UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|
| | | | |
ý☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2017March 31, 2023
Or
|
| | | | |
o☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number: 000-49799
OVERSTOCK.COM, INC.
(Exact name of registrant as specified in its charter)
|
| | | | | | | | | | | | | |
| Delaware | | 87-0634302 |
| (State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification Number) |
| | |
799 West Coliseum Way Midvale, Utah | | 84047 |
| Midvale | | |
| Utah | | 84047 |
| (Address of principal executive offices) | | (Zip Code) |
(801) 947-3100
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: | | | | | | | | | | | | | | |
| Title of each class | | Trading Symbol(s) | | Name of each exchange on which registered |
(801) 947-3100Common Stock, $0.0001 par value |
(Registrant's telephone number, including area code) | OSTK | | NASDAQ Global Market |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý☒ No o☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes ý☒ No o☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
|
| | | | | | | | | | |
Large accelerated filero | ☒ | Accelerated filerx | ☐ |
| | |
Non-accelerated filero (Do not check if a smaller reporting company)
| ☐ | Smaller reporting companyo | ☐ |
| | |
Emerging growth companyo | | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o☐ No ý☒
There were 25,023,32845,199,036 shares of the Registrant'sregistrant's common stock, par value $0.0001, are outstanding on November 3, 2017.
TABLE OF CONTENTS
OVERSTOCK.COM, INC.
TABLE OF CONTENTS TO QUARTERLY REPORT ON FORM 10-Q
For the Quarterly Period Ended March 31, 2023
| | | | | | | | |
| | Page |
|
| | |
| Item 1. | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| Item 2. | | |
| | |
| Item 3. | | |
| | |
| Item 4. | | |
| | |
|
| | |
| Item 1. | | |
| | |
| Item 1A. | | |
| | |
| Item 2. | | |
| | |
| Item 3. | | |
| | |
| Item 4. | | |
| | |
| Item 5. | | |
| | |
| Item 6. | | |
| | |
| | |
Special Cautionary Note Regarding Forward-Looking Statements
This Report on Form 10-Q and the documents incorporated herein by reference, and our other public documents and statements our officers and representatives may make from time to time, contain forward-looking statements within the meaning of the federal securities laws. These statements are therefore entitled to the protection of the safe harbor provisions of these laws. You can find many of these statements by looking for words such as "may," "would," "could," "should," "will," "expect," "anticipate," "predict," "project," "potential," "continue," "contemplate," "seek," "assume," "believe," "intend," "plan," "forecast," "goal," "estimate," or other similar expressions which identify these forward-looking statements.
These forward-looking statements involve risks and uncertainties and relate to future events or our future financial or operating performance. These forward-looking statements are not historical facts, and are based on current expectations, estimates and projections about our industry and business, and on management's beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond our control. Accordingly, you are cautioned that any such forward-looking statements are not guarantees of future performance and are subject to assumptions, risks and uncertainties that are difficult to predict, and that actual results and outcomes may be materially different from the results or outcomes expressed or implied by any of our forward-looking statements for a variety of reasons, including among others:
•a recession, other economic downturns, inflation, rising interest rates, our increasing exposure to the U.S. housing industry, or other changes in U.S. and global economic conditions or U.S. consumer spending;
•any difficulties we may encounter as a result of our reliance on third-parties that we do not control for the performance of critical functions material to our business, such as carriers, fulfillment partners, and SaaS/IaaS providers;
•any inability to compete successfully against existing or future competitors or to effectively market our business and generate customer traffic;
•any increases in the price of importing into the U.S. or transporting to our customers the types of merchandise we sell or other supply chain challenges that limit our ability to deliver merchandise to our customers in a timely manner;
•any inability to attract and/or retain key personnel;
•any inability to generate and maintain unpaid natural traffic to our Website;
•any inability to optimize and effectively operate our distribution center, warehouse, and customer service operations;
•any inability to maintain profitability and/or positive cash flow from operations;
•any negative impact from our workforce working on a remote, in-office, or hybrid schedule;
•any challenges that would result in the event of any loss of functionality or unavailability of our Website or reduced performance of our transaction systems;
•our exposure to cyber-security risks, risks of data loss and other security breaches;
•the risk that the amount of deferred tax assets we consider realizable could be reduced if estimates of future taxable income during the carryforward period are reduced;
•the risk that we may be required to recognize losses relating to our equity and debt investments;
•the impacts that we would experience if governmental entities or providers of consumer devices and internet browsers further restrict or regulate the use of "cookie" tracking technologies;
•the impact that any litigation, claims, or regulatory matters could have on our business, financial condition, results of operations, and cash flows;
•negative global economic consequences of global conflict, including the ongoing tensions between the United States and Russia, the United States and China, and other effects of the ongoing conflict in Ukraine;
•the possibility that we are unable to protect our proprietary technology and to obtain trademark protection for our marks;
•current and future claims of intellectual property infringement to which we are subject;
•any difficulties we may encounter as a result of our reliance on third-parties that we do not control for their representations regarding product compliance with various laws and regulations;
•any difficulties we may encounter as a result of our evolving business practices, including our exit from non-home categories and our continuing expansion into international markets;
•any inability of Pelion Venture Partners to successfully manage the Medici Ventures, L.P. fund, in which we are the limited partner, or any other entity in which we also have a direct minority interest; and
•the other risks described in this report or in our other public filings.
In evaluating all forward-looking statements, you should specifically consider the risks outlined above and in this report, especially under the headings "Special Cautionary Note Regarding Forward-Looking Statements," "Risk Factors," "Legal Proceedings," and "Management's Discussion and Analysis of Financial Condition and Results of Operations." These factors may cause our actual results and outcomes to differ materially from those contemplated by any forward-looking statement. Although we believe that our expectations reflected in the forward-looking statements are reasonable, we cannot guarantee or offer any assurance of future results, levels of activity, performance or achievements or other future events. Our forward-looking statements contained in this report speak only as of the date of this report and, except as required by law, we undertake no obligation to update forward-looking statements to reflect events or circumstances occurring after the date of this report or any changes in our expectations or any change in any events, conditions or circumstances on which any of our forward-looking statements are based.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
| | | | | | | | | | | |
Overstock.com, Inc. Consolidated Balance Sheets (Unaudited) (in thousands, except per share data) |
| March 31,
2023 | | December 31,
2022 |
| Assets | | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 374,711 | | | $ | 371,263 | |
| Restricted cash | 217 | | | 194 | |
| | | |
| Accounts receivable, net of allowance for credit losses of $3,127 and $3,223 | 22,071 | | | 17,693 | |
| | | |
| Inventories | 6,238 | | | 6,526 | |
| Prepaids and other current assets | 18,012 | | | 18,833 | |
| Total current assets | 421,249 | | | 414,509 | |
| Property and equipment, net | 107,064 | | | 109,906 | |
| Deferred tax assets, net | 44,888 | | | 41,439 | |
| | | |
| Goodwill | 6,160 | | | 6,160 | |
| Equity securities, including securities measured at fair value of $82,811 and $82,823 | 289,124 | | | 296,317 | |
| Operating lease right-of-use assets | 6,364 | | | 7,460 | |
| Other long-term assets, net | 12,540 | | | 2,755 | |
| Total assets | $ | 887,389 | | | $ | 878,546 | |
| Liabilities and Stockholders' Equity | | | |
| Current liabilities: | | | |
| Accounts payable | $ | 83,621 | | | $ | 75,130 | |
| Accrued liabilities | 68,593 | | | 63,614 | |
| Unearned revenue | 47,123 | | | 44,480 | |
| Operating lease liabilities, current | 3,872 | | | 4,410 | |
| Other current liabilities | 2,910 | | | 3,508 | |
| Total current liabilities | 206,119 | | | 191,142 | |
| Long-term debt, net | 34,207 | | | 34,476 | |
| Operating lease liabilities, non-current | 2,982 | | | 3,626 | |
| Other long-term liabilities | 3,576 | | | 3,476 | |
| Total liabilities | 246,884 | | | 232,720 | |
| Commitments and contingencies (Note 8) | | | |
|
|
| | | |
| Stockholders' equity: | | | |
| Preferred stock, $0.0001 par value, authorized shares - 5,000, issued and outstanding - none | — | | | — | |
| | | |
| | | |
| Common stock, $0.0001 par value, authorized shares - 100,000 | | | |
| Issued shares - 51,438 and 51,102 | | | |
| Outstanding shares - 45,191 and 44,951 | 5 | | | 5 | |
| Additional paid-in capital | 989,634 | | | 982,718 | |
| Accumulated deficit | (184,136) | | | (173,829) | |
| Accumulated other comprehensive loss | (518) | | | (522) | |
| Treasury stock at cost - 6,247 and 6,151 | (164,480) | | | (162,546) | |
| | | |
| | | |
| Total stockholders' equity | 640,505 | | | 645,826 | |
| Total liabilities and stockholders' equity | $ | 887,389 | | | $ | 878,546 | |
Overstock.com, Inc.
Consolidated Balance Sheets (Unaudited)
(in thousands)
|
| | | | | | | |
| | September 30,
2017 | | December 31,
2016 |
| Assets | |
| | |
|
| Current assets: | |
| | |
|
| Cash and cash equivalents | $ | 92,266 |
| | $ | 183,098 |
|
| Restricted cash | 562 |
| | 430 |
|
| Accounts receivable, net | 24,328 |
| | 28,142 |
|
| Inventories, net | 13,562 |
| | 18,937 |
|
| Prepaid inventories, net | 1,766 |
| | 2,112 |
|
| Prepaids and other current assets | 18,498 |
| | 11,654 |
|
| Total current assets | 150,982 |
| | 244,373 |
|
| Fixed assets, net | 131,981 |
| | 134,552 |
|
| Precious metals | 250 |
| | 9,946 |
|
| Deferred tax assets, net | 74,250 |
| | 56,266 |
|
| Intangible assets, net | 8,288 |
| | 10,913 |
|
| Goodwill | 14,698 |
| | 14,698 |
|
| Other long-term assets, net | 14,992 |
| | 14,328 |
|
| Total assets | $ | 395,441 |
| | $ | 485,076 |
|
| Liabilities and Stockholders’ Equity | |
| | |
|
| Current liabilities: | |
| | |
|
| Accounts payable | $ | 70,543 |
| | $ | 106,337 |
|
| Accrued liabilities | 58,784 |
| | 96,216 |
|
| Deferred revenue | 41,505 |
| | 41,780 |
|
| Finance obligations, current | 3,326 |
| | 3,256 |
|
| Other current liabilities, net | 1,507 |
| | 1,627 |
|
| Total current liabilities | 175,665 |
| | 249,216 |
|
| Long-term debt, net | 43,406 |
| | 44,179 |
|
| Finance obligations, non-current | 9,325 |
| | 11,831 |
|
| Other long-term liabilities | 7,159 |
| | 6,890 |
|
| Total liabilities | 235,555 |
| | 312,116 |
|
| Commitments and contingencies (Note 6) |
|
| |
|
|
| 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 - 555 and 569 | — |
| | — |
|
| Common stock, $0.0001 par value | |
| | |
|
| Authorized shares - 100,000 | |
| | |
|
| Issued shares - 28,149 and 27,895 | |
| | |
|
| Outstanding shares - 25,017 and 25,432 | 3 |
| | 3 |
|
| Additional paid-in capital | 387,195 |
| | 383,348 |
|
| Accumulated deficit | (158,893 | ) | | (153,898 | ) |
| Accumulated other comprehensive loss | (1,420 | ) | | (1,540 | ) |
| Treasury stock: | |
| | |
|
| Shares at cost - 3,132 and 2,463 | (63,691 | ) | | (52,587 | ) |
| Equity attributable to stockholders of Overstock.com, Inc. | 163,194 |
| | 175,326 |
|
| Equity attributable to noncontrolling interests | (3,308 | ) | | (2,366 | ) |
| Total equity | 159,886 |
| | 172,960 |
|
| Total liabilities and stockholders’ equity | $ | 395,441 |
| | $ | 485,076 |
|
See accompanying notes to unaudited consolidated financial statements.
Overstock.com, Inc.
Consolidated Statements of Operations (Unaudited)
(in thousands, except per share data)
| | | | | | | | | | | | | | | |
| | Three months ended
March 31, | | |
| | 2023 | | 2022 | | | | |
| Net revenue | $ | 381,140 | | | $ | 536,037 | | | | | |
| Cost of goods sold | 291,427 | | | 410,825 | | | | | |
| Gross profit | 89,713 | | | 125,212 | | | | | |
| Operating expenses | | | | | | | |
| Sales and marketing | 47,048 | | | 58,513 | | | | | |
| Technology | 30,546 | | | 32,989 | | | | | |
| General and administrative | 20,483 | | | 21,256 | | | | | |
| | | | | | | |
| Total operating expenses | 98,077 | | | 112,758 | | | | | |
| Operating income (loss) | (8,364) | | | 12,454 | | | | | |
| Interest income (expense), net | 2,559 | | | (125) | | | | | |
| Other expense, net | (7,389) | | | (114) | | | | | |
| Income (loss) before income taxes | (13,194) | | | 12,215 | | | | | |
| Provision (benefit) for income taxes | (2,887) | | | 2,092 | | | | | |
| | | | | | | |
| Net income (loss) | $ | (10,307) | | | $ | 10,123 | | | | | |
| | | | | | | |
| Net income (loss) per share of common stock: | | | | | | | |
| | | | | | | |
| Basic | $ | (0.23) | | | $ | 0.21 | | | | | |
| | | | | | | |
| | | | | | | |
| Diluted | $ | (0.23) | | | $ | 0.21 | | | | | |
| | | | | | | |
| Weighted average shares of common stock outstanding: | | | | | | | |
| Basic | 45,067 | | | 43,052 | | | | | |
| Diluted | 45,067 | | | 43,282 | | | | | |
|
| | | | | | | | | | | | | | | |
| | Three months ended
September 30, | | Nine months ended
September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| Revenue, net | |
| | |
| | |
| | |
|
| Direct | $ | 19,645 |
| | $ | 24,620 |
| | $ | 64,572 |
| | $ | 75,901 |
|
| Partner and other | 404,362 |
| | 416,944 |
| | 1,223,894 |
| | 1,197,880 |
|
| Total net revenue | 424,007 |
| | 441,564 |
| | 1,288,466 |
| | 1,273,781 |
|
| Cost of goods sold | |
| | |
| | |
| | |
|
Direct(1) | 19,577 |
| | 23,955 |
| | 61,687 |
| | 72,459 |
|
| Partner and other | 320,755 |
| | 337,893 |
| | 972,026 |
| | 967,977 |
|
| Total cost of goods sold | 340,332 |
| | 361,848 |
| | 1,033,713 |
| | 1,040,436 |
|
| Gross profit | 83,675 |
| | 79,716 |
| | 254,753 |
| | 233,345 |
|
| Operating expenses: | |
| | |
| | |
| | |
|
Sales and marketing(1) | 45,153 |
| | 34,707 |
| | 126,068 |
| | 99,516 |
|
Technology(1) | 28,746 |
| | 26,739 |
| | 85,982 |
| | 78,249 |
|
General and administrative(1) | 21,651 |
| | 23,317 |
| | 66,622 |
| | 67,843 |
|
| Litigation settlement | — |
| | — |
| | — |
| | (19,520 | ) |
| Total operating expenses | 95,550 |
| | 84,763 |
| | 278,672 |
| | 226,088 |
|
| Operating income (loss) | (11,875 | ) | | (5,047 | ) | | (23,919 | ) | | 7,257 |
|
| Interest income | 189 |
| | 73 |
| | 450 |
| | 228 |
|
| Interest expense | (713 | ) | | (212 | ) | | (2,139 | ) | | (219 | ) |
| Other income, net | 5,882 |
| | 1,251 |
| | 2,751 |
| | 9,399 |
|
| Income (loss) before income taxes | (6,517 | ) | | (3,935 | ) | | (22,857 | ) | | 16,665 |
|
| Provision (benefit) for income taxes | (5,412 | ) | | (543 | ) | | (7,727 | ) | | 8,178 |
|
| Consolidated net income (loss) | $ | (1,105 | ) | | $ | (3,392 | ) | | $ | (15,130 | ) | | $ | 8,487 |
|
| Less: Net loss attributable to noncontrolling interests | (319 | ) | | (294 | ) | | (942 | ) | | (940 | ) |
| Net income (loss) attributable to stockholders of Overstock.com, Inc. | $ | (786 | ) | | $ | (3,098 | ) | | $ | (14,188 | ) | | $ | 9,427 |
|
| Net income (loss) per common share—basic: | |
| | |
| | |
| | |
|
| Net income (loss) attributable to common shares—basic | $ | (0.03 | ) | | $ | (0.12 | ) | | $ | (0.55 | ) | | $ | 0.37 |
|
| Weighted average common shares outstanding—basic | 25,003 |
| | 25,356 |
| | 25,024 |
| | 25,326 |
|
| Net income (loss) per common share—diluted: | |
| | |
| | |
| | |
|
| Net income (loss) attributable to common shares—diluted | $ | (0.03 | ) | | $ | (0.12 | ) | | $ | (0.55 | ) | | $ | 0.37 |
|
| Weighted average common shares outstanding—diluted | 25,003 |
| | 25,356 |
| | 25,024 |
| | 25,388 |
|
|
| | | | | | | | | | | | | | | |
| (1) Includes stock-based compensation as follows (Note 8): | |
| | |
| | |
| | |
|
| Cost of goods sold — direct | $ | 46 |
| | $ | 69 |
| | $ | 134 |
| | $ | 200 |
|
| Sales and marketing | 109 |
| | 102 |
| | 318 |
| | 234 |
|
| Technology | 166 |
| | 210 |
| | 476 |
| | 615 |
|
| General and administrative | 703 |
| | 1,009 |
| | 2,081 |
| | 3,056 |
|
| Total | $ | 1,024 |
| | $ | 1,390 |
| | $ | 3,009 |
| | $ | 4,105 |
|
See accompanying notes to unaudited consolidated financial statements.
Overstock.com, Inc.
Consolidated Statements of Comprehensive Income (Loss) (Unaudited)
(in thousands)
| | | | | | | | | | | | | | | |
| | Three months ended
March 31, | | |
| | 2023 | | 2022 | | | | |
| Net income (loss) | $ | (10,307) | | | $ | 10,123 | | | | | |
| Other comprehensive income | | | | | | | |
| Unrealized gain on cash flow hedges, net of expense for taxes of $0 and $0 | 4 | | | 4 | | | | | |
| Other comprehensive income | 4 | | | 4 | | | | | |
| Comprehensive income (loss) | $ | (10,303) | | | $ | 10,127 | | | | | |
| | | | | | | |
| | | | | | | |
|
| | | | | | | | | | | | | | | |
| | Three months ended
September 30, | | Nine months ended
September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| Consolidated net income (loss) | $ | (1,105 | ) | | $ | (3,392 | ) | | $ | (15,130 | ) | | $ | 8,487 |
|
| Other comprehensive income (loss): | | | | | | | |
| Unrealized gain (loss) on cash flow hedges, net of benefit (expense) for taxes of $(31), $(346), $(71), and $718 | 52 |
| | (64 | ) | | 120 |
| | (1,624 | ) |
| Other comprehensive income (loss) | 52 |
| | (64 | ) | | 120 |
| | (1,624 | ) |
| Comprehensive income (loss) | $ | (1,053 | ) | | $ | (3,456 | ) | | $ | (15,010 | ) | | $ | 6,863 |
|
| Less: Comprehensive loss attributable to noncontrolling interests | (319 | ) | | (294 | ) | | (942 | ) | | (940 | ) |
| Comprehensive income (loss) attributable to stockholders of Overstock.com, Inc. | $ | (734 | ) | | $ | (3,162 | ) | | $ | (14,068 | ) | | $ | 7,803 |
|
See accompanying notes to unaudited consolidated financial statements.
Overstock.com, Inc.
Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)
(in thousands)
|
| | | |
| | Nine months ended
September 30, 2017 |
| Equity attributable to stockholders of Overstock.com, Inc. | |
|
| Number of common shares issued | |
| Balance at beginning of period | 27,895 |
|
| Common stock issued upon vesting of restricted stock | 202 |
|
| Exercise of stock options | 38 |
|
| Conversion of preferred shares | 14 |
|
| Balance at end of period | 28,149 |
|
| | |
| Number of treasury stock shares | |
| Balance at beginning of period | 2,463 |
|
| Purchases of treasury stock | 669 |
|
| Balance at end of period | 3,132 |
|
| Total number of outstanding shares | 25,017 |
|
| | |
| Common stock | $ | 3 |
|
| | |
| Number of Series A preferred shares issued and outstanding | 127 |
|
| | |
| Number of Series B preferred shares issued and outstanding | |
| Balance at beginning of period | 569 |
|
| Conversion of preferred shares | (14 | ) |
| Balance at end of period | 555 |
|
| | |
| Preferred stock | $ | — |
|
| | |
| Additional paid-in capital | |
| Balance at beginning of period | $ | 383,348 |
|
| Stock-based compensation to employees and directors | 3,009 |
|
| Exercise of stock options | 654 |
|
| Conversion of preferred shares | 181 |
|
| Issuance of stock warrants | 3 |
|
| Balance at end of period | $ | 387,195 |
|
| | |
| Accumulated deficit | |
| Balance at beginning of period | $ | (153,898 | ) |
| Cumulative effect of change in accounting principle | 9,374 |
|
| Net loss attributable to stockholders of Overstock.com, Inc. | (14,188 | ) |
| Conversion of preferred shares | (181 | ) |
| Balance at end of period | $ | (158,893 | ) |
| | |
| Accumulated other comprehensive loss | |
| Balance at beginning of period | $ | (1,540 | ) |
| Net other comprehensive income | 120 |
|
| Balance at end of period | $ | (1,420 | ) |
| | |
| Treasury stock | |
| Balance at beginning of period | $ | (52,587 | ) |
| Purchases of treasury stock | (11,104 | ) |
| Balance at end of period | (63,691 | ) |
| Total equity attributable to stockholders of Overstock.com, Inc. | $ | 163,194 |
|
| | |
| Equity attributable to noncontrolling interests | |
| Balance at beginning of period | $ | (2,366 | ) |
| Net loss attributable to noncontrolling interests | (942 | ) |
| Total equity attributable to noncontrolling interests | $ | (3,308 | ) |
| | |
| Total equity | $ | 159,886 |
|
| | | | | | | | | | | | | | | |
Overstock.com, Inc. Consolidated Statements of Changes in Stockholders' Equity (Unaudited) (in thousands) |
| | Three months ended
March 31, | | |
| 2023 | | 2022 | | | | |
| Equity attributable to stockholders of Overstock.com, Inc. | | | | | | | |
| Shares of common stock issued | | | | | | | |
| Balance at beginning of period | 51,102 | | | 46,625 | | | | | |
| Common stock issued upon vesting of restricted stock | 268 | | | 243 | | | | | |
| Common stock issued for ESPP purchases | 68 | | | 42 | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Balance at end of period | 51,438 | | | 46,910 | | | | | |
| Shares of treasury stock | | | | | | | |
| Balance at beginning of period | 6,151 | | | 3,602 | | | | | |
| | | | | | | |
| Repurchases of common stock | — | | | 517 | | | | | |
| Tax withholding upon vesting of employee stock awards | 96 | | | 71 | | | | | |
| | | | | | | |
| Balance at end of period | 6,247 | | | 4,190 | | | | | |
| Total shares of common stock outstanding | 45,191 | | | 42,720 | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Common stock | $ | 5 | | | $ | 4 | | | | | |
| | | | | | | |
| Shares of preferred stock issued | | | | | | | |
| | | | | | | |
| | | | | | | |
| Shares of Series A-1 preferred stock issued | — | | | 4,204 | | | | | |
| Shares of treasury stock | | | | | | | |
| Balance at beginning of period | — | | | — | | | | | |
| Repurchases of shares | — | | | 6 | | | | | |
| | | | | | | |
| Balance at end of period | — | | | 6 | | | | | |
| | | | | | | |
| Total shares of Series A-1 preferred stock outstanding | — | | | 4,198 | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Shares of Series B preferred stock issued and outstanding | — | | | 357 | | | | | |
| Preferred stock | $ | — | | | $ | — | | | | | |
| | | | | | | |
|
| | | |
| | | | | | | |
| | | | | | | |
| Additional paid-in capital | | | | | | | |
| Balance at beginning of period | $ | 982,718 | | | $ | 960,544 | | | | | |
| Stock-based compensation to employees and directors | 5,795 | | | 4,639 | | | | | |
| Common stock issued for ESPP purchases | 1,121 | | | 1,890 | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Balance at end of period | $ | 989,634 | | | $ | 967,073 | | | | | |
| Accumulated deficit | | | | | | | |
| Balance at beginning of period | $ | (173,829) | | | $ | (136,590) | | | | | |
| | | | | | | |
| Net income (loss) | (10,307) | | | 10,123 | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Balance at end of period | $ | (184,136) | | | $ | (126,467) | | | | | |
| | | | | | | |
|
| | | |
| | | | | | | |
| Accumulated other comprehensive loss | | | | | | | |
| Balance at beginning of period | $ | (522) | | | $ | (537) | | | | | |
| Net other comprehensive income | 4 | | | 4 | | | | | |
| Balance at end of period | $ | (518) | | | $ | (533) | | | | | |
| Treasury stock | | | | | | | |
| Balance at beginning of period | $ | (162,546) | | | $ | (79,035) | | | | | |
| Repurchases of common stock and Series A-1 preferred shares | — | | | (25,165) | | | | | |
| Tax withholding upon vesting of employee stock awards | (1,934) | | | (3,267) | | | | | |
| | | | | | | |
| | | | | | | |
| Balance at end of period | (164,480) | | | (107,467) | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Total stockholders' equity | $ | 640,505 | | | $ | 732,610 | | | | | |
See accompanying notes to unaudited consolidated financial statements.
Overstock.com, Inc.
Consolidated Statements of Cash Flows (Unaudited)
(in thousands)
|
| | | | | | | | | | | | | | | |
| | Nine months ended
September 30, | | Twelve months ended
September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| Cash flows from operating activities: | |
| | |
| | |
| | |
|
| Consolidated net income (loss) | $ | (15,130 | ) | | $ | 8,487 |
| | $ | (12,369 | ) | | $ | 8,350 |
|
| Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities: | |
| | |
| | |
| | |
|
| Depreciation of fixed assets | 21,895 |
| | 19,710 |
| | 29,468 |
| | 26,729 |
|
| Amortization of intangible assets | 2,839 |
| | 3,193 |
| | 3,614 |
| | 3,444 |
|
| Stock-based compensation to employees and directors | 3,009 |
| | 4,105 |
| | 3,795 |
| | 5,054 |
|
| Deferred income taxes, net | (8,682 | ) | | 6,688 |
| | (7,651 | ) | | 4,701 |
|
| (Gain) loss on investment in precious metals | (1,907 | ) | | — |
| | (2,108 | ) | | 521 |
|
| Gain on sale of cryptocurrencies | (845 | ) | | — |
| | (845 | ) | | — |
|
| Impairment of cost method investment | 4,500 |
| | 2,850 |
| | 4,500 |
| | 2,850 |
|
| Termination costs of cryptobond financing | — |
| | — |
| | — |
| | 850 |
|
| Other | 420 |
| | 207 |
| | 569 |
| | 212 |
|
| Changes in operating assets and liabilities, net of acquisitions: | |
| | |
| | |
| | |
|
| Restricted cash | (207 | ) | | — |
| | (207 | ) | | — |
|
| Accounts receivable, net | 3,814 |
| | (2,909 | ) | | (3,283 | ) | | (2,108 | ) |
| Inventories, net | 5,375 |
| | 4,325 |
| | 2,155 |
| | 7,489 |
|
| Prepaid inventories, net | 346 |
| | (226 | ) | | (229 | ) | | (259 | ) |
| Prepaids and other current assets | (6,296 | ) | | (3,456 | ) | | (451 | ) | | (1,012 | ) |
| Other long-term assets, net | (121 | ) | | (356 | ) | | (551 | ) | | (670 | ) |
| Accounts payable | (35,794 | ) | | (40,247 | ) | | (14,370 | ) | | 17,548 |
|
| Accrued liabilities | (35,831 | ) | | (8,678 | ) | | (10,217 | ) | | 4,920 |
|
| Deferred revenue | (275 | ) | | (9,687 | ) | | 248 |
| | (3,896 | ) |
| Other long-term liabilities | 235 |
| | 555 |
| | 280 |
| | 754 |
|
| Net cash (used in) provided by operating activities | (62,655 | ) | | (15,439 | ) | | (7,652 | ) | | 75,477 |
|
| Cash flows from investing activities: | |
| | |
| | |
| | |
|
| Proceeds from sale of precious metals | 11,603 |
| | — |
| | 13,213 |
| | — |
|
| Investment in precious metals | — |
| | — |
| | (1,633 | ) | | — |
|
| Disbursement of note receivable | (750 | ) | | (3,050 | ) | | (1,368 | ) | | (3,050 | ) |
| Cost method investments | (2,188 | ) | | (4,000 | ) | | (2,938 | ) | | (4,000 | ) |
| Equity method investment | (2,000 | ) | | — |
| | (2,000 | ) | | — |
|
| Acquisitions of businesses, net of cash acquired | — |
| | 1,220 |
| | 28 |
| | 1,192 |
|
| Expenditures for fixed assets, including internal-use software and website development | (20,873 | ) | | (59,382 | ) | | (33,772 | ) | | (75,514 | ) |
| Other | (160 | ) | | 46 |
| | (179 | ) | | 14 |
|
| Net cash used in investing activities | (14,368 | ) | | (65,166 | ) | | (28,649 | ) | | (81,358 | ) |
| Cash flows from financing activities: | |
| | |
| | |
| | |
|
| Paydown on direct financing arrangement | — |
| | (54 | ) | | — |
| | (134 | ) |
| Payments on finance obligations | (2,436 | ) | | (1,354 | ) | | (2,988 | ) | | (1,458 | ) |
| Payments on interest swap | — |
| | (563 | ) | | — |
| | (620 | ) |
| Proceeds from finance obligations | — |
| | 6,075 |
| | 5,324 |
| | 11,773 |
|
| Payments on short-term debt | — |
| | — |
| | — |
| | (750 | ) |
| Proceeds from long-term debt | — |
| | 31,447 |
| | 4,826 |
| | 40,935 |
|
| Payments on long-term debt | (750 | ) | | — |
| | (750 | ) | | — |
|
| Change in restricted cash | 75 |
| | — |
| | 75 |
| | 75 |
|
| Proceeds from exercise of stock options | 654 |
| | — |
| | 1,473 |
| | — |
|
| Proceeds from rights offering, net of offering costs | — |
| | — |
| | 7,591 |
| | — |
|
| Proceeds from issuance of stock warrants | 3 |
| | — |
| | 3 |
| | — |
|
| Purchase of treasury stock | (11,104 | ) | | (737 | ) | | (11,207 | ) | | (737 | ) |
| Payment of debt issuance costs | (251 | ) | | — |
| | (251 | ) | | — |
|
| Net cash (used in) provided by financing activities | (13,809 | ) | | 34,814 |
| | 4,096 |
| | 49,084 |
|
| Net (decrease) increase in cash and cash equivalents | (90,832 | ) | | (45,791 | ) | | (32,205 | ) | | 43,203 |
|
| Cash and cash equivalents, beginning of period | 183,098 |
| | 170,262 |
| | 124,471 |
| | 81,268 |
|
| Cash and cash equivalents, end of period | $ | 92,266 |
| | $ | 124,471 |
| | $ | 92,266 |
| | $ | 124,471 |
|
Continued on the following page
Overstock.com, Inc.
Consolidated Statements of Cash Flows (Unaudited)
(Continued)
(in thousands)
|
| | | | | | | | | | | | | | | |
| | Nine months ended
September 30, | | Twelve months ended
September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| Supplemental disclosures of cash flow information: | |
| | |
| | |
| | |
|
| Cash paid during the period: | |
| | |
| | |
| | |
|
| Interest paid (net of amounts capitalized) | $ | 1,980 |
| | $ | 675 |
| | $ | 2,574 |
| | $ | 864 |
|
| Taxes paid | 492 |
| | 1,206 |
| | 624 |
| | 1,207 |
|
| Non-cash investing and financing activities: | |
| | |
| | |
| | |
|
| Fixed assets, including internal-use software and website development, costs financed through accounts payable and accrued liabilities | $ | 618 |
| | $ | 9,574 |
| | $ | 618 |
| | $ | 9,574 |
|
| Capitalized interest cost | — |
| | 117 |
| | (12 | ) | | 157 |
|
| Change in value of cash flow hedge | (180 | ) | | 1,780 |
| | (2,619 | ) | | 1,361 |
|
| Note receivable converted to cost method investment | 869 |
| | 2,850 |
| | 869 |
| | 2,850 |
|
| | | | | | | | | | | | |
Overstock.com, Inc. Consolidated Statements of Cash Flows (Unaudited) (in thousands) |
| | Three months ended
March 31, |
| | | 2023 | | 2022 |
| Cash flows from operating activities: | | | | |
| Net income (loss) | | $ | (10,307) | | | $ | 10,123 | |
| | | | |
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | | |
| Depreciation and amortization | | 5,985 | | | 4,307 | |
| | | | |
| | | | |
| Non-cash operating lease cost | | 1,266 | | | 1,319 | |
| Stock-based compensation to employees and directors | | 5,795 | | | 4,639 | |
| | | | |
| (Increase) decrease in deferred tax assets, net | | (3,449) | | | 959 | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| Loss from equity method securities | | 7,181 | | | 299 | |
| | | | |
| | | | |
| | | | |
| | | | |
| Other non-cash adjustments | | (102) | | | (123) | |
| Changes in operating assets and liabilities: | | | | |
| Accounts receivable, net | | (4,378) | | | (2,559) | |
| Inventories | | 288 | | | (282) | |
| Prepaids and other current assets | | 1,109 | | | 1,604 | |
| Other long-term assets, net | | (369) | | | (307) | |
| Accounts payable | | 10,220 | | | 4,339 | |
| Accrued liabilities | | 5,377 | | | 7,886 | |
| Unearned revenue | | 2,643 | | | 2,034 | |
| Operating lease liabilities | | (1,352) | | | (1,329) | |
| Other long-term liabilities | | 100 | | | 284 | |
| | | | |
| | | | |
| Net cash provided by operating activities | | 20,007 | | | 33,193 | |
| Cash flows from investing activities: | | | | |
| Disbursement for notes receivable | | (10,000) | | | — | |
| Purchase of equity securities | | — | | | (11,420) | |
| | | | |
| | | | |
| Capital distribution from investment | | — | | | 1,162 | |
| | | | |
| | | | |
| Expenditures for property and equipment | | (5,256) | | | (3,256) | |
| | | | |
| Other investing activities, net | | 425 | | | (281) | |
| | | | |
| | | | |
| Net cash used in investing activities | | (14,831) | | | (13,795) | |
| | | | |
|
| | |
| | | | |
| Cash flows from financing activities: | | | | |
| | | | |
| Repurchase of shares | | — | | | (25,165) | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| Payments of taxes withheld upon vesting of employee stock awards | | (1,934) | | | (3,267) | |
| | | | |
| Other financing activities, net | | 229 | | | (854) | |
| | | | |
| | | | |
| Net cash used in financing activities | | (1,705) | | | (29,286) | |
| Net increase (decrease) in cash, cash equivalents, and restricted cash | | 3,471 | | | (9,888) | |
| Cash, cash equivalents, and restricted cash, beginning of period | | 371,457 | | | 503,366 | |
| | | | |
| | | | |
| Cash, cash equivalents, and restricted cash, end of period | | $ | 374,928 | | | $ | 493,478 | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
See accompanying notes to unaudited consolidated financial statements.
Overstock.com, Inc.
Notes to Unaudited Consolidated Financial Statements
1. BASISDESCRIPTION OF PRESENTATIONBUSINESS
Overstock.com, Inc. is a leading online furniture and home furnishings retailer and technology-focused innovator that sells products at a smart value. Our online shopping site offers a wide selection of quality furniture, décor, area rugs, bedding and bath, home improvement, outdoor, and kitchen and dining items, among others. Overstock.com, which receives tens of millions of visits per month, provides customers access to millions of products from third-party partners. As used herein, "Overstock," "Overstock.com," "O.co,"the Company," "we," "our" and similar terms include Overstock.com, Inc. and its majority-ownedwholly-owned subsidiaries, unless the context indicates otherwise. As used herein, the term "Website" refers to the Company's internet websites located at www.overstock.com, www.o.co, www.overstock.ca, and www.overstockgovernment.com and the Company's mobile app.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
We have prepared the accompanying unaudited consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC") regarding interim financial reporting. Accordingly, they do not include allcertain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States ("GAAP") have been omitted in accordance with the rules and regulations of the information and footnotes required by generally accepted accounting principles for completeSEC. These financial statements and should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations and our audited annual consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2016. 2022. There have been no significant changes to our significant accounting policies disclosed in Note 2—Accounting Policies, included in Part II, Item 8, Financial Statements and Supplementary Data, of our Annual Report on Form 10-K for the year ended December 31, 2022.
The accompanying unaudited consolidated financial statements include our accounts and the accounts of our wholly-owned subsidiaries and reflect all adjustments, consisting only of normal recurring adjustments, which are, in our opinion, necessary for a fair presentation of results for the interim periods presented. Preparing financial statements requires us to make estimatesAll intercompany account balances and assumptions that affect the amounts that are reportedtransactions have been eliminated 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, actual results may be different from the estimates.consolidation. The results of operations for the three and nine months ended September 30, 2017March 31, 2023 are not necessarily indicative of the results to be expected for any future period or the full fiscal year.year, due to seasonality and other factors.
For purposes of comparability, the presentation of certain immaterial amounts in the prior periods has been conformed with the current period presentation. We also retrospectively applied certain accounting standard updates as discussed in Note 2—Accounting Policies, Recently adopted accounting standards.
2. ACCOUNTING POLICIES
Principles of consolidation
The accompanying consolidated financial statements include our accounts and the accounts of our wholly-owned and majority-owned subsidiaries. All intercompany account balances and transactions have been eliminated in consolidation.
Use of estimates
The preparation of financial statements in conformity with generally accepted accounting principlesGAAP requires estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent liabilities in theour consolidated financial statements and accompanying notes. Estimates are used for, but not limited to, investment valuation, receivables valuation, valuation of derivative financial instruments, revenue recognition, Club O and gift card breakage, sales returns, incentive discount offers, inventory valuation, depreciable lives, of fixed assetsequity and internally-developed software, goodwill valuation, intangible asset valuation, cost method and equity method investmentdebt securities valuation, income taxes, stock-based compensation, performance-based compensation, self-funded health insurance liabilities, and contingencies. ActualAlthough these estimates are based on our best knowledge of current events and actions that we may undertake in the future, our accounting of these estimates may change from period to period. To the extent there are differences between these estimates and actual results, could differour consolidated financial statements may be materially from these estimates.affected.
Cash equivalentsAvailable-for-sale debt securities
We classify all highly liquid instruments, including instruments with a remaining maturity ofDuring the three months or lessended March 31, 2023, we invested $10 million in GrainChain, Inc. in the form of a convertible promissory note (the "Note"). The Note bears interest at an annual interest rate of 5% and accrued interest is recorded in Interest income (expense), net in our consolidated statements of operations. The Note has a maturity date of January 3, 2025 at which time the timeoutstanding principal and any unpaid accrued interest will automatically convert into shares of purchase, as cash equivalents. Cash equivalents were $40.4 million and $75.2a newly created series of preferred stock issued by GrainChain, Inc. unless converted earlier under limited circumstances. The carrying amount of the Note, including accrued interest, was $10.1 million at September 30, 2017March 31, 2023, which is included in Other long-term assets, net on our consolidated balance sheets.
Based on the nature of our indirect ownership interests in GrainChain, Inc. through Medici Ventures, L.P. and December 31, 2016, respectively.
Restricted cash
We consider cash that is legally restricted and cash that isthe extent of our contributed capital, we held as a compensating balance for lettervariable interest in GrainChain, Inc., which meets the definition of 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 thatvariable interest entity; however, we are not active, and model-derived valuationsthe primary beneficiary of this entity for purposes of consolidation as we do not have the
power (either explicit or implicit), through voting rights or otherwise, to direct the activities of GrainChain, Inc. that most significantly impact its economic performance. Our maximum exposure to loss 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.
Under GAAP, certain assets and liabilities are required to be recorded at fair value on a recurring basis. Our assets and liabilities that are adjusted to fair value on a recurring basis are investments in money market mutual funds, trading securities, derivative instruments, and deferred compensation liabilities.
The fair values of our investments in money market mutual funds, trading securities, and deferred compensation liabilities are determined using quoted market prices from daily exchange traded markets on the closing pricethis variable interest entity totaled $30.3 million as of the balance sheet dateMarch 31, 2023, representing our direct and are classified as Level 1.indirect interest in GrainChain, Inc.
The fair values of our derivative instruments are determined using standard valuation models. The significant inputs used in these models are readily available in public markets, or can be derived from observable market transactions, and therefore have been classified as Level 2. Inputs used in these standard valuation models for derivative instruments include the applicable forward rates, interest rates and discount rates. Included in the fair value of derivative instruments is an adjustment for nonperformance risk. The adjustment for nonperformance risk did not have a significant impact on the estimated fair value of our derivative instruments. For additional disclosures related to our derivative instruments, see Derivative financial instruments below.
3. FAIR VALUE MEASUREMENT
The following tables summarize our assets and liabilities measured at fair value on a recurring basis using the following levels of inputs as of September 30, 2017(in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| | Fair Value Measurements at March 31, 2023 |
| | Total | | Level 1 | | Level 2 | | Level 3 |
| Assets: | | | | | | | |
| Cash equivalents—Money market funds | $ | 255,209 | | | $ | 255,209 | | | $ | — | | | $ | — | |
| Equity securities, at fair value | 82,811 | | | 24 | | | — | | | 82,787 | |
| Available-for-sale debt securities (1) | 10,107 | | | — | | | — | | | 10,107 | |
| Trading securities held in a "rabbi trust" (1) | 443 | | | 443 | | | — | | | — | |
| Total assets | $ | 348,570 | | | $ | 255,676 | | | $ | — | | | $ | 92,894 | |
| Liabilities: | | | | | | | |
| | | | | | | |
| Deferred compensation accrual "rabbi trust" (2) | $ | 458 | | | $ | 458 | | | $ | — | | | $ | — | |
| Total liabilities | $ | 458 | | | $ | 458 | | | $ | — | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | Fair Value Measurements at December 31, 2022 |
| | Total | | Level 1 | | Level 2 | | Level 3 |
| Assets: | | | | | | | |
| Cash equivalents—Money market funds | $ | 252,650 | | | $ | 252,650 | | | $ | — | | | $ | — | |
| Equity securities, at fair value | 82,823 | | | 36 | | | — | | | 82,787 | |
| | | | | | | |
| Trading securities held in a "rabbi trust" (1) | 399 | | | 399 | | | — | | | — | |
| Total assets | $ | 335,872 | | | $ | 253,085 | | | $ | — | | | $ | 82,787 | |
| Liabilities: | | | | | | | |
| | | | | | | |
| Deferred compensation accrual "rabbi trust" (2) | $ | 396 | | | $ | 396 | | | $ | — | | | $ | — | |
| Total liabilities | $ | 396 | | | $ | 396 | | | $ | — | | | $ | — | |
___________________________________________(1) Included in Other long-term assets, net in the consolidated balance sheets.
(2) Included in Accrued liabilities and December 31, 2016 as indicatedOther long-term liabilities in the consolidated balance sheets.
The following table provides activity for our Level 3 investments (in thousands):
|
| | | | | | | | | | | | | | | |
| p | Fair Value Measurements at September 30, 2017: |
| | Total | | Level 1 | | Level 2 | | Level 3 |
| Assets: | |
| | |
| | |
| | |
|
| Cash equivalents - Money market mutual funds | $ | 40,390 |
| | $ | 40,390 |
| | $ | — |
| | $ | — |
|
| Trading securities held in a "rabbi trust" (1) | 70 |
| | 70 |
| | — |
| | — |
|
| Total assets | $ | 40,460 |
| | $ | 40,460 |
| | $ | — |
| | $ | — |
|
| Liabilities: | |
| | |
| | |
| | |
|
| Derivatives (2) | $ | 1,609 |
| | $ | — |
| | $ | 1,609 |
| | $ | — |
|
| Deferred compensation accrual "rabbi trust" (3) | 76 |
| | 76 |
| | — |
| | — |
|
| Total liabilities | $ | 1,685 |
| | $ | 76 |
| | $ | 1,609 |
| | $ | — |
|
|
| | | | | | | | | | | | | | | |
| | Fair Value Measurements at December 31, 2016: |
| | Total | | Level 1 | | Level 2 | | Level 3 |
| Assets: | |
| | |
| | |
| | |
|
| Cash equivalents - Money market mutual funds | $ | 75,177 |
| | $ | 75,177 |
| | $ | — |
| | $ | — |
|
| Trading securities held in a "rabbi trust" (1) | 58 |
| | 58 |
| | — |
| | — |
|
| Total assets | $ | 75,235 |
| | $ | 75,235 |
| | $ | — |
| | $ | — |
|
| Liabilities: | |
| | |
| | |
| | |
|
| Derivatives (2) | $ | 1,816 |
| | $ | — |
| | $ | 1,816 |
| | $ | — |
|
| Deferred compensation accrual "rabbi trust" (3) | 61 |
| | 61 |
| | — |
| | — |
|
| Total liabilities | $ | 1,877 |
| | $ | 61 |
| | $ | 1,816 |
| | $ | — |
|
___________________________________________
| | | | | |
(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.
Amount |
| Level 3 investments at December 31, 2021 | $ | 102,355 | |
(2)Increase due to purchases of Level 3 investments | — Derivative financial instruments are included in Other current liabilities, net and Other long-term liabilities in the consolidated balance sheets. |
| 18,920 | |
(3)Decrease in fair value of Level 3 investments | — Non qualified deferred compensation in a rabbi trust is included in Accrued liabilities and Other long-term liabilities in the consolidated balance sheets.(38,488) | |
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.
Accounts receivable
Accounts receivable consist primarily of trade amounts due from customers in the United States and from uncleared credit card transactions at period end. Accounts receivable are recorded at invoiced amounts and do not bear interest.
Allowance for doubtful accounts
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 $1.2 million and $2.0 million at September 30, 2017 and December 31, 2016, respectively.
Concentration of credit risk
Cash equivalents include short-term, highly liquid instruments with maturities at date of purchase of three months or less. At September 30, 2017 and December 31, 2016, two banks held the majority of our cash and cash equivalents. 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.
Financial instruments that potentially subject us to significant concentrations of credit risk consist primarily of cash equivalents and receivables. We invest our cash primarily in money market securities which are uninsured.
Valuation of inventories
Inventories, consisting of merchandise purchased for resale, 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. We write down our inventory for damage or estimated obsolescence and to lower of cost and net realizable value based upon assumptions about future demand market conditions and fulfillment costs. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required. Once established, the original cost of the inventory less the related inventory allowance represents the new cost basis of such products. Reversal of the allowance is recognized only when the related inventory has been sold or scrapped.
Prepaid inventories, net
Prepaid inventories, net represent inventories paid for in advance of receipt.
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, and other miscellaneous costs.
Fixed assets, net
Fixed assets, which include assets such as our corporate headquarters, land improvements, building machinery and equipment, furniture and equipment, technology infrastructure, internal-use software, website development and leasehold
improvements, are recorded at cost and 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:
| Level 3 investments at December 31, 2022 | 82,787 | |
| Increase due to purchases of Level 3 investments | 10,000 | |
| |
| Accrued interest on Level 3 investments | Life
(years)
107 | |
BuildingLevel 3 investments at March 31, 2023 | 40 |
Land improvements$ | 20 |
Building machinery and equipment92,894 | 15-20 |
Furniture and equipment | 5-7 |
Computer hardware | 3-4 |
Computer software | 2-4 |
Leasehold improvements are amortized over the shorter
4. PROPERTY AND EQUIPMENT, NET
Property and equipment, net consist of the term of the related leases or estimated useful lives.following (in thousands):
| | | | | | | | | | | |
| | March 31,
2023 | | December 31, 2022 |
| Computer hardware and software, including internal-use software and website development | $ | 240,454 | | | $ | 240,148 | |
| Building | 69,351 | | | 69,350 | |
| Land | 12,781 | | | 12,781 | |
| Furniture and equipment | 13,414 | | | 12,642 | |
| Building machinery and equipment | 9,791 | | | 9,791 | |
| Land improvements | 7,060 | | | 7,060 | |
| Leasehold improvements | 3,042 | | | 2,904 | |
| | | |
| 355,893 | | | 354,676 | |
| Less: accumulated depreciation | (248,829) | | | (244,770) | |
| Total property and equipment, net | $ | 107,064 | | | $ | 109,906 | |
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 of two to three years. Costs incurred related to design or maintenance of internal-use software are expensed as incurred.
During the three months ended September 30, 2017 and 2016, we capitalized $2.2 million and $3.2 million, respectively, ofCapitalized costs associated with internal-use software and website development, both developed internally and acquired externally. Amortizationexternally, and depreciation of costs for the same periods associated with internal-use software and website development was $3.9 million and $5.0 million, respectively. Duringconsist of the nine months ended September 30, 2017 and 2016, we capitalized $8.0 million and $13.3 million, respectively, of such costs and had amortization of $12.2 million and $12.7 million for those respective periods.following (in thousands):
| | | | | | | | | | | | | | | |
| Three months ended
March 31, | | |
| | 2023 | | 2022 | | | | |
| Capitalized internal-use software and website development | $ | 2,047 | | | $ | 1,769 | | | | | |
| Depreciation of internal-use software and website development | 3,070 | | | 1,726 | | | | | |
Depreciation expense is classified within the corresponding operating expense categories on theour consolidated statements of operations as follows (in thousands):
| | | | | | | | | | | | | | | |
| Three months ended
March 31, | | |
| | 2023 | | 2022 | | | | |
| Cost of goods sold | $ | 234 | | | $ | 167 | | | | | |
| Technology | 4,704 | | | 3,200 | | | | | |
| | | | | | | |
| General and administrative | 1,042 | | | 919 | | | | | |
| Total depreciation | $ | 5,980 | | | $ | 4,286 | | | | | |
|
| | | | | | | | | | | | | | | |
| | Three months ended
September 30, | | Nine months ended
September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| Cost of goods sold - direct | $ | 72 |
| | $ | 77 |
| | $ | 230 |
| | $ | 235 |
|
| Technology | 5,940 |
| | 6,952 |
| | 18,802 |
| | 18,755 |
|
| Sales and marketing | — |
| | 29 |
| | — |
| | 29 |
|
| General and administrative | 974 |
| | 357 |
| | 2,863 |
| | 691 |
|
| Total depreciation, including internal-use software and website development | $ | 6,986 |
| | $ | 7,415 |
| | $ | 21,895 |
| | $ | 19,710 |
|
Total accumulated depreciation of fixed assets was $201.6 million and $180.3 million at September 30, 2017 and December 31, 2016, respectively.
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 the consolidated statements of operations.5. EQUITY SECURITIES
Fixed assets included assets under capital leases and finance obligations of $17.0 million and $21.5 million at September 30, 2017 and December 31, 2016, respectively. Accumulated depreciation related to assets under capital leases and finance obligations was $7.7 million and $8.7 million at September 30, 2017 and December 31, 2016, respectively.
Depreciation expense of assets recorded under capital leases was $1.1 million and $948,000 for the three months ended September 30, 2017 and 2016, respectively, and $3.5 million and $2.4 million for the nine months ended September 30, 2017 and 2016, respectively.
Cost method investments
At September 30, 2017, we held minority interests (less than 20%) in seven privately held entities, which include PeerNova, Factom, Ripio, SettleMint, IdentityMind, Symbiont, and View. These investments are recognized as cost method
investments included in Other long-term assets, net in our consolidated balance sheets. Earnings from the investments are recognized to the extent of dividends received, and we will recognize subsequent impairments to the investment if they are other-than-temporary. We review these investments individually for impairment by evaluating if events or circumstances have occurred that may have a significant adverse effect on their fair value. If such events or circumstances have occurred, we will estimate the fair valueEquity securities consist of the investment and determine if any declinefollowing (in thousands):
| | | | | | | | | | | |
| March 31,
2023 | | December 31, 2022 |
| Equity securities accounted for under the equity method under ASC 323 | $ | 206,313 | | | $ | 213,494 | |
| Equity securities accounted for under the equity method under the fair value option | 82,787 | | | 82,787 | |
| Equity securities under ASC 321 | 24 | | | 36 | |
| Total equity securities | $ | 289,124 | | | $ | 296,317 | |
Our equity securities accounted for under the equity method under ASC 323 include equity securities in the fair value of the investment below its carrying value is other-than-temporary. In such cases, the estimated fair value of the investment is determined using unobservable inputs including assumptions by the investee's management. These inputs are classified as Level 3. See Fair value of financial instruments above. 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 cost method investments was approximately $6.3 million and $11.8 million at September 30, 2017 and December 31, 2016. We recognized zero and $2.9 million impairment loss on these investments during the three months ended September 30, 2017 and 2016, respectively, and $4.5 million and $2.9 million impairment loss during the nine months ended September 30, 2017 and 2016, respectively. These impairment losses were recorded in Other income, net on the consolidated statements of operations.
Equity method investments
At September 30, 2017, we held minority interests in Bitt and Spera, two privately held entities. We can exercise significant influence, but not control, over these entities through holding more than a 20% voting interest in the investees. Based onentity. The following table includes our equity securities accounted for under the nature of one of our investments, we have a variable interest. However, because we do not have power to direct the investee's activities and we are not the investee's primary beneficiary, we therefore do not consolidate the investee in our financial statements.
These investments are recognized as equity method investments included in Other long-term assets, net in our consolidated balance sheets. We initially accounted for our investment in Bittand related ownership interest as a cost method investment. During the nine months ended September 30, 2017, we acquired additional representation on the Board of Directors of Bitt, which gave us an ability to exercise significant influence but not control over the investee.March 31, 2023:
| | | | | |
| Ownership
interest |
| Medici Ventures, L.P. | 99% |
| tZERO Group, Inc. | 29% |
| SpeedRoute, LLC | 49% |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
The carrying value of our investments exceeded the amount of underlying equity in net assets of the investees and the difference was primarily related to goodwill and the fair value of its intangible assets. The difference related to intangible assets is amortized over their estimated useful lives. We record our proportionate share of the net income or loss of the investee in Other income, net on the consolidated statements of operations with corresponding adjustments to the carrying value of the investment.
At September 30, 2017, the carrying amount of our equity method securities was $289.1 million at March 31, 2023, which is included in Equity securities on our consolidated balance sheets, of which $82.8 million is valued under the fair value option (tZERO and SpeedRoute). For our investments was approximately $6.0 million,in Medici Ventures, tZERO, and SpeedRoute there is no difference in the carrying amount of the assets and liabilities and our maximum exposure to loss, and there is no difference between the carrying valueamount of thisour investment in Medici Ventures and the amount of underlying equity we have in the entity's net assets of the investee was not significant. Our proportionate share ofassets.
The following table summarizes the net income or loss of ourrecognized on equity method investee for the nine months ended September 30, 2017 was not significant.
Noncontrolling interests
tØ.com, Inc. ("tZERO") is a majority owned subsidiary of Overstock, which develops blockchain and fintech technology as part of our Medici blockchain and fintech technology initiatives. During 2016, tZERO completed the acquisition of a financial technology firm and two registered broker dealers, each of which was under common control with the firm from which the financial technology assets were purchased. The former owners of that firm hold noncontrolling interests in tZERO. These transactions are described further in Note 3—Acquisitions, Goodwill, and Acquired Intangible Assets. The proceeds for the acquisitions were financed by tZERO through a note payable to Overstock that bears interest at a rate that approximates the Federal Funds Rate. tZERO is included in our consolidated financial statements. Intercompany transactions have been eliminated and the amounts of contributions and gains or losses that are attributable to the noncontrolling interests are disclosed in our consolidated financial statements.
Leases
We 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 life of the lease, without assuming renewal features, if any, are exercised.
Treasury stock
We account for treasury stock under the cost method and include treasury stock as a component of stockholders' equity.
Precious metals
Our precious metals consisted of $250,000 in gold at September 30, 2017 and $5.9 million in gold and $4.0 million in silver at December 31, 2016. We store our precious metals at an off-site secure facility. Because these assets consist of actual precious metals, rather than financial instruments, we account for them as an investment initially recorded at cost (including transaction fees) and then adjusted to the lower of cost or market based on an average unit cost. On an interim basis, we recognize decreases in the value of these assets caused by market declines. Subsequent increases in the value of these assets through market price recoveries during the same fiscal year are recognized in the later interim period, but may not exceed the total previously recognized decreases in value during the same year. Such unrealized gains or losses resulting from changes in the value of these assets aresecurities recorded in Other income,expense, net in our consolidated statements of operations. There were no unrealized gains or lossesoperations (in thousands):
| | | | | | | | | | | |
| Three months ended
March 31, |
| 2023 | | 2022 |
| Net loss recognized on our proportionate share of the net assets of our equity method securities | $ | (7,181) | | | $ | (1,464) | |
| Increase in fair value of equity method securities held under fair value option | — | | | 1,165 | |
Regulation S-X Rule 10-01(b)(1)
In accordance with Rule 10-01(b)(1) of Regulation S-X, which applies to interim reports on precious metals duringForm 10-Q, the three and nine monthsCompany must determine if its equity method investees are considered "significant subsidiaries". Summarized income statement information of an equity method investee is required in an interim report if the significance criteria are met as defined under SEC guidance. For the period ended September 30, 2017 and 2016.
Gains and losses realized upon saleMarch 31, 2023, none of precious metals are also recorded in Other income, net in our consolidated statements of operations. Realized gains on sales of precious metals were $1.9 million duringequity method investees met the three and nine months ended September 30, 2017. There were no realized gains or losses on sale of precious metalssignificance criteria. The following is the unaudited summarized financial information for those equity method securities that met the significance criteria for the threeperiod ended March 31, 2022 (in thousands):
| | | | | | | |
| | | Three months ended
March 31, 2022 |
| | | |
| | | |
| Results of Operations | | | |
| Revenues | | | $ | 740 | |
| Pre-tax loss | | | (5,380) | |
| Net loss | | | (4,380) | |
6. BORROWINGS
In March 2020, we entered into two loan agreements. The loan agreements provide a $34.5 million Senior Note, carrying interest at an annual rate of 4.242%, and nine months ended September 30, 2016.
Goodwill
Goodwill representsa $13.0 million Mezzanine Note, carrying interest at an annual rate of 5.002%. The loans carry a blended annual interest rate of 4.45%. The Senior Note is for a 10-year term (stated maturity date is March 6, 2030) and requires interest only payments, with the excessprincipal amount and any then unpaid interest due and payable at the end of the purchase price paid10-year term. The Mezzanine Note has a stated 10-year term, though the agreement requires principal and interest payments monthly over the fair value of the net assets acquired in business combinations. Goodwill is not amortized but is tested for impairment at least annually. When evaluating whether goodwill is impaired, we makeapproximately a qualitative assessment to determine if it is more likely than not that its fair value 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, then the amount of the impairment loss must be measured. The impairment loss, if any, is calculated by comparing the implied fair value of the goodwill to its carrying amount. In calculating the implied fair value of goodwill, the fair value of the reporting unit is allocated to the other assets46-month payment period. Our debt issuance costs and liabilities within the reporting unit based on estimated fair value. The excess of the fair value of a reporting unit over the amount allocated to its other assets and liabilities is the implied fair value of goodwill. An impairment loss is recognized when the carrying amount of goodwill exceeds its implied fair value.
We test for impairment of goodwill annually or when we deem that a triggering event has occurred. There were no impairments to goodwill recorded during the nine months ended September 30, 2017 or the year ended December 31, 2016.
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. Intangible assets other than goodwilldebt discount are amortized using the straight-line methodbasis which approximates the effective interest method.
As of amortization over their useful lives, withMarch 31, 2023, the exceptiontotal outstanding debt on these loans was $37.1 million, net of certain intangibles (such as acquired technology, customer relationships,$380,000 in capitalized debt issuance costs, and trade names) which are amortized using an accelerated method of amortization based on cash flows. These assets are reviewed for impairment whenever events or changes in circumstances indicate that their carryingthe total amount may not be recoverable as described below under Impairment of long-lived assets.
Intangible assets, net consist of the following (in thousands):current portion of these loans included in Other current liabilities on our consolidated balance sheets was $2.9 million.
Both loans include certain financial and non-financial covenants and are secured by our corporate headquarters and the related land and rank senior to stockholders. The financial covenants require that Overstock maintain a net worth in excess of $30 million and minimum liquid assets of $3 million for so long as the Mezzanine Note is outstanding and is reduced to maintaining a net worth in excess of $15 million and minimum liquid assets of $1 million for the remainder of the term that the Senior Note is outstanding. We are in compliance with our debt covenants and continue to monitor our ongoing compliance with our debt covenants.
7. LEASES
|
| | | | | | | |
| | September 30,
2017 | | December 31,
2016 |
| Acquired intangible assets | $ | 16,000 |
| | $ | 16,000 |
|
| Intangible assets, other (1) | 1,571 |
| | 1,356 |
|
| | 17,571 |
| | 17,356 |
|
| Less: accumulated amortization of intangible assets | (9,283 | ) | | (6,443 | ) |
| Total intangible assets, net | $ | 8,288 |
| | $ | 10,913 |
|
| |
(1) | — At September 30, 2017, the weighted average remaining useful life for Intangible assets, other, excluding fully amortized intangible assets, was 3.50 years.
|
AmortizationWe have operating leases for warehouses, office space, and data centers. Our leases have remaining lease terms of intangible assets other than goodwill is classifiedone year to four years, some of which may include options to extend the leases perpetually, and some of which may include options to terminate the leases within the corresponding operating expense categories on the consolidated statementsone year.
The components of operationslease expenses were as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| | Three months ended
September 30, | | Nine months ended
September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| Technology | $ | 905 |
| | $ | 699 |
| | $ | 2,715 |
| | $ | 2,151 |
|
| Sales and marketing | 22 |
| | 246 |
| | 62 |
| | 949 |
|
| General and administrative | 21 |
| | 27 |
| | 62 |
| | 93 |
|
| Total amortization | $ | 948 |
| | $ | 972 |
| | $ | 2,839 |
| | $ | 3,193 |
|
Estimated amortization expense for the next five years is: $900,000 for the remainder of 2017, $2.8 million in 2018, $2.0 million in 2019, $1.3 million in 2020, and $1.0 million in 2021 and 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. 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 nine months ended September 30, 2017 or the year ended December 31, 2016.
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 $403,000 and $307,000 at September 30, 2017 and December 31, 2016, respectively, and are recorded at the lower of cost or market based on an average unit cost.
On an interim basis, we recognize decreases in the value of these assets caused by market declines. Subsequent increases in the value of these assets through market price recoveries during the same fiscal year are recognized in the later interim period, but may not exceed the total previously recognized decreases in value during the same year. Such unrealized gains or losses resulting from changes in the value of our cryptocurrencies are recorded in Other income, net in our consolidated statements of operations. There were no significant unrealized gains or losses on cryptocurrencies during the three and nine months ended September 30, 2017 and 2016.
Gains and losses realized upon sale of cryptocurrencies are also recorded in Other income, net in our consolidated statements of operations. Realized gains on sale of cryptocurrencies were $3.6 million during the three and nine months ended September 30, 2017. There were no realized gains or losses on sale of cryptocurrencies during the three and nine months ended September 30, 2016.
Other long-term assets, net
Other long-term assets, net consist primarily of cost and equity method investments (see Cost method investments and Equity method investments above) and related convertible notes and long-term prepaid expenses.
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 carry a variable LIBOR-based interest rate, we are affected by changes in certain market conditions. These changes in market conditions may adversely impact our financial performance, and as such, we use derivatives as a risk management tool to mitigate the potential impact of these changes. We do not enter into derivatives for speculative or trading purposes. The primary market risk we manage through the use of derivative instruments is interest rate risk on the amounts we have borrowed under the loan agreement relating to our new headquarters. To manage that risk, we use interest rate swap agreements. An interest rate swap agreement is a contract between two parties to exchange cash flows based on underlying notional amounts and indices. Our interest rate swaps entitle us to pay amounts based on a fixed rate in exchange for receipt of amounts based on variable rates over the term of the related loan agreement. The notional amounts under our hedges were $45.0 million and $45.8 million at September 30, 2017 and December 31, 2016, respectively.
Our derivatives are carried at fair value in our consolidated balance sheets in Other current liabilities, net and Other long-term liabilities on a gross basis. The accounting for gains and losses that result from changes in the fair values of derivative instruments depends on whether the derivatives have been designated and qualify as hedging instruments under GAAP. Our derivatives have been designated and qualify as cash flow hedges. We formally designated and documented, at inception, the financial instruments as hedges of specific underlying exposures, the risk management objectives, and the strategy for undertaking the hedging transactions. In addition, we formally assess, both at the inception and at least quarterly thereafter, whether the financial instruments used in hedging transactions are effective at offsetting changes in the cash flows of the related underlying exposures. To the extent that the hedges are effective, the changes in fair values of our cash flow hedges are recorded in Accumulated other comprehensive income (loss) in the consolidated statements of changes in stockholders' equity. Any ineffective portion is immediately recognized into earnings. The variable-rate interest on the borrowing for our new corporate headquarters was capitalized during the construction period. The amounts in Accumulated other comprehensive income (loss) related to the cash flow hedge of the variability of the interest that was capitalized is reclassified into earnings over the depreciable life of the asset. During the three and nine months ended September 30, 2017, the amount of gains or losses in Accumulated other comprehensive income (loss) that has been reclassified into earnings was not material and the amounts at September 30, 2017 that we will reclassify into earnings within the next 12 months is not expected to be material.
On November 6, 2017, we terminated the derivative instruments as a result of the repayment of the underlying loans (see Note 11—Subsequent Events).
We determine the fair values of our derivatives based on quoted market prices or using standard valuation models (see Fair value of financial instruments above). The notional amounts of the derivative financial instruments do not necessarily represent amounts exchanged by the parties and, therefore, are not a direct measure of our exposure to the financial risks described above. The amounts exchanged are calculated by reference to the notional amounts and by other terms of the derivatives, such as interest rates.
The following table shows the effect of derivative financial instruments that were designated as accounting hedges for the period indicated (in thousands):
|
| | | | | | | | | | | | | | | | |
| Cash flow hedges | | Amount of gain (loss) recognized in OCI on derivative (effective portion) net of tax | | Location of gain (loss) reclassified from Accumulated OCI into operations (effective portion) | | Amount of gain (loss) reclassified from Accumulated OCI into operations (effective portion) | | Location of gain (loss) recognized in operations on derivative (ineffective portion) | | Amount of gain (loss) recognized in operations on derivative (ineffective portion) |
| Three months ended September 30, 2017 | | | | | | | | | | |
| Interest rate swap | | $ | 52 |
| | Interest expense | | $ | 4 |
| | Other income, net | | $ | — |
|
| Three months ended September 30, 2016 | | | | | | | | | | |
| Interest rate swap | | $ | (64 | ) | | Interest expense | | $ | 1 |
| | Other income, net | | $ | — |
|
| Nine months ended September 30, 2017 | | | | | | | | | | |
| Interest rate swap | | $ | 120 |
| | Interest expense | | $ | 12 |
| | Other income, net | | $ | — |
|
| Nine months ended September 30, 2016 | | | | | | | | | | |
| Interest rate swap | | $ | (1,624 | ) | | Interest expense | | $ | 1 |
| | Other income, net | | $ | — |
|
| | | | | | | | | | | | | | | |
| Three months ended
March 31, | | |
| 2023 | | 2022 | | | | |
| Operating lease cost | $ | 1,406 | | | $ | 1,509 | | | | | |
| | | | | | | |
| Variable lease cost | 364 | | | 498 | | | | | |
The following table provides the outstanding positions, notional balances, fair values, and recorded gains (losses)a summary of derivative financial instruments that were designated as accounting hedges for periods indicatedother information related to leases (in thousands):
| | | | | | | | | | | |
| Three months ended
March 31, |
| 2023 | | 2022 |
| | | |
| Cash payments included in operating cash flows from lease arrangements | $ | 1,492 | | $ | 1,550 |
| | | |
| | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| Cash flow hedges | | Location in balance sheet | | Expiration date | | Outstanding notional | | Fair value | | Beginning gains (losses) | | Gains (losses) recorded during period (1) | | Ending gains (losses) |
| Three months ended September 30, 2017 | | | | | | | | | | | | | | |
| Interest rate swap | | Current and Other long-term liabilities | | 2023 | | $ | 45,010 |
| | $ | (1,609 | ) | | $ | (1,696 | ) | | $ | 87 |
| | $ | (1,609 | ) |
| Three months ended September 30, 2016 | | | | | | | | | | | | | | |
| Interest rate swap | | Current and Other long-term liabilities | | 2023 | | $ | 45,054 |
| | $ | (4,256 | ) | | $ | (4,683 | ) | | $ | 427 |
| | $ | (4,256 | ) |
| Nine months ended September 30, 2017 | | | | | | | | | | | | | | |
| Interest rate swap | | Current and Other long-term liabilities | | 2023 | | $ | 45,010 |
| | $ | (1,609 | ) | | $ | (1,816 | ) | | $ | 207 |
| | $ | (1,609 | ) |
| Nine months ended September 30, 2016 | | | | | | | | | | | | | | |
| Interest rate swap | | Current and Other long-term liabilities | | 2023 | | $ | 45,054 |
| | $ | (4,256 | ) | | $ | (2,397 | ) | | $ | (1,859 | ) | | $ | (4,256 | ) |
| |
(1) | — Gains (losses) recorded during the period are presented gross of the related tax impact.
|
Revenue recognition
We derive our revenue primarily from direct revenue and partner revenue from merchandise sales. We also earn revenue from advertising on our Website and from other pages. We have organized our operations into two principal reporting segments based on the primary source of revenue: direct revenue and partner revenue (see Note 9—Business Segments).
Revenue is recognized when theThe following revenue recognition criteria are met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or the service has been provided; (3) the selling price or fee revenue earned is fixed or determinable; and (4) collection of the resulting receivable is reasonably assured. Revenuetable provides supplemental balance sheet information related to merchandise sales is recognized upon delivery toleases:
| | | | | | | | | | | |
| March 31,
2023 | | December 31,
2022 |
| Weighted-average remaining lease term—operating leases | 1.92 years | | 2.04 years |
| Weighted-average discount rate—operating leases | 7 | % | | 7 | % |
Maturity of lease liabilities under our customers. As we ship high volumesnon-cancellable operating leases as 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.
We evaluate the criteria outlined in ASC Topic 605-45, Principal Agent Considerations, in determining whether it is appropriate to record the gross amount of product sales and related costs or the net amount earned as commissions. When we are the primary obligor in a transaction, are subject to inventory risk, have latitude in establishing prices and selecting suppliers, or have several but not all of these indicators, revenue is recorded gross. If we are not the primary obligor in the transaction and amounts earned are determined using a fixed percentage, revenue is recorded on a net basis. Currently, the majority of both direct revenue and partner revenue is recorded on a gross basis, as we are the primary obligor. We present revenue net of sales taxes. We periodically provide incentive offers to our customers to encourage purchases. Such offers include current discount offers, such as percentage discounts off current purchases and other similar offers, which, when used by customers, are treated as a reduction of revenue.
We evaluate the revenue recognition criteria above for our broker dealer subsidiaries (see Note 10—Broker Dealers) and we recognize securities transactions (and the related commission revenue) on a trade date and gross basis.
Based upon our historical experience, direct and partner revenues typically increase during the fourth quarter because of the holiday retail season and decrease in the following quarter(s).
Direct revenue
Direct revenue is derived from merchandise sales of our owned inventory to individual consumers and businesses. Direct revenue comes from merchandise sales that occur primarily through our Website, but may also occur through offline and other channels.
Partner and other revenue
Partner and other revenue is derived primarily from merchandise sales of inventory owned by our partners which they generally ship directly to our consumers and businesses. Partner and other revenue comes from merchandise sales that occur primarily through our Website, but may also occur through offline and other channels, including through our broker dealer subsidiaries in our Other segment.
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 (see Co-branded credit card program below for more information). Co-branded cardholders are also Club O Gold members and earn additional reward dollars for purchases made on our Website, and from other merchants.
Earned Club O Reward dollars may be redeemed on future purchases made through our Website. We recognize revenue for Club O Reward dollars when customers redeem their reward dollars as part of a purchase on our Website. We account for these transactions as multiple element arrangements and allocate revenue to the elements using their relative fair values. We include the value of reward dollars earned in deferred revenue and we record it as a reduction of revenue at the time the reward dollars are earned. Club O Gold membership reward dollars expire 90 days after the customer's Club O Gold membership expires. When Club O Reward dollars expire, we recognize reward dollar breakage as Other income, net in our consolidated statements of operations.
Beginning in 2015, we enrolled a significant number of members in Club O Silver, a newly introduced Club O membership tier for customers who agree to receive promotional emails. Club O Silver members earned Club O Rewards on qualifying purchases that expired after 90 days from a qualifying purchase. We discontinued Club O Silver in October 2016, and as a result we do not expect further Club O Silver rewards breakage in the future.
In instances where customers receive free Club O Reward dollars not associated with any purchases, we account for these transactions as sales incentives such as coupons and record a reduction of revenue at the time the reward dollars are redeemed.
Co-branded credit card program
We have a co-branded credit card agreement with a commercial bank for the issuance of credit cards bearing the Overstock.com brand, under which the bank pays us fees for new accounts and for customer usage of the cards. The agreement also provides for a customer loyalty program offering reward points that customers will accrue from card usage and can use to make purchases on our Website (see Club O loyalty program above for more information). New account fees are recognized as revenue on a straight-line basis over the estimated expected life of co-branded credit card customers. Credit card usage fees are recognized as revenues as actual credit card usage occurs.
We also have a private label credit card agreement with another commercial bank for the issuance of credit cards bearing our brand, but that is only available for use on our Website. In connection with the agreement, we received upfront fees that we recognize as revenue on a straight-line basis over the term of the agreement, which runs through February 2022. When customers make regular revolving purchases using the card, we receive fees, which are recognized as revenue. When we offer promotional financing for purchases made with the card (for example, 12 months same as cash), we pay a discount fee to the commercial bank, which we recognize as a reduction of revenue. The commercial bank owns all of the accounts under the program and performs all account administration, underwriting and servicing. Fees and royalties from new accounts, credit card usage fees, and fees from both of these cards were less than 1% of total net revenues for all periods presented.
Deferred revenue
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 and we recognize it as revenue upon redemption. If reward dollars are not redeemed, we recognize other income 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. If a gift card is not redeemed, we recognize other income when the likelihood of its redemption becomes remote based on our historical redemption experience. We consider the likelihood of redemption to be remote after 36 months.
We periodically enter into agreements with other parties to market ancillary products or services on our Website. As a result of those agreements, we sometimes receive payments in advance of performing our obligations under those agreements. Such payments received before we perform our obligations are initially recorded as deferred revenue and then recognized over our service period.
Sales returns allowance
We inspect returned items when they arrive at our processing facility. We refund the full cost of the merchandise returned and all original shipping charges if the returned item is defective or we or our partners have made an error, such as shipping the wrong product.
If the return is not a result of a product defect or a fulfillment error and the customer initiates a return of an unopened item within 30 days of delivery, for most products we refund the full cost of the merchandise minus the original shipping charge and actual return shipping fees. However, we reduce refunds for returns initiated more than 30 days after delivery or that are received at our returns processing facility more than 45 days after initial delivery.
If our customer returns an item that has been opened or shows signs of wear, we issue a partial refund minus the original shipping charge and actual return shipping fees.
Revenue is recorded net of estimated returns. We record an allowance for returns based on current period revenues and historical returns experience. We analyze actual historical returns, current economic trends and changes in order volume and acceptance of our products when evaluating the adequacy of the sales returns allowance in any accounting period.
The allowance for returns was $12.9 million and $18.2 million at September 30, 2017 and DecemberMarch 31, 2016, respectively.
Credit card chargeback allowance
Revenue is recorded net of credit card chargebacks. We maintain an allowance for credit card chargebacks based on current period revenues and historical chargeback experience. The allowance for chargebacks was $332,000 and $431,000 at September 30, 2017 and December 31, 2016, respectively.
Cost of goods sold
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. Cost of goods sold, including product cost and other costs and fulfillment and related costs2023, are as follows (in thousands):
| | | | | | | | |
| Payments due by period | | Amount |
| 2023 (Remainder) | | $ | 3,487 | |
| 2024 | | 2,880 | |
| 2025 | | 689 | |
| 2026 | | 250 | |
| 2027 | | 83 | |
| Thereafter | | — | |
| Total lease payments | | 7,389 | |
| Less interest | | 535 | |
| Present value of lease liabilities | | $ | 6,854 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended
September 30, | | Nine months ended
September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| Total revenue, net | $ | 424,007 |
| | 100 | % | | $ | 441,564 |
| | 100 | % | | $ | 1,288,466 |
| | 100 | % | | $ | 1,273,781 |
| | 100 | % |
| Cost of goods sold | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
| Product costs and other cost of goods sold | 321,678 |
| | 76 | % | | 343,401 |
| | 78 | % | | 977,827 |
| | 76 | % | | 985,603 |
| | 77 | % |
| Fulfillment and related costs | 18,654 |
| | 4 | % | | 18,447 |
| | 4 | % | | 55,886 |
| | 4 | % | | 54,833 |
| | 4 | % |
| Total cost of goods sold | 340,332 |
| | 80 | % | | 361,848 |
| | 82 | % | | 1,033,713 |
| | 80 | % | | 1,040,436 |
| | 82 | % |
| Gross profit | $ | 83,675 |
| | 20 | % | | $ | 79,716 |
| | 18 | % | | $ | 254,753 |
| | 20 | % | | $ | 233,345 |
| | 18 | % |
Advertising expense
We expense the costs of producing advertisements the first time the advertising takes place and expense the cost of communicating advertising in the period during which the advertising space or airtime is used. Internet advertising expenses are recognized as incurred based on the terms of the individual agreements, which are generally: 1) a commission for traffic driven to our Website that generates a sale or 2) a referral fee based on the number of clicks on keywords or links to our Website generated during a given period. Advertising expense is included in sales and marketing expenses and totaled $41.2 million and $31.5 million during the three months ended September 30, 2017 and 2016, respectively. For the nine months ended September 30, 2017 and 2016, advertising expenses totaled $114.6 million and $90.6 million, respectively. Prepaid advertising (included in Prepaids and other current assets in the accompanying consolidated balance sheets) was $2.3 million and $843,000 at September 30, 2017 and December 31, 2016, 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 restricted stock awards exceeds a straight-line basis. As a result of the adoption of ASU 2016-09, we made an accounting policy election to record forfeitures when they occur. 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 8—Stock-Based Awards.
Self-funded health insurance
As of January 1, 2017, we established a partially self-funded health insurance plan for our employees. We maintain a stop-loss insurance policy through an insurance company that limits our losses both on a per employee basis and an aggregate basis. Although we intend to maintain this plan indefinitely, we may terminate, modify, suspend, or discontinue this plan at any time and for any reason.
We are responsible for estimating our liability for unpaid costs of insured events that have occurred, which includes known cases on a case-by-case basis, and also for events that have occurred, but have not yet been reported. As of September 30, 2017, we have recorded an accrued liability of approximately $1.4 million. Actual claims may differ from the estimate and any difference could be significant. This accrual is included in Accrued liabilities in the accompanying consolidated balance sheets.
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 6—Commitments and Contingencies).
Income taxes
Our income tax provision for interim periods is determined using an estimate of our annual effective tax rate adjusted for discrete items, if any, for relevant interim periods. We update our estimate of the annual effective tax rate each quarter and make cumulative adjustments if our estimated annual effective tax rate changes.
Our quarterly tax provision and our quarterly estimate of our annual effective tax rate are subject to significant variations due to several factors including variability in predicting our pre-tax and taxable income and the mix of jurisdictions to which those items relate, relative changes of expenses or losses for which tax benefits are not recognized, how we do business, fluctuations in our stock price, and changes in law, regulations, and administrative practices. Our effective tax rate can be volatile based on the amount of pre-tax income. For example, the impact of discrete items on our effective tax rate is greater when pre-tax income is lower.
Each quarter we assess the recoverability of our deferred tax assets under ASC 740. We assess all available positive and negative evidence to determine whether we will generate sufficient future taxable income to use our existing deferred tax assets. We consider, among other things, our recent financial and operating results, along with our forecasted growth rates, projected future taxable income, carryforward periods, our utilization experience with operating loss and tax credit carryforwards, and prudent and feasible tax planning strategies. We give the most weight to objective evidence related to our more recent financial results. Based upon the level of historical taxable income and projections for future taxable income, and planned tax strategies over the periods in which the deferred tax assets are deductible, we believe it is more likely than not that we will realize the benefits of the deduction differences, net of recorded valuation allowances. This assessment requires significant judgment and estimates about our ability to generate revenue, gross profit, operating income and taxable income in future periods. Except as otherwise disclosed, there are no known trends, events, transactions or other uncertainties that are expected to negatively impact the future levels of taxable income. We established a valuation allowance of $2.3 million for certain state tax credits as of June 30, 2017, because estimates of future apportioned taxable income during the carryforward period were reduced. During the three months ended September 30, 2017, we sold precious metals and cryptocurrencies and generated capital gain income. We have deferred tax assets based on capital losses, which were offset by a valuation allowance. Since we generated capital gain income, a portion of the capital losses can now be utilized and we released $2.2 million of valuation allowance as of September 30, 2017. We will continue to monitor the need for a valuation allowance against our remaining deferred tax assets on a quarterly basis.
We have not provided for U.S. income tax on certain foreign earnings because we intend to indefinitely reinvest these earnings outside the U.S. We have begun expansion of operations outside of the U.S. and have plans for additional expansion
for which we have incurred and will continue to incur capital requirements. We have considered ongoing capital requirements of the parent company in the U.S.
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 and restricted stock awards are included in the calculation of diluted net income (loss) per common share to the extent such shares are dilutive.
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):
|
| | | | | | | | | | | | | | | |
| | Three months ended
September 30, | | Nine months ended
September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| Net income (loss) attributable to stockholders of Overstock.com, Inc. | $ | (786 | ) | | $ | (3,098 | ) | | $ | (14,188 | ) | | $ | 9,427 |
|
| Less: Preferred stock dividends - accumulated | 27 |
| | — |
| | 80 |
| | — |
|
| Undistributed income (loss) | (813 | ) | | (3,098 | ) | | (14,268 | ) | | 9,427 |
|
| Less: Undistributed loss allocated to participating securities | (22 | ) | | — |
| | (386 | ) | | — |
|
| Net income (loss) attributable to common shares | $ | (791 | ) | | $ | (3,098 | ) | | $ | (13,882 | ) | | $ | 9,427 |
|
| Net income (loss) per common share—basic: | |
| | |
| | |
| | |
|
| Net income (loss) attributable to common shares—basic | $ | (0.03 | ) | | $ | (0.12 | ) | | $ | (0.55 | ) | | $ | 0.37 |
|
| Weighted average common shares outstanding—basic | 25,003 |
| | 25,356 |
| | 25,024 |
| | 25,326 |
|
| Effect of dilutive securities: | |
| | |
| | |
| | |
|
| Stock options and restricted stock awards | — |
| | — |
| | — |
| | 62 |
|
| Weighted average common shares outstanding—diluted | 25,003 |
| | 25,356 |
| | 25,024 |
| | 25,388 |
|
| Net income (loss) attributable to common shares—diluted | $ | (0.03 | ) | | $ | (0.12 | ) | | $ | (0.55 | ) | | $ | 0.37 |
|
The following shares were excluded from the calculation of diluted shares outstanding as their effect would have been anti-dilutive (in thousands):
|
| | | | | | | | | | | |
| | Three months ended
September 30, | | Nine months ended
September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| Stock options and restricted stock units | 192 |
| | 765 |
| | 165 |
| | 536 |
|
Stock repurchase program
On May 5, 2015, our Board of Directors authorized a stock repurchase program under which we may repurchase shares of our outstanding common stock for up to $25 million at any time through December 31, 2017. In January 2017, we repurchased approximately 604,000 shares of our common stock for an aggregate purchase price of $10 million under the stock repurchase plan. All common shares repurchased were recognized as treasury stock.
Recently adopted accounting standards
In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory, which requires inventory to be measured at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. We implemented the provisions of ASU 2015-11 on January 1, 2017 on a prospective basis. The implementation of ASU 2015-11 did not impact our results of operations or cash flows.
In November 2015, the FASB issued ASU 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes, which requires that deferred tax assets and liabilities be classified as noncurrent in a classified balance sheet. We implemented the provisions of ASU 2015-17 on January 1, 2017 on a retrospective basis. Amounts related to the implementation for the year ended December 31, 2016 totaled approximately $16.3 million and have been reclassified to Long-term deferred tax assets, net in our consolidated balance sheet. The implementation of ASU 2015-17 did not impact our results of operations or cash flows.
In March 2016, the FASB issued ASU 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, which simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. We implemented the provisions of ASU 2016-09 on January 1, 2017 on a modified retrospective basis. We recognized $9.4 million of additional deferred tax assets related to excess tax benefits through a cumulative effect adjustment in retained earnings as of January 1, 2017. We will recognize future excess tax benefits or tax deficiencies related to the vesting of stock-based compensation awards as income tax benefit or income tax expense. This is likely to cause volatility in our effective tax rate and income tax expense. As part of our implementation of this standard, we also made a policy election to recognize forfeitures as they occur under a modified retrospective approach which did not have a significant impact on our results of operations or cash flows. Our adoption of the other provisions of this standard, which will be applied prospectively, did not have a significant impact on our results of operations or cash flows.
Recently issued accounting standards not yet adopted
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. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard becomes effective for us on January 1, 2018. In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers - Principal versus Agent Considerations. This ASU clarifies the implementation guidance for principal versus agent considerations in ASU 2014-09 and provides indicators that assist in the assessment of control. ASU 2016-08 is also effective for us on January 1, 2018. We are continuing to evaluate the impact of these ASUs on the specific areas that apply to the Company and their potential impact to our processes, accounting, financial reporting presentation, disclosures, and controls. We have identified gross versus net revenue recognition (principal versus agent considerations) as a potentially significant issue in our analysis. Under current FASB standards, we recognize revenue from the majority of our general Website sales on a gross basis. If our adoption of the new standards requires us to recognize net, rather than gross, revenue from the same types of sales for which we currently recognize gross revenue, our future revenue would be substantially lower than it would be under the current standards; however, our gross profit and net income (loss) would remain the same. We have further identified the timing of revenue recognition for undelivered orders (FOB shipping point versus FOB destination) as a potentially significant issue in our analysis, which is not expected to change the total amount of revenue recognized, but would accelerate the timing of when revenue and related costs are recognized. We expect the new standards to impact the timing of revenue recognition for gift card and loyalty program rewards breakage. Revenue related to the unredeemed portion of our gift cards and loyalty program rewards will be recognized over the expected redemption period, rather than waiting until the likelihood of redemption becomes remote or the rewards expire. This change is not expected to change the total amount of revenue recognized, but would accelerate the timing of when revenue is recognized. We plan to adopt these ASUs in the first
quarter 2018 and with a cumulative adjustment to retained earnings (cumulative effect transition method) as opposed to retrospectively adjusting prior periods.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which, among other things, requires lessees to recognize most leases on their balance sheets related to the rights and obligations created by those leases. The new standard also requires new disclosures to help financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. The new standard becomes effective for us on January 1, 2019. Early adoption is permitted. The amendments in this update should be applied under a modified retrospective approach. We are evaluating the effect that ASU 2016-02 will have 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 (a consensus of the FASB Emerging Issues Task Force), which provides guidance on the presentation of restricted cash or restricted cash equivalents in the statement of cash flows, thereby reducing the diversity in practice. The new standard becomes effective for us on January 1, 2018. The standard requires entities to apply this standard using the retrospective transition method to each period presented. The adoption of this standard will require that amounts generally described as restricted cash and restricted cash equivalents 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, rather than as currently presented within the operating activities and financing activities in the statement of cash flows. We do not expect that ASU 2016-18 will have a material impact on our consolidated financial statements and related disclosures.
In January 2017, the FASB issued ASU 2017-04, Intangibles, Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which simplifies the manner in which an entity should perform its annual, or interim, goodwill impairment test. The new standard becomes effective for us on January 1, 2020. Early adoption is permitted. We have not yet determined whether to early adopt. The amendments in this update should be applied on a prospective basis. We do not expect that ASU 2017-04 will have a material impact on our consolidated financial statements and related disclosures.
In May 2017, the FASB issued ASU 2017-09, Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting, which provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. Essentially, an entity will not have to account for the effects of a modification if: (1) the fair value of the modified award is the same immediately before and after the modification; (2) the vesting conditions of the modified award are the same immediately before and after the modification; and (3) the classification of the modified award as either an equity instrument or liability instrument is the same immediately before and after the modification. The new standard becomes effective for us on January 1, 2018. We do not expect that ASU 2017-09 will have a material impact on our financial statements and related disclosures.
In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, which more closely aligns an entity's risk management activities and financial reporting for hedging relationships through changes to both designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. The new standard becomes effective for us on January 1, 2019. Early adoption is permitted. We have not yet determined whether to early adopt. We do not expect ASU 2017-12 will have a material impact on our financial statements and related disclosures.
3. ACQUISITIONS, GOODWILL, AND ACQUIRED INTANGIBLE ASSETS
As part of our Medici blockchain and fintech technology initiatives, during 2015, a subsidiary of tZERO entered into a purchase agreement to acquire Cirrus Technologies LLC, a financial technology firm. In connection with the Cirrus Technology acquisition, a subsidiary of tZERO also entered into an agreement to purchase SpeedRoute LLC and all of the outstanding membership interests not already owned by tZERO in Pro Securities LLC. Both SpeedRoute and Pro Securities were under common control with Cirrus Technologies LLC by a party that holds a noncontrolling interest in tZERO, SpeedRoute and Pro Securities are FINRA-registered broker dealers.
This acquisition closed in two parts. The Cirrus Technologies acquisition closed in Q3 2015 and the membership interests in SpeedRoute and Pro Securities closed in Q1 2016 after receiving approval from FINRA. The total gross purchase price of this acquisition was $29.7 million, consisting of approximately $11.6 million in cash (which excludes $2.2 million in cash acquired, primarily during Q1 2016) and 908,364 shares of Overstock's common stock valued at approximately $18.1 million. The proceeds for the acquisition were financed by tZERO through a note payable to Overstock that bears interest that approximates the Federal Funds Rate. The total purchase price has been allocated to the assets acquired and the liabilities
assumed based on their respective fair values at the acquisition dates, with amounts exceeding fair value recorded as goodwill. We did not record significant deferred taxes related to the acquisition. The goodwill of the acquired business is deductible for tax purposes.
The acquisition of Cirrus Technologies and the acquisition of the membership interests of SpeedRoute and Pro Securities were negotiated and contemplated in conjunction with each other. As such, this was recognized as a single transaction. 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 dates are as follows (in thousands):
|
| | | |
| Purchase Price | Fair Value |
| Cash paid, net of cash acquired | $ | 9,353 |
|
| Common stock issued | 18,149 |
|
| | $ | 27,502 |
|
| Allocation | |
| Goodwill | $ | 11,914 |
|
| Intangibles | 16,000 |
|
| Accounts receivable and other assets | 2,565 |
|
| Other liabilities assumed | (2,977 | ) |
| | $ | 27,502 |
|
The following table details the identifiable intangible assets acquired at their fair value and useful lives as of September 30, 2017 (amounts in thousands):
|
| | | | | |
| Intangible Assets | Fair Value | | Weighted Average Useful Life (years) |
| Technology and developed software | $ | 13,600 |
| | 3.31 |
| Customer relationships | 1,900 |
| | — |
| Trade names | 300 |
| | 6.39 |
| Other | 200 |
| | |
| Total acquired intangible assets at the acquisition dates | 16,000 |
| | |
| Less: accumulated amortization of acquired intangible assets | (8,160 | ) | | |
| Total acquired intangible assets, net | $ | 7,840 |
| | |
The expense for amortizing acquired intangible assets in connection with this acquisition was $948,000 and $1.0 million for the three months ended September 30, 2017 and 2016, respectively, and $2.8 million and $3.2 million for the nine months ended September 30, 2017 and 2016, respectively.
Acquired intangible assets primarily include technology, customer relationships, and trade names. 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 using the expectations of market participants.
The acquired assets, liabilities, and associated operating results were consolidated into our financial statements at the acquisition dates, or the dates on which we obtained control of the acquired assets or interests.
4. ACCRUED LIABILITIES
Accrued liabilities consist of the following (in thousands):
|
| | | | | | | |
| | September 30,
2017 | | December 31,
2016 |
| Accrued marketing expenses | $ | 13,467 |
| | $ | 26,358 |
|
| Allowance for returns | 12,857 |
| | 18,176 |
|
| Accrued compensation and other related costs | 12,109 |
| | 8,903 |
|
| Accounts payable accruals | 8,956 |
| | 17,229 |
|
| Other accrued expenses | 6,307 |
| | 6,315 |
|
| Accrued freight | 5,038 |
| | 10,062 |
|
| Accrued loss contingencies | 50 |
| | 9,173 |
|
| Total accrued liabilities | $ | 58,784 |
| | $ | 96,216 |
|
5. BORROWINGS
U.S. Bank term loan and revolving loan agreement
We are party to a loan agreement (as amended through March 30, 2017, the "Agreement") dated October 24, 2014 with U.S. Bank National Association and other banks (the "Banks") in connection with the construction and long-term financing of our corporate headquarters (the "Project"). The Agreement provides for a senior secured real estate loan of $45.8 million (the "Term Loan") that we used to finance a portion of the Project and a $25.0 million senior secured revolving credit facility (the "Revolving Loan") to be used for working capital and other permitted purposes, including stock repurchases. The Term Loan and the Revolving Loan are both secured by the Project, our inventory and accounts receivable, substantially all of our deposit accounts and related assets. On January 1, 2017, the Term Loan was converted from a real estate loan used in the construction of our headquarters into an approximately 6.75-year loan due October 1, 2023. The aggregate principal amount converted was $45.8 million. The Revolving Loan terminates June 30, 2020.
Amounts outstanding under the Term Loan carry an interest rate based on one-month LIBOR plus 2.00% or an Alternate Base Rate plus 1.00%. However, we have entered into interest rate swap agreements designed to fix our interest rate on the Term Loan at approximately 4.6% annually (see Derivative financial instruments in Note 2. Accounting Policies). We are required to make monthly payments of principal plus interest, with a balloon payment of all unpaid principal and interest on October 1, 2023. Amounts outstanding under the Revolving Loan will carry an interest rate based on LIBOR plus 2.00% or an Alternate Base Rate plus 1.00%. The Term Loan includes customary events of default. The Term Loan and the Revolving Loan are cross-defaulted and cross-collateralized. In the event of a default, the default rate of interest would be 2.00% above the otherwise applicable rate.
Under the Agreement, we are required to maintain compliance as of the end of each calendar quarter with the following financial covenants:
a fixed charge coverage ratio on a trailing 12-month basis of no less than 1.15 to 1.00;
a cash flow leverage ratio on a trailing 12-month basis not greater than 2.75 to 1.00; and
minimum liquidity of at least $50.0 million.
At September 30, 2017, we were in compliance with the financial covenants.
At September 30, 2017, our outstanding balance on the Term Loan was $45.0 million and we had no amounts outstanding under the Revolving Loan. Our liability under the Term Loan approximates fair value. Amounts outstanding under the Term Loan are presented net of discount and issuance costs in our consolidated balance sheets.
On November 6, 2017, we repaid the outstanding balance and terminated both the Term Loan and the Revolving Loan (see Note 11—Subsequent Events).
U.S. Bank master lease agreement
In November 2015, we entered into a Master Lease Agreement and a Financial Covenants Rider (collectively, the "Master Lease Agreement") with U.S. Bank Equipment Finance, a division of U.S. Bank National Association. ("Lessor"). Under the Master Lease Agreement we are able to sell certain assets (the "Leased Assets") to the Lessor and simultaneously lease them back for a period of 60 months. We are also able to finance certain software licenses (inclusive in the "Leased Assets") for a period of 60 months. We have the right to repurchase the Leased Assets and terminate the Master Lease Agreement twelve months following the initial term. We also have the right to repurchase the Leased Assets at the end of the term for $1.00. Payments on the Master Lease Agreement are due monthly. During the nine months ended September 30, 2017, we did not receive proceeds under the Master Lease Agreement. At September 30, 2017, our total outstanding liability under the Master Lease Agreement was $12.7 million. The average interest rate for amounts outstanding under the Master Lease agreement was approximately 3.50%.
We have accounted for the Master Lease Agreement as a financing transaction and amounts owed are included in Finance obligations, current and non-current in the consolidated balance sheets. We recorded no gain or loss as a result of this transaction. The Master Lease Agreement allows for lease financing of up to $20 million. Our liability under the Master Lease Agreement approximates fair value.
In connection with the Master Lease Agreement, and as long as any obligations remain outstanding under the Master Lease Agreement, we are required to maintain compliance with the same financial covenants as the Agreement with U.S. Bank described above, and the two agreements have cross-default and cross-collateralization provisions.
On November 6, 2017, we repaid the outstanding balance and terminated the Master Lease Agreement (see Note 11—Subsequent Events).
U.S. Bank letters of credit
At September 30, 2017 and December 31, 2016, letters of credit totaling $355,000 and $430,000, respectively, were issued on our behalf collateralized by compensating cash balances held at U.S. Bank, which are included in Restricted cash in the accompanying consolidated balance sheets.
U.S. Bank commercial purchasing card agreement
We have a commercial purchasing card (the "Purchasing Card") agreement with U.S. Bank. We use the Purchasing Card for business purpose purchasing and must pay it in full each month. At September 30, 2017, $509,000 was outstanding and $4.5 million was available under the Purchasing Card. At December 31, 2016, $811,000 was outstanding and $4.2 million was available under the Purchasing Card.
6.8. COMMITMENTS AND CONTINGENCIES
Summary of future minimum lease payments for all operating leases
Minimum future payments under all operating leases as of September 30, 2017, are as follows (in thousands):
|
| | | | |
| Payments due by period | | |
| 2017 (Remainder) | | $ | 2,273 |
|
| 2018 | | 6,962 |
|
| 2019 | | 6,733 |
|
| 2020 | | 4,292 |
|
| 2021 | | 4,336 |
|
| Thereafter | | 20,775 |
|
| | | $ | 45,371 |
|
Rental expense for operating leases totaled $2.1 million and $3.3 million for the three months ended September 30, 2017 and 2016, respectively, and $7.0 million and $10.1 million for the nine months ended September 30, 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 thesesuch matters could materially affect our business, results of operations, financial position, or cash flows.
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 have filed our answer. The nature of the loss contingencies relating to claims that have been asserted against us are described above. However, no estimatebelow.
As previously disclosed, in October 2019, we received a subpoena from the SEC requiring us to produce documents and other information related to the Series A-1 Preferred stock dividend we announced to stockholders in June 2019 and requesting copies of 10b5-1 plans entered into by certain officers and directors. In December 2019, we received a subpoena from the loss or range of loss can be made.SEC requesting our insider trading policies and certain employment and consulting agreements. We intend to vigorously defend this action and pursuealso received requests from the SEC for our indemnification rightscommunications with our vendors.former Chief Executive Officer and Director, Patrick Byrne, and the matters referenced in the December 2019 subpoenas. In January 2021, we received a subpoena from the SEC requesting information regarding our retail guidance in 2019 and certain communications with current and former executives, board members, and investors. We continue to cooperate with the SEC on these matters.
On February 11, 2013, RPost Holdings, Inc., RPost Communications Limited,September 27, 2019, a purported securities class action lawsuit was filed against us and RMail Limited, filed suit against usour former Chief Executive Officer and former Chief Financial Officer in the United States District Court in Eastern District of Texas for infringement of patents covering productsUtah, alleging violations under Section 10(b), Rule 10b-5, Section 20(a), and services that verify the delivery and integrity of email messages. We tendered defenseSection 20A of the caseSecurities Exchange Act of 1934, as amended (the "Exchange Act"). On October 8, 2019, October 17, 2019, October 31, 2019, and November 20, 2019, four similar lawsuits were filed in the same court also naming us and the above referenced former executives as defendants, bringing similar claims under the Exchange Act, and seeking similar relief. These cases were consolidated into a single lawsuit in December 2019. The Court appointed The Mangrove Partners Master Fund Ltd. as lead plaintiff in January 2020. In March 2020, an amended consolidated complaint was filed against us, our President, our former Chief Executive Officer, and our former Chief Financial Officer. We filed a motion to an indemnitor who accepteddismiss and, on September 28, 2020, the defense.court granted our motion and entered judgment in our favor. The natureplaintiffs filed a motion to amend their complaint on October 23, 2020. The United States District Court of Utah granted the plaintiffs' motion to amend their complaint on January 6, 2021. The plaintiffs filed their amended complaint on January 11, 2021. We filed a motion to dismiss plaintiffs' amended complaint, and on September 20, 2021, the court granted our motion and entered judgment in our favor. On October 18, 2021, the plaintiffs filed a Notice of Appeal, appealing the ruling of the loss contingencies relatingdistrict court to claimsthe United States Court of Appeals for the Tenth Circuit. We are awaiting a ruling from the Tenth Circuit that have been asserted against us are described above. However, no estimateheard oral argument on the appeal on February 9, 2023. No estimates of the losspossible losses or range of losslosses can be made.made at this time. We intend to continue to vigorously defend this consolidated action.
On November 22, 2019, a shareholder derivative suit was filed against us and certain past and present directors and officers of ours in the United States District Court for the District of Delaware, with allegations that include: (i) breach of fiduciary duties, (ii) unjust enrichment, (iii) insider selling and misappropriation of the Company's information, and (iv) contribution under Sections 10(b) and 21D of the Exchange Act. On December 17, 2019, a similar lawsuit was filed in the same court, naming the same defendants, bringing similar claims, and seeking similar relief. These cases were consolidated into a single lawsuit in January 2020. In March 2020, the court entered a stay on litigation, pending the outcome of the securities class action motion to dismiss. The case remains stayed pending the outcome of the plaintiffs' appeal to the Tenth Circuit in the securities class action. No estimates of the possible losses or range of losses can be made at this time. We intend to vigorously defend thisthese actions.
On April 23, 2020, a putative class action and pursue our indemnification rights with our vendors.
In June 2013, William Frenchlawsuit was filed suit against us and 46 other defendants under seal in the SuperiorCircuit Court of the County of St. Louis, State of Delaware. The filing was unsealed on March 24, 2014. French brought the action on Delaware's behalf for violations of Delaware's unclaimed property laws and for recovery of the unredeemed gift card value allegedly attributable to Delaware residents. French's complaint allegesMissouri, alleging that we and other defendants, knowingly refused to fulfill obligations under Delaware's Abandoned Property Law by failing to report and deliver unclaimed gift card funds toover-collected taxes on products sold into the Statestate 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. The complaint seeks an injunction, monetary damages (including treble damages and penalties), and attorney's fees and costs. In the early stages ofMissouri. We removed the case we, along with others, filed motions to dismissUnited States District Court, Eastern District of Missouri on May 22, 2020, and on February 9, 2021, the case. The court dismissed one count, but allowed one count to remain. Recently, we filed motions for summary judgment, along with other defendants, to dismiss the case. The court has not yet ruled on these motions. The case is in its discovery stages. We intend to vigorously defend this action. The nature of the loss contingencies relating to claims that have been asserted against us are described above.
was dismissed. On April 28, 2016, the State of South Dakota suedMarch 1, 2021, a putative class action lawsuit was filed against us along with three other defendants in the Sixth Judicial Circuit Court of South Dakota. South Dakota alleges that U.S. constitutional law should be revised to permit South Dakota to require out-of-state ecommerce websites to withhold and remit sales tax in South Dakota in accordance with South Dakota's sales tax statute. Pursuantthe County of St. Louis, State of Missouri, alleging similar allegations to the statute,April 23, 2020 putative class action lawsuit that was dismissed, that we would not be requiredover-collected taxes on products sold into the state of Missouri. We filed a motion to withhold and remit sales tax until there was a verdict in favor of South Dakotacompel arbitration, which was then upheld by the highest applicable appellate court. The statute does not require us to pay sales tax retroactively if we were to lose. The state court granted summary judgment in our favor, anddenied on SeptemberOctober 13, 2017 the South Dakota Supreme Court denied South Dakota’s appeal and ruled in our favor. South Dakota has now2021. We filed a petition with the U.S. Supreme Courtmotion to hear the case. We intend to oppose the petition and continue to vigorously defend this action.
In September 2016, we received a letter from the District Attorney of Sonoma County, California who is acting as partdismiss, which was denied on March 16, 2022. No estimates of the Consumer Protection Divisionspossible losses or range of the following counties in California: Sonoma, Alameda, Monterey, Napa, Solano, Fresno, Sacramento, Shasta, Santa Cruz, Butte, and Merced. The District Attorney alleges that certain plastic products on our site which are labeled as biodegradable, degradable, or decomposable constitute false advertising under California law. On July 24, 2017, we agreed to the terms of a Final Judgment pursuant to which we paid the Sonoma County District Attorney's Office
a civil penalty of $27,000 and agreed to a five-year injunction. The injunction requires us to comply with the biodegradability law, to search our Website and re-label or remove any non-compliant products, and to certify our compliance to Sonoma each year during the five-year term of the injunction.
On July 7, 2017, the State of Wyoming sued us along with five other defendants in the Second Judicial District Court of Wyoming. Wyoming alleges that U.S. constitutional law shouldlosses can be revised to permit Wyoming to require out-of-state ecommerce websites to withhold and remit sales tax in Wyoming in accordance with Wyoming's sales tax statute. Pursuant to the statute, Wyoming is prohibited by an injunction from requiring us to withhold and remit sales tax until there is verdict in favor of Wyoming or the court otherwise lifts or dissolves the injunction. The statute does not require us to pay sales tax retroactively if we were to lose.made at this time. We intend to vigorously defend this action.
On August 28, 2017, the State of Indiana sued us along with one other defendant in the Superior Court of Indiana, Marion County. Indiana alleges that U.S. constitutional law should be revised to permit Indiana to require out-of-state ecommerce websites to withhold and remit sales tax in Indiana in accordance with Indiana's sales tax statute. Pursuant to the statute, we would not be required to withhold and remit sales tax until there was a verdict in favor of Indiana and the verdict was no longer subject to appeal. The statute does not require us to pay sales tax retroactively if we were to lose. We intend to vigorously defend this action.
We establish liabilities when a particular contingency is probable and estimable. At September 30, 2017, we had accrued $50,000 in light of probableMarch 31, 2023 and estimableDecember 31, 2022, our established liabilities net of related indemnities, which is included in accrued liabilities in the consolidated balance sheets. It is reasonably possible that the actual losses may exceed our accrued liabilities.were not material.
7.9. INDEMNIFICATIONS AND GUARANTEES
During our normal course of business, we have made certain indemnities, commitments, and guarantees under which we may be required to make payments in relation to certain transactions. These indemnities include, but are not limited to, indemnities towe entered into in favor of Loan Core Capital Funding Corporation LLC under our building loan agreements, various lessors in connection with facility leases for certain claims arising from such facility or lease, the environmental indemnity we entered into in favor of the lenders under our Loan Agreement with U.S. Bankprior loan agreements, customary indemnification arrangements in underwriting agreements and other banks,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.
8.10. STOCKHOLDERS' EQUITY
Common stock
Each share of common stock has the right to one vote. The holders of common stock are also entitled to receive dividends declared by the Board of Directors out of funds legally available, subject to prior rights of holders of all classes of stock outstanding having priority rights as to dividends.
Preferred stock conversion
Following the June 10, 2022 conversion of all outstanding Series A-1 and Series B preferred stock into shares of our common stock, the Company eliminated the Series A-1 and Series B preferred stock class by filing Certificates of Elimination with the Delaware Secretary of State.
JonesTrading Sales Agreement
During the three months ended March 31, 2023 and 2022, we did not sell any shares of our common stock pursuant to the "at the market" sales agreement with JonesTrading Institutional Services LLC and D.A. Davidson & Co. As of March 31, 2023, we had $150.0 million available under our "at the market" sales program.
Stock Repurchase Program
During the three months ended March 31, 2023, we did not repurchase any shares of our common stock under our stock repurchase program. During the three months ended March 31, 2022, we repurchased $24.9 million of our common stock and $256,000 of our Series A-1 preferred stock under the Repurchase Program at average prices of $48.18 and $45.24 per share, respectively. As of March 31, 2023, we had $19.9 million available for future share repurchases under our current repurchase authorization through December 31, 2023.
11. 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. Stock-based compensation expense wasis classified within the corresponding operating expense categories on our consolidated statements of operations as follows (in thousands):
| | | | | | | | | | | | | | | |
| Three months ended
March 31, | | |
| | 2023 | | 2022 | | | | |
| Cost of goods sold | $ | 19 | | | $ | 54 | | | | | |
| Sales and marketing | 190 | | | 345 | | | | | |
| Technology | 2,422 | | | 1,840 | | | | | |
| General and administrative | 3,164 | | | 2,400 | | | | | |
| Total stock-based compensation | $ | 5,795 | | | $ | 4,639 | | | | | |
|
| | | | | | | | | | | | | | | |
| | Three months ended
September 30, | | Nine months ended
September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| Medici stock options | $ | 9 |
| | $ | — |
| | $ | 9 |
| | $ | — |
|
| Restricted stock awards | 1,015 |
| | 1,390 |
| | 3,000 |
| | 4,105 |
|
| Total stock-based compensation expense | $ | 1,024 |
| | $ | 1,390 |
| | $ | 3,009 |
| | $ | 4,105 |
|
Overstock restricted stock awards
Medici stock options
In July 2017, the Board of Directors of Medici Ventures,The Overstock.com, Inc. ("Medici Ventures"), our wholly-owned subsidiary, approved the Medici Ventures, Inc. Stock OptionAmended and Restated 2005 Equity Incentive Plan which provides for the grant of optionsrestricted stock units to employees and directors of the Company and consultants to Medici Ventures. Pursuant to the plan, the Boardother types of Directors approved grants of 67,950 stock options to certain Medici Ventures and Overstock employees. The stock options are valued in total at $82,000 and subject to two vesting schedules, and compensation expense is recognized on a straight-line basis over the vesting schedules.
Restricted stockequity awards
During the three and nine months ended September 30, 2017, the Compensation Committee of the Board of Directors approved grants of 11,150 and 299,171 restricted stock awards to our officers, board members and employees. TheCompany. These restricted stock awards generally vest over three years at 33.3% at the end of the first year, 33.3% at the end of the second year and 33.3%33.4% at the end of the third year, and are subject to the recipient's continuing service to us. At September 30, 2017, there were 542,525 unvested restricted stock awards that remained outstanding.
The cost of restricted stock awards 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 three and nine months ended September 30, 2017 was $16.55 and $16.71.
The following table summarizes restricted stock award activity (in thousands, except per share data): | | | | | | | | | | | |
| | Three months ended
March 31, 2023 |
| Units | | Weighted
Average
Grant Date
Fair Value |
| Outstanding—beginning of year | 781 | | | $ | 50.17 | |
| Granted at fair value | 1,033 | | | 20.92 | |
| Vested | (268) | | | 44.79 | |
| Forfeited | (57) | | | 39.50 | |
| Outstanding—end of period | 1,489 | | | $ | 31.26 | |
Employee Stock Purchase Plan
Purchases under the Overstock.com, Inc. 2021 Employee Stock Purchase Plan (the "ESPP") during the ninethree months ended September 30, 2017 (in thousands):March 31, 2023 and 2022 were 68,011 shares and 41,918 shares, respectively, at an average purchase price per share of $16.46 and $48.37, respectively. At March 31, 2023, approximately 2.8 million shares of common stock remained available under the ESPP.
|
| | | | | | |
| | Nine months ended
September 30, 2017 |
| | Units | | Weighted
Average
Grant Date
Fair Value |
| Outstanding—beginning of year | 560 |
| | $ | 17.46 |
|
| Granted at fair value | 299 |
| | 16.71 |
|
| Vested | (202 | ) | | 19.82 |
|
| Forfeited | (114 | ) | | 16.20 |
|
| Outstanding—end of period | 543 |
| | $ | 16.43 |
|
9. BUSINESS SEGMENTS
Segment information has been preparedFor the three months ended March 31, 2023 and 2022, we recognized $548,000 and $627,000, respectively, in accordance with ASC Topic 280 Segment Reporting. We determined our segments based on how we manage our business,stock-based compensation expense related to the ESPP, which in our view, consists primarily of our Retail and Medici businesses. Our Retail business consists of our Direct and Partner reportable segments. We use gross profit as the measure to determine our reportable segments because there is not discrete financial information available below gross profit for our Direct and Partner segments. As a result, our Medici business is not significant as compared to our Direct and Partner segments and is included in Other. Our Other segment consists of Medici. Althoughthe stock-based compensation expense table above combined with the expense associated with our Direct and Partner segments both relate to our Retail business, we do not combine these segments because they have dissimilar economic characteristics, such as gross profit margins. We do not allocate assets between our segments for our internal management purposes, and as such, they are not presented here. There were no significant inter-segment sales or transfers during the three and nine months ended September 30, 2017 and 2016.restricted stock units.
12. REVENUE AND CONTRACT LIABILITY
Unearned Revenue
The following table summarizesprovides information about reportable segments for three and nine months ended September 30, 2017 and 2016unearned revenue from contracts with customers, including significant changes in unearned revenue balances during the periods presented (in thousands):
| | | | | |
| Amount |
| Unearned revenue at December 31, 2021 | $ | 59,387 | |
| Increase due to deferral of revenue at period end, net | 32,993 | |
| Decrease due to beginning contract liabilities recognized as revenue | (47,900) | |
| Unearned revenue at December 31, 2022 | 44,480 | |
| Increase due to deferral of revenue at period end, net | 25,052 | |
| Decrease due to beginning contract liabilities recognized as revenue | (22,409) | |
| Unearned revenue at March 31, 2023 | $ | 47,123 | |
|
| | | | | | | | | | | | | | | | | | | |
| | Three months ended
September 30, |
| | Direct | | Partner | | Retail Total | | Other | | Total |
| 2017 | |
| | |
| | | | | | |
|
| Revenue, net | $ | 19,645 |
| | $ | 400,419 |
| | $ | 420,064 |
| | $ | 3,943 |
| | $ | 424,007 |
|
| Cost of goods sold (1) | 19,577 |
| | 318,121 |
| | 337,698 |
| | 2,634 |
| | 340,332 |
|
| Gross profit | $ | 68 |
| | $ | 82,298 |
| | $ | 82,366 |
| | $ | 1,309 |
| | $ | 83,675 |
|
| Operating expenses (1) (2) | |
| | |
| | 90,592 |
| | 4,958 |
| | 95,550 |
|
| Interest and other income (expense), net (3) | |
| | |
| | 5,375 |
| | (17 | ) | | 5,358 |
|
| Pre-tax loss | | | | | (2,851 | ) | | (3,666 | ) | | (6,517 | ) |
| Benefit for income taxes | |
| | |
| | (3,993 | ) | | (1,419 | ) | | (5,412 | ) |
| Net income (loss) (4) | |
| | |
| | $ | 1,142 |
| | $ | (2,247 | ) | | $ | (1,105 | ) |
| | | | | | | | | | |
| 2016 | |
| | |
| | | | | | |
|
| Revenue, net | $ | 24,620 |
| | $ | 413,019 |
| | $ | 437,639 |
| | $ | 3,925 |
| | $ | 441,564 |
|
| Cost of goods sold (1) | 23,955 |
| | 335,306 |
| | 359,261 |
| | 2,587 |
| | 361,848 |
|
| Gross profit | $ | 665 |
| | $ | 77,713 |
| | $ | 78,378 |
| | $ | 1,338 |
| | $ | 79,716 |
|
| Operating expenses (1) (2) | |
| | |
| | 80,497 |
| | 4,266 |
| | 84,763 |
|
| Interest and other income (expense), net (3) | |
| | |
| | 1,177 |
| | (65 | ) | | 1,112 |
|
| Pre-tax loss | | | | | (942 | ) | | (2,993 | ) | | (3,935 | ) |
| Provision (benefit) for income taxes | |
| | |
| | 713 |
| | (1,256 | ) | | (543 | ) |
| Net loss (4) | |
| | |
| | $ | (1,655 | ) | | $ | (1,737 | ) | | $ | (3,392 | ) |
|
| | | | | | | | | | | | | | | | | | | |
| | Nine months ended
September 30, |
| | Direct | | Partner | | Retail Total | | Other | | Total |
| 2017 | |
| | |
| | | | | | |
|
| Revenue, net | $ | 64,572 |
| | $ | 1,211,536 |
| | $ | 1,276,108 |
| | $ | 12,358 |
| | $ | 1,288,466 |
|
| Cost of goods sold (1) | 61,687 |
| | 963,310 |
| | 1,024,997 |
| | 8,716 |
| | 1,033,713 |
|
| Gross profit | $ | 2,885 |
| | $ | 248,226 |
| | $ | 251,111 |
| | $ | 3,642 |
| | $ | 254,753 |
|
| Operating expenses (1) (2) | |
| | |
| | 264,455 |
| | 14,217 |
| | 278,672 |
|
| Interest and other income (expense), net (3) | |
| | |
| | 5,490 |
| | (4,428 | ) | | 1,062 |
|
| Pre-tax loss | | | | | (7,854 | ) | | (15,003 | ) | | (22,857 | ) |
| Benefit for income taxes | |
| | |
| | (3,280 | ) | | (4,447 | ) | | (7,727 | ) |
| Net loss (4) | |
| | |
| | $ | (4,574 | ) | | $ | (10,556 | ) | | $ | (15,130 | ) |
| | | | | | | | | | |
| 2016 | |
| | |
| | | | | | |
|
| Revenue, net | $ | 75,901 |
| | $ | 1,187,364 |
| | $ | 1,263,265 |
| | $ | 10,516 |
| | $ | 1,273,781 |
|
| Cost of goods sold (1) | 72,459 |
| | 961,227 |
| | 1,033,686 |
| | 6,750 |
| | 1,040,436 |
|
| Gross profit | $ | 3,442 |
| | $ | 226,137 |
| | $ | 229,579 |
| | $ | 3,766 |
| | $ | 233,345 |
|
| Operating expenses (1) (2) | |
| | |
| | 213,502 |
| | 12,586 |
| | 226,088 |
|
| Interest and other income (expense), net (3) | |
| | |
| | 9,409 |
| | (1 | ) | | 9,408 |
|
| Pre-tax income (loss) | | | | | 25,486 |
| | (8,821 | ) | | 16,665 |
|
| Provision (benefit) for income taxes | |
| | |
| | 11,626 |
| | (3,448 | ) | | 8,178 |
|
| Net income (loss) (4) | |
| | |
| | $ | 13,860 |
| | $ | (5,373 | ) | | $ | 8,487 |
|
(1) — The above amounts include Retail depreciation and amortization expense of $6.7Our total unearned revenue related to outstanding Club O Reward dollars was $10.7 million and $7.3$10.9 million for the three months ended September 30, 2017at March 31, 2023 and 2016, respectively,December 31, 2022, respectively. Breakage income related to Club O Reward dollars and $21.1 million and $19.5 million for the nine months ended September 30, 2017 and 2016.
(2) — The above amounts include Other depreciation and amortization expensegift cards is recognized in Net revenue in our consolidated statements of $1.2 millionoperations. Breakage included in revenue was $849,000 and $1.1 million for the three months ended September 30, 2017March 31, 2023 and 2016, respectively,2022. The timing of revenue recognition of these reward dollars is driven by actual customer activities, such as redemptions and $3.6 millionexpirations.
Sales returns allowance
The following table provides additions to and $3.4 milliondeductions from the sales returns allowance, which is included in our Accrued liabilities balance in our consolidated balance sheets (in thousands):
| | | | | |
| Amount |
| Allowance for returns at December 31, 2021 | $ | 13,923 | |
| Additions to the allowance | 161,492 | |
| Deductions from the allowance | (165,193) | |
| Allowance for returns at December 31, 2022 | 10,222 | |
| Additions to the allowance | 30,155 | |
| Deductions from the allowance | (29,961) | |
| Allowance for returns at March 31, 2023 | $ | 10,416 | |
13. NET INCOME (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted net income (loss) per common share for the nine months ended September 30, 2017 and 2016.periods indicated (in thousands, except per share data):
(3) — The above amounts exclude intercompany transactions eliminated in consolidation, which consist primarily of interest. These amounts were $403,000 and $60,000 for the three months ended September 30, 2017 and 2016, respectively, and $1.1 million and $405,000 for the nine months ended September 30, 2017 and 2016.
(4) — Net income presented for segment reporting purposes is before any adjustments attributable to noncontrolling interests.
For additional information regarding our non-GAAP financial measures, please see Item 2 of Part I, Management's Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates.
Our Direct segment includes revenues, direct costs, and cost allocations associated with sales of inventory we own. Costs for this segment include product costs, freight, warehousing and fulfillment costs, credit card fees and customer service costs.
Our Partner segment includes revenues, direct costs and cost allocations associated with sales of inventory owned by our partners. Costs for this segment include product costs, outbound freight and fulfillment costs, credit card fees and customer service costs.
For the three and nine months ended September 30, 2017 and 2016, substantially all of our sales revenues were attributable to customers in the United States. At September 30, 2017 and December 31, 2016, substantially all of our fixed assets were located in the United States.
10. BROKER DEALERS | | | | | | | | | | | | | | | |
| | Three months ended
March 31, | | |
| | 2023 | | 2022 | | | | |
| Numerator: | | | | | | | |
| Net income (loss) | $ | (10,307) | | | $ | 10,123 | | | | | |
| | | | | | | |
| Less: Preferred stock dividends—declared and accumulated | — | | | 182 | | | | | |
| Undistributed income (loss) | (10,307) | | | 9,941 | | | | | |
| Less: Undistributed income (loss) allocated to participating securities | — | | | 952 | | | | | |
| Net income (loss) attributable to common stockholders | $ | (10,307) | | | $ | 8,989 | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Denominator: | | | | | | | |
| Weighted average shares of common stock outstanding—basic | 45,067 | | | 43,052 | | | | | |
| Effect of dilutive securities: | | | | | | | |
| Restricted stock awards | — | | | 230 | | | | | |
| Weighted average shares of common stock outstanding—diluted | 45,067 | | | 43,282 | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Net income (loss) per share of common stock: | | | | | | | |
| Basic | $ | (0.23) | | | $ | 0.21 | | | | | |
| Diluted | $ | (0.23) | | | $ | 0.21 | | | | | |
As partThe following shares were excluded from the calculation of our Medici blockchain and fintech technology initiatives, we hold a controlling interest in eachdiluted shares outstanding as their effect would have been anti-dilutive (in thousands):
| | | | | | | | | | | | | | | |
| | Three months ended
March 31, | | |
| | 2023 | | 2022 | | | | |
| Restricted stock units | 1,489 | | | 506 | | | | | |
| Employee stock purchase plan | 117 | | | 64 | | | | | |
SpeedRoute is an electronic, agency-only FINRA-registered broker dealer that provides connectivity for its customers to U.S. equity exchanges as well as off-exchange sources of liquidity such as dark pools. All of SpeedRoute's customers are registered broker dealers. SpeedRoute does not hold, own or sell securities.
Pro Securities is a FINRA-registered broker dealer that owns and operates the Pro Securities alternative trading system ("ATS"), which is registered with the SEC. An ATS is a trading system that is not regulated as an exchange, but is a licensed venue for matching buy and sell orders. The Pro Securities ATS is a closed system available only to its broker dealer subscribers. Pro Securities does not accept orders from non-broker dealers, nor does it hold, own or sell securities.
SpeedRoute and Pro Securities are subject to the SEC's Uniform Net Capital Rule (SEC Rule 15c3-1), which requires the maintenance of minimum net capital and requires that the ratio of aggregate indebtedness to net capital, both as defined, shall not exceed 15 to 1 and that equity capital may not be withdrawn or cash dividends paid if the resulting net capital ratio would exceed 10 to 1. At September 30, 2017, SpeedRoute had net capital of $496,480, which was $391,483 in excess of its required net capital of $104,997 and SpeedRoute's net capital ratio was 3.17 to 1. At September 30, 2017, Pro Securities had net capital of $9,194 which was $4,194 in excess of its required net capital of $5,000 and Pro Securities net capital ratio was 2.34 to 1.
SpeedRoute and Pro Securities did not have any securities owned or securities sold, not yet purchased at September 30, 2017.
11. SUBSEQUENT EVENTS
New loan agreement
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 Chief Executive Officer, Dr. Patrick Byrne. The agreement provides for a $40.0 million term loan which carries an annual interest rate of 8.0% and a default rate of 18.0%. The loan is for a term of 18 months, subject
to mandatory prepayment under certain circumstances, and is prepayable at our election at any time without penalty or premium. Interest only will be due monthly. The principal amount and any then unpaid interest will be due and payable on May 1, 2019 (subject to mandatory prepayment in the event of a sale or encumbrance of the headquarters building or a change of ownership of Overstock or the occurrence of certain other events, including material changes to Overstock’s business, the loss of management control of Overstock by Dr. Patrick Byrne and other events). The loan is secured by our corporate headquarters and the related land, fixtures and certain related personal property. We incurred insignificant debt issuance costs with the new loan agreement. The $40.0 million proceeds from this loan together with our cash resources were used to repay the remaining outstanding balances and terminate the U.S. Bank Term Loan, Revolving Loan, Master Lease Agreement, and associated derivative instruments. As a result of the termination of the U.S. Bank agreements, we are required to write-off the remaining unamortized debt issuance costs of $816,000 associated with the U.S. Bank agreements.
Declaration of cash dividends on preferred shares
On November 7, 2017, we announced that the Board of Directors declared a cash dividend for 2017 of $0.16 per share on its Blockchain Voting Series A Preferred Stock and a cash dividend for 2017 of $0.16 per share on its Voting Series B Preferred Stock, in each case payable on December 15, 2017 to stockholders of record on December 1, 2017. The ex-dividend date for the Series B Preferred dividend is expected to be November 29, 2017. Holders and potential investors in the Series B Preferred shares may confirm the ex-dividend date for the Series B Preferred dividend on the OTCQX website operated by OTC Markets when posted.
Sale of warrants
On November 8, 2017, we sold a warrant for $2.6 million to purchase 1,250,000 shares of our common stock at $40.45 per share until February 7, 2018. We also sold a warrant for $4.0 million to purchase 2,472,188 shares of our common stock at $40.45 per share until January 2, 2018.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Special Cautionary Note Regarding Forward-Looking Statements
This Report on Form 10-QThe following discussion provides information that we believe to be relevant to an understanding of our consolidated financial condition and results of operations. The statements in this section regarding industry outlook, our expectations regarding 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:
the anticipated benefits and risksperformance of our business and plans;
our beliefs regarding our ability to attract and retain customers in a cost-efficient manner;
the anticipated effectiveness of our marketing;
our future operating and financial results, including any projections of revenue, profits or losses, contribution, technology expense, general and administrative expense, cash flow, capital expenditures or other financial measures or amounts or non-GAAP financial measures or amounts or anticipated changes in any of them;
our beliefs and expectations regarding the adequacy of our facilities, including leased and third-party operated warehouse facilities;
our belief that we can maintain compliance with the requirements of our credit facility;
our future capital requirements and our ability to satisfy our capital needs;
the adequacy of our liquidity;
our ability to improve our liquidity through potential strategic transactions, raising capital or initial coin offerings;
our ability to retire or refinance the debt we have or incur in the future;
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 and expectations regarding Supplier Oasis and our efforts to provide multi-channel fulfillment services;
our plans and expectations regarding our insurance product offerings and consumer finance offerings;
our plans for further changes to our business;
our beliefs regarding current or future litigation or regulatory actions;
our beliefs regarding the costs and benefits of our "spend and defend" policy under which we generally refuse to settle abusive patent suits brought against us;
our beliefs and expectations regarding existing and future tax laws and related laws and the application of those laws to our business including the results of tax assessments we receive periodically;
our beliefs regarding the adequacy of our insurance coverage;
our beliefs regarding the adequacy and anticipated functionality of our infrastructure, including our backup facilities and beliefs regarding the adequacy of our disaster planning and our ability to recover from a disaster or other interruption of our ability to operate our Website;
our beliefs regarding our cybersecurity efforts and measures and our efforts to prevent data breaches and the costs we will incur in our ongoing efforts to avoid interruptions to our product offerings and other business processes from cyber attacks and from data breaches;
our ability to maintain or improve upon customer service levels that we and our customers consider acceptable;
our beliefs regarding the adequacy of our order processing systems and our fulfillment and distribution capabilities;
our expectations regarding the costs and benefits of our other businesses, innovations and projects including our car listing service, our Worldstock Fair Trade offerings, our Main Street Revolution offerings and our ecommerce marketplace channel offerings, as well as the credit, insurance and other services we advertise;
our expectations regarding the costs and benefits of various programs we offer, including Club O and programs pursuant to which we may offer free or discounted participation in Club O or other programs we
offer to members of the United States Armed Forces and/or to full-time, post-secondary students or others, and including our community site and our public service pet adoption program;
our expectations regarding the costs, benefits and risks of our efforts to develop blockchain and financial technology and of the costs, benefits and risks of our acquisitions of the assets and operations of a financial technology company and two registered broker dealers affiliated with the financial technology business;
our expectations regarding the risks and benefits of our recent rights offering of shares of our Blockchain Voting Series A Preferred Stock and our Voting Series B Preferred Stock;
our expectations regarding the costs and benefits of modifying our marketing efforts to deemphasize coupons;
our belief that we and our partners will be able to maintain inventory levels at appropriate levels despite the seasonal nature of our business;
our expectations regarding our emphasis on home and garden product offerings and our attempts to brand ourselves as a home and garden shopping destination;
our belief that our sales through other ecommerce marketplace channels will be successful; and
our belief that we can successfully offer and sell a constantly changing mix of products and services.
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. Thesenon-historical statements are only predictions. Actual events orforward-looking statements. Our actual results and outcomes may differ materially from those contemplated by our forward-looking statements for a variety of reasons, including among others:
difficulties we have encountered and may continue to encounter with changes that Google has made and that Google and other search engine companies may make to their natural search engine algorithms, which have periodically resultedcontained in lower rankings of our products and may continue to do so;
changes in U.S. and global economic conditions and consumer spending;
any downturn in the U.S. housing industry;
the potential effects on our financial results of new accounting standards we will be required to adopt no later than January 1, 2018, relating to revenue recognition;
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;
world events;
the rate of growth of the Internet and online commerce, and the occurrence of any event that would adversely affect ecommerce or discourage or prevent consumers from shopping online or via mobile apps;
our failure to maintain our existing relationships with our fulfillment partners or build new relationships with fulfillment partners on acceptable terms;
our failure to maintain optimal levels of product quality, quantity and assortment or to attract sufficient consumer interest in our product offerings;
any claims we may face regarding the quality, safety or labelling of the products we offer;
modifications we may make to our business model from time to time, including aspects relating to our product mix and the mix of direct/partner sourcing of the products we offer;
the mix of products purchased by our customers and changes to that mix;
any claims we may face regarding cyber security issues or data breaches or difficulties we encounter regarding Internet or other infrastructure or communications impairment problems or the costs of preventing or responding to any such problems;
any problems with or affecting our payment card processors, including cyber-attacks, Internet or other infrastructure or communications impairment or other events that could interrupt the normal operation of the payment card processors or any difficulties we may have maintaining compliance with the rules of the payment card processors;
any substantial decrease in our liquidity, whether as a result of stock repurchases we may make or as a result of our business operations;
problems with or affecting the facility where substantially all of our computer and communications hardware is located or other problems that result in the unavailability of our Website or reduced performance of our transaction systems;
difficulties we may have in responding to technological changes;
losses we may incur due to fraud or our inability to prevent or limit fraud;
claims or other problems we may encounter as a result of the listing or sale on our Website of pirated, counterfeit or illegal items;
difficulties we may have financing our operations or our expansion with either internally generated funds or external sources of financing;
any failure by us to maintain compliance with the requirements of our credit facility;
any environmental liabilities we may incur relating to the real estate we recently purchased for our new corporate headquarters;
any failure of any of our product or service offerings outside of our main shopping Website offerings to provide the benefits we expect from them;
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;
any difficulties we may encounter in connection with the rapid shift of ecommerce and online payments to mobile and multi-channel commerce and payments;
the extent to which we may owe income or sales taxes or may be required to collect sales taxes or report sales or to modify our business model in order to avoid being required to collect sales taxes or report sales or avoid the application of other types of taxes, and any liabilities that may ultimately be imposed upon us for not having collected sales tax in jurisdictions in which we have not done so;
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;
increasing competition, including competition from well-established competitors including Amazon.com, competition from competitors based in China or elsewhere, competition from well-funded companies willing to incur substantial losses in order to build market share, and from others including competitors with business models that may include delivery capabilities that we may be unable to match;
difficulties with the management of our growth and any periods in which we fail to grow in accordance with our plans;
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;
fluctuations in our operating results;
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;
difficulties we may encounter in connection with our efforts to offer services to our customers outside of our retail ecommerce business, including the credit, insurance and other services we advertise;
difficulties, including expense and any operational or regulatory issues we may encounter in connection with the integration or operation of the assets and operations of the financial technology company and two registered broker dealers affiliated with the financial technology business that we acquired;
technical, operational, regulatory or other difficulties we may encounter with our Medici blockchain and financial technology initiatives, including any difficulties we may have marketing any products or services Medici may offer, whether due to lack of market 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 incur in connection with our Medici blockchain and financial technology initiatives;
any impairment we may recognize with respect to assets or businesses that we have acquired or may acquire, including with respect to our investments in companies that are in startup or development stages;
any liability or expense we may incur as a result of our investments in other companies, whether as a result of regulatory issues or otherwise;
adverse results in legal proceedings, investigations or other claims;
any difficulties we may have optimizing our warehouse operations;
the risks of inventory management and seasonality, particularly with inventory subject to rapid price declines;
the cost and availability of traditional and online advertising, the rapid changes in the online advertising business and the longer-term changes in the traditional advertising business, and the results of our various brand building and marketing campaigns;
risks that the amount of deferred tax assets we consider realizable could be reduced if estimates of future taxable income during the carryforward period are reduced; 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 contemplatedimplied by any forward-looking statement. Although we believe that our expectations reflected in thestatements contained herein. These 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 reportsubject to numerous risks 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.
Available Information
Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and other reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available free of charge through the Investor Relations section of our main website www.overstock.com as soon as reasonably practicable after we electronically file such material with, or furnish ituncertainties, including, but not limited to, the Securitiesrisks and Exchange Commission. Our Websiteuncertainties described in "Special Cautionary Note Regarding Forward Looking Statements" and the information contained therein or connected thereto are not a part of or incorporated intoin Part II, Item 1A, "Risk Factors" included in this Quarterly Report on Form 10-Q. You should read the following discussion together with our consolidated financial statements and related notes included in this Quarterly Report on Form 10-Q and with the sections entitled "Special Cautionary Note Regarding Forward-Looking Statements," Part I, Item 1A, "Risk Factors," and our consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2022.
Overview
We are an online furniture and home furnishings retailer and advancer of blockchain technology. Through our online retail business we offer a broad range of price-competitive brand name, non-brand name and closeout products, including furniture, home decor, bedding and bath, housewares, jewelry and watches, apparel and designer accessories, health and beauty products, electronics and computers, and sporting goods, among other products. In July 2017, we launched a new Cars tab. We sell these 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.
In late 2014, we began working on initiatives to develop and advance blockchain technology, which we refer to collectively as Medici. As part of our Medici initiatives, we have formed a wholly-owned subsidiary Medici Ventures, Inc. and acquired a majority interest in a financial technology company and two related registered broker dealers which we have rolled into the majority-owned subsidiary tØ.com, Inc. ("tZERO"). We have also made minority investments in several blockchain technology companies. In 2015, we were the first public company to issue a private security using blockchain technology and in December 2016, as a successful demonstration of our technology, we issued publicly traded blockchain preferred shares of Overstock.com, Inc.
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.technology-focused innovator. As used herein, "Overstock," "Overstock.com,", "O.co,"the Company," "we," "our" and similar terms include Overstock.com, Inc. and our majority-owned subsidiaries, unless the context indicates otherwise.
Overview
Overstock provides furniture and home furnishings to assist consumers in "Making Dream Homes Come True," particularly for our target customers—consumers who seek smart value on quality, stylish furniture and home furnishings at competitive prices, and who want an easy shopping experience. We believe that the furniture and home furnishings market, which is highly fragmented and has traditionally been served by brick-and-mortar stores, will continue transitioning to online sales as consumers become increasingly comfortable shopping online for goods in this product category. We continually update and augment our product assortment to meet the evolving preferences of our customers and current trends. Our Business
Retail business
Inproducts include furniture, décor, area rugs, bedding and bath, home improvement, outdoor, and kitchen and dining items, among others. We sell our products and services primarily through our internet websites located at www.overstock.com, www.o.co, www.overstock.ca, and www.overstockgovernment.com (referred to collectively as the "Website") and through our mobile app. Nearly all of our retail business, we deal primarily in price-competitive, new and replenishable merchandise and use the Internet to aggregate both supply and demand to create an efficient marketplace for selling these products. We provide our customers an opportunity to conveniently shop for a broad range of price-competitive products. We continually add new, and sometimes limited, inventory tosales through our Website and mobile app were from transactions in order to create an atmosphere that encourages customers to visit frequently and purchase products beforewhich we fulfilled orders through our inventory sells out. We provide suppliers with access to a large customer base and convenient services for order fulfillment, customer service, returns handling, and other services. The merchandise offered on our Website is from a varietynetwork of sources including well-known, brand-name manufacturers. We have organized our retail business (sales of product offered through the Shopping Section of our Website) into two principal segments-a "direct" business and a "partner" business. Consumers and businesses are able to access and purchase our products 24 hours a day from the convenience of a computer, Internet-enabled mobile telephone or other Internet-enabled device. Our team of customer service representatives assists
customers by telephone, instant online chat and e-mail. We also derive revenue from other businesses advertising products or services on our Website. Our sales are primarily to customers located in the United States.
Our retail direct business includes sales made to individual consumers and businesses from our owned inventory and that are fulfilled primarily from our warehouse in Salt Lake City, Utah.
For our retail partner business, we sell merchandise from manufacturers, distributors and other suppliers ("partners") primarily throughselling on our Website. We are considered to be the primary obligor for the majority of these sales transactions and we record revenue from the majority of these sales transactions on a gross basis. Our use of the term "partner" does not mean that we have formed any legal partnerships with any of our retail partners. These third-partyWe provide our partners generally perform the samewith access to a large customer base and convenient services for marketing, order fulfillment, operations as our warehouses, such as order picking and shipping; however, we handle returns and customer service, relatedreturns handling, and other services. Our supply chain allows us to substantially allship directly to our customers from our partners or from our warehouses. Our warehouses primarily fulfill orders placed through our Website. Revenue generated from sales on our Shopping site from both the direct and partner businesses is recorded net of returns, coupons and other discounts.
Both direct and partner revenues are seasonal, with revenues historically being the highest in the fourth quarter, which ends December 31, reflecting higher consumer holiday spending. We anticipate this will continue for the foreseeable future. To the extent possible we maintain supplier relationships, and seek new supplier relationships, for both our direct and partner businesses, and also use our working capital, to ensure a continuous allotment of product offerings for our customers. Because a portion of our product offerings are closeout merchandise,partners' owned inventory, including some customer returns of our suppliers cannot supply products to us on a continuous basis.partner products.
Medici business
Our Medici business initiatives leverage the security, transparency and immutability of cryptographically protected, distributed ledgers, such as blockchains, andWe are focused on solving important problems,growth drivers including financial transaction issues, particularly in the area of securities settlement. Throughincreasing our wholly-owned subsidiary, Medici Ventures, Inc., we hold minority investments in several technology companies which, at September 30, 2017, included PeerNova, Bitt, IdentityMind, Factom, SettleMint, Ripio, Spera and Symbiont, whose focuses include commercial blockchain applications, digital currency solutions, compliance, identity, voting, and land. Medici Ventures, Inc.'s primary business is its majority interest in tZERO, which includes a financial technology company and two related registered broker dealers.
As described further in Item 1 of Part I, "Financial Statements (Unaudited)"-Note 9. Business Segments, we determinedhome assortment to improve our segments based on how we manage our business, which, in our view, consists primarily of our Retail and Medici businesses. As described above, our Retail business consists of our Direct and Partner reportable segments. We use gross profit as the measure to determine our reportable segments because there is not discrete financial information available below gross profitbrand association with home, making it easier for our Directcustomers to find and Partner segments. Asview a result,broad assortment of products, increasing mobile app adoption driving higher customer retention and brand loyalty, optimizing our Medici business is not significant as comparedmarketing efforts to grow Overstock consideration among home shoppers, growing our Directcustomer base in Canada, and Partner segmentsgaining market share by strengthening our brand pillars of "Product Findability," "Smart Value," and is included in Other. Our Other segment consists of Medici."Easy Delivery and Support."
Executive Commentary
This executive commentary is intended to provide investors with a view of our business through the eyes of our management. As an executive commentary, it necessarily focuses on selected aspects of our business. This executive commentary is intended as a supplement to, but not a substitute for, the more detailed discussion of our business included elsewhere herein. Investors are cautioned to read our entire "Management's Discussion and Analysis of Financial Condition and Results of Operations," 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."
Revenues in Q3 2017Revenue decreased 4%28.9% for the three months ended March 31, 2023, compared to Q3 2016. In Q2 2017 and continuingthe same period in Q3 2017, we have experienced slowing of our overall revenue growth which we believe is2022. This decrease was primarily due to a 29% decrease in part to changes that Google, Inc. ("Google") has made in its natural search engine algorithms. We have found that the algorithm adjustments that Google has made have introduced more volatility than past years and the length of the tuning has been significantly greater than previous years. This has created tremendous headwind for our business beginning in May and continuing. We have reorganized a large number of resources around addressing this current challenge, as well as seekingcustomer orders delivered, while average order value was relatively flat year over year. This decreased order activity was largely driven by the impact of macroeconomic factors
including a heightened inflationary environment and uncertainty impacting consumer sentiment, a shift in consumer spending preferences, and our strategy to prevent it from occurring again. We have implemented a variety of innovationsexit non-home categories.
Gross profit decreased 28.4% for the three months ended March 31, 2023, compared to the same period in 2022, primarily due to lower sales and technical improvements in this area and expect to continue to do so. This decrease to revenue was partially offset by efforts toan increase revenue in other marketing channels such as sponsored search and email.
Gross profit in Q3 2017 increased 5% compared to Q3 2016 primarily as a result of increased gross margin. Gross margin increased to 19.7% in Q3 201723.5% for the three months ended March 31, 2023, compared to 18.1%23.4% for the same period in Q3 2016. The increase in gross margin was2022, primarily due to a continued shift in sales mix into higher margin homemerchandising actions and garden products,operational efficiencies. The increase was partially offset by increasedhigher promotional activities, including couponsdiscounting and site sales due to our driving a higher proportion of our sales using such promotions.carrier costs.
Sales and marketing expenses as a percentage of revenue increased from 7.9%10.9% for the three months ended March 31, 2022 to 10.6% during Q3 2017 as compared to Q3 2016,12.3% for the three months ended March 31, 2023, primarily due to increased spending in the sponsored search and televisionperformance marketing channels, due in part to our seeking to increase revenue in these channels toexpenses partially offset the effects of the Google algorithm changes described above.by lower brand advertising.
While we work to adapt to Google's changes, we have increased our emphasis on other marketing channels, such as sponsored search, which has generated revenue growth but with higher associated marketing expenses than natural search. We expect this trend to continue while we work to adapt to these changes.
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.
As a result of these factors, our contribution decreased 20% in Q3 2017 compared to Q3 2016 (see Non-GAAP Financial Measures below for a reconciliation of Contribution to Gross Profit). Contribution margin was 9.2% in Q3 2017 compared to 11.1% in Q3 2016.
Technology expenses in Q3 2017 increased $2.0totaled $30.5 million for the three months ended March 31, 2023, a $2.4 million decrease compared to Q3 2016,the three months ended March 31, 2022, primarily due to an increasea reduction in staff related costs of $1.5 million, an increasestaff-related expenses, including a reduction in technology licenses and maintenance costs of $1.3 million, partially offset by a decrease in depreciation of $848,000.accrued bonuses.
General and administrative expenses in Q3 2017 decreased $1.7 million$773,000 for the three months ended March 31, 2023 compared to Q3 2016,the three months ended March 31, 2022, primarily due to a decreasereduction in bad debt expensestaff-related expenses, including a reduction in accrued bonuses.
Our consolidated cash and cash equivalents balance increased from $371.3 million as of $1.1December 31, 2022, to $374.7 million a decrease in consulting and outside services expenseas of $479,000, and a decrease in legal fees of $434,000. These decreases were partially offset by an increase in staffMarch 31, 2023.
Additional commentary related costs of $509,000.to macroeconomic trends
We continue to seek opportunities for growth, in our retail businessmonitor recent macroeconomic trends, including, but not limited to, geopolitical events, fluctuating interest rates, and through our Medici blockchaininflation. These events have and financial technology initiatives and through other means. As a result of these initiatives, we may continue to incur additional expenses or make investments in, or acquisitions of other technologiesnegatively impact consumer confidence and businesses. We also anticipate that our Medici initiatives will incur losses in the near term. These losses, additional expenses, acquisitions or investmentsconsumer spending which have and may be material, and, coupled with existing marketing expense trends and the seasonality ofcontinue to adversely affect our business may leadand our results of operations. Due to reduced consolidated incomethe uncertain and constantly evolving nature and volatility created by these disruptions to global economic activities, we cannot currently predict the long-term impact of these events on our operations and financial results. Nevertheless, as of March 31, 2023, the challenges arising from these events have not adversely affected our liquidity or losses in some periods, andcapacity to reduced liquidity. Additionally, we may recognize additional impairment charges fromservice our investments. We are considering other alternatives for Medici, including raising capital.debt, nor have these conditions required us to reduce our capital expenditures.
Results of Operations
The following table sets forth our results of operations expressed as a percentage of total net revenue:
|
| | | | | | | | | | | | |
| | | Three months ended
September 30, | | Nine months ended
September 30, |
| | | 2017 | | 2016 | | 2017 | | 2016 |
| | | (as a percentage of total net revenue) | | (as a percentage of total net revenue) |
| Revenue, net | | |
| | |
| | |
| | |
|
| Direct | | 4.6 | % | | 5.6 | % | | 5.0 | % | | 6.0 | % |
| Partner and other | | 95.4 |
| | 94.4 |
| | 95.0 |
| | 94.0 |
|
| Total net revenue | | 100.0 |
| | 100.0 |
| | 100.0 |
| | 100.0 |
|
| Cost of goods sold | | | | | | | | |
| Direct | | 4.6 |
| | 5.4 |
| | 4.8 |
| | 5.7 |
|
| Partner and other | | 75.6 |
| | 76.5 |
| | 75.4 |
| | 76.0 |
|
| Total cost of goods sold | | 80.3 |
| | 81.9 |
| | 80.2 |
| | 81.7 |
|
| Gross profit | | 19.7 |
| | 18.1 |
| | 19.8 |
| | 18.3 |
|
| Operating expenses: | | | | | | | | |
| Sales and marketing | | 10.6 |
| | 7.9 |
| | 9.8 |
| | 7.8 |
|
| Technology | | 6.8 |
| | 6.1 |
| | 6.7 |
| | 6.1 |
|
| General and administrative | | 5.1 |
| | 5.3 |
| | 5.2 |
| | 5.3 |
|
| Litigation settlement | | — |
| | — |
| | — |
| | (1.5 | ) |
| Total operating expenses | | 22.5 |
| | 19.2 |
| | 21.6 |
| | 17.7 |
|
| Operating income (loss) | | (2.8 | ) | | (1.1 | ) | | (1.9 | ) | | 0.6 |
|
| Other income, net | | 1.3 |
| | 0.3 |
| | 0.1 |
| | 0.7 |
|
| Income (loss) before income taxes | | (1.5 | ) | | (0.9 | ) | | (1.8 | ) | | 1.3 |
|
| Provision (benefit) for income taxes | | (1.3 | ) | | (0.1 | ) | | (0.6 | ) | | 0.6 |
|
| Consolidated net income (loss) | | (0.3 | )% | | (0.8 | )% | | (1.2 | )% | | 0.7 | % |
Comparisons of Three Months Ended September 30, 2017March 31, 2023 to Three Months Ended September 30, 2016,March 31, 2022.
Net revenue, cost of goods sold, gross profit and Nine Months Ended September 30, 2017 to Nine Months Ended September 30, 2016gross margin
Revenue
The following table reflectssummarizes our net revenues for the threerevenue, cost of goods sold, and nine months ended September 30, 2017 and 2016gross profit (in thousands):
| | | | | | | | | | | | | | | |
| | Three months ended
March 31, | | |
| 2023 | | 2022 | | | | |
| Net revenue | $ | 381,140 | | | $ | 536,037 | | | | | |
| Cost of goods sold | | | | | | | |
| Product costs and other cost of goods sold | 276,621 | | | 388,970 | | | | | |
| Merchant fees, customer service, and other | 14,806 | | | 21,855 | | | | | |
| Total cost of goods sold | 291,427 | | | 410,825 | | | | | |
| Gross profit | $ | 89,713 | | | $ | 125,212 | | | | | |
| Year-over-year percentage changes | | | | | | | |
| Net revenue | (28.9) | % | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Gross profit | (28.4) | % | | | | | | |
| Percent of total net revenue | | | | | | | |
| Cost of goods sold | | | | | | | |
| Product costs and other cost of goods sold | 72.6 | % | | 72.6 | % | | | | |
| Merchant fees, customer service, and other | 3.9 | % | | 4.1 | % | | | | |
| Total cost of goods sold | 76.5 | % | | 76.6 | % | | | | |
| Gross margin | 23.5 | % | | 23.4 | % | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three months ended
September 30, | | | | | | Nine months ended
September 30, | | | | |
| | | 2017 | | 2016 | | $ Change | | % Change | | 2017 | | 2016 | | $ Change | | % Change |
| Revenue, net | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
| Direct | | $ | 19,645 |
| | $ | 24,620 |
| | $ | (4,975 | ) | | (20.2 | )% | | $ | 64,572 |
| | $ | 75,901 |
| | $ | (11,329 | ) | | (14.9 | )% |
| Partner and other | | 404,362 |
| | 416,944 |
| | (12,582 | ) | | (3.0 | ) | | 1,223,894 |
| | 1,197,880 |
| | 26,014 |
| | 2.2 |
|
| Total revenue, net | | $ | 424,007 |
| | $ | 441,564 |
| | $ | (17,557 | ) | | (4.0 | )% | | $ | 1,288,466 |
| | $ | 1,273,781 |
| | $ | 14,685 |
| | 1.2 | % |
The primary reason for decreased total28.9% decrease in net revenue for the three months ended September 30, 2017,March 31, 2023, as compared to the same period in 2016, was due in part to changes that Google, Inc. ("Google") has made in its natural search engine algorithms. A large percentage of our traffic is dependent upon Google’s natural search engine algorithms. We have found that the algorithm adjustments that Google has made have introduced more volatility than past years and the length of the tuning has been significantly greater than previous years. This has created tremendous headwind for our business beginning in May and continuing. We have reorganized a large number of resources around addressing this current challenge, as well as seeking to prevent it from occurring again. We have implemented a variety of innovations and technical improvements in this area and
expect to continue to do so. This decrease to revenue was partially offset by efforts to increase revenue in other marketing channels such as sponsored search and email.
The primary reason for increased total net revenue for the nine months ended September 30, 2017, as compared to the same period in 2016, was a 5% increase in average order size, partially offset by a 1% decrease in orders. This increase is offset by increased promotional activities, including coupons and site sales due to our driving a higher proportion of our sales using such promotions. Also, we had an increase in product sales for which we record only our commission as revenue. These decreases to revenue were partially offset by a decrease in Club O Rewards earned due to discontinuing rewards on the Club O Silver program in Q4 2016.
The decrease in direct revenue for the three months ended September 30, 2017, as compared to the same period in 2016, was due in part to a decrease in sales of home and garden products, and increased promotional activities, including coupons and site sales due to our driving a higher proportion of our sales using such promotions. These decreases were partially offset by deferring a lower number of orders taken but not delivered due to decreased direct revenue, and a decrease in Club O Rewards earned due to discontinuing rewards on the Club O Silver program in Q4 2016.
The decrease in direct revenue for the nine months ended September 30, 2017, as compared to the same period in 2016, was due in part to a decrease in sales of home and garden and jewelry products, and increased promotional activities, including coupons and site sales due to our driving a higher proportion of our sales using such promotions. These decreases were partially offset by deferring a lower number of orders taken but not delivered due to decreased direct revenue, and a decrease in Club O Rewards earned due to discontinuing rewards on the Club O Silver program in Q4 2016.
The decrease in partner revenue for the three months ended September 30, 2017, as compared to the same period in 2016, was due in part to an increase in product sales for which we record only our commission as revenue. Also, the percentage of revenue we defer from orders taken but not delivered was higher due to the timing of quarter ends. In addition, we 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. These decreases to revenue were partially offset by a decrease in Club O Rewards earned due to discontinuing rewards on the Club O Silver program in Q4 2016.
The increase in partner revenue for the nine months ended September 30, 2017, as compared to the same period in 2016,2022, was primarily due to an increase in sales of home and garden products. This increase was partially offset by increased promotional activities, including coupons and site sales due to our driving a higher proportion of our sales using such promotions. Also, we had an increase in product sales for which we record only our commission as revenue. These decreases to revenue were partially offset by a29% decrease in Club O Rewards earned due to discontinuing rewards on the Club O Silver program in Q4 2016.
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 1 of Part I, "Financial Statements (Unaudited)"—Note 2. Accounting Policies, Club O loyalty program.
The shift of business from direct to partner (or vice versa) is an economic result based on the economics of each particular product offering at the time and we generally do not have particular goals for an "appropriate" mix or percentage for the size of either. Although we have experienced a trend from direct revenue to partner revenue in recent years, we believe that the mix of the business between direct and partner remains consistent with our strategic objectives for our business model and we do not currently foresee material shifts in this trend.
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. Thesecustomer orders delivered, while average order value was relatively flat year over year. This decreased order activity was largely driven by the impact of macroeconomic factors change frequentlyincluding a heightened inflationary environment and can affectuncertainty impacting consumer sentiment, a shift in consumer spending preferences, and our strategy to exit non-home categories.
We cannot estimate the miximpact that macroeconomic conditions, such as supply chain challenges, inflation, rising interest rates, or geopolitical events will have on our business in the future due to the unpredictable nature of the product lines we sell. We have experienced a trend toward our homeultimate development and garden category in recent years and we have recently focused our marketing and branding efforts towards our home and garden product line. We are also working to increase the numberduration 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.these conditions.
International net revenues were less than 2%1% of total net revenues for each of the three and nine months ended September 30, 2017March 31, 2023 and 2016.2022.
Change in estimate of average transit times (days)
RevenueOur revenue related to merchandise sales is recognized upon delivery to our customers. As we ship high volumes of packages through multiple carriers, it is not practical for us to track the actual delivery date of each shipment. Therefore, we use estimates to determine which shipments are delivered and, therefore, recognized as revenue at the end of the period. Our delivery date estimates are based on average shipping transit times. We review and update our estimates on a quarterly basis based on our actual transit time experience. However, actual shipping times may differ from our estimates.estimates, which can be further impacted by uncertainty, volatility, and any disruption to our carriers caused by certain macroeconomic conditions, such as supply chain challenges, inflation, rising interest rates, or geopolitical events.
The following table shows the effect that hypothetical changes in the estimate of average shipping transit times would have had on the reported amount of revenue and pre-tax income for the three months ended September 30, 2017before income taxes (in thousands):
| | | | | | | | | | | | | | |
| | | Three months ended
March 31, 2023 |
| Change in the Estimate of Average Transit Times (Days) | | Increase (Decrease)
Revenue | | Increase (Decrease)
Income Before Income Taxes |
| 2 | | $ | (14,597) | | | $ | (2,814) | |
| 1 | | $ | (5,491) | | | $ | (1,059) | |
| As reported | | As reported | | As reported |
| -1 | | $ | 4,660 | | | $ | 899 | |
| -2 | | $ | 9,259 | | | $ | 1,786 | |
|
| | | | | | | | |
| | | Three Months Ended
September 30, 2017 |
Change in the Estimate of Average Transit Times (Days) | | Increase (Decrease) Revenue | | Increase (Decrease) Pre-Tax Income |
| 2 | | $ | (15,709 | ) | | $ | (1,722 | ) |
| 1 | | $ | (6,126 | ) | | $ | (682 | ) |
| As reported | | As reported |
| | As reported |
|
| -1 | | $ | 4,669 |
| | $ | 510 |
|
| -2 | | $ | 9,227 |
| | $ | 1,009 |
|
See "Executive Commentary" above for additional discussion regarding revenue.
Gross profit and gross margin
Our overall gross margins fluctuate based on our sales volume mix between our direct business and partner business; changes in supplier cost and / or sales price; competitive pricing; inventory management decisions within the direct business; sales coupons and promotions;product costs; discounting; product mix of sales; advertising revenue and our marketing allowance program; and operational and fulfillment costs.
The following table reflects Merchant fees, customer service, and other (previously labeled "Fulfillment and related costs") include merchant processing fees associated with customer payments made by credit cards and other payment methods and other variable fees, customer service costs, costs incurred to operate and staff our net revenues, cost of goods soldwarehouses, including rent and gross profitdepreciation expense associated with these facilities, costs to receive, inspect, pick, and prepare customer order for the threedelivery, and nine months ended September 30, 2017direct and 2016 (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three months ended
September 30, | | | | | | Nine months ended
September 30, | | | | |
| | | 2017 | | 2016 | | $ Change | | % Change | | 2017 | | 2016 | | $ Change | | % Change |
| Revenue, net | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
| Direct | | $ | 19,645 |
| | $ | 24,620 |
| | $ | (4,975 | ) | | (20.2 | )% | | $ | 64,572 |
| | $ | 75,901 |
| | $ | (11,329 | ) | | (14.9 | )% |
| Partner and other | | 404,362 |
| | 416,944 |
| | (12,582 | ) | | (3.0 | ) | | 1,223,894 |
| | 1,197,880 |
| | 26,014 |
| | 2.2 |
|
| Total net revenue | | $ | 424,007 |
|
| $ | 441,564 |
| | $ | (17,557 | ) | | (4.0 | )% | | $ | 1,288,466 |
| | $ | 1,273,781 |
| | $ | 14,685 |
| | 1.2 | % |
| Cost of goods sold | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
| Direct | | $ | 19,577 |
| | $ | 23,955 |
| | $ | (4,378 | ) | | (18.3 | )% | | $ | 61,687 |
| | $ | 72,459 |
| | $ | (10,772 | ) | | (14.9 | )% |
| Partner and other | | 320,755 |
| | 337,893 |
| | (17,138 | ) | | (5.1 | ) | | 972,026 |
| | 967,977 |
| | 4,049 |
| | 0.4 |
|
| Total cost of goods sold | | $ | 340,332 |
| | $ | 361,848 |
| | $ | (21,516 | ) | | (5.9 | )% | | $ | 1,033,713 |
| | $ | 1,040,436 |
| | $ | (6,723 | ) | | (0.6 | )% |
| Gross Profit | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
| Direct | | $ | 68 |
| | $ | 665 |
| | $ | (597 | ) | | (89.8 | )% | | $ | 2,885 |
| | $ | 3,442 |
| | $ | (557 | ) | | (16.2 | )% |
| Partner and other | | 83,607 |
| | 79,051 |
| | 4,556 |
| | 5.8 |
| | 251,868 |
| | 229,903 |
| | 21,965 |
| | 9.6 |
|
| Total gross profit | | $ | 83,675 |
| | $ | 79,716 |
| | $ | 3,959 |
| | 5.0 | % | | $ | 254,753 |
| | $ | 233,345 |
| | $ | 21,408 |
| | 9.2 | % |
Gross margins for the past seven quarterly periods and fiscal year ending 2016 were:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Q1 2016 | | Q2 2016 | | Q3 2016 | | Q4 2016 | | FY 2016 | | Q1 2017 | | Q2 2017 | | Q3 2017 |
| Direct | | 4.7 | % | | 6.2 | % | | 2.7 | % | | 7.3 | % | | 5.2 | % | | 8.2 | % | | 4.3 | % | | 0.3 | % |
| Partner and other | | 19.7 | % | | 19.0 | % | | 19.0 | % | | 19.2 | % | | 19.2 | % | | 20.8 | % | | 20.3 | % | | 20.7 | % |
| Combined | | 18.7 | % | | 18.2 | % | | 18.1 | % | | 18.6 | % | | 18.4 | % | | 20.1 | % | | 19.5 | % | | 19.7 | % |
Gross profit for the three months ended September 30, 2017 increased 5% compared to the same period in 2016 primarily as a result of increased gross margin. Gross margin increased to 19.7% for the three months ended September 30, 2017 compared to 18.1% for the same period in 2016. The increase in gross margin was primarily due to a continued shift in sales mix into higher margin home and garden products, partially offset by increased promotional activities, including coupons and site sales due to our driving a higher proportion of our sales using such promotions.
Gross profit for the nine months ended September 30, 2017 increased 9% compared to the same period in 2016 primarily as a result of increased gross margin. Gross margin increased to 19.8% for the nine months ended September 30, 2017 compared to 18.3% for the same period in 2016. This increase in gross margin was primarily due to a continued shift in sales mix into higher margin home and garden products, partially offset by increased promotional activities, including coupons and site sales due to our driving a higher proportion of our sales using such promotions.
The 235 basis point decrease in direct gross margin for the three months ended September 30, 2017, as compared to the same period in 2016, was primarily due to increased promotional activities, including coupons and site sales due to our driving a higher proportion of our sales using such promotions and increased warehousing costs, partially offset by a shift in sales mix into higher margin home and garden products. Direct gross margin for the nine months ended September 30, 2017, as compared to the same period in 2016, remained relatively flat.
The 172 basis point increase in partner gross margin for the three months ended September 30, 2017, as compared to the same period in 2016 was primarily due to a continued shift in sales mix into higher margin home and garden products, partially offset by increased promotional activities, including coupons and site sales due to our driving a higher proportion of our sales using such promotions.
The 139 basis point increase in partner gross margin for the nine months ended September 30, 2017, as compared to the same period in 2016 was primarily due to a continued shift in sales mix into higher margin home and garden products, 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 $46,000 and $69,000 for the three months ended September 30, 2017 and 2016, respectively, and $134,000 and $200,000 for the nine months ended September 30, 2017 and 2016, respectively.
See "Executive Commentary" above for additional discussion.
Fulfillment costs
Fulfillment costs include all warehousingindirect labor costs including fixed overheadpayroll, payroll-related benefits, and variable handling costs (excluding packaging costs), as well as credit card fees and customer service costs,stock-based compensation, all of which we include as costs in calculating gross margin. Merchant fees, customer service, and other as a percentage of sales may vary due to several factors, such as our ability to effectively manage merchant fees, customer service costs, and warehouse costs. We believe that some companies in our industry, including some of our competitors, account for fulfillmentmerchant fees, customer service, and other costs within operating expenses, and therefore exclude fulfillmentmerchant fees, customer service, and other costs from gross margin. As a result, our gross margin may not be directly comparable to others in our industry.
Gross margins for the past five quarterly periods and fiscal year ending 2022 were:
The following table has been included to provide investors additional information regarding our classification of fulfillment costs, gross | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Q1 2022 | | Q2 2022 | | Q3 2022 | | Q4 2022 | | FY 2022 | | Q1 2023 | | | | |
| Gross margin | 23.4 | % | | 22.9 | % | | 23.3 | % | | 22.1 | % | | 23.0 | % | | 23.5 | % | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Gross profit and margin, thus enabling investors to better compare our gross margin with others in our industry (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended
September 30, | | Nine months ended
September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| Total revenue, net | $ | 424,007 |
| | 100% | | $ | 441,564 |
| | 100% | | $ | 1,288,466 |
| | 100% | | $ | 1,273,781 |
| | 100% |
| Cost of goods sold | |
| | | | |
| | | | |
| | | | |
| | |
| Product costs and other cost of goods sold | 321,678 |
| | 76% | | 343,401 |
| | 78% | | 977,827 |
| | 76% | | 985,603 |
| | 77% |
| Fulfillment and related costs | 18,654 |
| | 4% | | 18,447 |
| | 4% | | 55,886 |
| | 4% | | 54,833 |
| | 4% |
| Total cost of goods sold | 340,332 |
| | 80% | | 361,848 |
| | 82% | | 1,033,713 |
| | 80% | | 1,040,436 |
| | 82% |
| Gross profit | $ | 83,675 |
| | 20% | | $ | 79,716 |
| | 18% | | $ | 254,753 |
| | 20% | | $ | 233,345 |
| | 18% |
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 increased slightly duringfor the three and nine months ended September 30, 2017 asMarch 31, 2023 decreased 28.4% compared to the same periodsperiod in 2016.2022, due to lower sales and partially offset by an increase in gross margin. Gross margin increased to 23.5% for the three months ended March 31, 2023, compared to 23.4% for the same period in 2022, primarily due to merchandising actions and operational efficiencies. The increase was partially offset by higher promotional discounting and carrier costs.
See "Gross profit" above for additional discussion.
Operating expenses
Sales and marketing expenses
We use a variety of methodsonline advertising channels to target our consumer audience,attract new and repeat customers, including online campaigns, such as advertising through keywords, product listing ads, display ads, search engines,engine marketing, personalized emails, mobile app, loyalty program, affiliate marketing, programs, social coupon websites, portals,display banners, e-mail, direct mail and viral and social media campaigns.media. We also dobuild our brand advertisingawareness through television, radio, print ads,linear and event sponsorships.streaming TV.
The following table reflects our sales and marketing expenses for the three and nine months ended September 30, 2017 and 2016 (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three months ended
September 30, | | | | | | Nine months ended
September 30, | | | | |
| | | 2017 | | 2016 | | $ Change | | % Change | | 2017 | | 2016 | | $ Change | | % Change |
| Sales and marketing expenses | | $ | 45,153 |
| | $ | 34,707 |
| | $ | 10,446 |
| | 30.1 | % | | $ | 126,068 |
| | $ | 99,516 |
| | $ | 26,552 |
| | 26.7 | % |
| Sales and marketing expenses as a percent of net revenues | | 10.6 | % | | 7.9 | % | | |
| | |
| | 9.8 | % | | 7.8 | % | | | | |
The 279 basis point increase in sales and marketing expenses as a percentage of revenue for the three months ended September 30, 2017, as compared to the same period in 2016, was primarily due to increased spending in the sponsored search and television 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.
While we work to adapt to Google's changes in its natural search engine algorithms as noted above, we have increased our emphasis on other marketing channels, such as sponsored search, which has generated revenue growth but with higher associated marketing expenses than natural search. We expect this trend to continue while we work to adapt to these changes.
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.
The 197 basis point increase in sales and marketing expenses as a percentage of revenue for the nine months ended September 30, 2017, as compared to the same period in 2016, was primarily due to increased spending in sponsored search and display ads on social media marketing channels, and increased staff related costs.
Sales and marketing expenses include stock-based compensation expense of $109,000 and $102,000 for the three months ended September 30, 2017 and 2016, respectively, and $318,000 and $234,000 for the nine months ended September 30, 2017 and 2016, respectively.
Costs associated with our discounted shipping and other promotions, such as coupons, are not included in sales and marketing expense. Rather, they are accounted for as a reduction in revenue as they reduce the amount of revenueconsideration we expect to receive in exchange for goods or services and therefore affect salesnet revenues and gross margin. We consider discounted shipping and other promotions, such as our policy offor free shipping on orders, over $45, as an effective marketing tool,tool.
The following table summarizes our sales and intendmarketing expenses (in thousands):
| | | | | | | | | | | | | | | |
| | Three months ended
March 31, | | |
| | 2023 | | 2022 | | | | |
| | | | | | | |
| Sales and marketing expenses | $ | 47,048 | | | $ | 58,513 | | | | | |
| | | | | | | |
| Advertising expense included in sales and marketing expenses | 44,806 | | | 55,712 | | | | | |
| Year-over-year percentage changes | | | | | | | |
| Sales and marketing expenses | (19.6) | % | | | | | | |
| Advertising expense included in sales and marketing expenses | (19.6) | % | | | | | | |
| Percentage of net revenues | | | | | | | |
| Sales and marketing expenses | 12.3 | % | | 10.9 | % | | | | |
| Advertising expense included in sales and marketing expenses | 11.8 | % | | 10.4 | % | | | | |
The 140 basis point increase in sales and marketing expenses as a percent of net revenues for the three months ended March 31, 2023, as compared to continuethe same period in 2022, was primarily due to offer them as we deem appropriate as part of our overallincreased performance marketing plan.expenses partially offset by lower brand advertising.
Technology expenses
We seek to investdeploy our capital resources efficiently in technology to support operations including private and public cloud, web services, customer support solutions, website search, expansion of new and existing product categories, and in investmentssearch. We also invest in technology to enhance the customer experience improveincluding machine learning algorithms, improving our process efficiency, modernizing and supportexpanding our systems, and expandsupporting and expanding our logistics infrastructure. We expect to continue to increase ourincur technology expenses to support these initiativesefforts and these increasesexpenditures may continue to be material.
The frequency and variety of cyberattacks on our Website, our corporateenterprise systems, services, and on third parties that we use to support our technology continuecontinues to increase. The impact of such attacks, their costs, and the costs we incur to protect ourselves against future attacks, have not been material.material to date. However, we consider the threat fromrisk introduced by cyberattacks to be serious and will continue to incur costs related to efforts to protect ourselves against them.
The following table reflectssummarizes our technology expenses (in thousands):
| | | | | | | | | | | | | | | |
| | Three months ended
March 31, | | |
| | 2023 | | 2022 | | | | |
| | | | | | | |
| Technology expenses | $ | 30,546 | | | $ | 32,989 | | | | | |
| Year-over-year percentage change | | | | | | | |
| Technology expenses | (7.4) | % | | | | | | |
| Technology expenses as a percent of net revenues | 8.0 | % | | 6.2 | % | | | | |
The $2.4 million decrease in technology expenses for the three and nine months ended September 30, 2017 and 2016 (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three months ended
September 30, | | | | | | Nine months ended
September 30, | | | | |
| | | 2017 | | 2016 | | $ Change | | % Change | | 2017 | | 2016 | | $ Change | | % Change |
| Technology expenses | | $ | 28,746 |
| | $ | 26,739 |
| | $ | 2,007 |
| | 7.5 | % | | $ | 85,982 |
| | $ | 78,249 |
| | $ | 7,733 |
| | 9.9 | % |
| Technology expenses as a percent of net revenues | | 6.8 | % | | 6.1 | % | | |
| | |
| | 6.7 | % | | 6.1 | % | | |
| | |
|
The $2.0 million increase in technology costs for the three months ended September 30, 2017,March 31, 2023, as compared to the same period in 2016,2022, was primarily due to an increasea reduction in staff related costsstaff-related expenses, including a reduction in accrued bonuses.
The $7.7 million increase in technology costs for the nine months ended September 30, 2017, as compared to the same period in 2016, was primarily due to an increase in staff related costs of $3.5 million, an increase in technology licenses and maintenance of $3.0 million, an increase in IT-related vendor expenses of $1.0 million, and an increase in depreciation of $505,000.
Technology expenses include stock-based compensation expense of $166,000 and $210,000 for the three months ended September 30, 2017 and 2016, respectively, and $476,000 and $615,000 for the nine months ended September 30, 2017 and 2016, respectively.
General and administrative expenses
The following table reflectssummarizes our general and administrative expenses ("G&A") for the three and nine months ended September 30, 2017 and 2016 (in thousands):
| | | | | | | | | | | | | | | |
| | Three months ended
March 31, | | |
| | 2023 | | 2022 | | | | |
| | | | | | | |
| General and administrative expenses | $ | 20,483 | | | $ | 21,256 | | | | | |
| Year-over-year percentage change | | | | | | | |
| General and administrative expenses | (3.6) | % | | | | | | |
| General and administrative expenses as a percent of net revenues | 5.4 | % | | 4.0 | % | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three months ended
September 30, | | | | | | Nine months ended
September 30, | | | | |
| | | 2017 | | 2016 | | $ Change | | % Change | | 2017 | | 2016 | | $ Change | | % Change |
| General and administrative expenses | | $ | 21,651 |
| | $ | 23,317 |
| | $ | (1,666 | ) | | (7.1 | )% | | $ | 66,622 |
| | $ | 67,843 |
| | $ | (1,221 | ) | | (1.8 | )% |
| General and administrative expenses as a percent of net revenues | | 5.1 | % | | 5.3 | % | | |
| | |
| | 5.2 | % | | 5.3 | % | | |
| | |
|
The $1.7 million$773,000 decrease in general and administrative expenses ("G&A") for the three months ended September 30, 2017,March 31, 2023, as compared to the same period in 2016,2022, was primarily due to a decreasereduction in bad debtstaff-related expenses, including a reduction in accrued bonuses.
Other expense, of $1.1 million, a decrease in consulting and outside servicesnet
Other expense, of $479,000, and a decrease in legal fees of $434,000. These decreases were partially offset by an increase in staff related costs of $509,000.
The $1.2 million decrease in general and administrative expenses ("G&A")net for the ninethree months ended September 30, 2017,March 31, 2023 was $7.4 million as compared to $114,000 for the same period in 2016,three months ended March 31, 2022. The increase was primarily due to a decrease in legal costs of $1.8$6.9 million a decrease in bad debt expense of $1.1 million, a $617,000 decrease in travel, and a $547,000 contract termination fee in Q1 2016. These decreases were partially offset by an increase in staff related costs of $3.2 million.
G&A expenses include stock-based compensation expense of approximately $703,000 and $1.0 million for the three months ended September 30, 2017 and 2016, respectively, and $2.1 million and $3.1 million for the nine months ended September 30, 2017 and 2016.
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 may continue to incur additional expenses or make investments in, or acquisitions of other technologies and businesses. We also anticipate that our Medici initiatives will incur losses in the near term. These losses, additional expenses, acquisitions or investments may be material, and, coupled with existing marketing expense trends and the seasonality of our business, may lead to reduced consolidated income or losses in some periods, and to reduced liquidity. Additionally, we may recognize additional impairment chargesloss recognized from our investments. We are also considering other alternatives for Medici, including raising capital. During the three months ended September 30, 2017, our Medici-related subsidiaries incurred a pre-tax loss of approximately $3.7 million, which includes $1.2 million of amortization and depreciation expense. During the nine months ended September 30, 2017, Medici Ventures, Inc. and its subsidiaries incurred an operating loss of approximately $15.0 million, which includes $3.6 million of amortization and depreciation expense, and a $4.5 million impairment charge related to a costequity method investment.securities.
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 on the consolidated statements of operations as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| | Three months ended
September 30, | | Nine months ended
September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| Cost of goods sold - direct | $ | 72 |
| | $ | 77 |
| | $ | 230 |
| | $ | 235 |
|
| Technology | 5,940 |
| | 6,952 |
| | 18,802 |
| | 18,755 |
|
| Sales and marketing | — |
| | 29 |
| | — |
| | 29 |
|
| General and administrative | 974 |
| | 357 |
| | 2,863 |
| | 691 |
|
| Total depreciation, including internal-use software and website development | $ | 6,986 |
| | $ | 7,415 |
| | $ | 21,895 |
| | $ | 19,710 |
|
Amortization of intangible assets other than goodwill is classified within the corresponding operating expense categories on the consolidated statements of operations as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| | Three months ended
September 30, | | Nine months ended
September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| Technology | $ | 905 |
| | $ | 699 |
| | $ | 2,715 |
| | $ | 2,151 |
|
| Sales and marketing | 22 |
| | 246 |
| | 62 |
| | 949 |
|
| General and administrative | 21 |
| | 27 |
| | 62 |
| | 93 |
|
| Total amortization of intangible assets other than goodwill | $ | 948 |
| | $ | 972 |
| | $ | 2,839 |
| | $ | 3,193 |
|
Interest expense
Total interest expense increased $500,000, from $212,000 for the three months ended September 30, 2016 to $713,000 for the three months ended September 30, 2017. The increase in interest expense is primarily due to no longer capitalizing interest on our headquarters loan due to construction completion in late 2016.
Total interest expense increased $1.9 million, from $219,000 for the nine months ended September 30, 2016 to $2.1 million for the nine months ended September 30, 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 three months ended September 30, 2017 was $5.9 million as compared to $1.3 million in 2016. The increase is primarily due to an increase in realized gains on sales of cryptocurrencies and precious metals of $5.5 million, and a decrease in impairment charges of $2.8 million, partially offset by a decrease in Club O Rewards breakage of $3.5 million due to discontinuing our Club O Silver rewards program in Q4 2016.
Other income, net for the nine months ended September 30, 2017 was $2.8 million as compared to $9.4 million in 2016. The decrease is primarily due to a decrease in Club O Rewards breakage of $10.4 million due to discontinuing our Club O Silver rewards program in Q4 2016, and an increase in impairment charges of $1.7 million related to cost method investments. These decreases were partially offset by an increase in realized gains on sales of cryptocurrencies and precious metals of $5.5 million.
Income taxes
Our income tax provision for interim periods is determined using an estimate of our annual effective tax rate adjusted for discrete items, if any, for relevant interim periods. We update our estimate of the annual effective tax rate each quarter and make cumulative adjustments if our estimated annual effective tax rate changes.
Our quarterly tax provision and our quarterly estimate of our annual effective tax rate are subject to significant variations due to several factors includingincluding: variability in predicting our pre-tax and taxable income, and the mix of jurisdictions to which those items relate, relative changes ofin expenses or losses for which tax benefits are limited or not recognized, how we do business, fluctuations in our stock price, economic outlook, political climate, and other conditions such as supply chain challenges, inflation, rising interest rates, and geopolitical events. In addition, changes in law,laws, regulations, and administrative practices.practices will impact our rate. Our effective tax rate can be volatile based on the amount of pre-tax income. For example, the impact of discrete items on our effective tax rate is greater when pre-tax income is lower.
Our provision (benefit) for income taxestax for the three months ended September 30, 2017March 31, 2023 and 20162022 was $(5.4)$(2.9) million and $(543,000).$2.1 million, respectively. The decrease in theour tax provision is due to the release of a valuation allowance against capital losses and a decrease in pre-tax income during the three months ended September 30, 2017, as compared to the same period in 2016. Our provision (benefit) for income taxes for2022 is mostly due to the nine months ended September 30, 2017 and 2016 was $(7.7) million and $8.2 million, respectively. The decrease in the provision is primarily due to a decrease in pre-tax income during the nine months ended September 30, 2017 as compared to the same period in 2016.
from operations. The effective tax rate for the ninethree months ended September 30, 2017March 31, 2023 and 20162022 was 33.8%21.9% and 49.1%17.1%, respectively. The decrease in theOur effective tax rate ischanged from the comparative period in 2022 primarily attributabledue to a valuation allowance recorded during the three months ended
June 30, 2017 against certain statean increase in tax credits and an impairment loss on a cost method investment that wedeficiencies recognized duringfrom stock-based compensation. Our effective tax rate for the three months ended March 31, 2017, for2023 differs from the statutory federal income tax rate of 21% primarily due to the U.S. federal R&D credit, state income taxes, and tax impacts from stock-based compensation, including tax deficiencies recognized from stock-based compensation in the current quarter, and changes in estimates. Stock-based compensation may increase or decrease our effective tax rate based upon the difference between our stock-based compensation expense and the deductions taken on our tax return, which depend upon the stock price at the time of employee award vesting.
Each quarter we assess the recoverability of our deferred tax assets under ASC Topic 740. We assess available positive and negative evidence to estimate whether we will generate sufficient future taxable income to use our existing deferred tax assets. We have no carryback ability, and therefore we must rely on future taxable income, including tax benefit can be recorded, partially offset by the releaseplanning strategies and future reversals of taxable temporary differences, to support their realizability. We maintain a valuation allowance against our deferred tax assets for capital losses duringand the three months ended September 30, 2017.
We adopted ASU 2016-09 on January 1, 2017, which requires stock based compensation excessstate of Utah where not supported by future reversals of taxable temporary differences, because of the uncertainty regarding the realizability of these deferred tax benefits or deficiencies toassets. Any activities that impact the valuation allowance will be reflectedrecognized discretely in the Consolidated Statementsperiod in which they occur. We will continue to monitor the need for a valuation allowance against our other deferred tax assets on a quarterly basis.
We have indefinitely reinvested foreign earnings of $1.1 million at September 30, 2017. We would need to accrue and pay U.S. income tax on this amount if repatriated. We do not intend to repatriate these earnings.
We are subject to taxation in the United States and severalmultiple state and foreign jurisdictions. Tax years beginning in 20122018 are subject to examination by taxing authorities, although net operating loss and credit carryforwards from all years are subject to examinations and adjustments for at least three years following the year in which the attributes are used. We are under audit by the Internal Revenue Service ("IRS") for the calendar year 2015. The IRS has not indicated or communicated any deficiencies. We expect the audit to complete during 2017.
Each quarter we assess the recoverability of our deferred tax assets under ASC 740. We assess all available positive and negative evidence to determine whether we will generate sufficient future taxable income to use the existing deferred tax assets. We consider, among other things, our recent financial and operating results, along with our forecasted growth rates, projected future taxable income, carryforward periods, our utilization experience with operating loss and tax credit carryforwards, and prudent and feasible tax planning strategies. We give the most weight to objective evidence related to our more recent financial results. Based upon the level of historical taxable income and projections for future taxable income, and planned tax strategies over the periods in which the deferred tax assets are deductible, we believe it is more likely than not that we will realize the benefits of these deduction differences, net of recorded valuation allowances. This assessment requires significant judgment and estimates about our ability to generate revenue, gross profit, operating income and taxable income in future periods. Except as otherwise disclosed, there are no known trends, events, transactions or other uncertainties that are expected to negatively impact the future levels of taxable income. We established a valuation allowance of $2.3 million for certain state tax credits as of June 30, 2017, because estimates of future apportioned taxable income during the carryforward period were reduced. During the three months ended September 30, 2017, we sold precious metals and cryptocurrencies and generated capital gain income. We have deferred tax assets based on capital losses, which were offset by a valuation allowance. Since we generated capital gain income, a portion of the capital losses can now be utilized and we released $2.2 million of valuation allowance as of September 30, 2017. We will continue to monitor the need for a valuation allowance against our remaining deferred tax assets on a quarterly basis.
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 |
| 2017 | | $ | 432,435 |
| | $ | 432,024 |
| | $ | 424,007 |
| | $ | N/A |
|
| 2016 | | | 413,677 |
| | | 418,540 |
| | | 441,564 |
| | | 526,182 |
|
| 2015 | | | 398,344 |
| | | 388,013 |
| | | 391,211 |
| | | 480,270 |
|
Liquidity and Capital Resources
Current sources of liquidityOverview
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. Our failureWe continue to generate sufficient revenues or profits ormonitor, evaluate, and manage our operating plans, forecasts, and liquidity considering the most recent developments driven by macroeconomic conditions, such as supply chain challenges, inflation, rising interest rates, and geopolitical events. We proactively seek opportunities to obtain additional financing or raise additional capital could have a material adverse effect onimprove the efficiency of our operations and have in the past and may in the future take steps to realize internal cost savings, including aligning our staffing needs based on our ability to achieve our business objectives. Any projectionscurrent and expected future levels of future cash needsoperations and cash flows are subject to substantial uncertainty.process streamlining.
In December 2016, as a successful demonstrationCurrent sources of the platform and technology developed by our majority-owned subsidiary tZERO, we issued preferred shares of Overstock.com, Inc. for proceeds of $7.6 million, net of offering costs.liquidity
Subsequent to September 30, 2017, we entered into a $40.0 million loan agreement dated November 6, 2017 with PCL L.L.C., an entity directly or indirectly wholly owned by the mother and brother of our Chief Executive Officer, Dr. Patrick Byrne. For additional information, see Borrowings - below.
We do not have any credit facilities available to us other than our purchasing card with U.S. Bank, all as described under Borrowings below.
In January 2017, we repurchased approximately 604,000 shares of our common stock for an aggregate purchase price of $10 million under our stock repurchase plan, utilizing cash on hand. All common shares repurchased were recognized as treasury stock. We may repurchase additional shares in the future.
Our principal sources of liquidity are cash flows generated from operations, and our existing cash and cash equivalents.equivalents and accounts receivable, net. At September 30, 2017,March 31, 2023, we had $374.7 million of cash and cash equivalents and $22.1 million of $92.3 million.accounts receivable, net.
At March 31, 2023, we had $150.0 million available under our "at the market" sales program which permits us to conduct "at the market" sales of our common stock under the Sales Agreement.
Cash flow information is as follows (in thousands):
| | | | | | | | | | | |
| | Three months ended
March 31, |
| | 2023 | | 2022 |
| Cash provided by (used in): | | | |
| Operating activities | $ | 20,007 | | | $ | 33,193 | |
| Investing activities | (14,831) | | | (13,795) | |
| Financing activities | (1,705) | | | (29,286) | |
|
| | | | | | | | | | | | | | | | |
| | | Nine months ended
September 30, | | Twelve months ended
September 30, |
| | | 2017 | | 2016 | | 2017 | | 2016 |
| Cash provided by (used in): | | |
| | |
| | |
| | |
|
| Operating activities | | $ | (62,655 | ) | | $ | (15,439 | ) | | $ | (7,652 | ) | | $ | 75,477 |
|
| Investing activities | | (14,368 | ) | | (65,166 | ) | | (28,649 | ) | | (81,358 | ) |
| Financing activities | | (13,809 | ) | | 34,814 |
| | 4,096 |
| | 49,084 |
|
Free cash flow
"Free Cash Flow" (a non-GAAP measure) for the nine months ended September 30, 2017 and 2016, was $(83.5) million and $(74.8) million, respectively, and $(41.4) million and $(37,000) for the twelve months ended September 30, 2017 and 2016, 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 operatingOperating activities
For the nine months ended September 30, 2017 and 2016, our operating activities resulted in net cash outflows of $62.7 million and $15.4 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, accounts payable and accrued liability 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 and accrued liability balances normally decline during the
first three months following year-end, which normally results in a decline in our cash and cash equivalents balances from the year-end balance. The seasonality of our business causes payables and accruals to grow significantly in the fourth quarter, and then decrease in the first quarter when they are typically paid.
The $62.7$20.0 million of net cash used inprovided by operating activities during the ninethree months ended September 30, 2017March 31, 2023 was primarily due to decreases in accounts payableincome from operating activities adjusted for non-cash items of $35.8$6.4 million and accruedcash provided by changes in operating assets and liabilities of $35.8$13.6 million.
The $33.2 million and consolidated net loss of $15.1 million. Accounts payable and accrued liabilities decreased due to seasonality which caused high balances at year-end 2016 and a significant decline during 2017, and due to decreased revenue growth in 2017. The net cash used inprovided by operating activities during the ninethree months ended September 30, 2017 was partially offset by non-cash depreciation expense of $21.9 million. The increase in net cash used in operating activities for the nine months ended September 30, 2017, as compared to the same period of 2016, is due in part to the results for 2016 including litigation settlement proceeds of $19.5 million, as described above under Litigation settlement.
The $15.4 million of net cash used in operating activities during the nine months ended September 30, 2016March 31, 2022 was primarily due to decreases in accounts payableincome from operating activities adjusted for non-cash items of $40.2 million, deferred revenue of $9.7$21.5 million and accruedcash provided by changes in operating assets and liabilities of $8.7 million. Accounts payable, accrued liabilities and deferred revenue decreased due to seasonality which caused high balances at year-end 2015 and a significant decline during 2016. The net cash used in operating activities during the nine months ended September 30, 2016 was partially offset by non-cash depreciation expense of $19.7 million, consolidated net income of $8.5 million, and deferred income taxes of $6.7$11.7 million.
Cash flows from investingInvesting activities
For the ninethree months ended September 30, 2017,March 31, 2023, investing activities resulted in a net cash outflowsoutflow of $14.4$14.8 million, primarily due to $20.9$10.0 million for disbursement for notes receivable and $5.3 million of expenditures for fixed assets.property and equipment.
For the ninethree months ended September 30, 2016,March 31, 2022, investing activities resulted in a net cash outflows of $65.2 million primarily due to $59.4 million of expenditures for fixed assets.
Cash flows from financing activities
For the nine months ended September 30, 2017, financing activities resulted in net cash outflowsoutflow of $13.8 million, primarily due to the purchase$11.4 million for purchases of treasury stockequity securities and $3.3 million of expenditures for $11.1 million.property and equipment.
Financing activities
For the ninethree months ended September 30, 2016,March 31, 2023, financing activities resulted in a net cash inflowsoutflow of $34.8$1.7 million primarily due to $31.4$1.9 million for payment of proceeds fromtaxes withheld upon vesting of employee stock awards.
For the three months ended March 31, 2022, financing activities resulted in a net cash outflow of $29.3 million primarily due to $25.2 million for repurchases of our U.S. Bank term loancommon stock and $6.1Series A-1 preferred stock under the Repurchase Program and $3.3 million for payment of proceeds from lease finance obligations with U.S. Bank.taxes withheld upon vesting of employee stock awards.
Contractual Obligations and Commitments
The following table summarizes our contractual obligations as of September 30, 2017March 31, 2023 and the effect such obligations and commitments are expected to have on our liquidity and cash flow in future periods (in thousands):
| | | | | | |
| Contractual Obligations | | Contractual Obligations | | Total | | Less than
1 year | | 1-3
years | | 3-5
years | | More than 5 years | |
| | | | | Payments Due by Period | |
| Contractual Obligations | | Remainder of 2017 | | 2018 | | 2019 | | 2020 | | 2021 | | Thereafter | | Total | |
| U.S. Bank term loan payments (1) | | $ | 45,010 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 45,010 |
| |
| U.S. Bank master lease agreement (2) | | 12,651 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 12,651 |
| |
Operating leases (3)(1) | | 2,273 |
| | 6,962 |
| | 6,733 |
| | 4,292 |
| | 4,336 |
| | 20,775 |
| | 45,371 |
| | $ | 7,389 | | | $ | 4,203 | | | $ | 2,916 | | | $ | 270 | | | $ | — | | |
| Purchase obligations (4) | | 3,497 |
| | 1,528 |
| | — |
| | — |
| | — |
| | — |
| | 5,025 |
| |
| Loan agreements (2) | | Loan agreements (2) | | 48,015 | | | 4,607 | | | 2,968 | | | 2,972 | | | 37,468 | | |
| | Total contractual cash obligations | | $ | 63,431 |
| | $ | 8,490 |
| | $ | 6,733 |
| | $ | 4,292 |
| | $ | 4,336 |
| | $ | 20,775 |
| | $ | 108,057 |
| Total contractual cash obligations | | $ | 55,404 | | | $ | 8,810 | | | $ | 5,884 | | | $ | 3,242 | | | $ | 37,468 | | |
_____________________________________________________________________________________
(1) — Subsequent to September 30, 2017, we terminatedRepresents the U.S. Bank term loan agreement (see Borrowings below).
(2) — Subsequent to September 30, 2017, we terminated the U.S. Bank masterfuture minimum lease agreement (see Borrowings below).
(3) — From time to time we enter intopayments under non-cancellable operating leases for facilities and equipment for use in our operations.
(4) — 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 September 30, 2017. Under different assumptionsleases. For information regarding our rights to cancel our purchase orders or different assumptions regarding the enforceability of the purchase orders under applicable law, the amount of purchaseoperating lease obligations, shownsee Note 7—Leases, in the table above would be less.
During Q1 2017, we established a partially self-funded health insurance plan for our employees, and have established accrued liabilities based upon claims history and estimates of claims that have been incurred but not reported. In additionNotes to the contractual obligations summarized above, we are responsible for estimating our liability for unpaid costs of insured events under the health insurance plan that have occurred, which includes known cases on a case-basis, and also for events that have occurred, but have not yet been reported. As of September 30, 2017, we have recorded an accrued liability of approximately $1.4 million. Actual claims may differ from the estimate and any difference could be significant. This accrual isUnaudited Consolidated Financial Statements included in accrued liabilitiesItem 1, Part I, Financial Statements (Unaudited) of this Quarterly Report on Form 10-Q.
(2) Represents future interest and principal payments on the financing agreements with Loan Core Capital Funding Corporation LLC. For information regarding our financing agreements, see Note 6—Borrowings, in the accompanying consolidated balance sheets.Notes to Unaudited Consolidated Financial Statements included in Item 1, Part I, Financial Statements (Unaudited) of this Quarterly Report on Form 10-Q.
Subsequent to September 30, 2017, we entered into a new loan agreement related to our corporate headquarters. The loan agreement provides for $40.0 million term loan which carries an interest rate of 8.0%. We are required to make monthly interest-only payments during the term of the loan and a balloon payment of all unpaid principal and interest on May 1, 2019 (see Borrowings below).
Tax contingencies
We are involved in various tax matters, the outcomes of which are uncertain. As of September 30, 2017,March 31, 2023, accrued tax contingencies were $1.7$3.6 million. We expect the total amount of tax contingencies to increase in the future. In addition, changesChanges 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 the issues raised by the taxing authorities may differ from the amounts accrued. While itIt is reasonably possible that within the next 12 months we will receive additional assessments by various tax authorities or reach resolution of tax contingencies in one or more jurisdictions, we do not anticipate that we will make any payments to such authorities during that period.authorities. These assessments or settlements may or may not result in changes to our contingencies related to positions on prior years' tax filings.
Borrowings
U.S. Bank term loan and revolving loan agreement
We are party to a loan agreement (as amended through March 30, 2017, the "Agreement") dated October 24, 2014 with U.S. Bank National Association and other banks (the "Banks") in connection with the construction and long-term financing of our corporate headquarters (the "Project"). The Agreement provides for a senior secured real-estate loan of $45.8 million (the "Term Loan") that we used to finance a portion of the Project and a $25.0 million senior secured revolving credit facility (the "Revolving Loan") to be used for working capital and other permitted purposes, including stock repurchases. The Term Loan and the Revolving Loan are both secured by the Project, our inventory and accounts receivable, substantially all of our deposit accounts and related assets. On January 1, 2017, the Term Loan was converted from a real estate loan used in the construction of our headquarters into an approximately 6.75-year loan due October 1, 2023. The aggregate principal amount converted was $45.8 million. The Revolving Loan terminates June 30, 2020.
At September 30, 2017, our outstanding balance on the Term Loan was $45.0 million. We have no amounts outstanding under the Revolving Loan. Our liability under the Term Loan approximates fair value. Amounts outstanding under the Term Loan are presented net of discount and issuance costs in our consolidated balance sheets.
Subsequent to September 30, 2017, we repaid the remaining outstanding balance and terminated the Term Loan and Revolving Loan (see PCL L.L.C. term loan agreement below).
U.S. Bank master lease agreement
In November 2015, we entered into a Master Lease Agreement and a Financial Covenants Rider (collectively, the "Master Lease Agreement") with U.S. Bank Equipment Finance, a division of U.S. Bank National Association ("Lessor"). Under the Master Lease Agreement we are able to sell certain assets (the "Leased Assets") to the Lessor and simultaneously lease them back for a period of 60 months. We are also able to finance certain software licenses (inclusive in the "Leased Assets") for a period of 60 months. We have the right to repurchase the Leased Assets and terminate the Master Lease
Agreement twelve months following the initial term. We have the right to repurchase the Leased Assets at the end of the term for $1.00. Payments on the Master Lease Agreement are due monthly. During the nine months ended September 30, 2017, we did not receive proceeds under the Master Lease Agreement. The average interest rate for amounts outstanding under the Master Lease Agreement was approximately 3.50%.
We have accounted for the Master Lease Agreement as a financing transaction and amounts owed are included in Finance Obligations, current and non-current in the consolidated balance sheets. We recorded no gain or loss as a result of this transaction. Our liability under the Master Lease Agreement approximates fair value.
Subsequent to September 30, 2017, we repaid the remaining outstanding balance and terminated the Master Lease Agreement (see PCL L.L.C. term loan agreement below).
PCL L.L.C. term loan agreement
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 Chief Executive Officer, Dr. Patrick Byrne. The agreement provides for a $40.0 million term loan which carries an annual interest rate of 8.0% and a default rate of 18.0%. The loan is for a term of 18 months, subject to mandatory prepayment under certain circumstances, and is prepayable at our election at any time without penalty or premium. Interest only will be due monthly. The principal amount and any then unpaid interest will be due and payable on May 1, 2019 (subject to mandatory prepayment in the event of a sale or encumbrance of the headquarters building or a change of ownership of Overstock or the occurrence of certain other events, including material changes to Overstock’s business, the loss of management control of Overstock by Dr. Patrick Byrne and other events). The loan is secured by our corporate headquarters and the related land, fixtures and certain related personal property. We incurred insignificant debt issuance costs with the new loan agreement. The $40.0 million proceeds from this loan together with our cash resources were used to repay the remaining outstanding balances and terminate the U.S. Bank Term Loan, Revolving Loan, Master Lease Agreement, and associated derivative instruments.
U.S. Bank commercial purchasing card agreement
We have a commercial purchasing card (the "Purchasing Card") agreement with U.S. Bank. We use the Purchasing Card for business purpose purchasing and must pay it in full each month. At September 30, 2017, $509,000 was outstanding and $4.5 million was available under the Purchasing Card. At December 31, 2016, $811,000 was outstanding and $4.2 million was available under the Purchasing Card.
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.
Critical Accounting Policies and Estimates
The preparation of our financial statements requires that we make estimates and judgments. We base these on historical experience and on other assumptions that we believe to be reasonable. Our critical accounting policies are discussed in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" section of our Annual Report on Form 10-K for the year ended December 31, 2016, and our accounting policies and use of estimates are further discussed in Note 2 to the financial statements included in this Form 10-Q and elsewhere in this Management's Discussion and Analysis of Financial Condition and Results of Operations.
As discussed in Note 2 to the financial statements, during Q1 2017, we established a partially self-funded health insurance plan for our employees, and have recorded an accrued liability based upon claims history and estimates of claims that have been incurred but not reported. During Q1 2017, we implemented ASU No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes on a retrospective basis and, for the year ended December 31, 2016, reclassified approximately $16.3 million from current Deferred tax assets, net to long-term Deferred tax assets, net in our consolidated balance sheet. In addition, during Q1 2017, we implemented ASU No. 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting on a modified retrospective basis and recognized $9.4 million of additional deferred tax assets related to excess tax benefits through a cumulative effect adjustment in retained
earnings as of January 1, 2017. The adoption of these new accounting standards is discussed further in Note 2 to the financial statements included in this Form 10-Q. There have been no other material changes to our critical accounting policies and estimates as compared to the critical accounting policies previously disclosedand estimates described in Note 2—Accounting Policies and Supplemental Disclosures, included in Part II, Item 8, Financial Statements and Supplementary Data, of our Annual Report on Form 10-K for the year ended December 31, 2016.2022.
For information about recently issued accounting standards not yet adopted, see Note 2, Recently issued accounting standards not yet adopted, included in Note 2 to the financial statements included in this Form 10-Q.
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.
Contribution and contribution margin
Contribution (a non-GAAP financial measure which we reconcile below to "Gross Profit," the nearest GAAP financial measure appearing in our consolidated statement of operations) consists of gross profit less sales and marketing expense plus Club O Rewards and gift card breakage and reflects an additional way of viewing our results. Contribution margin is contribution as a percentage of total net revenue. We believe contribution and contribution margin provide management and users of the financial statements information about our ability to cover our operating costs, such as technology and general and administrative expenses, while reflecting the selling costs we incurred to generate our revenues. Including these amounts in our contribution improves this measure by adding back the reductions in revenue that we recognized for Club O Rewards that have subsequently expired and for gift cards whose redemption is remote. Contribution and contribution margin are used in addition to and in conjunction with results presented in accordance with GAAP and should not be relied upon to the exclusion of GAAP financial measures. The material limitation associated with the use of contribution is that it is an incomplete measure of profitability as it does not include all operating expenses or all non-operating income and expenses. Management compensates for these limitations when using this measure by looking at other GAAP measures, such as operating income and net income. You should review our financial statements and publicly-filed reports in their entirety and not rely on any single financial measure.
For further details on contribution and contribution margin, see the reconciliation of these non-GAAP financial measures below (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three months ended
September 30, | | Nine months ended
September 30, |
| | | 2017 | | 2016 | | 2017 | | 2016 |
| Total net revenue | | $ | 424,007 |
| | 100 | % | | $ | 441,564 |
| | 100% | | $ | 1,288,466 |
| | 100 | % | | $ | 1,273,781 |
| | 100 | % |
| Cost of goods sold | | 340,332 |
| | 80.3 | % | | 361,848 |
| | 81.9 | | 1,033,713 |
| | 80.2 | % | | 1,040,436 |
| | 81.7 | % |
| Gross profit | | 83,675 |
| | 19.7 | % | | 79,716 |
| | 18.1 | | 254,753 |
| | 19.8 | % | | 233,345 |
| | 18.3 | % |
| Less: Sales and marketing expense | | 45,153 |
| | 10.6 | % | | 34,707 |
| | 7.9 | | 126,068 |
| | 9.8 | % | | 99,516 |
| | 7.8 | % |
| Plus: Club O Rewards and gift card breakage (included in Other income, net) | | 692 |
| | 0.2 | % | | 4,162 |
| | 0.9% | | 1,924 |
| | 0.1 | % | | 12,247 |
| | 1.0 | % |
| Contribution and contribution margin | | $ | 39,214 |
| | 9.2 | % | | $ | 49,171 |
| | 11.1% | | $ | 130,609 |
| | 10.1 | % | | $ | 146,076 |
| | 11.5 | % |
Our calculation of our contribution and contribution margin by Retail Total (which consists of Direct and Partner) and Other (which consists of Medici) is set forth below (in thousands):
|
| | | | | | | | | | | | | | | | | |
| | Three months ended
September 30, |
| | Direct | Partner | Retail Total | | Other | | Total |
| 2017 | | | | | | | |
|
| Total net revenue | $ | 19,645 |
| $ | 400,419 |
| $ | 420,064 |
| | $ | 3,943 |
| | $ | 424,007 |
|
| Cost of goods sold | 19,577 |
| 318,121 |
| 337,698 |
| | 2,634 |
| | 340,332 |
|
| Gross profit | $ | 68 |
| $ | 82,298 |
| $ | 82,366 |
| | $ | 1,309 |
| | $ | 83,675 |
|
| Less: Sales and marketing expense | | | 44,910 |
| | 243 |
| | 45,153 |
|
| Plus: Club O Rewards and gift card breakage (included in Other income, net) | | | 692 |
| | — |
| | 692 |
|
| Contribution | | | $ | 38,148 |
| | $ | 1,066 |
| | $ | 39,214 |
|
| Contribution margin | | | 9.1 | % | | 27.0 | % | | 9.2 | % |
| | | | | | | | |
| 2016 | | | | | | | |
|
| Total net revenue | $ | 24,620 |
| $ | 413,019 |
| $ | 437,639 |
| | $ | 3,925 |
| | $ | 441,564 |
|
| Cost of goods sold | 23,955 |
| 335,306 |
| 359,261 |
| | 2,587 |
| | 361,848 |
|
| Gross profit | $ | 665 |
| $ | 77,713 |
| $ | 78,378 |
| | $ | 1,338 |
| | $ | 79,716 |
|
| Less: Sales and marketing expense | | | 34,594 |
| | 113 |
| | 34,707 |
|
| Plus: Club O Rewards and gift card breakage (included in Other income, net) | | | 4,162 |
| | — |
| | 4,162 |
|
| Contribution | | | $ | 47,946 |
| | $ | 1,225 |
| | $ | 49,171 |
|
| Contribution margin | | | 11.0 | % | | 31.2 | % | | 11.1 | % |
|
| | | | | | | | | | | | | | | | | |
| | Nine months ended
September 30, |
| | Direct | Partner | Retail Total | | Other | | Total |
| 2017 | | | | | | | |
|
| Total net revenue | $ | 64,572 |
| $ | 1,211,536 |
| $ | 1,276,108 |
| | $ | 12,358 |
| | $ | 1,288,466 |
|
| Cost of goods sold | 61,687 |
| 963,310 |
| 1,024,997 |
| | 8,716 |
| | 1,033,713 |
|
| Gross profit | $ | 2,885 |
| $ | 248,226 |
| $ | 251,111 |
| | $ | 3,642 |
| | $ | 254,753 |
|
| Less: Sales and marketing expense | | | 125,312 |
| | 756 |
| | 126,068 |
|
| Plus: Club O Rewards and gift card breakage (included in Other income, net) | | | 1,924 |
| | — |
| | 1,924 |
|
| Contribution | | | $ | 127,723 |
| | $ | 2,886 |
| | $ | 130,609 |
|
| Contribution margin | | | 10.0 | % | | 23.4 | % | | 10.1 | % |
| | | | | | | | |
| 2016 | | | | | | | |
|
| Total net revenue | $ | 75,901 |
| $ | 1,187,364 |
| $ | 1,263,265 |
| | $ | 10,516 |
| | $ | 1,273,781 |
|
| Cost of goods sold | 72,459 |
| 961,227 |
| 1,033,686 |
| | 6,750 |
| | 1,040,436 |
|
| Gross profit | $ | 3,442 |
| $ | 226,137 |
| $ | 229,579 |
| | $ | 3,766 |
| | $ | 233,345 |
|
| Less: Sales and marketing expense | | | 99,097 |
| | 419 |
| | 99,516 |
|
| Plus: Club O Rewards and gift card breakage (included in Other income, net) | | | 12,247 |
| | — |
| | 12,247 |
|
| Contribution | | | $ | 142,729 |
| | $ | 3,347 |
| | $ | 146,076 |
|
| Contribution margin | | | 11.3 | % | | 31.8 | % | | 11.5 | % |
OSTK Retail and Medici pre-tax income or loss
OSTK Retail and Medici pre-tax income or loss (non-GAAP financial measures - which we reconcile to Consolidated pre-tax income or loss) consists of income or loss before taxes of our Retail (which consists of Direct and Partner) and Medici (which is included in Other) businesses, excluding intercompany transactions eliminated in consolidation. We believe these measures provide management and users of the financial statements useful information because they provide financial results for our separate businesses which are distinct in nature. The material limitation associated with these measures is that they are an incomplete measure of our consolidated operations. These measures should be used in addition to and in conjunction with results presented in accordance with GAAP and should not be relied upon to the exclusion of GAAP financial measures. You should review our financial statements and publicly-filed reports in their entirety and not rely on any single financial measure. For additional information regarding our segment reporting, and a reconciliation of OSTK Retail and Medici pre-tax income or loss, please see Item 1 of Part I, "Financial Statements (Unaudited)"—Note 9. Business Segments, contained in the "Notes to Consolidated Financial Statements" of this Quarterly Report on Form 10-Q.
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. However, 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. 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):
|
| | | | | | | | | | | | | | | | |
| | | Nine months ended
September 30, | | Twelve months ended September 30, |
| | | 2017 | | 2016 | | 2017 | | 2016 |
| Net cash (used in) provided by operating activities | | $ | (62,655 | ) | | $ | (15,439 | ) | | $ | (7,652 | ) | | $ | 75,477 |
|
| Expenditures for fixed assets, including internal-use software and website development | | (20,873 | ) | | (59,382 | ) | | (33,772 | ) | | (75,514 | ) |
| Free cash flow | | $ | (83,528 | ) | | $ | (74,821 | ) | | $ | (41,424 | ) | | $ | (37 | ) |
Government Regulation
We are subject to a wide variety of laws, rules, mandates, and regulations, some of which apply or may apply to us as a result of our retail business, 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 mainretail business is subject to general business regulations and laws, as well as regulations and laws specifically governing the Internet,internet, e-commerce, and other services.services we offer. Existing and future laws and regulations may result in increasing expense and may impede our growth. TheseApplicable and potentially applicable regulations and laws may coverinclude regulations and laws regarding taxation, privacy, data protection, pricing, content, copyrights, distribution, mobile communications, electronic device certification, electronic waste, energy consumption, environmental regulation, electronic contracts and other communications, competition, consumer protection, employment, import and export matters, information reporting requirements, access to our services and facilities, the design and operation of websites, health, safety, and sanitation standards, the characteristics and quality of products and services. New state tax regulations in states where we do not now collect stateservices, product labeling and local taxes may subject us to the obligation to collect and remit state and local taxes, or subject us to additional state and local sales and income taxes, or to requirements intended to assist states with their tax collection efforts. New legislation or regulations, the application of laws and regulations from jurisdictions whose laws do not currently apply to our business or the application of existing laws and regulations to the Internet and commercial online services could result in significant additional taxes on our business. These taxes or tax collection obligations could have an adverse effect on us. Further, there is a possibility that we may be subject to significant fines or other payments for any past failures to comply with these requirements. In addition, it is not clear how existing laws governing issues such as property ownership, libel, and personal privacy apply to the Internet, e-commerce and digital content. Laws and regulations may diminish the demand for our products and services and increase our cost of doing business. Certain of our services are subject to federal and state consumer protection laws, including laws protecting the privacy of consumer information and regulations prohibiting unfair and deceptive trade practices. In particular, under federal and state financial privacy laws and regulations, we must provide notice to consumers of our policies on sharing non-public information with third parties, advance notice of any changes to our policies and, with limited exceptions, we must give consumers the right to prevent
sharing of their non-public personal information with unaffiliated third parties. Further, the growth and demand for online commerce could result in more stringent consumer protection laws that could impose additional compliance burdens on us. These consumer protection laws could result in substantial compliance costs.
In addition, our broker dealers are subject to additional extensive regulatory requirements under federal and state laws and regulations and self-regulatory organization ("SRO") rules. Broker dealers are subject to regulation, examination 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 members. See Part II - Item 1A - "Risk Factors - The registered broker dealers we acquired are subject to extensive regulation."
Our efforts to expand our salesretail business outside of the U.S. expose us to foreign and additional U.S. and foreign 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 investment in Bitt Inc. also may expose us to additional laws and regulations relating to money transmitters and money services businesses. See Part II - Item 1A - "Risk Factors - Our investment in Bitt Inc. may expose us to additional risks."
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.
On January 27, 2017, we repurchased approximately $10 million of our common stock under the $25 million stock repurchase plan authorized by our Board of Directors on May 5, 2015. We are considering additional repurchases of our common stock, which we may finance through additional debt.
Any investment in our securities involves a high degree of risk. Investors should consider carefully the risks and uncertainties described in this Form 10-Q, including the risks described in Item 1A of Part II ("Risk Factors") of this Form 10-Q, and all other information in this Form 10-Q and in our other filings with the SEC including those we file after we file this Form 10-Q, 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Other thanWe are exposed to market risk for the effect of interest rate swaps described belowchanges, foreign currency fluctuations, and elsewherechanges in this Quarterly Report on Form 10-Q, we do not use derivative financial instruments inthe market values of our investment portfolio,securities. Information relating to quantitative and we have no foreign exchange contracts. Our financial instruments consistqualitative disclosures about these market risks is set forth below.
Interest Rate Sensitivity
The fair value of our cash and cash equivalents accounts receivable, accounts payable, current notes payable and long-term obligations. We consider investments in highly-liquid(highly liquid instruments with a remaining maturity of 90 days or less at the date of purchasepurchase) would not be significantly affected by either an increase or decrease in interest rates due mainly to be cash equivalents.the short-term nature of these instruments.
In connection with the syndicated senior secured credit facility with U.S. Bank described above, we entered intoOur loan agreements carry a fixed blended annual interest rate swap transactions. The swapsof 4.45%. As a result, we have an effective dateno direct financial statement risk associated with changes in interest rates.
Foreign Currency Risk
Most of September 1, 2015our sales and a maturity dateoperating expenses are denominated in U.S. dollars, and therefore, our total revenue and operating expenses are not currently subject to significant foreign currency risk.
Inflation
Increases in commodity and shipping prices and energy and labor costs have resulted in inflationary pressures across various parts of October 1, 2023.
The combined notional amount changes monthly beginning at approximately $3.6 million on September 1, 2015, increasingour business and operations, including our partners and supply chain. We continue to a maximummonitor the impact of approximately $45.8 million as of December 31, 2016, and will decreaseinflation to approximately $38.2 million on October 1, 2023. The swaps effectively fix our effective interest rate on the approximate amounts expected to be outstanding from time to time on the Real Estate Loan at an annual rate of approximately 4.6%. At September 30, 2017, we had $45.0 million outstanding under the Real Estate Loan, and the notional amount of the swaps was $45.0 million.
We carry our interest rate swaps at fair valueminimize its effects on our consolidated balance sheets. At September 30, 2017, we recognized swap liabilities incustomers. We work with our partners to limit the amount of $1.6 million. The change in fair valuecost increases that are passed on through higher pricing. If costs borne by ourselves or our partners were to be subject to incremental inflationary pressures, we may not be able to fully offset such higher costs through pricing actions or other cost efficiency measures. Our inability or failure to do so could harm our business, financial condition, and results of our swaps for the nine months ended September 30, 2017 was a gain of $207,000. The fair value of the swaps can be impacted by several factors including forward rates, interest rates and discount rates (see Item 1 of Part I, "Financial Statements"—Note 2. Accounting Policies, Fair value of financial instruments). Because we have designated our swaps as cash flow hedges for accounting purposes, to the extent the swaps qualify for this designation and are effective, changes in the fair value of the instruments are recognized through Other comprehensive income (loss) in our statements of comprehensive income (loss) (see Item 1 of Part I, "Financial Statements"—Note 2. Accounting Policies, Derivative financial instruments). On November 6, 2017, we terminated the interest rate swaps as a result of the termination of the underlying loan instruments (see Note 11—Subsequent Events).operations.
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, theInvestment Risk
The fair values of our investmentsequity and debt securities may be subject to fluctuations due to volatility of the stock market in general, investment-specific circumstances, and changes in general economic conditions.
At September 30, 2017March 31, 2023, our recorded value in equity securities in public and private companies was $289.1 million, of which $24,000 relates to publicly traded companies, recorded at fair value, which are subject to market price volatility. At March 31, 2023, $82.8 million of our equity securities and $10.1 million of our debt securities are in private companies, recorded at fair value using Level 3 inputs. Our fair value assessment of private companies includes a review of recent operating results and trends, recent sales/acquisitions of the 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. These investments valued using Level 3 inputs represents 26.7% of assets measured at fair value. See Note 3—Fair Value Measurement for further information. For our equity interest in Medici Ventures, L.P., we had $92.3 million in cash and cash equivalents. Hypothetically, an increase or decrease in interest ratesrecord our proportionate share of one hundred basis points would have an estimated impact of $923,000 on our earningsthe entity's reported net income or loss, which reflects the fair value changes of the underlying investments of the entity and any other income or losses of the cash flowsentity.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
We maintain disclosure controls and procedures, as such term is defined in Rule 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The term disclosure controls and procedures means controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission's rules and forms.
Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer's management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Evaluation of Disclosure Controls and Procedures
We carried out an evaluation required by the Exchange Act under the supervision and with the participation of our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rule 13a-15(e) of the Exchange Act, as of the end of the period covered by this report. Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and to provide reasonable assurance that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
During the most recent fiscal quarter, 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.Limitations on Disclosure Controls and Procedures
Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives as specified above. Management does not expect, however, that our disclosure controls and procedures will prevent or detect all error and fraud. Any control system, no matter how well designed and operated, is based upon certain assumptions and can provide only reasonable, not absolute, assurance that its objectives will be met. Further, no evaluation of controls can provide
absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected.
Changes in Disclosure Controls and Procedures and Internal Control Over Financial Reporting
There were no changes in either our disclosure controls and procedures or our internal controls over financial reporting that occurred during the quarter ended March 31, 2023, that have materially affected, or are reasonably likely to materially affect, our disclosure controls and procedures or our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The information set forth under Item 1 of Part I, "Financial Statements "—Note 6—"Commitments and Contingencies," subheading "Legal Proceedings and Contingencies," contained in the "Notes to Consolidated Financial Statements" of this Quarterly Report on Form 10-Q is incorporated by reference in answer to this Item.
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, including the risk factors under the caption "Risks Related Primarily to our Common Stock and Other Securities" before making any decision to acquire or hold our common 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.
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-Q and in any reports we file with the SEC after we file this Form 10-Q, 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-Q 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.
We have a history of significant losses. If we do not maintain profitability, our financial results and business could be harmed, and our stock price could suffer.
We have a history of losses, and we may incur operating and net losses in the foreseeable future. At September 30, 2017, our accumulated deficit was $158.9 million. We need to generate significant revenues to be profitable, and we may not be able to do so. Although we have generated positive net income in recent years, we incurred a net loss for 2011, and interim net losses during 2015, 2016 and 2017. We may be unable to maintain profitability in the future. If our revenues grow more slowly than we anticipate or decline, or if our expenses exceed our expectations, our financial results would be harmed and our business, prospects, financial condition and results of operations could fall below the expectations of our partners and other companies with which we do business, as well as public market analysts and investors. The occurrence of any of the foregoing could have a material adverse effect on our financial results and 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 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 and business.
We are subject to cyber security risks and risks of data loss or other security breaches.
Our business involves the storage and transmission of users' proprietary information, and security breaches could expose us to a risk of loss or misuse of this information, and to resulting claims, fines, and litigation. We have been subjected to a variety of cyber-attacks, which we expect will continue to occur from time to 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.
Our dependence on payment card payments increases our risks.
Most of our customers use credit or other payment cards to pay for their purchases. Under payment card rules and our contracts with our card processors, if we experience a breach of payment card information or fail to follow payment card industry security standards, we could incur significant fines, higher transaction costs or lose our ability to give customers the option of using payment cards. If we were unable to accept payment cards, it would have a material adverse effect on our financial results and business.
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 and business.
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 specialty retailers such as Blue Nile, Bluefly, Houzz, Jet.com, Wayfair, Zappos.com, and Zulily; |
• | private sale sites such as Groupon, Living Social and Rue La La; |
• | 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. Penny 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 |
• | liquidation e-tailers 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 ecommerce competitors, including Amazon, will continue to increase their offerings and delivery capabilities. 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. Competition from Amazon and from other competitors, many of whom have longer operating histories, larger customer bases, greater brand recognition and significantly greater financial, marketing and other resources than we do, affect us and could have a material adverse effect on our financial results and business.
Our competitors may directly increase our marketing costs and also may cause us to decrease certain types of marketing.
In addition to competing with us for customers, suppliers, and employees, our competitors may directly increase our operating costs, by driving up the cost of various forms of online advertising, as has happened recently, or otherwise. 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, and the additional expenditures may have a material adverse effect on our financial results and business.
Our business depends on effective marketing, including marketing via email and social networking messaging.
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. If we are unable to develop, implement and maintain effective and efficient cost-effective advertising and marketing programs, it would have a material adverse effect on our financial results and business.
We rely upon paid and unpaid natural search engines including Google, Bing, and Yahoo! to rank our product offerings. Our financial results may suffer if search engines change their ranking algorithms and our product offerings are ranked lower 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.
We rely on paid and unpaid natural search engines to attract consumer interest in our product offerings. Potential and existing customers use search engines provided by search engine companies, including, but not limited to, Google, Bing, and Yahoo!, which use algorithms and other devices to provide users a natural ranked listing of relevant Internet sites matching a user's search criteria and specifications. 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 occurred again during the second and third quarters of this year, reducing our revenue growth and leading us to pursue revenue growth in other more expensive marketing channels. In addition, 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 continue to experiment with various ways to reduce the number of coupons we offer to our customers, which may have adversely affected our revenue growth and may continue to do so.
Although our business has historically relied heavily on coupons to generate sales, we are experimenting with modifications to our coupon marketing. We believe that changes we have made to our coupon marketing in the past adversely affected our revenue growth, and that these and other changes we may make may continue to adversely affect our revenue growth. We have not yet achieved the results we are seeking, and there can be no assurance that we will be able to do so. If we are unable to generate sales using other marketing approaches at rates equal to or better than the rates we were generating through our coupon marketing, our revenue growth could be adversely affected or reversed, and it could have a material adverse effect on our financial results and business.
If one or more states successfully asserts that we should collect sales or other taxes on the sale of our merchandise or the merchandise of third parties that we offer for sale on our Website, or that we should pay commercial activity taxes, our business could be harmed.
We generally do not currently collect sales or other similar taxes on sales of goods into states where we have no duty to do so under federal court decisions construing applicable constitutional law. If any jurisdiction where we do not or did not collect sales or other taxes successfully asserts that we should do so or should have done so, or should otherwise have collected or paid other types of taxes, it could have a material adverse effect on our business. Several states have enacted laws requiring remote vendors to notify resident purchasers in those states of their obligation to pay a use tax on their purchases and, in some instances, to report untaxed purchases to the state tax authorities. Other states have enacted legislation to require retailers without a physical presence in the state to collect and remit state sales taxes if they engage in any activity in connection with the selling, leasing or delivery of tangible personal property or taxable services within the state. In the past we have terminated affiliate marketing websites as a result of efforts by certain states to require us to collect sales taxes based on the presence of our third-party Internet advertising affiliates in those states, and we may do so again, which may have material adverse effect on our financial results and business. Additionally, states may seek to apply economic pressure by enacting similar or new laws,
or revising their existing tax positions, to force or encourage remote retailers to collect and remit sales tax. Such laws could harm our business by imposing notice burdens upon us, by requiring transaction notices that would adversely affect sales, or by discouraging customer purchases by requiring detailed purchase reporting. The occurrence of any of the foregoing could have a material adverse effect on our financial results and business.
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 few 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 and business.
Decreases in discretionary consumer spending may have an adverse effect on 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 and business.
We are attempting to expand our international business, which could adversely affect us.
We sell products in international markets, and are attempting to expand into some of these markets. International sales and transactions, and our efforts to expand them, 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. |
Penalties for non-compliance with laws applicable to international business and trade, including the U.S. Foreign Corrupt Practices Act, 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 and business.
A subsidiary of ours owns the land on which we built our new headquarters, and consequently has environmental and other risks, and we may incur environmental expense and liabilities under the environmental indemnity agreements we entered into in connection with our former credit facility or with the new loan we obtained in order to refinance our former credit facility.
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 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. Further, in connection with the credit facility we entered into with U.S. Bank and other banks, we entered into a broad environmental indemnity agreement pursuant to which we agreed to indemnify U.S. Bank and other banks and other persons against a broad array of potential environmental claims, liabilities and exposures relating to the property. We have entered into a similar indemnity agreement for the benefit of our new lender, PCL L.L.C. Any
such environmental liabilities, and any liabilities under any environmental indemnity agreement, could be material and could have a material adverse effect on our financial results and business.
Our secured credit facility requires us to maintain compliance with a variety of covenants.
We are party to a $40.0 million term loan agreement with PCL L.L.C. We will need to maintain compliance with the requirements governing the facility, including compliance with a variety of covenants, certain of which may be subject to events outside of our control. We have pledged substantially all of our assets to secure our obligations under the credit facility. If we fail to comply with the terms of the credit facility, the failure could have a material adverse effect on our liquidity and financial results and business.
We have incurred substantial indebtedness and may incur additional indebtedness.
We are party to a $40.0 million term loan agreement with PCL L.L.C. and may incur additional indebtedness. This existing indebtedness increases, and any additional future indebtedness will further increase, our business risks substantially, including our vulnerability to industry downturns and competitive pressures. The degree to which we are ultimately leveraged could materially and adversely affect our ability to obtain additional financing for working capital, acquisitions or other purposes. Our ability to satisfy our debt service obligations will be dependent upon our future performance, which will be subject to financial, business and other factors affecting our operations, many of which are beyond our control. Any difficulties we have satisfying our debt service obligations could have a material adverse effect on our financial results and business.
We may be unable to generate sufficient cash flow to satisfy our debt service obligations.
Our ability to generate cash flow from operations to make interest and principal payments on our debt obligations will depend on our future performance, which will be affected by a range of economic, competitive and business factors. We cannot control many of these factors, including general economic conditions, the health of the Internet retail industry and certain costs of marketing. If our operations do not generate sufficient cash flow from operations to satisfy our debt service obligations and all of our other obligations, we may need to borrow additional funds to make these payments or undertake alternative financing plans, such as refinancing or restructuring our debt, or reducing or delaying capital investments and other expenses. Additional funds or alternative financing may not be available to us on favorable terms, or at all. Our inability to generate sufficient cash flow from operations or obtain additional funds or alternative financing on acceptable terms could have a material adverse effect on our financial results and business.
Our Board has authorized a stock repurchase program and repurchases under the program reduce our liquidity and increase our risks.
In May 2015, our Board authorized a stock repurchase program. In January 2017, we repurchased approximately 604,000 shares of our common stock for $10 million under the program. We may repurchase additional shares for up to $15 million at any time through December 31, 2017 under our existing repurchase program. Further, our Board could authorize additional repurchases. Any such repurchases would reduce our liquidity and could increase our vulnerability to industry downturns and competitive pressures. A material decrease in our liquidity could have a material adverse effect on our financial results and business.
We face risks related to automating our process for onboarding new products.
We are in the process of automating portions of our new product onboarding process that we previously performed manually. As we do so, there is a risk that inappropriate content or products we prohibit may not be properly identified by our new systems and may appear on our Website until we identify and remove them. The appearance of any such products or content on our Website could violate applicable laws or regulations, result in damage to our brand and/or result in claims, fines or penalties, and could have a material adverse effect on our business.
We face risks relating to our inventory and returns.
In our direct business, we sell merchandise that we have purchased and hold in inventory. In addition, subject to our returns policies, we accept returns of products sold through our partners as well as products we sell in our direct business, and we have the risk of reselling the returned products. We assume the risks of inventory damage, theft and obsolescence, as well as risks of price erosion for these products, and we sometimes sell merchandise at a loss. Our risk of losses in our direct business is especially significant because much of the merchandise we sell is subject to seasonal trends, fashion trends, rapid technological change, obsolescence and price erosion, and because we sometimes make large purchases of particular types of
inventory. Difficulties we may experience with our inventory or returns could have a material adverse effect on our financial results and business.
If we do not successfully optimize and operate our warehouse and customer service operations, our business could be harmed.
We have expanded, contracted and otherwise modified our warehouse and customer service operations from time to time in the past, and expect that we will continue to do so. We also contract with third parties to operate warehouses, receive returns and process orders. If we or our third-party providers do not successfully optimize and operate our warehouse 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 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 and business.
We depend on a large number of other companies to perform functions critical to our ability to deliver products and services to our customers.
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. Difficulties with any of our significant fulfillment partners or with any of the delivery services, regardless of the reason, could have a material adverse effect on our financial results and business.
Risks associated with the suppliers from whom we or our fulfillment partners source products and risks regarding the safety, labelling, content or quality of those products could adversely affect our financial performance.
We depend on our and our fulfillment partners' ability to access products from qualified suppliers in a timely and efficient manner. We rely on suppliers' 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 and business.
If we fail to accurately forecast our expenses and revenues, our business may be harmed.
The rapidly evolving nature of our industry and the constantly evolving nature of our business make forecasting operating results difficult. We periodically implement large, complex and expensive infrastructure upgrades in order to increase our ability to handle larger volumes of sales and to develop or increase our ability to perform a variety of analytical procedures relating to our business. We are continuing to upgrade and further expand these and other components of our infrastructure. As a result of expenditures on our infrastructure and headquarters, our ability to reduce our expenditures is and will be limited, and any significant shortfall in the revenues for which we have built and are continuing to build our business could have a material adverse effect on our financial results and business.
Changes in assumptions, estimates and judgments by management related to complex accounting matters could affect our financial results significantly.
The rules governing our financial reporting require our management to make many subjective assumptions, estimates and judgments about revenue recognition, valuation allowances and accrued liabilities (including allowances for returns, credit card chargebacks, doubtful accounts, obsolete and damaged inventory, and self-funded health insurance liabilities), internal-use software and website development (acquired and developed internally), income taxes, valuation of intangible assets and goodwill, stock-based compensation, loss contingencies and other matters. Changes in any of these assumptions, estimates or judgments could change our reported or expected financial performance significantly, and could have a material adverse effect on our financial results and business.
Changes in accounting policies governing our financial reporting could affect our future financial results significantly.
The Financial Accounting Standards Board (FASB), which sets accounting standards for U.S. public companies, has issued new standards relating to revenue recognition. Subject to transition provisions, the new standards will become effective for us on January 1, 2018. We are in the process of analyzing the new standards and their application to our financial reporting. We have not reached conclusions about the effects of the new standards on our future financial reporting, but have identified gross versus net revenue recognition, the timing of revenue recognition (FOB shipping point versus FOB destination), and the allocation of performance obligation related to the loyalty program (standalone selling price consideration) as potentially significant issues in our analysis. We generate substantially all of our net revenues in our retail partner business, in which we sell merchandise from manufacturers, distributors and other suppliers primarily through our Website. Under current FASB standards, we recognize revenue from the majority of these sales transactions on a gross basis. If our adoption of the new standards requires us to recognize net, rather than gross, revenue from the same types of sales for which we currently recognize gross revenue, our future revenue would be substantially lower than it would be under the current standards, which could have a material adverse effect on our financial results and business.
Our income tax provisions and the amounts we reserve for tax contingencies are estimates and are subject to variations and adjustments. The amounts we ultimately pay may exceed the amounts estimated or accrued.
Our quarterly tax provision and our quarterly estimate of our annual effective tax rate are subject to significant variations due to several factors, including variability in accurately predicting our pre-tax and taxable income and loss and the mix of jurisdictions to which they relate, relative changes of expenses or losses for which tax benefits are not recognized, changes in how we do business, fluctuations in our stock price, and changes in law, regulations, and administrative practices. Additionally, our effective tax rate can be more or less volatile based on the amount of pre-tax income. For example, the impact of discrete items and non-deductible expenses on our effective tax rate is greater when our pre-tax income is relatively low. We are subject to audits by a number of tax authorities. The timing of the resolution of income, sales and other tax examinations is highly uncertain, and the amounts ultimately paid, if any, upon resolution of the issues raised by the taxing authorities may differ from the amounts we have accrued. It is possible that within the next 12 months we will receive additional assessments by various tax authorities or reach resolution of tax examinations in one or more jurisdictions. These assessments or settlements may result in changes to our contingencies related to positions on prior years' tax filings and may result in increases to amounts we have accrued. The volatility of our quarterly tax provision, the resolution of matters related to our tax contingencies, and establishment of or increases to any such accruals could have a material adverse effect on our financial results and business.
We have significant deferred tax assets, and we may not be able to realize these assets in the future. Our deferred tax assets may also be subject to additional valuation allowances, which could adversely affect our operating results.
From our inception to December 31, 2013, we established a valuation allowance for our 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 have historically recorded valuation allowances against deferred tax assets related to net operating losses and credits generated in domestic and foreign separate filing jurisdictions and capital losses. At June 30, 2017, based on the weight of all the positive and negative evidence (primarily our estimate of future taxable income and prudent and feasible tax planning strategies), we concluded that it was not more likely than not that we would realize the benefits of certain state tax credits, and we established a valuation allowance for these tax credits. Our estimates of future taxable income are based primarily on historical performance, but also include estimates and assumptions and external data, some of which are subject to significant judgment. If our actual taxable income differs significantly from our estimates, we may need to establish a valuation allowance for more or all of our deferred tax assets, which could have a material adverse effect on our financial results and 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 distributed ledger. We are also working on other potential financial applications of blockchain technology, including a solution for initial coin offerings and post-offering trading of cryptosecurities. All of these are areas in which we do not have substantial experience, and all of them 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 investments in startup businesses.
At September 30, 2017, we held investments of approximately $12.3 million in several companies that are in the startup or development stages. These investments are inherently risky because the markets for the technologies or products these companies are developing are typically in the early stages and may never materialize. Additionally, since several of our investments 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 our investees would be successful, even if they were brought to market. We may write off additional amounts related to these investments, and any such write-offs could be material. Any of the foregoing could have a material adverse effect on our financial results and business.
The registered broker dealers we acquired are subject to extensive regulation.
The broker dealers we acquired in January 2016 are subject to regulation, examination and disciplinary action by the SEC, the Financial Industry Regulatory Authority ("FINRA") and state securities regulators, as well as other governmental authorities and self-regulatory organizations ("SROs") with which they are registered or licensed or of which they are members. The broker dealers are also subject to rules and regulations relating to the prevention and detection of money laundering, privacy and data protection laws and regulations, and substantial other regulatory requirements. Any failure to comply with all applicable regulations, and any regulatory proceeding or civil or criminal action against any of the broker dealers that we have acquired, or any of their associated persons, could have a material adverse effect on our financial results and business. Further, any failure to identify and successfully manage conflicts of interest or to implement appropriate policies or procedures could subject the broker dealers or us to disciplinary sanctions or litigation or could harm our reputation. Any of the foregoing could have a material adverse effect on our financial results and business.
Our investment in Bitt Inc. may expose us to additional risks.
In 2016, we acquired an equity interest in Bitt, Inc., a startup company based in Barbados, that is pursuing a variety of digital currency transfer and payment businesses in the Caribbean. 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 the Financial Crimes Enforcement Network ("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, even if the person, entity or business was unaware of the licensing requirement. 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. The business in which we have invested has represented to us that it has not taken any action that could subject it to registration with FinCEN or to the licensing requirements in any state and has agreed that it will not do so until it has become properly licensed in all required states and registered with FinCEN. However, if the business makes an error, even inadvertently, we could be subject to potential civil and criminal penalties as a result. 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. Further, all of our foreign business activities expose us to a variety of risks, including risks under the Foreign Corrupt Practices Act.
Each of our offerings faces specialized competition and involves regulatory risks.
We offer a variety of services and product offerings, including specialized services and product offerings, such as advertising for various types of loans, credit cards and insurance offerings, automobiles, and our Farmers Market offerings. Each of these is subject to substantial regulation and competition. For example, many states and other jurisdictions, including Utah, where we are located, have regulations governing the conduct of automobile sellers and public advertising for automobile sales. We have no ability to know whether the information the automobile advertisers or other advertisers provide is correct. Similarly, we have no ability to ensure that the sellers in our Farmers Market offerings comply with all regulations governing the sale of food products. More generally, we have no ability to ensure that our partners or others with whom we do business will comply with all laws and regulations applicable to them and their transactions. Any negative publicity we receive regarding any allegations of unlawful or deceptive conduct may damage our reputation, our ability to attract new customers to our main
shopping site, and our brand name generally. The occurrence of any of the foregoing could have a material adverse effect on our financial results and business.
We have an evolving business model, which increases the complexity of our business.
Our business model has evolved in the past and continues to do so. In prior years we have added additional types of services and product offerings and in some cases we have modified or discontinued those offerings. We intend to 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 and business.
The seasonality of our business places increased strain on our operations.
A disproportionate amount of our sales normally occur during our fourth quarter. If we, or our partners, do not stock or are otherwise unable to source products sufficient to meet customer demand, our business would be adversely affected. We may experience an increase in our net shipping cost due to complimentary upgrades and the expense of shipments necessary to ensure timely delivery for the holiday season. In addition, we may be unable to adequately staff our fulfillment and customer service centers during peak periods, and delivery services and other fulfillment companies and customer service providers may be unable to meet the seasonal demand. The occurrence of any of the foregoing, or the occurrence of a disappointing fourth quarter for any reason, could have a material adverse effect on our financial results and business.
Acquisitions we have made and may make will increase costs and regulatory and integration risks.
From time to time we have acquired, and may in the future acquire, other businesses or the assets of other businesses. Integrating an acquired business or its assets involves a number of risks and financial, managerial and operational challenges. We have incurred significant expenses in connection with acquisitions we have made in the past, and expect to incur additional expenses in connection with those acquisitions or in connection with other acquisitions we may make in the future. Our profitability has been and may continue to be adversely affected by such acquisitions. 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. The occurrence of any of the foregoing could have a material adverse effect on our financial results and business.
We are routinely involved in, substantial litigation.
From time to time we receive claims andor become subject to lawsuits involvinglitigation or other legal proceedings concerning consumer protection, employment, intellectual property, claims under the securities laws, and other commercial matters related to the conduct and operation of our business and the sale of products on our Website, including claims by regulators and by customers.Website. We also prosecute lawsuits to enforce our legal rights. In addition,connection with such litigation or other legal proceedings, we have been in the past been and we may be in the future may be, involved in substantial litigation. We are presently involved insubject to significant damages, associated costs, or equitable remedies relating to the operation of our business. Such litigation regarding the constitutionality of certain state tax laws. Litigation cancould be costly and time consuming and could divert or distract our management and key personnel from our regular business operations. AnDue to the uncertainty of litigation and depending on the amount and the timing, an unfavorable resolution of any substantial litigation matter could have a material adverse effect on our financial results and business.
We may be accused of infringing intellectual property rights of third parties.
We have been and expect we will continue to 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 and business.
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 may be unable to protect it, in the United States or elsewhere, which could have a material adverse effect on our business. Further, we may not be able to secure protection for our service marks or trademarks in the United States or elsewhere as we expand internationally. 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 and business.
Our decision to accept and hold cryptocurrency, such as bitcoin, may subject us to exchange risk and additional tax and regulatory requirements.
In January 2014, we began accepting bitcoin as a form of payment for purchases on our Website. Bitcoin is not considered legal tender or backed by any government, and it has experienced price volatility, technological glitches and various law enforcement and regulatory interventions. In September 2014, we began accepting bitcoin internationally. The use of cryptocurrency such as bitcoin has been prohibited or effectively prohibited in some countries. We also accept other cryptocurrencies for sales to customers in the United States and internationally. 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. From time to time we also 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. The uncertainties regarding legal and regulatory requirements relating to cryptocurrencies or transactions utilizing cryptocurrencies, as well as potential accounting and tax issues, or other requirements relating to cryptocurrencies could have a material adverse effect on our financial results and business.
Our cash, cash equivalents and short-term investments are subject to a risk of loss based upon the solvency of the financial institutions in which they are maintained.
We maintain the majority of our cash, cash equivalents and short-term investments in accounts with a small number of major financial institutions within the United States, in the form of demand deposits, money market accounts, time deposits, U.S. Treasury Bills and other short-term investments. Our deposits in these institutions are generally substantially in excess of the amounts of insurance provided by the FDIC, and some deposits may not be covered by insurance at all. If any of these institutions were to become insolvent or subject to regulatory action, we could lose some or all of such deposits,matters could materially affect our business, results of operations, financial position, or cash flows. For additional details, see the information set forth under Item 1 of Part I, Financial Statements—Note 8—Commitments and Contingencies, subheading Legal Proceedings and Contingencies, contained in the Notes to Unaudited Consolidated Financial Statements of this Quarterly Report on Form 10-Q, which would have ais incorporated by reference in answer to this Item.
ITEM 1A. RISK FACTORS
There are no material adverse effect on our financial results and business.
Existing or future government regulation could harm our business.
We are subject to regulation atchanges from the federal, state, local and international levels, including regulation relating to privacy, security, retention, transfer and use of personal user information and telemarketing laws. Increasing regulation may increase the costrisk factors previously disclosed in Part I - Item 1A - "Risk Factors," of our business and may further restrict our marketing efforts. Our expanding business model may trigger additional regulatory scrutiny. Existing laws, including those governing advertising, product labeling, product content requirements and product safety, may cause us to incur expenses. We may be subject to claims related to personal injury, death, environmental or property damage. We are periodically required to participate in product recalls. We may incur expense in connection with any of the foregoing or other matters or actions which may not be covered by any liability insurance we may carry. These current and future laws and regulations could have a material adverse effectAnnual Report on our financial results and business.
Changes in management roles and responsibilities, the loss of key personnel, or any inability to attract and retain additional personnel could affect our ability to successfully grow our business.
Our performance is substantially dependent on the continued services and on the performance of our senior management and other key personnel. Our performance also depends on our ability to retain and motivate our officers and key employees. Changes in the roles and responsibilities of members of management or the loss of the services of any of our executive officers or other key employees for any reason could harm our business. Members of senior management or key employees may need to take a leave of absence for medical or other reasons. In 2013 our Chief Executive Officer and then Chairman of the Board, Dr. Patrick Byrne, took a two-month leave of absence for medical reasons, and in 2016 he took a three-month leave of absence for medical reasons. We do not have employment agreements with any of our key personnel and we do not maintain "key person" life insurance policies. Our future success also depends on our ability to identify, attract, hire, train, retain and motivate other highly-skilled technical, managerial, editorial, merchandising, marketing and customer service personnel. Competition for such personnel is intense. Our failure to attract and retain the necessary personnel could have a
material adverse effect on our financial results and business. In addition, events affecting Dr. Patrick Byrne could result in a default and/or early mandatory pre-payment obligation under our new $40 million loan.
Mobile commerce is becoming increasingly significant to us.
Mobile commerce within our iOS and Android apps is becoming increasingly significant to us. Customers who shop on mobile devices may behave differently from our other customers. If we fail to successfully develop app-specific features or if we fail to keep up with mobile technology and adapt to the changing mobile landscape, it could have a material adverse effect on our business.
Changes we are making to Club O or our loss of Club O Gold members could adversely affect us.
We recently have made changes and are planning additional changes to our Club O offerings. For example, in Q4 2016 we discontinued rewards on the Club O Silver program. Such changes could cause confusion among our customers. Because our Club O Gold members tend to be particularly valuable customers, a loss of a significant number of them would have an adverse effect on us. Further, if we fail to successfully implement the changes we are planning or otherwise fail to develop and market our Club O offerings, it could have a material adverse effect on our business.
Our insurance coverage and indemnity rights may not adequately protect us against loss.
The types, coverage, or the amounts of any insurance coverage we may carry from time to time may not be adequate to compensate us for any losses we may actually incur in the operation of our business. Further, any insurance we may desire to purchase may not be available to us on terms we find acceptable or at all. We are not indemnified by all of our suppliers, and any indemnification rights we may have may not be enforceable or adequate to cover actual losses we may incur as a result of our sales of their products. Actual losses for which we are not insured or indemnified, or which exceed our insurance coverage or the capacity of our indemnitors or our ability to enforce our indemnity agreements, could have a material adverse effect on our business.
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 and business.
Risks Related Primarily to our Common Stock and Other Securities
(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.)
The issuance of our Series A Preferred Stock and our Series B Preferred Stock could adversely affect the holders of our common stock in some circumstances.
In December 2016, we issued shares of our Blockchain Voting Series A Preferred Stock (the "Series A Preferred") and our Voting Series B Preferred Stock (the "Series B Preferred," and together with the Series A Preferred, collectively sometimes called the "Preferred Stock") in a registered rights offering (the "rights offering"). The Preferred Stock could adversely affect the holders of our common stock in some circumstances. Except as required by law, the Preferred Stock votes with the common stock on all matters submitted to a vote of the common stock, with holders of the Preferred Stock having one vote for each share of Preferred Stock held. As of September 30, 2017, the 681,259 issued shares of Preferred Stock constituted approximately 2.7% 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. Holders of the Preferred Stock will be entitled to an annual cash dividend equal to $0.16 per share of Preferred Stock, in preference to any dividend payment to the holders of the common
stock. 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 any 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. The Preferred Stock will rank on a parity with the common stock with respect to rights upon our liquidation, winding up or dissolution. If we are a party to any merger or consolidation in which the 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 be required to 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. Any of the foregoing could have a material adverse effect on the holders of the common stock.
Our quarterly operating results are volatile and may adversely affect the market price of our securities, 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 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 price of our securities include: |
| |
• | increases in the cost of advertising and changes in our sales and marketing expenditures; |
• | expenses we incur in our Medici 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, in the costs of marketing as well as in producing pricing, that results in losses or lower profit margins; |
• | the amount and timing of operating costs and capital expenditures relating to the expansion of our business operations and infrastructure; |
• | the amount and timing of our purchases of inventory; |
• | our inability to manage distribution operations or provide adequate levels of customer service; |
• | increases in the cost of fuel, transportation or distribution; |
• | our ability to successfully implement technology changes or to integrate operations and technologies from acquisitions or other business combinations; |
• | our efforts to offer new lines of products and services; and |
• | our ability to attract users to our shopping and other sites. |
Any of the foregoing could have a material adverse effect on our financial results and business and particularly on our ability to raise capital, and could have a material adverse effect on the holders of our securities.
Sales by our significant stockholders could have an adverse effect on the market price of our stock.
A small number of our stockholders own significant percentages of our common stock and preferred stock. If one or more of them were to offer or sell all or a portion of their holdings, the market price of our common stock, preferred stock or both could be materially adversely affected. 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.
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 stockForm 10-K for the foreseeable future. We intend to invest our future earnings, if any, to fund our growth. Therefore, holdersyear ended December 31, 2022.
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.
Provisions in our amended and restated certificate of incorporation and bylaws and Delaware law might discourage, delay or prevent a change of control of our company or changes in our management.
Our amended and restated certificate of incorporation and bylaws contain provisions that could discourage, delay or prevent a change in control of our company or changes in our management that the stockholders of our company may deem advantageous. These provisions among other things:
|
| |
• | permit the board of directors to establish the number of directors; |
• | provide that only one-third of our board of directors is elected at each of our annual meetings of stockholders (and our amended and restated certificate of incorporation prohibits cumulative voting in the election of directors); |
• | mean that directors may be removed by the affirmative vote of the holders of the outstanding shares of common stock only "for cause;" |
• | authorize the issuance of "blank check" preferred stock that our board could use to implement a stockholder rights plan (also known as a "poison pill"); |
• | eliminate the ability of our stockholders to call special meetings of stockholders; |
• | prohibit stockholder action by written consent, which requires all stockholder actions to be taken at a meeting of our stockholders; |
• | provide that the board of directors is expressly authorized to make, alter or repeal our bylaws; |
• | establish advance notice requirements, including specific requirements as to the timing, form and content of a stockholder's notice, for nominations for election to our board or for proposing matters that can be acted upon by stockholders at annual stockholder meetings; |
• | provide that special meetings of our stockholders may be called only by the board of directors, the chairman of the board, the chief executive officer or the president; and |
• | provide that stockholders are permitted to amend the bylaws only with the approval of the holders of sixty-six and two-thirds percent (66-2/3%) of the voting power of outstanding capital stock entitled to vote at an election of directors. |
In addition, Section 203 of the Delaware General Corporation Law may discourage, delay or prevent a change in control of our company. In general, Section 203 prohibits a publicly held Delaware corporation from engaging in a "business combination" with an "interested stockholder" for a period of three years following the date the person became an interested stockholder, subject to certain exceptions.
Further, certain provisions of the loan agreement we entered into on or about November 6, 2017 with a lender directly or indirectly wholly owned by members of Dr. Patrick Byrne’s family could discourage, delay or prevent a change in control of our company or changes in our management.
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. Under the terms of the outstanding grants, upon vesting, one share of our common stock is issued for every RSU held. Under the terms of these grants, the board or the compensation committee could determine to accelerate the vesting of RSUs in the event of a sale of our company 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, the aggregate amount outstanding as of September 30, 2017 was approximately 2.2% of the number of shares of common stock outstanding.
We have issued and in the future may again issue preferred stock as authorized by our amended and restated certificate of incorporation 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. In addition to the possibility that the Board could do so in connection with the adoption of a stockholder rights plan as described above, the Board has done so and could do so again for a variety of other purposes.
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 lack of coverage may adversely affect our share price and trading volume. The lack of coverage may cause our share price or trading volume to be lower than they might be if more analysts covered us.
Additional Risks Related Primarily to our Series A Preferred Stock
The Series A Preferred and the tZERO Platform are novel, and the use of the PRO Securities ATS utilizing the tZERO Platform for trading public digital securities was untested prior to the December 2016 closing of the offering of the Series A Preferred.
Trades in publicly traded securities currently generally take place through the continuous net settlement system operated by The Depositary Trust Company ("DTC"). Our Series A Preferred does not trade or settle through the system operated by the DTC. Instead, shares of Series A Preferred trade exclusively on a registered alternative trading system (the "PRO Securities ATS") operated by our indirect majority-owned subsidiary PRO Securities LLC ("PRO Securities") utilizing technology known as the tZERO Issuance and Trading Platform (the "tZERO Platform"). Shares of Series A Preferred can be held only in an online brokerage account with Keystone Capital Corporation ("Keystone"). Unlike trades through the system operated by the DTC, trades of the Series A Preferred settle on the trade date. The tZERO Platform is a recent development, licensed by PRO Securities from our majority-owned subsidiary tØ.com, Inc. ("tZERO"), and the tZERO Platform had not been tested with public trading of digital securities prior to the closing of the offering of the Series A Preferred in December 2016. Consequently, investors in the Series A Preferred bear the risks of investing in a novel type of security that trades exclusively on a novel type of trading platform and that is subject to a number of unusual restrictions, as well as the risks of investing in our business. Any failure of the PRO Securities ATS or of the tZERO Platform to perform as expected could have a material adverse effect on holders' ability to sell the Series A Preferred.
Our Series A Preferred is not and will not be listed on any securities exchange; prior to December 2016 there was no trading market for the Series A Preferred, and an active trading market has not yet developed and may not develop.
Our Series A Preferred is a new issue of securities that may be traded only on an unprecedented trading platform. Prior to December 2016 there was no established trading market for the Series A Preferred, and no digital security had ever been publicly traded on the PRO Securities ATS or utilizing the tZERO Platform. As of September 30, 2017 only 141 persons had open online brokerage accounts with Keystone for the purpose of acquiring and holding shares of Series A Preferred, including persons who opened accounts in order to participate in the rights offering, and only ten trades in the Series A Preferred had taken place since the closing of the rights offering in December 2016. The Series A Preferred is not and will not be listed on any securities exchange or any other market of any kind, other than the PRO Securities ATS utilizing the tZERO Platform. Even if a trading market for the Series A Preferred does develop on the PRO Securities ATS utilizing the tZERO Platform, the depth and liquidity of that market and the ability of the holders to sell the Series A Preferred may nevertheless be very limited, which may have a material adverse effect on holders 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. tZERO also licenses the tZERO Platform to the Company for the Company's use in connection with the Series A Preferred. Neither tZERO nor PRO Securities has substantial resources. PRO Securities had net capital of approximately $9,194 at September 30, 2017. Neither tZERO nor PRO Securities has any legally binding 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, 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.
The requirement that each prospective purchaser of Series A Preferred open and maintain an online brokerage account with Keystone limits the number of potential purchasers.
In order to trade in the Series A Preferred, a prospective purchaser is required to open an online brokerage account with Keystone Capital Corporation ("Keystone"), and it is possible that very few prospective purchasers will ever do so. Consequently, we expect liquidity in the Series A Preferred to be very limited, which could have a material adverse effect on holders' ability to trade the Series A Preferred.
Accounts for the Series A Preferred are held directly in the customer's name, rather than in "street name."
Each investor in the Series A Preferred is required to open an online brokerage account in his, her or its name with Keystone. Investors cannot hold their Series A Preferred in "street name." The Series A Preferred shares are directly recorded on our stockholder books and records maintained by Computershare Trust Company, N.A. ("Computershare"). We expect that many potential investors will not hold securities in their own names and therefore will not invest in the Series A Preferred. In addition, as a result of this requirement, individual retirement accounts and other fiduciary or nominee accounts including 401(k) accounts are unable to acquire shares of Series A Preferred (although certain custodial accounts for minors are permitted). We expect that these limitations will further limit liquidity in the Series A Preferred, and the limitations may have a material adverse effect on the development of any trading market in the Series A Preferred.
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 tZERO Platform makes trade data publicly available shortly after each trade. Although the trade data that the tZERO Platform makes publicly available is anonymous, the publicly available information includes the digital wallet address (the location where records of transactions and balances involving the series A Preferred are stored) of each holder transacting in Series A Preferred, and the entire trading history of each digital wallet (including the number of securities traded by each digital wallet, the price of each trade and the balance of the securities held in each digital wallet). As a result, the trading history of each digital wallet is available to the general public. It may be possible for members of the public to determine the identity of the holders of certain wallets based on the information that the tZERO Platform makes publicly available and other publicly available information, including any ownership reports required to be filed with the SEC regarding the Series A Preferred. In addition, under Delaware law stockholders have certain rights to inspect and copy a corporation's stock ledger and a list of its stockholders. Delaware law also requires the Company to make lists of its stockholders, including the number of shares held, available for inspection by stockholders of the Company in connection with stockholder meetings. These lists disclose the identity of stockholders of record. 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. Potential investors who desire to execute their trades in relative anonymity may find these aspects of the tZERO Platform unattractive, which may further limit liquidity in the Series A Preferred, and may have a material adverse effect on the development of any trading market in the Series A Preferred.
Only certain persons and entities are able to acquire Series A Preferred.
Only certain persons and entities may purchase Series A Preferred. We expect that these limitations will limit liquidity in the Series A Preferred, and the limitations may have a material adverse effect on the development of any trading market in the Series A Preferred.
The Series A Preferred and any development of a trading market for the Series A Preferred depends on both Keystone and its clearing broker, ETC.
The Series A Preferred depends on the continuing business operations of both Keystone and Electronic Transaction Clearing, Inc. ("ETC"). Keystone is the only broker dealer authorized to provide the accounts required to acquire, hold and trade shares of 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 its business in the ordinary course or to satisfactorily perform their respective obligations could require PRO Securities to engage a substitute broker dealer to perform the functions we expect Keystone to perform, and Keystone or such substitute broker dealer might need to engage a substitute clearing broker. PRO Securities or Keystone may not be able to do so on a timely basis or at all. A transition from Keystone to a replacement broker dealer or from ETC to a replacement clearing broker would be a lengthy process, during which time it would be impossible to trade Series A Preferred.
A violation of privacy or data protection laws could have a material adverse effect on PRO Securities, tZERO or other entities, the tZERO Platform and the Series A Preferred.
PRO Securities, tZERO and other entities relevant to the operation of the PRO Securities ATS utilizing the tZERO Platform, including Keystone, ETC and Computershare, are subject to applicable privacy and data protection laws and regulations. Any violations of laws and regulations relating to the safeguarding of private information could subject us or any of them to fines, penalties or other regulatory actions, as well as to civil actions by affected parties. Any such violations could adversely affect the ability of PRO Securities to operate the PRO Securities ATS or to use the tZERO Platform, either of which could have a material adverse effect on holders' ability to trade Series A Preferred.
PRO Securities, tZERO, the PRO Securities ATS, the tZERO Platform and the other entities relevant to the operation of the PRO Securities ATS are subject to cyberattacks, security risks and risks of security breaches.
PRO Securities, tZERO, the PRO Securities ATS, the tZERO Platform and the other entities relevant to the operation of the PRO Securities ATS utilizing the tZERO Platform, including Keystone, ETC and Computershare, are all subject to cyberattacks, security risks and risks of security breaches. An attack on any of them or a breach of security of any of them could result in a loss of private data, unauthorized trades, and an interruption of trading for an extended period of time. Any such attack or breach could adversely affect the ability of PRO Securities to operate the PRO Securities ATS or to utilize the tZERO Platform, or both, any of which could have a material adverse effect on holders' ability to trade the Series A Preferred. Any breach of data security that compromises the security of any of the private digital keys used to authorize or validate transaction orders, or that enables any unauthorized person to generate any of the private digital keys, could result in unauthorized trades and would have a material adverse effect on the Series A Preferred. Because trades on the PRO Securities ATS utilizing the tZERO Platform settle on the trade date, it could be impossible to correct unauthorized trades.
In the event of the insolvency of Keystone or ETC, the Securities Investor Protection Corporation would be unable to cause the return of shares of Series A Preferred until a substitute for Keystone or ETC, as applicable, was in place.
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. In a liquidation under the Securities Investor Protection Act, SIPC and a court-appointed trustee typically work to return customers' securities and cash. Within limits, SIPC expedites the return of missing customer property by protecting each customer up to $500,000 for securities and cash (including a $250,000 limit for cash only). If Keystone or ETC were to become insolvent, the structure of the trading system for the Series A Preferred could cause delays in the return of Series A Preferred until a substitute for Keystone or ETC, as applicable, was in place, which could have a material adverse effect on holders of Series A Preferred.
Certain transactions involving the Series A Preferred will require manual intervention, which could result in errors.
All ordinary course Series A Preferred purchase and sale transactions initiated by purchasers and sellers through their Keystone accounts are executed on the PRO Securities ATS utilizing the automated processes of the tZERO Platform, without separate manual intervention by any of the relevant parties. Extraordinary transactions, however, may require manual intervention, which would be initiated by employees of ETC through the tZERO Platform. For example, a unilateral transfer to a specific transferee, such as gift to a family member or charity, or an involuntary transfer pursuant to a court order, will require such manual intervention. In any situation involving manual intervention, there is a risk of human error. The same-day settlement of trades on the PRO Securities ATS utilizing the tZERO Platform also means that any error not detected promptly on the trade date may be impossible to correct, which could have a material adverse effect on holders of Series A Preferred.
The same-day settlement of trades on the PRO Securities ATS utilizing the tZERO Platform may make it impossible to correct trading errors in the Series A Preferred.
Trades on the PRO Securities ATS utilizing the tZERO Platform settle on the trade date rather than on the current three-day (T+3) basis or the two-day (T+2) basis expected to begin in September 2017. This may make it impossible to correct trading errors that might have been corrected prior to settlement under a T+3 or T+2 system. Consequently, persons acquiring shares of Series A Preferred must accept the risk that correction of any trading errors may be impossible. The occurrence of any such trading error could have a material adverse effect on any affected holder of Series A Preferred. Further, in the future ETC's custody and settlement systems may be able to move funds between customer accounts in near real-time after order executions are recorded by the PRO Securities ATS on the electronic data store in which the ownership and transfer of the Series A Preferred are recorded (the "Proprietary Ledger"), which could result in near-real time settlement. Near-real time settlement would further increase the risk that correction of trading errors may be impossible, and could have a material adverse effect on any affected holder of Series A Preferred.
The technology on which the tZERO Platform depends is in an area in which tZERO and PRO Securities have limited experience.
Neither tZERO nor PRO Securities has significant experience with the technology on which the tZERO Platform depends or the operation of the tZERO Platform. Portions of the technology utilized by the tZERO Platform have been developed by tZERO recently. Any problems tZERO or PRO Securities encounters with the operation of the tZERO Platform, including technical, legal and regulatory problems, could have a material adverse effect on holders of the Series A Preferred.
tZERO may continue to modify the tZERO Platform, and any such modifications could require periods of downtime during which trading on the PRO Securities ATS might be suspended.
tZERO developed the tZERO Platform recently and intends to continue to work on enhancements to the tZERO Platform. The continued development of enhancements to the tZERO Platform or other modifications of the tZERO Platform could cause service interruptions and interruptions in trading on the PRO Securities ATS, which could make it impossible to trade the Series A Preferred from time to time. Any such interruptions could occur with little or no notice, which could have a material adverse effect on holders of the Series A Preferred.
Our use of the Bitcoin blockchain to enable members of the public to confirm that the public copies of the Proprietary Ledger have not been altered depends on the continued availability and functioning of the Bitcoin blockchain.
The Series A Preferred trade exclusively on the PRO Securities ATS utilizing the tZERO Platform. The tZERO Platform embeds a digital fingerprint in the Bitcoin blockchain that may be used to confirm that the public copies of the Proprietary Ledger have not been altered. No person, business, governmental authority or other entity or authority of any kind has any obligation to provide any financial, technical or other support to the continued operation or development of blockchain technology. If the Bitcoin blockchain were to become unavailable to us in its current form and functionality for any reason, we would need to use a different form of public announcement, which could make it more difficult for members of the public to confirm that the public copies of the Proprietary Ledger have not been altered, which could have a material adverse effect on the holders of the Series A Preferred.
Trading in the Series A Preferred depends on the operation and functionality of the PRO Securities ATS, on tZERO's proprietary tZERO Platform and on the Proprietary Ledger.
The Series A Preferred trades exclusively on the PRO Securities ATS utilizing the tZERO Platform. The ATS is operated and maintained by PRO Securities, and the tZERO Platform is maintained by tZERO. Each of PRO Securities and tZERO is a direct or indirect majority-owned subsidiary of the Company, and neither of them has substantial resources. If the PRO Securities ATS or the tZERO Platform were to fail to operate as intended for any reason, trading in the Series A Preferred could be impossible until the failure were corrected and full functionality of the affected system or systems were restored and tested. Further, if the Proprietary Ledger were to fail to operate as intended, or were to become unavailable to us in its current form and functionality for any reason, the tZERO Platform might be unable to publish trade data or to provide trade data to ETC and to the transfer agent. Any of the foregoing could have a material adverse effect on our ability to execute or settle trades of Series A Preferred, to maintain accurate records of the ownership of the Series A Preferred and to comply with our obligations relating to records of the ownership of the Series A Preferred and a material adverse effect on the holders of the 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 both the Series A Preferred and the Series B Preferred. If Computershare were unable or unwilling for any reason to serve as the transfer agent for the Series A Preferred, trading in the Series A Preferred would be impossible unless we were able to locate another transfer agent able and willing to serve as a replacement transfer agent for the Series A Preferred. We estimate that a transition from Computershare to a replacement transfer agent would take approximately three months; however, any such transition could take longer, during which time it would be impossible to trade in the Series A Preferred, which would have a material adverse effect on the holders of the Series A Preferred.
The tZERO Platform relies on technology and intellectual property rights licensed from tZERO to PRO Securities.
The ability of PRO Securities to operate the PRO Securities ATS utilizing the tZERO Platform depends on technology and intellectual property rights that PRO Securities licenses from our majority-owned subsidiary tZERO. Keystone, ETC and
Computershare, in the performance of their respective obligations, also depend on the technology and intellectual property rights that they license (or have licensed on their behalf) from tZERO. tZERO has filed both provisional and non-provisional patent applications covering numerous aspects of the technology relating to the tZERO Platform, none of which have been granted. We believe that a number of organizations are or may be working to develop trading systems utilizing distributed ledger or blockchain technologies that may be competitive with the tZERO Platform. Some or all of such organizations and/or their respective investors have substantially greater resources than tZERO or we have, and many or all of them may be attempting to patent technologies that may be competitive with or similar to the technology tZERO has developed. If third parties obtain patents covering any or all of the technology relating to the tZERO Platform, or if the rights of tZERO to the technology or intellectual property necessary for the operation of the tZERO Platform were otherwise invalidated or limited, or if tZERO were to fail to comply with its obligations under the applicable license agreement, or for any other reason were unable to provide the technology and intellectual property that PRO Securities requires, PRO Securities would be unable to operate the PRO Securities ATS utilizing the tZERO Platform, 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.
The commercial law regarding traditional investment securities in the United States is well-developed. Article 8 of the Uniform Commercial Code as adopted in most states, including Delaware, provides a set of rules that governs common aspects of securities transfers and related matters. 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 Bitcoin blockchain is unclear.
Existing state and federal laws applicable to various activities of persons exchanging or otherwise using virtual currencies, in some cases expressly including Bitcoin, impose prohibitions and require licensing or registration requirements and impose substantive regulations on such persons. Many more states impose licensing and substantive regulation on persons engaging in various activities relating to money transmission, some of which do or may apply to the transmission of virtual currencies such as Bitcoin. The failure to be properly licensed and registered if required under any of these state or federal laws can be a criminal offense. The tZERO Platform uses the Bitcoin blockchain for the purpose of enabling members of the public to confirm that the public copies of the Proprietary Ledger have not been altered. The tZERO Platform does not use the Bitcoin blockchain for any purpose of transmitting value and does not transmit Bitcoin to any third-party; rather, the tZERO Platform simply transmits nominal amounts of Bitcoin to itself in order to embed data relating to Series A Preferred transactions into the Bitcoin blockchain. 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 the Financial Crimes Enforcement Network ("FinCEN") of the U.S. Department of the Treasury. Although we do not believe that the operation of the tZERO Platform requires such licensing or registration, if any regulatory authority were to assert otherwise, it could have a material adverse effect on the ability of the parties involved in the operation of the tZERO Platform to publish Series A Preferred trade data to the Bitcoin blockchain, which could have a material adverse effect on the holders of the Series A Preferred.
The potential application of foreign laws to the tZERO Platform is unclear.
Any person opening an account with Keystone will be required to represent that doing so and acquiring shares of Series A Preferred will not cause a violation of any law, rule or regulation of any jurisdiction outside of the United States and will not subject us or PRO Securities or the tZERO Platform to regulation by any authority in any jurisdiction outside of the United States. We also limit purchasers of Series A Preferred to certain U.S. residents, entities and trusts. If we became subject to any law, rule or regulation of any jurisdiction outside of the United States, it could have a material adverse effect on the ability of PRO Securities to operate the tZERO Platform and on the Series A Preferred, which would have a material adverse effect on the holders of the Series A Preferred.
Regulatory or factual developments may adversely affect the tZERO Platform.
Neither PRO Securities nor tZERO is registered as a transfer agent under the Exchange Act. If PRO Securities or tZERO were required to register as a transfer agent, the process would be expensive and one or both entities might be unable to do so. Further, future regulatory developments could otherwise affect the tZERO Platform or the ability of PRO Securities to operate the tZERO Platform. To the extent that any current or future regulatory requirements adversely affect the ability of PRO
Securities to operate the tZERO Platform or its ability to utilize the Bitcoin blockchain, such regulatory requirements would have a material adverse effect on the holders of the Series A Preferred.
PRO Securities is involved in an ongoing dialog with regulatory authorities.
PRO Securities has been and remains involved in ongoing discussions with regulatory authorities about the operation of the PRO Securities ATS utilizing the tZERO Platform and various matters relating to the regulated entities involved. While many of the discussions have been relatively informal, PRO Securities has also received and responded to written inquiries, and most recently received and responded to additional written inquiries from FINRA. While we consider these continuing inquiries to be ordinary course in light of the non-traditional nature of the registered alternative trading system operated by PRO Securities utilizing the tZERO Platform, any failure of PRO Securities to satisfy FINRA or any other regulatory authority that PRO Securities is in compliance with all applicable rules and regulations could have a material adverse effect on the holders of the Series A Preferred.
Holders of Series A Preferred are at risk of fee and commission increases by Keystone.
At present the tZERO Platform does not allow more than a single broker dealer to provide access to the system. The lack of an alternative broker dealer to provide access to the tZERO Platform may subject customers to the risk of fee and commission increases by Keystone. Keystone has agreed to limits on the fees and commissions it will charge to customers who trade shares of the Series A Preferred; however, if PRO Securities and tZERO agree to amend the relevant agreements to permit increases to those limits, or if such agreements or the provisions regarding such matters were ineffective for any reason, it could have a material adverse effect on 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, even if the Series B Preferred is trading for substantially less than the Series A Preferred.
We have the right to cause the conversion of all outstanding shares of Series A Preferred into shares of Series B Preferred at any time. If we were to do so at a time when the Series B Preferred were trading at a price lower than the trading price of the Series A Preferred, holders of Series A Preferred would likely experience an immediate and potentially material decrease in the market value of the Series A Preferred they hold and of the Series B Preferred they would receive upon the conversion. Investors should not purchase shares of Series A Preferred unless they are willing to hold shares of Series B Preferred in lieu of shares of Series A Preferred.
The terms of the Series B Preferred could be amended after the issuance of the Series B Preferred without the consent of the holders of the Series A Preferred.
The terms of the Series B Preferred may be amended at any time without the consent of the holders of the Series A Preferred. Nevertheless, we will have the right to cause the conversion of all outstanding shares of Series A Preferred into shares of Series B Preferred at any time. Consequently, holders of Series A Preferred are subject to the risk that their shares could be converted into shares of Series B Preferred having terms different from those of the Series B Preferred at the date of its issuance or at the date of a holder's acquisition of Series A Preferred. 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.
Taxpayers must report gains and losses on sales of securities, and related cost basis information when they file their income tax returns. Brokers, including Keystone, also have a requirement to report sales information to the IRS. Holders of most securities typically can elect one of several methods permitted by the IRS for their reporting of their cost basis in securities. However, only one method of cost basis reporting (the first-in, first-out, or FIFO, method) is available for the Series A Preferred. Sellers of Series A Preferred will not be able to elect any method other than FIFO to report their sales information to the IRS. As a result, sellers of Series A Preferred may be required to pay more tax on their sales or to pay taxes earlier than might have been required if other methods of cost basis reporting had been available, which could have a material adverse effect on the holders of Series A Preferred.
Additional Risks Related to 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 result in very limited trading in each series.
Although we have the right to convert the outstanding shares of Series A Preferred into Series B Preferred, we do not intend to issue any additional shares of Series A Preferred or any additional shares of Series B Preferred. Consequently, we expect trading of the Series A Preferred and the Series B Preferred to be limited to the shares we issued in the rights offering. As a result, trading in the Series A Preferred and the Series B Preferred may 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 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 will not be available for resales of "restricted shares" of Series A Preferred, and Rule 144 volume limitations on resales of Series B Preferred would be 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, acquire "restricted shares" for purposes of Rule 144. Although Rule 144 permits public sales of "restricted shares" subject to certain conditions, we do not expect Rule 144 ever to be available for any sales of Series A Preferred. Because all of the shares of Series A Preferred and Series B Preferred were issued in a registered public offering, and because we expect to register the resale of shares of Series A Preferred and Series B Preferred by our affiliates, we do not anticipate that any outstanding shares of Series A Preferred or Series B Preferred will be "restricted" for purposes of Rule 144. However, any person who acquires any shares of Series A Preferred or Series B Preferred in any manner described in the definition of "restricted securities" in Rule 144, will acquire "restricted" shares. We do not expect Rule 144 ever to be available for public resales of any shares 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, sales of Series B Preferred under Rule 144 may also be severely limited.
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.
Subject to applicable laws and regulations regarding issuer repurchases of their capital stock, we could repurchase shares of the Series A Preferred or Series B Preferred. If we repurchase any shares, we would do so only at or below the prices at which we could redeem shares. Because our right to redeem the Series A Preferred and the Series B Preferred will be at prices that will vary with the price of our common stock as well as the prices of the Series A Preferred and the Series B Preferred, respectively, and in any case would be no less than the Subscription Price, we will have an economic incentive to repurchase the shares at their trading prices from time to time if those prices are lower than the prices at which we would be entitled to 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, the holders of 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 may be substantially lower than the trading price of our common stock at any time. The market for the Series B Preferred is expected to have substantially less liquidity than the market for our common stock, which is traded on the Nasdaq Global Market, and the market for the Series A Preferred has been and is expected to remain even more limited. The Series B Preferred trades in the over-the-counter market rather than on any securities exchange, and the Series A Preferred trades exclusively on the PRO Securities ATS utilizing the tZERO
Platform, which is a closed trading platform. Consequently, the trading prices of the Series A Preferred and the Series B Preferred may both 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. On June 23, 2017, OTC Markets Group, Inc. announced that the Series B Preferred quotations had been moved from the OTCQB® Venture Market to the OTCQX® Best Market; however, the change may not result in improved liquidity in the Series B Preferred. Further, the Series B Preferred may fail to qualify for the OTCQX in the future.
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 Series A Preferred or Series B Preferred into shares of common stock or to exchange their Series A Preferred or Series B Preferred for shares of common stock, except that such holders have the right to vote with the common stock (together with the holders of the other series of Preferred Stock) on any matter submitted to a vote of the holders of the common stock, the right to receive payments upon liquidation with the holders of the common stock (together with the holders of the other series of Preferred Stock) and the right to receive dividends (together with the holders of the other series of Preferred Stock) in preference to the holders of the common stock and to participate in cash dividends, if any, paid on 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.
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 September 30, 2017, the 681,259 shares of Preferred Stock outstanding represented approximately 2.7% of the combined voting power of the Series A Preferred, the Series B Preferred and the common stock, voting together as a single class. 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, our 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. Further, although we will be contractually restricted from paying a
dividend on the common stock unless we have paid preferential cumulative 1.0% annual dividends on the Series A Preferred and the Series B Preferred, we have never paid a dividend on the common stock and we have no current intent to do so. Consequently, 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. Moreover, agreements governing any future indebtedness of ours may further limit our ability to pay dividends on our capital stock, including the Series A Preferred and the Series B Preferred. In addition, our ability to pay dividends is limited by applicable law. 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 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 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
IssuanceRecent Purchases of equity securitiesEquity Securities
On September 22, 2017, we issued 14,639See Note 10—Stockholders' Equity, in the Notes to Unaudited Consolidated Financial Statements included in Item 1, Part I, Financial Statements (Unaudited) of this Quarterly Report on Form 10-Q for information regarding our authorized share repurchase program. There were no repurchases made during the three months ended March 31, 2023. As of March 31, 2023, the approximate dollar value of shares of our common stock in exchange for 14,639 shares of our Voting Series B Preferred Stock in an exchange exempt from registrationthat may yet be purchased under the Securities Act of 1933, as amended, pursuant to Section 3(a)(9) thereof. The class of persons to which we issued the common stock was holders of our Voting Series B Preferred Stock. No underwriters were involved. The transaction was an exchange in which we did not pay any consideration other than the issuance of the shares of common stock and did not receive any consideration other than the delivery of the shares of Voting Series B Preferred Stock. The exchange was between the issuer with existing security holders exclusively where no commission or other remuneration was paid or given directly or indirectly for soliciting the exchange. The shares of Voting Series B Preferred Stock we received in the exchange were not restricted in the hands of the stockholders that exchanged them.repurchase program is $19.9 million.
Issuer purchases of equity securities
None.
Limitations upon the payment of 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.
In December 2016, we issued a total of 695,898 shares of our preferred stock (the "Preferred Stock"), of which 681,259 shares remained outstanding at September 30, 2017. 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, 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.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
|
| | | | | | | | | | | | | |
| (a) | | ExhibitsExhibit Number | | Exhibit Description |
| | 10.13.1 | | |
| | *31.131.1* | | |
| | *31.231.2* | | |
| | 32.1**32.1 | | |
| | 32.2**32.2 | | |
| | 101 | | Attached as Exhibit 101 to this report are the following documents formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Comprehensive Income (Loss), (iv) Consolidated Statements of Cash Flows, (v) Consolidated Statements of Stockholders' Equity, and (vi) Notes to Consolidated Financial Statements. |
| | 104 | | The cover page from the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2023, formatted in Inline XBRL (included as Exhibit 101). |
* Filed herewith.
** Furnished herewith.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrantregistrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
| | | | | | | |
| Date: | November 8, 2017May 2, 2023 | OVERSTOCK.COM, INC. |
| | |
| | /s/ ROBERT P. HUGHESADRIANNE B. LEE |
| | Robert P. HughesAdrianne B. Lee |
| | Senior Vice President, Finance and Risk Management
Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer) |
