges
with active markets, in certain circumstances (e.g., when there is evidence of impairment).
92
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, 2018 and 2017, as indicated (in thousands):
Assets:
Cash equivalents - Money market mutual funds
Investment in equity securities, at fair value
Trading securities held in a "rabbi trust" (1)
Total assets
Liabilities:
Deferred compensation accrual "rabbi trust" (2)
Total liabilities
Assets:
Cash equivalents - Money market mutual funds
Trading securities held in a "rabbi trust" (1)
Total assets
Liabilities:
Deferred compensation accrual "rabbi trust" (2)
Total liabilities
___________________________________________
Fair Value Measurements at December 31, 2018:
Total
Level 1
Level 2
Level 3
3,135 $
2,636
84
5,855 $
85 $
85 $
3,135 $
2,636
84
5,855 $
85 $
85 $
— $
—
—
— $
— $
— $
Fair Value Measurements at December 31, 2017:
Total
Level 1
Level 2
Level 3
25,455 $
74
25,529 $
25,455 $
74
25,529 $
92
92 $
92
92 $
— $
—
— $
—
— $
—
—
—
—
—
—
—
—
—
—
—
$
$
$
$
$
$
$
(1) — Trading securities held in a rabbi trust are included in Prepaids and other current assets and Other long-term
assets, net in the consolidated balance sheets.
(2) — Non-qualified deferred compensation in a rabbi trust is included in Accrued liabilities and Other long-term
liabilities in the consolidated balance sheets.
Accounts receivable, net
Accounts receivable consist primarily of carrier rebates, trade amounts due from customers in the United States, and
uncleared credit card transactions at period end. Accounts receivable are recorded at invoiced amounts and do not bear interest.
From time to time, we grant credit to some of our business customers on normal credit terms (typically 30 days). We maintain
an allowance for doubtful accounts receivable based upon our business customers' financial condition and payment history, and
our historical collection experience and expected collectability of accounts receivable. The allowance for doubtful accounts
receivable was $2.1 million and $1.3 million at December 31, 2018 and 2017, respectively.
Concentration of credit risk
At December 31, 2018 and 2017, one and two banks 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, net
Inventories, net include merchandise purchased for resale which are accounted for using a standard costing system
which approximates the first-in-first-out ("FIFO") method of accounting, and are valued at the lower of cost and net realizable
value. Inventory valuation requires us to make judgments, based on currently available information, about the likely method of
disposition, such as through sales to individual customers, returns to product vendors, liquidations, and expected recoverable
values of each disposition category.
93
Prepaids and other current assets
Prepaids and other current assets represent expenses paid prior to receipt of the related goods or services, including
advertising, license fees, maintenance, packaging, insurance, prepaid inventories, other miscellaneous costs, and
cryptocurrency-denominated assets ("cryptocurrencies"). See Cryptocurrencies below.
Cryptocurrencies
We hold cryptocurrency-denominated assets ("cryptocurrencies") such as bitcoin and we include them in Prepaids and
other current assets in our consolidated balance sheets. Our cryptocurrencies were $2.4 million and $1.5 million at
December 31, 2018 and 2017, 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 $10.5 million for the year ended December 31, 2018. There was no impairment on
cryptocurrencies during the years ended December 31, 2017 and 2016.
Gains and losses realized upon sale of cryptocurrencies are also recorded in General and administrative expense in our
consolidated statements of operations. We occasionally use our cryptocurrencies to purchase other cryptocurrencies. Gains and
losses realized with these non-cash transactions are also recorded in General and administrative expense in our consolidated
statements of operations. These non-cash transactions as well as gains (losses) from cryptocurrencies received through our
tZERO security token offering are also presented as an adjustment to reconcile Consolidated net income (loss) to Net cash
provided by (used in) operating activities in our consolidated statements of cash flows. Further, the proceeds from the sale of
cryptocurrencies received through our tZERO security token offering are presented as a financing activity in our consolidated
statements of cash flows due to its near immediate conversion into cash and its economic similarity to the receipt of cash
proceeds under the tZERO security token offering. Realized gains on sale of cryptocurrencies were $8.4 million for the year
ended December 31, 2018. There were no realized gains (losses) on sale of cryptocurrencies for the years ended December 31,
2017 and 2016.
Fixed assets, net
Fixed assets are recorded at cost and stated net of depreciation and amortization. Fixed assets are depreciated using the
straight-line method over the estimated useful lives of the related assets or the term of the related capital lease, whichever is
shorter, as follows:
Building
Land improvements
Building machinery and equipment
Furniture and equipment
Computer hardware
Computer software, including internal-use software and website development
Life
(years)
40
20
15-20
5-7
3-4
2-4
Leasehold improvements are amortized over the shorter of the term of the related leases or estimated useful lives.
Included in fixed assets 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, 2018, 2017, and 2016, we capitalized $19.3 million, $9.6 million, and $15.9
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,
2018, 2017, and 2016 was $13.8 million, $15.9 million, and $17.1 million, respectively.
94
Depreciation expense is classified within the corresponding operating expense categories in the consolidated
statements of operations as follows (in thousands):
Cost of goods sold - retail
Technology
Sales and marketing
General and administrative
$
Total depreciation, including internal-use software and website development
$
Year ended
December 31,
2018
2017
2016
354 $
21,894
—
4,163
26,411 $
307 $
24,604
—
3,937
28,848 $
310
25,693
124
1,156
27,283
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.
Equity investments under ASC 321
At December 31, 2018, we held minority interests (less than 20%) in fourteen privately held entities, accounted for
under ASC Topic 321, Investments - Equity Securities ("ASC 321"), which are included in Equity investments in our
consolidated balance sheets. One of these equity investments, which had a carrying value of $2.6 million at December 31, 2018,
is carried at fair value based on Level 1 inputs. See Fair value of financial instruments above. The remaining equity
investments lack readily determinable fair values and therefore the investments are measured at cost minus impairment, if any,
plus or minus changes resulting from observable price changes in orderly transactions for the identical or similar equity
securities of the same issuer. Dividends received are reported in earnings if and when received. We review our investments
individually for impairment by evaluating if events or circumstances have occurred that may indicate the fair value of the
investment is less than its carrying value. If such events or circumstances have occurred, we estimate the fair value of the
investment and recognize an impairment loss equal to the difference between the fair value of the investment and its carrying
value. In such cases, the estimated fair value of the investment is determined using unobservable inputs including assumptions
by the investee's management including quantitative information such as lower valuations in recently completed or proposed
financings. These inputs are classified as Level 3. Because several of our investees are in the early startup or development
stages, these entities are subject to potential changes in cash flows, valuation, and inability to attract new investors which may
be necessary for the liquidity needed to support their operations.
The carrying amount of our investments under ASC 321 was approximately $20.3 million and $6.5 million at
December 31, 2018 and 2017, respectively. We recognized unrealized gains of $1.1 million during the year ended December 31,
2018 and no unrealized gains on investments carried at fair value during the years ended December 31, 2017 and 2016,
respectively. We recognized $511,000, $5.5 million and $2.9 million impairment loss on these investments during the years
ended December 31, 2018, 2017 and 2016, respectively. Unrealized gains and impairment losses on our investments are
recorded in Other income (expense), net on our consolidated statements of operations.
Equity method investments under ASC 323
At December 31, 2018, we held minority interests in privately held entities, accounted for as equity method
investments under ASC Topic 323, Investments - Equity Method and Joint Ventures ("ASC 323"), which are included in Equity
investments in our consolidated balance sheets. We can exercise significant influence, but not control, over the investees
through either holding more than a 20% voting interest in the entity or through our representation on the entity's board of
directors.
95
The following table includes our equity method investments and related ownership interest as of December 31, 2018:
Bitt Inc.
Spera, Inc.
Voatz, Inc.
SettleMint NV
Bitsy, Inc.
Chainstone Labs, Inc.
Minds, Inc.
VinX Network Ltd.
GrainChain, Inc.
StockCross Financial Services, Inc.
Boston Security Token Exchange LLC
Ownership
interest
21%
19%
13%
30%
33%
29%
24%
21%
10%
24%
50%
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 means 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 $25.9 million and $3.7 million as of December 31, 2018 and 2017, respectively,
representing our maximum exposures to loss.
The carrying amount of our equity method investments was approximately $40.1 million and $6.5 million at
December 31, 2018 and 2017, respectively. The carrying value of our equity method investments exceeded the amount of the
underlying equity in net assets of the investees and the difference was primarily related to goodwill and the fair value of
intangible assets. The basis difference attributable to amortizable intangible assets is amortized over their estimated useful lives.
We record our proportionate share of the net income or loss of the investee and the amortization of the basis difference related
to intangible assets in Other income (expense), net in our consolidated statements of operations with corresponding adjustments
to the carrying value of the investment. Our proportionate share of the net losses of our equity method investees and
amortization of the basis difference for the years ended December 31, 2018, 2017 and 2016 was $3.9 million, $0.5 million, and
zero, respectively, and recognized in Other income (expense), net in our consolidated statements of operations.
Noncontrolling interests
Our wholly-owned subsidiary, Medici Ventures, Inc. ("Medici Ventures"), conducts its primary business through its
majority-owned subsidiary, 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. Medici Ventures, tZERO, 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.
On December 18, 2017, tZERO launched an offering (the "security token offering") of the right to acquire tZERO
Preferred Equity Tokens (the "tZERO Security Token") through a Simple Agreement for Future Equity ("SAFE"). The security
token offering closed on August 6, 2018, and on October 12, 2018 tZERO issued the tZERO Security Tokens in settlement of
the SAFEs. tZERO Security Token holders have the right to, prior to distributing earnings to tZERO common shareholders, a
noncumulative dividend equal to 10% of tZERO's consolidated Adjusted Gross Revenue (as defined by the security token
offering documents) for the most recently completed fiscal quarter, if declared by tZERO's Board of Directors, to be paid out of
funds lawfully available on a quarterly basis. tZERO Security Token holders are not entitled to participate in any dividends paid
to the holders of tZERO's common stock, have no rights to vote, and have no rights to the undistributed earnings of tZERO and
are not entitled to any utility functionality as part of the tZERO Security Tokens. Any remaining undistributed earnings or
losses of tZERO for a period shall be allocated to the noncontrolling interest held by the tZERO Security Token holders based
on the contractual participation rights of the security to share in those earnings as if all the earnings for the period had been
distributed. In the event of any liquidation, dissolution or winding up of tZERO, the tZERO Security Token holders will be
entitled to the limited preferential liquidation rights equal to USD $0.10 per token to the extent funds are available.
96
At December 31, 2018, cumulative proceeds since December 18, 2017, net of withdrawals, from the security token offering
totaling $104.8 million have been classified as a component of noncontrolling interest within our consolidated financial
statements. Withdrawals during the security token offering period were $22.0 million. As of December 31, 2018, tZERO
incurred $21.5 million of offering costs associated with the security token offering that are classified as a reduction in proceeds
within noncontrolling interest of our consolidated financial statements.
During the first quarter of 2018, tZERO purchased 65.8% of ES Capital Advisors, LLC ("ES Capital"), a registered
investment advisor under the Investment Advisers Act of 1940, which was accounted for as an asset acquisition. tZERO
operated the ES Capital business under the name tZERO Advisors and offered automated investment advisory services on our
Website. tZERO subsequently sold its equity interest in ES Capital during the fourth quarter of 2018.
tZERO also purchased 81.0% of Verify Investor, LLC, an accredited investor verification company. This transaction is
described further in Note 3—Acquisitions, Goodwill, and Acquired Intangible Assets. The financial position and results of
operations for these entities are included in our consolidated financial statements.
Medici Land Governance Inc., a Delaware public benefit corporation ("MLG"), was recently formed by Medici
Ventures with our President and Chief Executive Officer, Dr. Patrick M. Byrne ("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. 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.
Leases
We account for lease agreements as either operating or capital leases depending on certain defined criteria. In certain
of our lease agreements, we receive rent holidays and other incentives. We recognize lease costs on a straight-line basis without
regard to deferred payment terms, such as rent holidays, that defer the commencement date of required payments. Additionally,
tenant improvement allowances are amortized as a reduction in rent expense over the term of the lease. Leasehold
improvements are capitalized at cost and amortized over the lesser of their expected useful life or the term of the lease at
inception, without assuming renewal features, if any, are exercised.
Treasury stock
We account for treasury stock of our common shares under the cost method and include treasury stock as a component
of stockholders' equity.
Goodwill
Goodwill represents the excess of the purchase price paid over the fair value of the net assets acquired in business
combinations. Goodwill is not amortized but is tested for impairment at least annually or when we deem that a triggering event
has occurred. When evaluating whether goodwill is impaired, we make a qualitative assessment to determine if it is more likely
than not that the fair value of a reporting unit is less than its carrying amount. If the qualitative assessment determines that it is
more likely than not that its fair value is less than its carrying amount, we compare the fair value of the reporting unit to which
the goodwill is assigned to its carrying amount. If the carrying amount exceeds its fair value, an impairment loss is recognized
in an amount equal to the excess of the carrying amount over the fair value of the reporting unit, not to exceed the carrying
amount of the goodwill. There were no impairments to goodwill recorded during the years ended December 31, 2018, 2017 and
2016.
For the year ended December 31, 2018, we recognized $8.2 million in goodwill related to two business acquisitions as
described in Note 3-Acquisitions, Goodwill, and Acquired Intangible Assets.
Intangible assets other than goodwill
We capitalize and amortize intangible assets other than goodwill over their estimated useful lives unless such lives are
indefinite. Intangible assets other than goodwill acquired separately from third-parties are capitalized at cost while such assets
acquired as part of a business combination are capitalized at their acquisition-date fair value. Indefinite-lived intangible assets
are tested for impairment annually or more frequently when events or circumstances indicate that the carrying value more likely
than not exceeds its fair value. In addition, we routinely evaluate the remaining useful life of intangible assets not being
97
amortized to determine whether events or circumstances continue to support an indefinite useful life, including any legal,
regulatory, contractual, competitive, economic, or other factors that may limit their useful lives. Definite lived intangible assets
are amortized using the straight-line method of amortization over their useful lives, with the exception of certain intangibles
(such as acquired technology, customer relationships, and trade names) which are amortized using an accelerated method of
amortization based on cash flows. These definite lived intangible assets are reviewed for impairment whenever events or
changes in circumstances indicate that their carrying amount may not be recoverable as described below under Impairment of
long-lived assets.
Intangible assets, net consist of the following (in thousands):
Intangible assets subject to amortization, gross (1)
Less: accumulated amortization of intangible assets subject to amortization
Total intangible assets, net
___________________________________________
December 31,
2018
2017
$
$
29,099 $
(15,729 )
13,370 $
17,779
(10,442 )
7,337
(1) — At December 31, 2018, the weighted average remaining useful life for intangible assets, other, excluding fully amortized
intangible assets, was 5.54 years.
For the year ended December 31, 2018, we recognized a $3.2 million loss included in General and administrative
expense in our consolidated statements of operation, upon the sale of our investment advisor licenses, as part of the ES Capital
disposition, which were classified as intangible assets.
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):
Technology
Sales and marketing
General and administrative
Total amortization
Year ended
December 31,
2018
2017
2016
$
$
3,424 $
460
1,402
5,286 $
3,620 $
83
296
3,999 $
2,904
1,008
56
3,968
Estimated amortization expense for the next five years is: $5.6 million in 2019, $2.8 million in 2020, $2.4 million in
2021, $1.2 million in 2022, $705,000 in 2023 and $695,000 thereafter.
Impairment of long-lived assets
We review property and equipment and other long-lived assets, including intangible assets other than goodwill, for
impairment whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be
recoverable. See the Cryptocurrencies section above for our impairment policy over cryptocurrencies. Recoverability is
measured by comparison of the assets' carrying amount to future undiscounted net cash flows the asset group is expected to
generate. Cash flow forecasts are based on trends of historical performance and management's estimate of future performance,
giving consideration to existing and anticipated competitive and economic conditions. If such asset group is considered to be
impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds their
fair values. There were no impairments to long-lived assets recorded during the years ended December 31, 2018, 2017 and
2016.
For the year ended December 31, 2018, we realized a $6.0 million loss on impairments to indefinite-lived intangible
assets included in General and administrative expense in our consolidated statements of operations related to certain intellectual
property licenses held by Medici Ventures that previously had an indefinite useful life. 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 intangible assets recorded during the years ended December 31, 2017 and 2016.
Other long-term assets, net
Other long-term assets, net consist primarily of long-term prepaid expenses and deposits.
98
Derivative financial instruments
In 2014, we entered into a loan agreement in connection with the construction of our new corporate headquarters. We
began borrowing under the facility in October 2015. Because amounts borrowed on the loan carried a variable LIBOR-based
interest rate, we were affected by changes in certain market conditions and as such, we used derivatives, in the form of interest
rate swap agreements, as a risk management tool to mitigate the potential impact of these changes. In November 2017, we
repaid the outstanding balance of the underlying loans and concurrently terminated the derivative instruments.
To the extent that the hedges were effective, the changes in fair values of our cash flow hedges were recorded in
Accumulated other comprehensive income (loss) in the consolidated statements of changes in stockholders' equity. The
variable-rate interest on the borrowing for our new corporate headquarters was capitalized during the construction period and is
reclassified into earnings over the depreciable life of the asset.
Upon termination of the derivative instrument in November 2017, we reclassified $941,000 unrealized loss on cash
flow hedges, net of tax benefits from Accumulated other comprehensive loss into earnings, and recognized a $1.4 million loss
on early extinguishment of debt recorded in Other income, net in our consolidated statements of operations for the year ended
December 31, 2017. The remaining construction period capitalized variable-rate interest from our cash flow hedge included in
Accumulated other comprehensive loss is not material.
Revenue recognition
As further discussed below in Recently adopted accounting standards, the Company adopted ASC 606 effective at the
beginning of fiscal 2018. Refer to Note 2 - Summary of Significant Accounting Policies of the Company’s annual report on
Form 10-K for the year ended December 30, 2017 for policies in effect for revenue recognition prior to December 31, 2017,
which were based on ASC 605.
Revenue is recognized when, or as, control of a promised product or service transfers to a customer, in an amount that
reflects the consideration to which the Company expects to be entitled in exchange for transferring those products or services.
Revenue excludes taxes that have been assessed by governmental authorities and that are directly imposed on revenue-
producing transactions between the Company and its customers, including sales and use taxes. Revenue recognition is
evaluated through the following five-step process:
1) identification of the contract with a customer;
2) identification of the performance obligations in the contract;
3) determination of the transaction price;
4) allocation of the transaction price to the performance obligations in the contract; and
5) recognition of revenue when or as a performance obligation is satisfied.
Product Revenue
We derive our revenue primarily from our retail business through our Website, but may also derive revenue from sales
of merchandise through offline and other channels. Our Retail revenue is derived primarily from merchandise sold at a point in
time and shipped to customers. Merchandise sales are fulfilled with inventory sourced through our partners or from our owned
inventory, depending on the most efficient means of fulfilling the customer contract. The majority of our sales, however, are
fulfilled from inventory sourced through our partners.
Revenue is recognized when control of the product passes to the customer, typically at the date of delivery of the
merchandise to the customer or the date a service is provided, and is recognized in an amount that reflects the expected
consideration to be received in exchange for such goods or services. As such, customer orders are recorded as deferred revenue
prior to delivery of products or services ordered. As we ship high volumes of packages through multiple carriers, it is not
practical for us to track the actual delivery date of each shipment. Therefore, we use estimates to determine which shipments are
delivered and, therefore, recognized as revenue at the end of the period. Our delivery date estimates are based on average
shipping transit times, which are calculated using the following factors: (i) the type of shipping carrier (as carriers have
different in-transit times); (ii) the fulfillment source (either our warehouses, those warehouses we control, or those of our
partners); (iii) the delivery destination; and (iv) actual transit time experience, which shows that delivery date is typically one to
eight business days from the date of shipment. We review and update our estimates on a quarterly basis based on our actual
transit time experience. However, actual shipping times may differ from our estimates.
99
Generally, we require authorization from credit card or other payment vendors whose services we offer to our
customers (such as PayPal), or verification of receipt of payment, before we ship products to consumers or business purchasers.
From time to time we grant credit to our business purchasers with normal credit terms (typically 30 days). We generally receive
payments from our customers before our payments to our suppliers are due. We do not recognize assets associated with costs to
obtain or fulfill a contract with a customer.
Shipping and handling is considered a fulfillment activity, as it takes place prior to the customer obtaining control of
the merchandise, and fees charged to customers are included in net revenue upon completion of our performance obligation. We
present revenue net of sales taxes, discounts, and expected refunds.
Our merchandise sales contracts include terms that could cause variability in the transaction price for items such as
discounts, credits, or sales returns. Accordingly, the transaction price for product sales includes estimates of variable
consideration to the extent it is probable that a significant reversal of revenue recognized will not occur. At the time of sale, we
estimate a sales return liability for the variable consideration based on historical experience, which is recorded within Accrued
liabilities in the consolidated balance sheet. We record an allowance for returns based on current period revenues and historical
returns experience. We analyze actual historical returns, current economic trends and changes in order volume and acceptance
of our products when evaluating the adequacy of the sales returns allowance in any accounting period.
We evaluate the criteria outlined in ASC 606-10-55, Principal versus Agent Considerations, in determining whether it
is appropriate to record the gross amount of merchandise sales and related costs or the net amount earned as commissions.
When we are the principal in a transaction and control the specific good or service before it is transferred to the customer,
revenue is recorded gross; otherwise, revenue is recorded on a net basis. Through contractual terms with our partners, we have
the ability to control the promised goods or services and as a result record the majority of our retail revenue on a gross basis.
Our Other revenue occurs primarily through our broker dealer subsidiaries in our tZERO segment. We evaluate the
revenue recognition criteria above for our broker dealer subsidiaries and we recognize revenue based on the gross amount of
consideration that we expect to receive on securities transactions (commission revenue) on a trade date basis.
Club O loyalty program
We have a customer loyalty program called Club O Gold for which we sell annual memberships. For Club O Gold
memberships, we record membership fees as deferred revenue and we recognize revenue ratably over the membership period.
The Club O Gold loyalty program allows members to earn Club O Reward dollars for qualifying purchases made on
our Website. We also have a co-branded credit card program which provides Club O Gold members additional reward dollars
for purchases made on our Website, and from other merchants. Under these programs, the customer may redeem Club O
Reward dollars on future purchases made through our Website, which conveys a material right to the customer. As such, the
initial transaction price giving rise to the reward dollar is allocated to each separate performance obligation based upon its
relative standalone selling price. In determining the stand-alone selling price, we incorporate assumptions about the redemption
rates of loyalty points. We recognize revenue for Club O Reward dollars when customers redeem such rewards as part of a
purchase on our Website.
We record the standalone value of reward dollars earned in deferred revenue at the time the reward dollars are earned.
Club O Reward dollars expire 90 days after the customer's Club O Gold membership expires. We recognize estimated reward
dollar breakage, to which we expect to be entitled, over the expected redemption period in proportion to actual redemptions by
customers. Upon adoption of Topic 606, Revenue Contracts with Customers, on January 1, 2018, we began classifying the
breakage income related to Club O Reward dollars and gift cards as a component of Retail revenue in our consolidated
statements of operations rather than as a component of Other income (expense), net. Breakage included in revenue was $5.6
million for the year ended December 31, 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 $6.9 million and $8.7 million
at December 31, 2018 and December 31, 2017, respectively. The timing of revenue recognition of these reward dollars is driven
by actual customer activities, such as redemptions and expirations.
100
Advertising Revenue
Advertising revenues are derived primarily from sponsored links and display advertisements that are placed on our
Website, distributed via email, or sent out as direct mailers. Advertising revenue is recognized in Retail revenue when
the advertising services are rendered. Advertising revenues were less than 2% of total net revenues for all periods presented.
Revenue Disaggregation
Disaggregation of revenue by major product line is included in Segment Information in Note 21 - Business Segments.
Deferred Revenue
When the timing of our provision of goods or services is different from the timing of the payments made by our
customers, we recognize a contract liability (customer payment precedes performance).
Customer orders are recorded as deferred revenue prior to delivery of products or services ordered. We record amounts
received for Club O Gold membership fees as deferred revenue and we recognize it ratably over the membership period. We
record Club O Reward dollars earned from purchases as deferred revenue at the time they are earned based upon the relative
standalone selling price of the Club O Reward dollar and we recognize it as Retail revenue in proportion to the estimated
pattern of rights exercised by the customer. If reward dollars are not redeemed, we recognize Retail revenue upon expiration. In
addition, we sell gift cards and record related deferred revenue at the time of the sale. We sell gift cards without expiration dates
and we recognize revenue from a gift card upon redemption of the gift card. For the unredeemed portion of our gift cards and
loyalty program rewards, we will recognize Retail revenue over the expected redemption period based upon the estimated
pattern of rights exercised by the customer.
The following table provides information about deferred revenue from contracts with customers, including significant
changes in deferred revenue balances during the period (in thousands).
Deferred revenue at December 31, 2017
Increase due to deferral of revenue at period end
Decrease due to beginning contract liabilities recognized as revenue
Deferred revenue at December 31, 2018
Sales returns allowance
Amount
46,468
43,216
(39,106 )
50,578
$
$
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.
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The following table provides additions to and deduction from the sales returns allowance (in thousands):
Allowance for returns at December 31, 2015
Additions to the allowance
Deductions from the allowance
Allowance for returns at December 31, 2016
Additions to the allowance
Deductions from the allowance
Allowance for returns at December 31, 2017
Additions to the allowance
Deductions from the allowance
Allowance for returns at December 31, 2018
Cost of goods sold
Amount
17,896
163,693
(163,413 )
18,176
169,398
(170,183 )
17,391
174,864
(176,994 )
15,261
$
$
Our Retail cost of goods sold includes product costs, warehousing costs, outbound shipping costs, handling and
fulfillment costs, customer service costs, and credit card fees, and is recorded in the same period in which related revenues have
been recorded. Our Other cost of goods sold primarily consists of exchange fees, clearing agent fees, and other exchange fees
from our broker dealer subsidiaries in our tZERO segment. These fees are primarily for executing, processing, and settling
trades on exchanges and other venues. These fees fluctuate based on changes in trade and share volumes, rate of clearance fees
charged by clearing brokers, and exchanges.
Total revenue, net
Cost of goods sold
Product costs and other cost of goods sold
Fulfillment and related costs
Total cost of goods sold
Gross profit
Advertising expense
Year ended
December 31,
2018
$ 1,821,592 100%
2017
$ 1,744,756 100%
2016
$ 1,799,963 100%
1,390,750
76,934
1,467,684
353,908
$
76%
4%
81%
19%
1,328,749
75,456
1,404,205
340,551
76%
4%
80%
20%
1,391,736
76,878
1,468,614
331,349
77%
4%
82%
18%
$
$
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 $249.7 million,
$164.6 million and $135.1 million during the years ended December 31, 2018, 2017 and 2016, respectively. Prepaid advertising
(included in Prepaids and other current assets in the accompanying consolidated balance sheets) was $961,000 and $987,000 at
December 31, 2018 and 2017, respectively.
Stock-based compensation
We measure compensation expense for all outstanding unvested share-based awards at fair value on the date of grant
and recognize compensation expense over the service period for awards at the greater of a straight-line basis or on an
accelerated schedule when vesting of the share-based awards exceeds a straight-line basis. When an award is forfeited prior to
the vesting date, we recognize an adjustment for the previously recognized expense in the period of the forfeiture. See
Note 15—Stock-Based Awards.
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Loss contingencies
In the normal course of business, we are involved in legal proceedings and other potential loss contingencies. We
accrue a liability for such matters when it is probable that a loss has been incurred and the amount can be reasonably estimated.
When only a range of probable loss can be estimated, the most probable amount in the range is accrued. If no amount within
this range is a better estimate than any other amount within the range, the minimum amount in the range is accrued. We expense
legal fees as incurred (see Note 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.
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 income (loss) per share
In 2016, we issued shares of our Blockchain Voting Series A Preferred Stock and our Voting Series B Preferred Stock
(collectively the "preferred shares"). These shares are considered participating securities, and as a result, net income (loss) per
share is calculated using the two-class method. Under this method, we give effect to preferred dividends and then allocate
remaining net income (loss) attributable to our stockholders to both common shares and participating securities (based on the
percentages outstanding) in determining net income (loss) per common share.
Basic net income (loss) per common share is computed by dividing net income (loss) attributable to common shares
(after allocating between common shares and participating securities) by the weighted average number of common shares
outstanding during the period.
Diluted net income (loss) per share is computed by dividing net income (loss) attributable to common shares (after
allocating between common shares and participating securities) by the weighted average number of common and potential
common shares outstanding during the period (after allocating total dilutive shares between our common shares outstanding and
our preferred shares outstanding). Potential common shares, comprising incremental common shares issuable upon the exercise
of stock options, warrants, and restricted stock awards are included in the calculation of diluted net income (loss) per common
share to the extent such shares are dilutive. Net income (loss) attributable to common shares is adjusted for options and
restricted stock awards issued by our subsidiaries when the effect of our subsidiary's diluted earnings per share is dilutive.
103
The following table sets forth the computation of basic and diluted net income (loss) per common share for the periods
indicated (in thousands, except per share data):
Net income (loss) attributable to stockholders of Overstock.com, Inc.
Less: Preferred stock converted to common stock
Less: Preferred stock dividends - declared and accumulated
Undistributed income (loss)
Less: Undistributed loss allocated to participating securities
Net income (loss) attributable to common shares
Net income (loss) per common share—basic:
Net income (loss) attributable to common shares—basic
Weighted average common shares outstanding—basic
Effect of dilutive securities:
Stock options and restricted stock awards
Weighted average common shares outstanding—diluted
Net income (loss) attributable to common shares—diluted
Year ended December 31,
2018
2017
2016
$
$
$
(206,070 ) $
3,098
77
(209,245 )
(4,368 )
(109,878 ) $
—
216
(110,094 )
(2,960 )
(204,877 ) $
(107,134 ) $
(6.83 ) $
29,976
(4.28 ) $
25,044
—
29,976
—
25,044
$
(6.83 ) $
(4.28 ) $
12,522
—
—
12,522
—
12,522
0.49
25,342
84
25,426
0.49
The following shares were excluded from the calculation of diluted shares outstanding as their effect would have been
anti-dilutive (in thousands):
Stock options and restricted stock units
Common shares issuable under stock warrant
Warrants
Year ended December 31,
2018
2017
2016
543
21
226
78
466
—
On November 8, 2017, we issued warrants to purchase up to a combined aggregate of 3,722,188 shares of our common
stock to two purchasers in privately negotiated transactions, for an aggregate purchase price of $6.5 million, net of issuance
costs. The exercise price for the warrants was $40.45 per share of common stock. On December 29, 2017, one of the warrant
holders exercised its warrant in full and purchased a total of 2,472,188 shares of common stock for $100.0 million. On January
17, 2018, the other warrant holder exercised its warrant in full and purchased 1,250,000 shares of common stock for $50.6
million.
Recently adopted accounting standards
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which requires an
entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to
customers. We adopted the new standard on January 1, 2018 with a cumulative adjustment that reduced Accumulated deficit by
approximately $5.0 million as opposed to retrospectively adjusting prior periods. 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 disclosures 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 of operations rather as a component of Other
income (expense), net.
In January 2016, the FASB issued ASU 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and
Measurement of Financial Assets and Financial Liabilities, which requires equity investments previously recognized under the
cost method to be measured at cost minus impairment, if any, plus or minus changes resulting from observable price changes in
orderly transactions for the identical or similar investment of the same issuer. We adopted the changes under the new standard
104
on January 1, 2018 on a prospective basis. The implementation of ASU 2016-01 did not have a material impact on our
consolidated financial statements and related disclosures.
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, which
requires amounts generally described as restricted cash be included with cash and cash equivalents when reconciling beginning-
of-period and end-of-period total amounts shown in the statement of cash flows. We adopted the new standard on January 1,
2018 retrospectively to each period presented in the statement of cash flows. The implementation of ASU 2016-18 did not have
a material impact on our consolidated financial statements and related disclosures.
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a
Business, which provides guidance to assist entities with evaluating whether transactions should be accounted for as
acquisitions (or disposals) of assets or businesses. We adopted the changes under the new standard on January 1, 2018 on a
prospective basis. The implementation of ASU 2017-01 did not have a material impact on our consolidated financial statements
and related disclosures.
In January 2017, the FASB issued ASU No. 2017-04, Intangibles — Goodwill and Other (Topic 350) — Simplifying
the Test for Goodwill Impairment. The ASU simplifies the quantitative goodwill impairment test by eliminating the second step
of the test. Under this ASU, impairment will be measured by comparing the estimated fair value of the reporting unit with its
carrying value. We early adopted this ASU in the fourth quarter of 2018. Adoption of the ASU did not have a material impact
on the results of our goodwill impairment test.
Recently issued accounting standards
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.
The new standard is effective for us on January 1, 2019. A modified retrospective transition approach is required,
applying the new standard to all leases existing at the date of initial application. An entity may choose to use either (1) its
effective date or (2) the beginning of the earliest comparative period presented in the financial statements as its date of initial
application. If an entity chooses the second option, the transition requirements for existing leases also apply to leases entered
into between the date of initial application and the effective date. The entity must also recast its comparative period financial
statements and provide the disclosures required by the new standard for the comparative periods. We expect to adopt the new
standard on January 1, 2019 and use the effective date as our date of initial application. Consequently, financial information will
not be updated and the disclosures required under the new standard will not be provided for dates and periods before January 1,
2019.
The new standard provides a number of optional practical expedients in transition. We expect to elect the "package of
practical expedients", which permits us not to 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 do not expect to
elect the use-of-hindsight practical expedient.
We expect that this standard will have a material effect on our financial statements. While we continue to assess all of
the effects of adoption, we currently believe the most significant effects relate to (1) the recognition of new ROU assets and
lease liabilities on our balance sheet for our warehouse, office, and equipment operating leases; and (2) providing significant
new disclosures about our leasing activities.
On adoption, we currently expect to recognize additional operating liabilities which includes the present value of the
total amount disclosed in "Note 12—Commitments and Contingencies", which constitute the remaining minimum rental
payments under current leasing standards for our existing operating leases, discounted by our incremental borrowing rate for
borrowings of a similar duration on a fully secured basis, with corresponding ROU assets of approximately the same amount.
The new standard also provides practical expedients for an entity's ongoing accounting. We currently expect to elect
the short-term lease recognition exemption for all leases that qualify. This means, for those leases that qualify, we will not
recognize ROU assets or lease liabilities, and this includes not recognizing ROU assets or lease liabilities for existing short-
105
term leases of those assets in transition. We also currently expect to elect the practical expedient to not separate lease and non-
lease components for all of our leases.
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. The new standard becomes
effective for us on January 1, 2019. We do not expect the adoption to have a material impact on our consolidated financial
statements and related disclosures.
3. ACQUISITIONS, GOODWILL, AND ACQUIRED INTANGIBLE ASSETS
Verify Investor, LLC
On February 12, 2018, tZERO acquired 81% of the total equity interests of Verify Investor, LLC, an accredited
investor verification company, for a total purchase price of $12.0 million in cash. 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, 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
Cash paid, net of cash acquired
Allocation
Intangible assets
Goodwill
Other assets acquired
Other liabilities assumed
Total net assets, net of cash acquired
Less: noncontrolling interest
Total net assets attributable to tZERO, net of cash acquired
Fair Value
11,769
7,400
7,360
3
(179 )
14,584
(2,815 )
11,769
$
$
$
The following table details the identifiable intangible assets acquired at their fair value and remaining useful lives as of
December 31, 2018 (amounts in thousands):
Intangible Assets
Technology and developed software
Trade names
Customer relationships
Total acquired intangible assets as of the acquisition date
Less: accumulated amortization of acquired intangible assets
Total acquired intangible assets, net
Fair Value
Weighted Average
Useful Life (years)
$
$
10
10
0.5
6,300
700
400
7,400
1,105
6,295
The expense for amortizing intangible assets acquired in connection with this acquisition was $1.1 million for the year
ended December 31, 2018.
Acquired intangible assets primarily include technology, trade name, and customer relationships. As described above,
we determined the fair value of these assets using an income approach method to determine the present value of expected future
cash flows for each identifiable intangible asset. This method was based on discount rates which incorporate a risk premium to
take into account the risks inherent in those expected cash flows. The expected cash flows were estimated based on the
company's historical operating results.
106
The acquired assets, liabilities, and associated operating results were consolidated into our financial statements at the
acquisition date. The goodwill recognized arises from intangible assets that do not qualify for separate recognition and expected
synergies with our tZERO operations. The total amount of goodwill expected to be deductible for tax purposes is our share of
the goodwill recognized at the acquisition date. The carrying amount of goodwill has not changed since the acquisition date.
Pro forma results of operations have not been presented because the effects of this acquisition were not material to our
consolidated results of operations.
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 for a total purchase price of $1.2 million in cash and the
assumption of a loan of $3.1 million. 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.
Determination and allocation of the purchase price to net tangible and intangible assets is based upon preliminary
estimates. These preliminary estimates and assumptions could change significantly during the measurement period as we
finalize the valuations of the intangible assets acquired and related tax impact. Any change could result in variances between
our future financial results and the amounts recognized in the financial information presented below, including variances in fair
values recorded, as well as expenses associated with these items.
The preliminary estimated fair values of the assets acquired and liabilities assumed at the acquisition date are as
follows (in thousands):
Purchase Price
Cash paid, net of cash acquired
Allocation
Accounts receivable, net
Inventories, net
Prepaids and other current assets
Fixed assets
Intangible assets
Goodwill
Accounts payable and accrued liabilities
Long-term debt, net
Deferred tax liabilities
Total net assets, net of cash acquired
Fair Value
1,143
399
1,033
29
154
3,502
837
(905 )
(3,069 )
(837 )
1,143
$
$
$
Acquired intangible assets primarily include trade name and customer relationships which have an estimated useful
life of 18 months.
The acquired assets, liabilities, and associated operating results were consolidated into our financial statements at the
acquisition dates. The carrying amount of goodwill includes the amount of deferred tax liability recognized.
The following unaudited pro forma financial information presents our results as if the current year acquisitions of Mac
Warehouse, LLC had occurred at the beginning of 2016 (amounts in thousands), however, it should not be taken as indicative of
our future consolidated results of operations:
(unaudited)
Years ended December 31,
Total revenue
Consolidated net income (loss)
107
2018
2017
$ 1,825,776 $ 1,759,503 $ 1,809,418
11,380
$
(222,597 ) $
(111,848 ) $
2016
4. ACCOUNTS RECEIVABLE, NET
Accounts receivable, net consist of the following (in thousands):
Freight rebates receivable
Accounts receivable, trade
Credit card receivables
Other receivables
Less: allowance for doubtful accounts
Accounts receivable, net
5. INVENTORIES, NET
Inventories, net consist of the following (in thousands):
Product inventories, net
Inventory in-transit
Total inventories, net
6. PREPAIDS AND OTHER CURRENT ASSETS
Prepaids and other current assets consist of the following (in thousands):
Prepaid maintenance
Prepaid other
Other current assets
Prepaid insurance
Prepaid advertising
Prepaid inventories
Total prepaids and other current assets
December 31,
2018
2017
11,729 $
10,380
8,924
7,013
38,046
(2,116 )
35,930 $
8,527
8,317
8,480
6,009
31,333
(1,253 )
30,080
December 31,
2018
2017
10,520 $
3,588
14,108 $
8,844
4,859
13,703
December 31,
2018
2017
7,373 $
7,573
3,322
2,341
961
845
22,415 $
7,427
5,684
1,577
444
987
1,625
17,744
$
$
$
$
$
$
108
7. FIXED ASSETS, NET
Fixed assets, net consist of the following (in thousands):
Computer hardware and software, including internal-use software and website
development
Building
Furniture and equipment
Land
Building machinery and equipment
Leasehold improvements
Land improvements
Less: accumulated depreciation
Total fixed assets, net
December 31,
2018
2017
$
$
$
215,412
69,266
17,066
12,781
9,713
8,379
6,972
339,589
(204,902 )
134,687 $
196,501
69,169
14,455
12,781
8,356
7,752
6,764
315,778
(186,435 )
129,343
Depreciation of fixed assets totaled $26.4 million, $28.8 million, and $27.3 million for the years ended December 31,
2018, 2017 and 2016, respectively. During 2018, we retired $8.0 million of fully depreciated fixed assets that were removed
from service in 2018.
Fixed assets included assets under capital leases and finance obligations of $1.8 million and $1.8 million at
December 31, 2018 and 2017, respectively. Accumulated depreciation related to assets under capital leases and finance
obligations was $962,000 and $458,000 at December 31, 2018 and 2017, respectively.
Depreciation expense of assets recorded under capital leases and finance obligations was $504,000, $3.5 million and
$4.1 million for the years ended December 31, 2018, 2017 and 2016, respectively.
8. OTHER LONG-TERM ASSETS, NET
Other long-term assets, net consist of the following (in thousands):
Deposit on purchase of a business
Other long-term assets
Prepaid expenses, long-term portion
Total other long-term assets, net
December 31,
2018
2017
$
$
8,000 $
4,310
2,154
14,464 $
—
2,786
1,430
4,216
109
9. ACCRUED LIABILITIES
Accrued liabilities consist of the following (in thousands):
Accounts payable accruals
Allowance for returns
Accrued marketing expenses
Accrued compensation and other related costs
Accrued loss contingencies
Sales and other taxes payable
Accrued freight
Other accrued expenses
Total accrued liabilities
10. DEFERRED REVENUE
Deferred revenue consists of the following (in thousands):
Payments received prior to product delivery
Club O membership fees and reward points
Unredeemed gift cards
In store credits
Other
Total deferred revenue
11. BORROWINGS
PCL L.L.C. Term Loan
December 31,
2018
2017
15,872 $
15,261
14,150
12,099
10,940
9,923
5,343
4,270
87,858 $
16,614
17,391
25,959
10,716
608
2,363
5,040
3,920
82,611
December 31,
2018
2017
30,033 $
11,709
3,399
4,707
730
50,578 $
24,632
11,761
4,955
4,489
631
46,468
$
$
$
$
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 President and Chief Executive Officer, 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.
High Bench Senior Credit Agreement
On June 25, 2018, we became party to a senior credit agreement, as amended, with High Bench-Mac Warehouse-
Senior Debt, LLC ("High Bench Loan"), in connection with our acquisition of Mac Warehouse, LLC. Under the amended
agreement, the loan carries an annual interest rate of 11.0% and a default rate of 18.0%. The High Bench Loan is subject to
monthly interest only payments with the remaining principal amount and any then unpaid interest due and payable on April 18,
2020. The High Bench Loan is subject to mandatory prepayment under certain circumstances, such as a change-in-control of
the business, and is prepayable at our election at any time without penalty or premium. There are no financial covenants
associated the High Bench Loan. At December 31, 2018, our outstanding balance on the High Bench Loan was $3.1 million.
110
Letters of credit
At December 31, 2018 and 2017, letters of credit totaling $280,000 and $355,000, respectively, were issued on our
behalf collateralized by compensating cash balances held at a bank, which are included in Restricted cash in our consolidated
balance sheets.
Commercial purchasing card agreement
We have a commercial purchasing card (the "Purchasing Card") agreement. We use the Purchasing Card for business
purpose purchasing and must pay it in full each month. At December 31, 2018, $48,000 was outstanding and $952,000 was
available under the Purchasing Card. At December 31, 2017, $822,000 was outstanding and $4.2 million was available under
the Purchasing Card.
Capital lease
During the year ended December 31, 2017, we entered into a capital lease arrangement of computer equipment for
$1.4 million. The arrangement will expire in 2020. At December 31, 2018, the outstanding balance under the capital lease was
$884,000 and is included in Other current liabilities, net and Other long-term liabilities on our consolidated balance sheets.
Future payment obligations, including interest, under the capital lease are $496,000 and $413,000 for 2019 and 2020,
respectively.
12. COMMITMENTS AND CONTINGENCIES
Summary of future minimum lease payments for all operating leases
Minimum future payments under all operating leases as of December 31, 2018, are as follows (in thousands):
Payments due by period:
2019
2020
2021
2022
2023
Thereafter
$
$
8,822
7,414
7,654
7,579
6,677
19,571
57,717
Our subsidiary, tZERO, commenced a new lease subsequent to December 31, 2018. We have included the future lease
payments associated with this lease in the table above.
Rental expense for operating leases totaled $7.8 million, $9.3 million and $12.6 million for the years ended December
31, 2018, 2017 and 2016, respectively.
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.
111
On September 23, 2009, SpeedTrack, Inc. sued us along with 27 other defendants in the United States District Court in
the Northern District of California. We are alleged to have infringed a patent covering search and categorization software. We
believe that certain third-party vendors of products and services sold to us are contractually obligated to indemnify us, and we
have tendered defense of the case to an indemnitor who accepted the defense. On April 21, 2016, the court entered an order
partially dismissing the claims against us. On May 4, 2016, the plaintiff filed an amended complaint, and we filed our answer.
No estimate of the possible loss or range of loss can be made. We intend to vigorously defend this action and pursue our
indemnification rights with our vendors.
On February 11, 2013, RPost Holdings, Inc., RPost Communications Limited, and RMail Limited, filed suit against us
in the United States District Court in the Eastern District of Texas for infringement of patents covering products and services
that verify the delivery and integrity of email messages. We tendered defense of the case to an indemnitor who accepted the
defense. No estimate of the possible loss or range of loss can be made. We intend to vigorously defend this action and pursue
our indemnification rights with our vendors.
On September 20, 2018, a jury returned a verdict against us in our Delaware unclaimed property case, which is
expected to result in a judgment against us in the amount of approximately $7.3 million (for certain unredeemed gift card
balances, treble damages, and penalties) plus attorneys’ fees and costs. Our estimated liability for these amounts was included
in Accrued liabilities at December 31, 2018. The expense associated with these litigation charges was included in general and
administrative expense in our consolidated statement of operations for the year ended December 31, 2018. William French
("French") and the State of Delaware ("Delaware") sued us, along with numerous other defendants, in the Superior Court of the
State of Delaware for alleged violations of Delaware's unclaimed property laws. French and Delaware alleged that we
knowingly refused to fulfill obligations under Delaware's Abandoned Property Law by failing to report and deliver unclaimed
gift card funds to the State of Delaware, and knowingly made, used or caused to be made or used, false statements and records
to conceal, avoid or decrease an obligation to pay or transmit money to Delaware in violation of the Delaware False Claims and
Reporting Act. We intend to file an appeal once a judgment has been entered by the court.
On June 21, 2018, the U.S. Supreme Court issued an opinion in our South Dakota sales tax case, overturning Quill
Corp v. North Dakota and permitting states to require remote sellers to collect sales tax under certain circumstances. As a result,
we began collecting sales tax in all 45 states that have sales tax, including South Dakota. Pursuant to South Dakota’s statute, we
are not required to pay sales tax retroactively. Although the U.S. Supreme Court’s opinion vacated and remanded the case back
to the South Dakota Supreme Court for further proceedings, the parties entered an agreement to dismiss the case in November
of 2018.
On July 7, 2017, the State of Wyoming sued us along with five other defendants in the Second Judicial District Court
of Wyoming. Wyoming alleged that U.S. constitutional law should be revised to permit Wyoming to require out-of-state e-
commerce retailers to collect and remit sales tax in Wyoming in accordance with Wyoming's sales tax statute. After the U.S.
Supreme Court’s ruling in our South Dakota case listed above, we began collecting sales tax in Wyoming and a consent
judgment to dismiss the case was entered in November of 2018. Wyoming’s statute does not require us to pay sales tax
retroactively.
On August 28, 2017, the State of Indiana sued us along with one other defendant in the Superior Court of Indiana,
Marion County. Indiana alleged that U.S. constitutional law should be revised to permit Indiana to require out-of-state e-
commerce retailers to collect and remit sales tax in Indiana in accordance with Indiana's sales tax statute. After the U.S.
Supreme Court’s ruling in our South Dakota case listed above, we began collecting sales tax in Indiana. Indiana’s statute does
not require us to pay sales tax retroactively. The Indiana case was dismissed in August of 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 of 2018, we received a follow-
up request from the SEC relating to its investigation. We are cooperating fully with the SEC in connection with its
investigation.
tZERO's broker-dealer subsidiaries are, and any broker-dealer subsidiaries that it acquires or forms in the future will
be, subject to extensive regulatory requirements under federal and state laws and regulations and self-regulatory organization
("SRO") rules. Each of SpeedRoute and PRO Securities is registered with the SEC as a broker-dealer under the Exchange Act
and in the states in which it conducts securities business and is a member of FINRA and other SROs (as applicable). In
addition, PRO Securities owns and operates the PRO Securities ATS, which is registered with the SEC as an alternative trading
system. Each of SpeedRoute and PRO Securities is subject to regulation, examination, investigation, and disciplinary action by
the SEC, FINRA, and state securities regulators, as well as other governmental authorities and SROs with which it is registered
112
or licensed or of which it is a member. Moreover, as a result of tZERO's projects seeking to apply distributed ledger
technologies to the capital markets, tZERO's subsidiaries have been, and remain involved in, ongoing oral and written
communications with regulatory authorities. As previously disclosed, tZERO's broker-dealer subsidiaries are currently
undergoing various examinations, inquiries, and/or investigations undertaken by various regulatory authorities; as appropriate
or required, we will provide further information regarding such matters. Any failure by tZERO's broker-dealer subsidiaries to
satisfy their regulatory authorities that they are in compliance with all applicable rules and regulations could have a material
adverse effect on tZERO and on us.
On January 31, 2019, a putative class action lawsuit was filed against us in the United States District Court, Southern
District of New York, alleging that our website violates the Americans with Disabilities Act ("ADA") in addition to other New
York specific laws, because it is not accessible to blind and visually impaired people. No estimate of the possible loss or range
of loss can be made. We intend to vigorously defend this action.
On March 15, 2019, Consolidated Transaction Processing, LLC. filed suit against us in the United States District Court
for the District of Delaware. We are alleged to have infringed patents covering electronic transaction processing methods. We
are currently evaluating the merits of the complaint, and no estimate of the possible loss or range of loss can be made. We
intend to vigorously defend this action and pursue any indemnification rights that exist with our vendors.
We establish liabilities when a particular contingency is probable and estimable. At December 31, 2018, we have
accrued $10.3 million, which is included in accrued liabilities in the consolidated balance sheets. It is reasonably possible that
the actual losses may exceed our accrued liabilities.
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 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. No dividends have been declared or paid on our common stock through
December 31, 2018.
Preferred Stock
Each share of Series A Preferred and each share of Series B Preferred (collectively the "preferred shares") is intended
to have voting and dividend rights similar to those of one share of common stock. Preferred shares rank senior to common stock
with respect to dividends. Holders of the preferred shares will be entitled to an annual cash dividend of $0.16 per share, in
preference to any dividend payment to the holders of the common stock, out of funds of the Company legally available for
payment of dividends and subject to declaration by our Board of Directors. Holders of the preferred shares are also entitled to
participate in any cash dividends we pay to the holders of the common stock and are also entitled to participate in non-cash
dividends we pay to holders of the common stock, subject to potentially different treatment if we effect a stock dividend, stock
split or combination of the common stock. There are no arrearages in cumulative preferred dividends. We declared and paid a
cash dividend of $0.16 per share on our preferred stock during 2017 and 2018.
113
Neither the Series A Preferred nor Series B Preferred is required to be converted into or exchanged for shares of our
common stock or any other entity; however, at our sole discretion, we may convert the Series A Preferred shares into Series B
Preferred shares at any time on a one-to-one basis. Until the third anniversary of the original issuance date, we may redeem, at
our discretion, both the Series A and Series B Preferred shares for an amount equal to the highest of the following: (1) the
subscription price plus any accrued but unpaid dividends, (2) 105% of the average trading price of our common stock during a
five-trading-day period and (3) 105% of the average trading price of the series of preferred shares during the same five-day-
trading period. In the event of any liquidation, any amount available for distribution to stockholders after payment of all
liabilities will be distributed proportionately, with each share of Series A Preferred and each share of Series B Preferred being
treated as though it were a share of our common stock.
JonesTrading Sales Agreement
In August 2018, we entered into a sales agreement with JonesTrading Institutional Services LLC ("JonesTrading"),
under which we conducted "at the market" public offerings of our common stock during the quarter ended September 30, 2018,
and may conduct additional "at the market" public offerings of our common stock from time to time. Under the sales
agreement, JonesTrading, acting as our agent, may offer our common stock in the market on a daily basis or otherwise as we
request from time to time. We have no obligation to sell additional shares under the sales agreement, but expect to do so from
time to time. We will pay JonesTrading up to a 2.0% sales commission on all sales. The sales agreement contemplates sales of
up to $150 million of our common stock over a period of up to three years. As of December 31, 2018, we had
sold 2,883,344 shares of our common stock pursuant to the sales agreement and have received $94.6 million in proceeds, net
of $2.6 million of offering costs, including commissions paid to JonesTrading. The average price per share of stock sold
pursuant to the sales agreement during the year ended December 31, 2018, excluding offering costs, was $33.71.
JonesTrading Standby Equity Agreement
In August 2018 we also entered into a standby equity underwriting agreement with JonesTrading. We did not sell any
shares under the standby equity underwriting agreement, and the agreement terminated in accordance with its terms during the
quarter ended September 30, 2018. Under the standby underwriting agreement, we had the right, but no obligation, to sell up
to $50 million of our common stock to JonesTrading, as underwriter, for sale to the public in a firm commitment public
offering. We paid a 1% commitment fee to JonesTrading for entering into the underwriting agreement.
GSR Agreement
In August 2018, Overstock signed a Token Purchase Agreement with GSR Capital Ltd., a Cayman Islands exempted
company ("GSR"). The Token Purchase Agreement sets forth the terms on which GSR agreed to purchase, for $30 million, on
May 6, 2019 or such other date as may be agreed by the parties, security tokens at a price of $6.67 per security token. These
security tokens were issued by tZERO to Overstock in satisfaction of $30 million of tZERO's indebtedness to Overstock. We
may be required to obtain additional tokens in order to fulfill our obligations under the agreement. The agreement states that the
obligations of GSR to complete the transaction described will be subject to conditions, some of which are unidentified.
15. STOCK BASED AWARDS
We have equity incentive plans that provide for the grant to employees and board members of stock-based awards,
including stock options and restricted stock. Employee accounting applies to awards granted by the Company or subsidiary in
the company or subsidiary's shares only to its own employees, respectively. No sibling or upstream awards have been granted.
Stock-based compensation expense was as follows (in thousands):
Overstock restricted stock awards
Medici Ventures stock options
tZERO equity awards
Total stock-based compensation expense
114
Years ended December 31,
2018
2017
2016
$
$
9,096 $
412
4,848
14,356 $
4,056 $
21
—
4,077 $
4,891
—
—
4,891
Overstock stock option awards
Our Board of Directors adopted the Overstock.com, Inc. 2005 Equity Incentive Plan and it 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 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. Options granted under
this 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 did not grant any options during the years ended December 31, 2018,
2017 and 2016. At December 31, 2018, 1.8 million shares of stock remained available for future grants under the Plan. We
settle stock option exercises with newly issued common shares. As of December 31, 2018, there were no options outstanding
under the Plan.
The following is a summary of stock option activity (in thousands, except per share data):
Outstanding—beginning of year
Exercised
Expired/Forfeited
Outstanding—end of year
Options exercisable at year-end
2018
2017
2016
Weighted
Average
Exercise
Price
Shares
Weighted
Average
Exercise
Price
Shares
Shares
— $
—
—
— $
— $
—
—
—
—
—
156 $
(39 )
(117 )
— $
— $
17.33
16.90
17.48
—
—
204 $
(42 )
(6 )
156 $
156 $
Weighted
Average
Exercise Price
17.27
17.08
17.08
17.33
17.33
The most recent stock options were granted in May 2008 and have fully vested. There was no stock based
compensation related to stock options recorded during the years ended December 31, 2018, 2017 and 2016.
The total intrinsic value of options exercised during the years ended December 31, 2018, 2017 and 2016 was $0,
$54,000, and $82,000, respectively. The total cash received from employees as a result of employee stock option exercises
during the years ended December 31, 2018, 2017 and 2016 were approximately $0, $664,000, and $819,000, respectively.
Overstock restricted stock awards
For the years ended December 31, 2018, 2017 and 2016, the Compensation Committee of the Board of Directors
approved grants of 387,000, 310,000 and 541,000 restricted stock awards, respectively, to our officers, board members and
employees. These restricted stock awards vest over three years at 33.3% at the end of the first year, 33.3% at the end of the
second year and 33.3% at the end of the third year; subject to the recipient's continuing service to us. At December 31, 2018,
there were 559,000 unvested restricted stock awards that remained outstanding.
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 three-year 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,
2018, 2017 and 2016 was $65.42, $17.75 and $14.52, respectively.
115
The following table summarizes restricted stock award activity (in thousands, except fair value data):
2018
2017
2016
Weighted
Average
Grant Date
Fair Value
17.05
65.42
17.68
42.85
44.08
Units
540 $
387
(234 )
(134 )
559 $
Weighted
Average
Grant Date
Fair Value
17.46
17.75
19.58
16.21
17.05
Weighted
Average
Grant Date
Fair Value
24.80
14.52
22.57
16.52
17.46
Units
349 $
541
(219 )
(111 )
560 $
Units
560 $
310
(212 )
(118 )
540 $
Outstanding—beginning of year
Granted at fair value
Vested
Forfeited
Outstanding—end of year
Medici Ventures stock options
The Medici Ventures, Inc. 2017 Stock Option Plan provides for the grant of options to employees and directors of and
consultants to Medici Ventures to acquire up to 10% of the authorized shares of Medici Ventures' common stock. During
the twelve months ended December 31, 2018, Medici Ventures granted 94,450 stock options with a cumulative grant date fair
value of $1.8 million which vest over a three year period. During the year ended December 31, 2017, Medici Ventures granted
74,750 stock options to certain Medici Ventures and Overstock employees with a cumulative grant date fair value of $91,000,
which will be expensed on a straight-line basis over the vesting period of three years.
tZERO equity awards
The tZERO.com 2017 Equity Incentive Plan provides for grant of options to employees and directors of and
consultants to tZERO to acquire up to 5% of the authorized shares of tZERO's common stock. 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 twelve months ended December 31, 2018, tZERO granted awards 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. No awards were issued during the year ended December 31, 2017.
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, 2018,
2017 and 2016, 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 $5.5 million,
$4.1 million and $3.8 million for the years ended December 31, 2018, 2017 and 2016, respectively. We made no discretionary
contributions to eligible participants for the years ended December 31, 2018, 2017 and 2016, respectively.
17. OTHER INCOME (EXPENSE), NET
Other income (expense), net consisted of the following (in thousands):
Club O Rewards and gift card breakage
Gain on investment in precious metals
Loss on equity investments, net
Other
Total other income (expense), net
116
Years ended December 31,
2018
2017
2016
$
— $
—
(2,843 )
(645 )
$
(3,488 ) $
2,742 $
1,971
(5,995 )
2,460
1,178 $
16,808
201
(2,850 )
22
14,181
18. INCOME TAXES
For financial reporting purposes, income (loss) before income taxes includes the following components (in thousands):
United States
Foreign
Total income (loss) before income taxes
Years ended December 31,
$
2018
(219,585 ) $
(369 )
$
(219,954 ) $
2017
(48,039 ) $
305
(47,734 ) $
2016
20,974
(429 )
20,545
The provision (benefit) for income taxes for 2018, 2017 and 2016 consists of the following (in thousands):
Years ended December 31,
2018
2017
2016
Current:
Federal
State
Foreign
Total current
Deferred:
Federal
State
Foreign
Total deferred
$
(57 ) $
(141 )
44
(154 )
(1,583 )
(645 )
(2 )
(2,230 )
(2,384 ) $
365 $
280
57
702
56,350
7,146
(10 )
63,486
64,188 $
280
1,264
34
1,578
7,311
410
(2 )
7,719
9,297
Total provision (benefit) for income taxes
$
The provision (benefit) for income taxes for 2018, 2017 and 2016 differ from the amounts computed by applying the
U.S. federal income tax rate of 21% for 2018 and 35% for 2017 and 2016 to income (loss) before income taxes for the
following reasons (in thousands):
Year ended December 31,
2018
(46,190 ) $
2017
(16,707 ) $
$
(8,289 )
(1,734 )
(1,260 )
1,652
2,192
—
51,245
(2,384 ) $
(2,480 )
(1,696 )
164
581
—
25,287
59,039
64,188 $
2016
7,191
1,232
(1,078 )
674
110
—
—
1,168
9,297
U.S. federal income tax provision (benefit) at statutory rate
State income tax expense, net of federal benefit
Research and development credit
Stock based compensation expense
Other
Gain on subsidiary stock
Reduction in federal rate
Change in valuation allowance
Total provision (benefit) for income taxes
$
117
The components of our deferred tax assets and liabilities as of December 31, 2018 and 2017 are as follows (in
thousands):
Deferred tax assets:
Net operating loss carryforwards
Research and development tax credits
Accrued expenses
Reserves and other
Basis difference in investments
Fixed and intangible assets
Other tax credits
Gross deferred tax assets
Valuation allowance
Total deferred tax assets
Deferred tax liabilities:
Prepaid expenses
Goodwill
Fixed assets
Total deferred tax liabilities
Total deferred tax assets (liabilities), net
December 31,
2018
2017
$
79,820 $
15,382
7,898
5,345
4,857
2,493
206
116,001
(114,523 )
1,478
(880 )
(489 )
—
(1,369 )
$
109 $
29,350
12,653
10,672
1,480
1,636
8,068
220
64,079
(63,278 )
801
(788 )
(261 )
—
(1,049 )
(248 )
At December 31, 2018, we have federal net operating loss carryforwards with no expiration date of approximately
$168.6 million and federal net operating loss carryforwards of approximately $152.3 million which primarily expire between
2020 and 2037 if unused. We have state net operating loss carryforwards of approximately $286.9 million, which primarily
expire between 2021 and 2033 if unused. At December 31, 2018, we have federal research credit carryforwards of
approximately $16.4 million and state research credit carryforwards of approximately $6.9 million. These tax credits expire at
various dates between 2021 and 2038 if unused. Ownership changes under Internal Revenue Code Section 382 could limit the
amount of net operating losses or credit carryforwards that can be used in any annual period.
Each quarter we assess the recoverability of our deferred tax assets under ASC Topic 740. We assess the available
positive and negative evidence to estimate whether we will generate sufficient future taxable income to use our existing
deferred tax assets. We have limited carryback ability and do not have significant taxable temporary differences to recover our
existing deferred tax assets, therefore we must rely on future taxable income, including tax planning strategies, to support their
realizability. We have established a valuation allowance for our deferred tax assets not supported by carryback ability or taxable
temporary differences, primarily due to uncertainty regarding our future taxable income. We have considered, among other
things, the cumulative loss incurred over the three-year period ended December 31, 2018, as a significant piece of objective
negative evidence. We intend to continue maintaining a valuation allowance on our net deferred tax assets until there is
sufficient evidence to support the reversal of all or some portion of these allowances. The amount of the deferred tax asset
considered realizable could be adjusted if objective negative evidence in the form of cumulative losses is no longer present and
additional weight may be given to subjective evidence such as long-term projections for growth. We will continue to monitor
the need for a valuation allowance against our remaining deferred tax assets on a quarterly basis.
Tax laws and regulations themselves are subject to change as a result of changes in fiscal policy, changes in legislation,
the evolution of regulations, and court rulings. On December 22, 2017, the President signed into law Public Law No. 115-97,
commonly referred to as the Tax Cuts and Jobs Act ("TCJA"), following its passage by the United States Congress. Staff
Accounting Bulletin No. 118 ("SAB 118") was issued to address the application of US GAAP in situations when a registrant did
not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete
the accounting for certain income tax effects of the TCJA. As of December 31, 2017, we were able to reasonably estimate
certain effects and, therefore, recorded adjustments associated with the remeasurement of certain deferred tax assets and
liabilities and the mandatory deemed repatriation of cumulative foreign earnings. Our accounting for the following elements of
the TCJA was completed as of September 30, 2018. The expense related to the remeasurement of certain deferred tax assets and
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liabilities, based on the rates at which they are expected to reverse in the future, was $25.2 million. The expense related to the
one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings was $47,000. We did not make
any measurement-period adjustments related to these items during the year because there were no significant changes to our
provisional amounts, and therefore, there is no impact to our effective tax rate due to measurement-period adjustments.
The TCJA includes a provision to tax global intangible low-taxed income ("GILTI") of foreign subsidiaries beginning
in 2018. Under GAAP, we can make an accounting policy election to either treat taxes due on the GILTI inclusion as a current
period expense or factor such amounts into our measurement of deferred taxes. We will elect to treat any potential GILTI
inclusions as a period cost as we are not projecting any material impact from GILTI inclusions and any deferred taxes related to
any inclusion would be immaterial.
A reconciliation of the beginning and ending unrecognized tax benefits, excluding interest and penalties, as of
December 31, 2018, 2017 and 2016 is as follows (in thousands):
Beginning balance
Additions for tax positions related to the current year
Additions (reductions) for tax positions taken in prior years
Reduction for tax positions settled by utilizing tax attributes
Ending balance
Year ended December 31,
2018
2017
2016
6,964 $
1,013
332
(335 )
7,974 $
7,333 $
881
230
(1,480 )
6,964 $
4,753
1,112
1,468
—
7,333
$
$
Included in the balance of unrecognized tax benefits as of December 31, 2018, 2017 and 2016, are approximately $8.0
million, $7.0 million, and $5.9 million, respectively, of tax benefits that, if recognized, would affect the effective tax rate. Also
included in the balance of unrecognized tax benefits as of December 31, 2018, 2017 and 2016, are approximately $0, $0, and
$1.5 million, respectively, of tax benefits that, if recognized, would result in adjustments to other tax accounts, primarily
deferred taxes. 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, 2018 and 2017 were $499,000 and
$492,000, respectively.
We are subject to taxation in the United States and various state and foreign jurisdictions. Tax years beginning in 2014
are subject to examination by taxing authorities, although net operating loss and credit carryforwards from all years are subject
to examinations and adjustments for at least three years following the year in which the attributes are used. We are currently
under audit in Ireland for the 2016 tax year.
We have indefinitely reinvested foreign earnings of $1.4 million at December 31, 2018. 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 President and Chief Executive Officer, 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
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approximately 62% of the SiteHelix common stock, is a member of our Board of Directors and served as President, Retail, of
Overstock until May 8, 2018, when he became Chief Executive Officer of tZERO.
Bitsy Agreement
In July 2018, Medici Ventures entered into a stock purchase agreement with Bitsy, Inc. ("Bitsy") to acquire an
additional 25% equity interest in Bitsy for $3.0 million and $1.5 million worth of Overstock.com common stock
(47,378 shares). Subsequent to the purchase, Medici Ventures held a 33% interest in Bitsy. Bitsy is a U.S.-based startup
company that plans to build a regulatory-compliant bridge between the U.S. Dollar and cryptocurrencies and offer our
customers the ability to purchase cryptocurrencies on or through the Bitsy app and our Website. Bitsy was founded by Steve
Hopkins, Medici Ventures' former chief operating officer and general counsel, and current president of tZERO, who held a
25% equity interest in Bitsy. Our equity interest is included in our equity investments on our consolidated balance sheets.
On December 21, 2018, tZERO entered into a stock purchase agreement with the owners of Bitsy to acquire the
remaining 67% equity interest in Bitsy for $8.0 million with effective control of Bitsy transferring to tZERO effective
January 1, 2019. As tZERO paid the $8.0 million purchase price prior to the effective date of the transaction, the payment is
included in Other long-term assets in our consolidated balance sheets as a deposit on purchase of a business. In connection with
the stock purchase agreement, Medici Ventures transferred its 33% equity interest to tZERO. Our purchase accounting has not
yet been finalized for the transaction, as we are still finalizing our valuation of assets acquired and liabilities assumed.
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 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 investments 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, our President and Chief Executive Officer, a member of our Board of Directors and our largest
stockholder, holds approximately 43% of the outstanding capital stock of MLG. Dr. Byrne is also a member of the board of
directors of MVI and is a member of the board of directors of MLG. The financial results of MLG are included in our
consolidated financial statements.
20. BROKER DEALERS
tZERO wholly owns each of two broker dealers, SpeedRoute LLC ("SpeedRoute") and PRO Securities LLC ("PRO
Securities"), which we acquired in January 2016.
SpeedRoute is an electronic, agency-only, FINRA-registered broker dealer that provides connectivity for its customers
to U.S. equity exchanges as well as off-exchange sources of liquidity such as dark pools. All of SpeedRoute's customers are
registered broker dealers. SpeedRoute does not hold, own, or sell securities.
120
PRO Securities is a FINRA-registered broker dealer that owns and operates the PRO Securities alternative trading
system ("ATS"), which is registered with the SEC. An ATS is a trading system that is not regulated as an exchange, but is a
licensed venue for matching buy and sell orders. The PRO Securities ATS is a closed system available only to its broker dealer
subscribers. PRO Securities does not accept orders from non-broker dealers, nor does it hold, own, or sell securities.
SpeedRoute and PRO Securities are subject to the SEC's Uniform Net Capital Rule (SEC Rule 15c3-1), which requires
the maintenance of minimum net capital and requires that the ratio of aggregate indebtedness to net capital, both as defined,
shall not exceed 15 to 1 and that equity capital may not be withdrawn or cash dividends paid if the resulting net capital ratio
would exceed 10 to 1. At December 31, 2018, SpeedRoute had net capital of $1,251,579, which was $1,152,854 in excess of its
required net capital of $98,725 and SpeedRoute's net capital ratio was 1.2 to 1. At December 31, 2018, PRO Securities had net
capital of $13,958, which was $8,958 in excess of its required net capital of $5,000 and PRO Securities net capital ratio
was 2 to 1. At December 31, 2017, SpeedRoute had net capital of $334,848, which was $233,485 in excess of its required net
capital of $101,363 and SpeedRoute's net capital ratio was 4.5 to 1. At December 31, 2017, PRO Securities had net capital
of $24,175, which was $19,175 in excess of its required net capital of $5,000 and PRO Securities net capital ratio was 1.3 to 1.
SpeedRoute and PRO Securities did not have any securities owned or securities sold, not yet purchased at
December 31, 2018 and 2017.
21. BUSINESS SEGMENTS
Segment information has been prepared in accordance with ASC Topic 280 Segment Reporting. As described in Note
1—Basis of Presentation, we have recast our segment information to conform with current year presentation. We determined
our segments based on how we manage our business. In the fourth quarter of 2018, we completed our review of our segment
reporting and in light of a strategic shift in our Chief Operating Decision Maker's long-term strategic focus for our organization,
we no longer consider the split of retail direct and retail partner as a distinct and relevant measure of our business. Accordingly,
Direct and Partner are no longer considered separate reportable segments but are included under Retail in our Business Segment
disclosures. Our Medici business includes one reportable segment, tZERO. We use pre-tax net income (loss) as the measure to
determine our reportable segments. As a result, the remainder of our Medici business is not significant as compared to our
Retail and tZERO segments. Our Other segment consists of Medici Ventures' remaining operations.
Our Retail segment primarily consists of amounts earned through e-commerce sales through our Website. In addition,
substantially all our corporate support costs (administrative functions such as finance, human resources, and legal) are included
within our Retail segment.
Our tZERO segment primarily consists of amounts earned through securities transaction through our broker-dealers
and costs incurred to execute our tZERO business initiatives.
We do not allocate assets between our segments for our internal management purposes, and as such, they are not
presented here. There were no significant inter-segment sales or transfers during the years ended December 31, 2018, 2017 and
2016.
The following table summarizes information about reportable segments and a reconciliation to consolidated net
income (loss) for the years ended December 31, 2018, 2017 and 2016 (in thousands):
2018
Revenue, net
Cost of goods sold
Gross profit
Operating expenses
Interest and other income (expense), net (1)
Pre-tax loss
Benefit for income taxes
Net loss (2)
Retail
tZERO
Other
Total
$ 1,800,187 $
1,452,195
347,992
506,113
(476 )
$
(158,597 ) $
19,043 $
13,127
5,916
47,006
233
(40,857 ) $
2,362 $ 1,821,592
1,467,684
2,362
353,908
—
571,114
17,995
(2,748 )
(2,505 )
(20,500 )
$
(219,954 )
(2,384 )
(217,570 )
121
2018
2017
Revenue, net
Cost of goods sold
Gross profit
Operating expenses
Interest and other income (expense), net (1)
Pre-tax loss
Provision (benefit) for income taxes
Net loss (2)
2016
Revenue, net
Cost of goods sold
Gross profit
Operating expenses
Interest and other income (expense), net (1)
Pre-tax income (loss)
Provision (benefit) for income taxes
Net income (loss) (2)
___________________________________________
Retail
tZERO
Other
Total
$ 1,728,104 $
1,392,558
335,546
365,648
4,680
(25,422 ) $
$
16,493 $
11,647
4,846
17,101
—
(12,255 ) $
$ 1,784,782 $
1,458,411
326,371
307,669
13,630
32,332 $
$
15,181 $
10,203
4,978
15,826
—
(10,848 ) $
159 $ 1,744,756
1,404,205
—
340,551
159
387,185
4,436
(1,100 )
(5,780 )
(10,057 )
$
(47,734 )
64,188
(111,922 )
— $ 1,799,963
1,468,614
—
331,349
—
324,434
939
13,630
—
20,545
(939 )
9,297
11,248
$
(1) — The above amounts exclude intercompany transactions eliminated in consolidation, which consist primarily of
service fees and interest. The net amounts of these intercompany transactions were $3.5 million, $2.0 million, and
$594,000 for the years ended December 31, 2018, 2017 and 2016, respectively.
(2) — Pre-tax income (loss) presented for segment reporting purposes is before any adjustments attributable to
noncontrolling interests.
For the years ended December 31, 2018, 2017 and 2016, substantially all our sales revenues were attributable to
customers in the United States. At December 31, 2018 and 2017, substantially all our fixed assets were located in the United
States.
22. SUBSEQUENT EVENTS
On January 18, 2019, tZERO sold its entire equity interest in one of its equity method investments which had a
carrying value of $5.8 million for $5.9 million.
In February 2019, we executed a Memorandum of Understanding regarding a potential transaction involving an equity
investment of up to $100 million in tZERO by GSR Capital and Makara Capital, and are in continuing discussions in
furtherance thereof.
23. QUARTERLY RESULTS OF OPERATIONS (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, 2018. 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.
122
Consolidated Statement of Operations Data:
Revenue, net
Retail
Other
Total net revenue
Cost of goods sold
Retail
Other
Total cost of goods sold
Gross profit
Operating expenses:
Sales and marketing
Technology
General and administrative
Total operating expenses
Operating loss
Interest income
Interest expense
Other income (expense), net
Net loss before income taxes
Benefit for income taxes
Consolidated net loss
Three Months Ended
March 31,
2018
June 30,
2018
September 30,
2018
December 31,
2018
(in thousands, except per share data)
$
439,996 $
5,335
445,331
477,683 $
5,450
483,133
435,775 $
4,805
440,580
446,733
5,815
452,548
347,580
3,882
351,462
93,869
77,214
31,294
39,755
148,263
(54,394 )
544
(874 )
(9 )
(54,733 )
(277 )
387,252
4,138
391,390
91,743
94,416
32,423
31,440
158,279
(66,536 )
620
(395 )
368
(65,943 )
350,651
3,213
353,864
86,716
55,312
33,880
45,356
134,548
(47,832 )
383
(101 )
(1,848 )
366,712
4,256
370,968
81,580
47,537
34,557
47,930
130,024
(48,444 )
661
(98 )
(1,999 )
(49,398 )
(49,880 )
(27 )
(141 )
(1,939 )
(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
Weighted average common shares outstanding—basic
Net loss per common share—diluted:
Net loss attributable to common shares—diluted
Weighted average common shares outstanding—diluted
$
(1.74 ) $
(2.20 ) $
(1.55 ) $
28,566
28,903
30,279
$
(1.74 ) $
(2.20 ) $
(1.55 ) $
28,566
28,903
30,279
(1.39 )
32,112
(1.39 )
32,112
123
Consolidated Statement of Operations Data:
Revenue, net
Retail
Other
Total net revenue
Cost of goods sold
Retail
Other
Total cost of goods sold
Gross profit
Operating expenses:
Sales and marketing
Technology
General and administrative
Total operating expenses
Operating loss
Interest income
Interest expense
Other income (expense), net
Net loss before income taxes
Provision (benefit) for income taxes
Consolidated net loss
Three Months Ended
March 31,
2017
June 30,
2017
September 30,
2017
December 31,
2017
(in thousands, except per share data)
$
428,089 $
4,346
432,435
427,955 $
4,069
432,024
420,064 $
3,943
424,007
451,996
4,294
456,290
342,260
3,268
345,528
86,907
345,039
2,814
347,853
84,171
37,618
28,992
22,610
89,220
(2,313 )
125
(710 )
(3,724 )
(6,622 )
(340 )
(6,282 )
(379 )
43,297
28,244
22,361
93,902
(9,731 )
136
(716 )
593
(9,718 )
(1,975 )
(7,743 )
(244 )
337,698
2,634
340,332
83,675
45,153
28,746
21,651
95,550
(11,875 )
189
(713 )
5,882
(6,517 )
(5,412 )
(1,105 )
(319 )
367,561
2,931
370,492
85,798
54,521
29,896
24,096
108,513
(22,715 )
209
(798 )
(1,573 )
(24,877 )
71,915
(96,792 )
(1,102 )
(5,903 ) $
(7,499 ) $
(786 ) $
(95,690 )
Less: Net loss attributable to noncontrolling interests
Net income (loss) attributable to stockholders of Overstock.com,
Inc.
$
Net income (loss) per common share—basic:
Net income (loss) per share—basic
Weighted average common shares outstanding—basic
Net income (loss) per common share—diluted:
Net income (loss) per share—diluted
Weighted average common shares outstanding—diluted
$
(0.23 ) $
(0.29 ) $
(0.03 ) $
25,290
24,996
25,003
$
(0.23 ) $
(0.29 ) $
(0.03 ) $
25,290
24,996
25,003
(3.72 )
25,103
(3.72 )
25,103
124
Schedule II
Valuation and Qualifying Accounts
(in thousands)
Balance at
Beginning of
Year
Charged to
Expense
Deductions
Balance at
End of Year
Year ended December 31, 2018
Deferred tax valuation allowance
$
Allowance for sales returns
Allowance for doubtful accounts
Year ended December 31, 2017
Deferred tax valuation allowance
$
Allowance for sales returns
Allowance for doubtful accounts
Year ended December 31, 2016
Deferred tax valuation allowance
$
Allowance for sales returns
Allowance for doubtful accounts
63,278 $
17,391
1,253
4,239 $
18,176
1,999
3,071 $
17,896
465
$
$
$
51,245
174,864
883
59,039
169,398
309
1,168
163,693
1,608
— $
176,994
20
— $
170,183
1,055
— $
163,413
74
114,523
15,261
2,116
63,278
17,391
1,253
4,239
18,176
1,999
125