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, ~~2019~~2020



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
(Address of principal executive offices)				(Zip Code)
~~(801) 947-3100~~
~~(Registrant's telephone number, including area 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
Common Stock, $0.0001 par value	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. Yesý☒ No o☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yesý☒ 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	☐	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☒

~~35,249,070~~42,765,117 shares of the Registrant's common stock, par value $0.0001, outstanding on ~~November 6, 2019~~October 30, 2020.

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OVERSTOCK.COM, INC.

TABLE OF CONTENTS TO QUARTERLY REPORT ON FORM 10-Q

For the Quarterly Period Ended September 30, ~~2019~~

~~TABLE OF CONTENTS~~2020



		Page
PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)	3
	~~Consolidated Balance Sheets~~	3
	~~Consolidated Statements of Operations~~	4
	~~Consolidated Statements of Comprehensive Loss~~	5
	Consolidated ~~Statements of Changes in Stockholders' Equity~~Balance Sheets	65
	Consolidated Statements of ~~Cash Flows~~Operations	7
	Consolidated Statements of Comprehensive Income (Loss)	8
	Consolidated Statements of Changes in Stockholders' Equity	9
	Consolidated Statements of Cash Flows	11
	Notes to Unaudited Consolidated Financial Statements	1013

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	3731

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	5745

Item 4.	Controls and Procedures	5846

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	5947

Item 1A.	Risk Factors	5947

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	6750

Item 3.	Defaults Upon Senior Securities	6751

Item 4.	Mine Safety Disclosures	6751

Item 5.	Other Information	6751

Item 6.	Exhibits	6751

Signature		6852

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Special Cautionary Note Regarding Forward-Looking Statements

This Report on Form 10-Q and the documents incorporated herein by reference, as well as 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 may be materially different from the results expressed or implied by any of our forward-looking statements.

Actual events or results may differ materially from those contemplated by our forward-looking statements for a variety of reasons, including among others:

the impact that the novel coronavirus, or COVID-19, pandemic may have on our business and the industries in which we and our subsidiaries operate;

the impact that any litigation, claims, or regulatory matters could have on our business, financial condition, results of operations, and cash flows;

any increases in the price of importing into the U.S. the types of merchandise we sell in our retail business or other supply chain challenges that limit our access to merchandise we sell in our retail business;

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;

any inability to convert new customers into repeat customers or maintain increased sales volumes;

any downturn in the U.S. housing industry or other changes in U.S. and global economic conditions or U.S. consumer spending, as a result of the COVID-19 pandemic or otherwise;

our exposure to cyber security risks, risks of data loss and other security breaches;

any strategic transactions, restructurings or other changes we may make to our business;

any challenges that result in the unavailability of our Website or reduced performance of our transaction systems;

the possibility that we are unable to protect our proprietary technology and to obtain trademark protection for our marks;

current claims of intellectual property infringement to which we are subject and additional infringement claims to which we may become subject in the future;

the commercial, competitive, technical, operational, financial, regulatory, legal, reputational, marketing and other obstacles we face in trying to create a profitable business from our blockchain initiatives, including tZERO;

the extensive regulatory regimes applicable to tZERO and the possibility that various tZERO subsidiaries or ventures do not receive the regulatory approval required to operate their anticipated businesses;

any losses or issues we may encounter as a consequence of accepting or holding bitcoin or other cryptocurrencies;

our inability to attract and retain key personnel;

the possibility that the cost of our current insurance policies may increase significantly or fail to adequately protect us as expected; 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 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

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any changes in our expectations or any change in any events, conditions or circumstances on which any of our forward-looking statements are based.

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)

~~Overstock.com, Inc.~~

~~Consolidated Balance Sheets (Unaudited)~~

Overstock.com, Inc. Consolidated Balance Sheets (Unaudited) (in thousands, except per share data)

	September 30, 2020		December 31, 2019
Assets
Current assets:
Cash and cash equivalents	$	529,710	$	112,266
Restricted cash	2,570		2,632
Marketable securities at fair value	1,355		10,308
Accounts receivable, net of allowance for credit losses of $2,053 and $2,474 at September 30, 2020 and December 31, 2019, respectively	35,403		24,728
Inventories	6,867		5,840
Prepaids and other current assets	19,704		21,589
Total current assets	595,609		177,363
Property and equipment, net	125,142		130,028
Intangible assets, net	9,009		11,756
Goodwill	27,120		27,120
Equity securities	48,983		42,043
Operating lease right-of-use assets	25,402		25,384
Other long-term assets, net	11,717		4,033
Total assets	$	842,982	$	417,727
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable	$	119,663	$	75,416
Accrued liabilities	145,668		88,197
Unearned revenue	78,757		41,821
Operating lease liabilities, current	5,959		6,603
Other current liabilities	3,803		3,962
Total current liabilities	353,850		215,999
Long-term debt, net	42,148		0
Operating lease liabilities, non-current	21,640		21,554
Other long-term liabilities	6,038		2,319
Total liabilities	423,676		239,872
Commitments and contingencies (Note 10)

Continued on the following page

~~(in thousands, except per share data)~~

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September 30,
2019 December 31,
2018
Assets

Current assets:

Cash and cash equivalents $ 83,546
$ 141,512
Restricted cash 2,251
1,302
Accounts receivable, net 22,407
35,930
Inventories, net 7,244
14,108
Prepaids and other current assets 18,233
22,415
Total current assets 133,681
215,267
Property and equipment, net 132,696
134,687
Intangible assets, net 12,879
13,370
Goodwill 27,120
22,895
Equity securities 41,713
60,427
Operating lease right-of-use assets 43,266
—
Other long-term assets, net 8,446
14,573
Total assets $ 399,801
$ 461,219
Liabilities and Stockholders' Equity

Current liabilities:

Accounts payable $ 60,557
$ 102,574
Accrued liabilities 79,440
87,858
Deferred revenue 40,512
50,578
Operating lease liabilities, current 5,725
—
Other current liabilities 489
476
Total current liabilities 186,723
241,486
Long-term debt, net —
3,069
Operating lease liabilities, non-current 42,510
—
Other long-term liabilities 1,616
5,958
Total liabilities 230,849
250,513
Commitments and contingencies (Note 7)

Stockholders' equity:

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

Series A, issued and outstanding - 0 and 127 —
—
Series A-1, issued and outstanding - 3,702 and 0 (including 3,577 shares declared as a stock dividend, not yet distributed) —
—
Series B, issued and outstanding - 357 and 355 —
—
Common stock, $0.0001 par value, authorized shares - 100,000

Issued shares - 38,565 and 35,346

Outstanding shares - 35,242 and 32,146 3
3
Additional paid-in capital 726,132
657,981
Accumulated deficit (553,335 ) (458,897 )
Accumulated other comprehensive loss (572 ) (584 )
Treasury stock at cost - 3,323 and 3,200 (68,773 ) (66,757 )
Equity attributable to stockholders of Overstock.com, Inc. 103,455
131,746
Equity attributable to noncontrolling interests 65,497
78,960
Total stockholders' equity 168,952
210,706
Total liabilities and stockholders' equity $ 399,801
$ 461,219

Overstock.com, Inc. Consolidated Balance Sheets (Unaudited) (in thousands, except per share data)

	September 30, 2020			December 31, 2019
Stockholders' equity:
Preferred stock, $0.0001 par value, authorized shares - 5,000
Series A-1, issued and outstanding - 4,204 and 4,210	0			0
Series B, issued and outstanding - 357 and 357	0			0
Common stock, $0.0001 par value, authorized shares - 100,000
Issued shares - 46,317 and 42,790
Outstanding shares - 42,758 and 39,464	4			4
Additional paid-in capital	966,299			764,845
Accumulated deficit	(537,089		)	(580,390		)
Accumulated other comprehensive loss	(556		)	(568		)
Treasury stock at cost - 3,559 and 3,326	(71,124		)	(68,807		)
Equity attributable to stockholders of Overstock.com, Inc.	357,534			115,084
Equity attributable to noncontrolling interests	61,772			62,771
Total stockholders' equity	419,306			177,855
Total liabilities and stockholders' equity	$	842,982		$	417,727

See accompanying notes to unaudited consolidated financial statements.

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Overstock.com, Inc.

Consolidated Statements of Operations (Unaudited)

(in thousands, except per share data)



	Three months ended September 30,						Nine months ended September 30,
	2020			2019			2020			2019
Revenue, net
Retail	$	717,695		$	340,798		$	1,824,249		$	1,070,898
Other	13,956			6,301			41,519			17,639
Total net revenue	731,651			347,099			1,865,768			1,088,537
Cost of goods sold
Retail	548,982			272,545			1,403,418			858,169
Other	11,901			5,006			35,860			13,797
Total cost of goods sold	560,883			277,551			1,439,278			871,966
Gross profit	170,768			69,548			426,490			216,571
Operating expenses
Sales and marketing	72,010			34,215			188,562			102,252
Technology	34,984			32,782			101,458			101,368
General and administrative	34,225			32,681			94,022			104,877
Total operating expenses	141,219			99,678			384,042			308,497
Operating income (loss)	29,549			(30,130		)	42,448			(91,926		)
Interest income	402			449			1,288			1,482
Interest expense	(579		)	(57		)	(1,367		)	(289		)
Other expense, net	(7,526		)	(4,781		)	(5,014		)	(14,048		)
Income (loss) before income taxes	21,846			(34,519		)	37,355			(104,781		)
Provision for income taxes	620			23			1,313			279
Net income (loss)	21,226			(34,542		)	36,042			(105,060		)
Less: Net loss attributable to noncontrolling interests	(2,165		)	(3,604		)	(7,372		)	(10,197		)
Net income (loss) attributable to stockholders of Overstock.com, Inc.	$	23,391		$	(30,938	)	$	43,414		$	(94,863	)
Net income (loss) per share of common stock:
Net income (loss) attributable to common shares—basic	$	0.50		$	(0.89	)	$	1.00		$	(2.74	)
Net income (loss) attributable to common shares—diluted	$	0.50		$	(0.89	)	$	0.99		$	(2.74	)
Weighted average shares of common stock outstanding:
Basic	41,595			35,241			40,697			34,289
Diluted	42,202			35,241			41,030			34,289

Three months ended
September 30, Nine months ended
September 30,
2019 2018 2019 2018
Revenue, net

Retail $ 340,798
$ 435,775
$ 1,070,898
$ 1,353,454
Other 6,301
4,805
17,639
15,590
Total net revenue 347,099
440,580
1,088,537
1,369,044
Cost of goods sold

Retail(1)
272,545
350,651
858,169
1,085,483
Other 5,006
3,213
13,797
11,233
Total cost of goods sold 277,551
353,864
871,966
1,096,716
Gross profit 69,548
86,716
216,571
272,328
Operating expenses:

Sales and marketing(1)
34,215
55,312
102,252
226,942
Technology(1)
32,782
33,880
101,368
97,597
General and administrative(1)
32,681
45,356
104,877
116,551
Total operating expenses 99,678
134,548
308,497
441,090
Operating loss (30,130 ) (47,832 ) (91,926 ) (168,762 )
Interest income 449
383
1,482
1,547
Interest expense (57 ) (101 ) (289 ) (1,370 )
Other expense, net (4,781 ) (1,848 ) (14,048 ) (1,489 )
Loss before income taxes (34,519 ) (49,398 ) (104,781 ) (170,074 )
Provision (benefit) from income taxes 23
(141 ) 279
(445 )
Net loss $ (34,542 ) $ (49,257 ) $ (105,060 ) $ (169,629 )
Less: Net loss attributable to noncontrolling interests (3,604 ) (1,334 ) (10,197 ) (5,886 )
Net loss attributable to stockholders of Overstock.com, Inc. $ (30,938 ) $ (47,923 ) $ (94,863 ) $ (163,743 )
Net loss per common share—basic:

Net loss attributable to common shares—basic $ (0.89 ) $ (1.55 ) $ (2.74 ) $ (5.47 )
Weighted average common shares outstanding—basic 35,241
30,279
34,289
29,256
Net loss per common share—diluted:

Net loss attributable to common shares—diluted $ (0.89 ) $ (1.55 ) $ (2.74 ) $ (5.47 )
Weighted average common shares outstanding—diluted 35,241
30,279
34,289
29,256

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

Cost of goods sold — retail $ 55
$ 41
$ 156
$ 152
Sales and marketing 486
277
1,460
1,465
Technology 1,428
583
4,325
1,725
General and administrative 2,498
1,345
7,682
8,312
Total $ 4,467
$ 2,246
$ 13,623
$ 11,654

~~See accompanying notes to unaudited consolidated financial statements.~~

~~Table of Contents~~

~~Overstock.com, Inc.~~

~~Consolidated Statements of Comprehensive Loss (Unaudited)~~

~~(in thousands)~~

Three months ended
September 30, Nine months ended
September 30,
2019 2018 2019 2018
Net loss $ (34,542 ) $ (49,257 ) $ (105,060 ) $ (169,629 )
Other comprehensive income:
Unrealized gain on cash flow hedges, net of expense for taxes of $0, and $0 4
4
12
12
Other comprehensive income 4
4
12
12
Comprehensive loss $ (34,538 ) $ (49,253 ) $ (105,048 ) $ (169,617 )
Less: Comprehensive loss attributable to noncontrolling interests (3,604 ) (1,334 ) (10,197 ) (5,886 )
Comprehensive loss attributable to stockholders of Overstock.com, Inc. $ (30,934 ) $ (47,919 ) $ (94,851 ) $ (163,731 )

See accompanying notes to unaudited consolidated financial statements.

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Overstock.com, Inc.

Consolidated Statements of ~~Changes in Stockholders' Equity~~Comprehensive Income (Loss) (Unaudited)

(in thousands)

Three months ended September 30, Nine months ended September 30,

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

Number of common shares issued
Balance at beginning of period 38,561
32,203
35,346
30,632
Common stock issued upon vesting of restricted stock 4
5
259
226
Common stock issued for asset purchase —
47
—
147
Exercise of stock warrants —
—
—
1,250
Common stock sold through ATM offering —
2,883
2,960
2,883
Balance at end of period 38,565
35,138
38,565
35,138
Number of treasury stock shares
Balance at beginning of period 3,322
3,196
3,200
3,135
Common stock repurchased through business combination —
—
47
—
Tax withholding upon vesting of restricted stock 1
1
76
62
Balance at end of period 3,323
3,197
3,323
3,197
Total number of outstanding shares 35,242
31,941
35,242
31,941
Common stock $ 3
$ 3
$ 3
$ 3
Number of Series A preferred shares issued and outstanding
Balance at beginning of period 3
127
127
127
Exchange of shares to Series A-1 (2 ) —
(125 ) —
Conversion of shares to Series B (1 ) —
(2 ) —
Balance at end of period —
127
—
127
Number of Series A-1 preferred shares issued and outstanding
Balance at beginning of period 123
—
—
—
Exchange of shares from Series A 2
—
125
—
Dividend declared, not yet distributed 3,577
—
3,577
—
Balance at end of period 3,702
—
3,702
—
Number of Series B preferred shares issued and outstanding
Balance at beginning of period 356
555
355
555
Conversion of shares from Series A 1
—
2
—
Balance at end of period 357
555
357
555
Preferred stock $ —
$ —
$ —
$ —
Additional paid-in capital
Balance at beginning of period $ 719,010
$ 553,112
$ 657,981
$ 494,732
Stock-based compensation to employees and directors 4,467
2,246
13,623
7,614
Common stock issued for asset purchase —
1,500
—
4,430
Issuance and exercise of stock warrants —
—
—
50,587
Common stock sold through ATM offering, net —
94,624
52,112
94,624
Other 2,655
—
2,416
(505 )
Balance at end of period $ 726,132
$ 651,482
$ 726,132
$ 651,482

Continued on the following page



	Three months ended September 30,						Nine months ended September 30,
	2020			2019			2020			2019
Net income (loss)	$	21,226		$	(34,542	)	$	36,042		$	(105,060	)
Other comprehensive income
Unrealized gain on cash flow hedges, net of expense for taxes of $0, $0, $0, and $0	4			4			12			12
Other comprehensive income	4			4			12			12
Comprehensive income (loss)	21,230			(34,538		)	36,054			(105,048		)
Less: Comprehensive loss attributable to noncontrolling interests	(2,165		)	(3,604		)	(7,372		)	(10,197		)
Comprehensive income (loss) attributable to stockholders of Overstock.com, Inc.	$	23,395		$	(30,934	)	$	43,426		$	(94,851	)

~~Table of Contents~~

Overstock.com, Inc.
Consolidated Statements of Changes in Stockholders' Equity (Unaudited)
(in thousands)

Three months ended September 30, Nine months ended September 30,
2019 2018 2019 2018
Accumulated deficit
Balance at beginning of period $ (522,397 ) $ (365,472 ) $ (458,897 ) $ (254,692 )
Cumulative effect of change in accounting principle —
—
—
5,040
Net loss attributable to stockholders of Overstock.com, Inc. (30,938 ) (47,923 ) (94,863 ) (163,743 )
Other —
—
425
—
Balance at end of period $ (553,335 ) $ (413,395 ) $ (553,335 ) $ (413,395 )
Accumulated other comprehensive loss
Balance at beginning of period $ (576 ) $ (591 ) $ (584 ) $ (599 )
Net other comprehensive income 4
4
12
12
Balance at end of period $ (572 ) $ (587 ) $ (572 ) $ (587 )
Treasury stock
Balance at beginning of period $ (68,746 ) $ (66,662 ) $ (66,757 ) $ (63,816 )
Common stock repurchased through business combination —
—
(643 ) —
Tax withholding upon vesting of restricted stock (27 ) (47 ) (1,373 ) (2,893 )
Balance at end of period (68,773 ) (66,709 ) (68,773 ) (66,709 )
Total equity attributable to stockholders of Overstock.com, Inc. $ 103,455
$ 170,794
$ 103,455
$ 170,794

Equity attributable to noncontrolling interests
Balance at beginning of period $ 71,786
$ 77,718
$ 78,960
$ (3,505 )
Proceeds from security token offering, net —
4,167
—
82,610
Stock-based compensation to employees and directors —
—
—
4,040
Tax withholding upon vesting of restricted stock —
—
—
(1,681 )
Net loss attributable to noncontrolling interests (3,604 ) (1,334 ) (10,197 ) (5,886 )
Fair value of noncontrolling interest at acquisition —
—
—
4,468
Paid in capital for noncontrolling interest —
6,700
—
6,700
Other (2,685 ) —
(3,266 ) 505
Total equity attributable to noncontrolling interests $ 65,497
$ 87,251
$ 65,497
$ 87,251

Total stockholders' equity $ 168,952
$ 258,045
$ 168,952
$ 258,045

~~See accompanying notes to unaudited consolidated financial statements.~~

~~Table of Contents~~

Overstock.com, Inc.
Consolidated Statements of Cash Flows (Unaudited)
(in thousands)
Nine months ended
September 30,
2019 2018
Cash flows from operating activities:

Net loss $ (105,060 ) $ (169,629 )
Adjustments to reconcile net loss to net cash used in operating activities:

Depreciation of property and equipment 19,387
19,437
Amortization of intangible assets 3,646
3,596
Non-cash operating lease cost 4,940
—
Stock-based compensation to employees and directors 13,623
11,654
Deferred income taxes, net (26 ) (383 )
Gain on sale of cryptocurrencies (311 ) (8,412 )
Impairment of cryptocurrencies 318
9,641
Impairment of equity securities 6,964
511
Losses on equity method securities 4,922
2,504
Impairments on intangible assets 1,406
—
Other non-cash adjustments 1,997
(1,480 )
Changes in operating assets and liabilities, net of acquisitions:

Accounts receivable, net 12,858
(73 )
Inventories, net 6,864
(1,833 )
Prepaids and other current assets 5,473
(4,806 )
Other long-term assets, net (1,046 ) (4,120 )
Accounts payable (42,110 ) 7,143
Accrued liabilities (8,683 ) 18,044
Deferred revenue (10,066 ) (1,511 )
Operating lease liabilities (4,086 ) —
Other long-term liabilities (205 ) (583 )
Net cash used in operating activities (89,195 )
(120,300 )
Cash flows from investing activities:

Purchase of intangible assets —
(9,583 )
Purchase of equity securities (5,106 ) (43,670 )
Proceeds from sale of equity securities 7,082
—
Disbursement of notes receivable (3,250 ) (2,700 )
Acquisitions of businesses, net of cash acquired 4,886
(12,912 )
Expenditures for property and equipment (17,902 ) (20,677 )
Other investing activities, net 31
34
Net cash used in investing activities (14,259 ) (89,508 )

Continued on the following page

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Overstock.com, Inc.
Consolidated Statements of Cash Flows (Unaudited)
(in thousands)
Nine months ended September 30,
2019 2018
Cash flows from financing activities:

Payments on long-term debt (3,141 ) (40,000 )
Proceeds from issuance and exercise of stock warrants —
50,587
Proceeds from security token offering, net of offering costs and withdrawals —
82,610
Proceeds from sale of common stock, net of offering costs 52,112
94,624
Paid in capital for noncontrolling interest —
6,700
Payments of taxes withheld upon vesting of restricted stock (1,373 ) (4,574 )
Other financing activities, net (1,161 ) (372 )
Net cash provided by financing activities 46,437
189,575
Net decrease in cash, cash equivalents and restricted cash (57,017 ) (20,233 )
Cash, cash equivalents and restricted cash, beginning of period 142,814
203,670
Cash, cash equivalents and restricted cash, end of period $ 85,797
$ 183,437

Supplemental disclosures of cash flow information:
Cash paid during the period:
Interest paid, net of amounts capitalized $ 218
$ 1,232
Income taxes paid (refunded), net (469 ) 59
Non-cash investing and financing activities:

Property and equipment financed through accounts payable and accrued liabilities $ 227
$ 731
Acquisition of assets through stock issuance —
4,430
Common stock repurchased through business combination 643
—
Receivables converted to equity security 1,024
200
Deposit applied to business combination purchase price 7,347
—
Equity method security applied to business combination purchase price 3,800
—
Recognition of right-of-use assets upon adoption of ASC 842 30,968
—

See accompanying notes to unaudited consolidated financial statements.

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Overstock.com, Inc. Consolidated Statements of Changes in Stockholders' Equity (Unaudited) (in thousands)

	Three months ended September 30,					Nine months ended September 30,
	2020		2019			2020			2019
Equity attributable to stockholders of Overstock.com, Inc.
Shares of common stock issued
Balance at beginning of period	43,885		38,561			42,790			35,346
Common stock issued upon vesting of restricted stock	17		4			696			259
Common stock sold through offerings	2,415		0			2,831			2,960
Balance at end of period	46,317		38,565			46,317			38,565
Shares of treasury stock
Balance at beginning of period	3,553		3,322			3,326			3,200
Common stock repurchased through business combination	0		0			0			47
Tax withholding upon vesting of restricted stock	6		1			233			76
Balance at end of period	3,559		3,323			3,559			3,323
Total shares of common stock outstanding	42,758		35,242			42,758			35,242
Common stock	$	4	$	3		$	4		$	3
Shares of Series A preferred stock issued and outstanding
Balance at beginning of period	0		3			0			127
Exchange of shares to Series A-1 preferred stock	0		(2		)	0			(125		)
Conversion of shares to Series B preferred stock	0		(1		)	0			(2		)
Balance at end of period	0		0			0			0
Shares of Series A-1 preferred stock issued and outstanding
Balance at beginning of period	4,204		123			4,210			0
Exchange of shares from Series A preferred stock	0		2			0			125
Dividend declared, not yet distributed	0		3,577			0			3,577
Shares declared, not distributed (Note 12)	0		0			(6		)	0
Balance at end of period	4,204		3,702			4,204			3,702
Shares of Series B preferred stock issued and outstanding
Balance at beginning of period	357		356			357			355
Conversion of shares from Series A preferred stock	0		1			0			2
Balance at end of period	357		357			357			357
Preferred stock	$	0	$	0		$	0		$	0
Additional paid-in capital
Balance at beginning of period	$	770,984	$	719,010		$	764,845		$	657,981
Stock-based compensation to employees and directors	2,623		4,467			8,356			13,623
Common stock sold through offerings, net	192,692		0			192,692			52,112
Other	0		2,655			406			2,416
Balance at end of period	$	966,299	$	726,132		$	966,299		$	726,132

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Overstock.com, Inc. Consolidated Statements of Changes in Stockholders' Equity (Unaudited) (in thousands)

	Three months ended September 30,						Nine months ended September 30,
	2020			2019			2020			2019
Accumulated deficit
Balance at beginning of period	$	(560,480	)	$	(522,397	)	$	(580,390	)	$	(458,897	)
Net income (loss) attributable to stockholders of Overstock.com, Inc.	23,391			(30,938		)	43,414			(94,863		)
Other	0			0			(113		)	425
Balance at end of period	$	(537,089	)	$	(553,335	)	$	(537,089	)	$	(553,335	)
Accumulated other comprehensive loss
Balance at beginning of period	$	(560	)	$	(576	)	$	(568	)	$	(584	)
Net other comprehensive income	4			4			12			12
Balance at end of period	$	(556	)	$	(572	)	$	(556	)	$	(572	)
Treasury stock
Balance at beginning of period	$	(70,537	)	$	(68,746	)	$	(68,807	)	$	(66,757	)
Common stock repurchased through business combination	0			0			0			(643		)
Tax withholding upon vesting of restricted stock	(587		)	(27		)	(2,317		)	(1,373		)
Balance at end of period	(71,124		)	(68,773		)	(71,124		)	(68,773		)
Total equity attributable to stockholders of Overstock.com, Inc.	$	357,534		$	103,455		$	357,534		$	103,455

Equity attributable to noncontrolling interests
Balance at beginning of period	$	63,937		$	71,786		$	62,771		$	78,960
Paid in capital for noncontrolling interest	0			0			5,000			0
Net loss attributable to noncontrolling interests	(2,165		)	(3,604		)	(7,372		)	(10,197		)
Other	0			(2,685		)	1,373			(3,266		)
Total equity attributable to noncontrolling interests	$	61,772		$	65,497		$	61,772		$	65,497

Total stockholders' equity	$	419,306		$	168,952		$	419,306		$	168,952

See accompanying notes to unaudited consolidated financial statements.

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Overstock.com, Inc. Consolidated Statements of Cash Flows (Unaudited) (in thousands)

	Nine months ended September 30,
	2020			2019
Cash flows from operating activities:
Consolidated net income (loss)	$	36,042		$	(105,060	)
Adjustments to reconcile consolidated net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization	22,709			23,033
Non-cash operating lease cost	4,379			4,940
Stock-based compensation to employees and directors	8,356			13,623
Impairment of equity securities	813			6,964
Losses on equity method securities	11,909			4,922
Gain on disposal of business	(10,705		)	0
Impairments on intangible assets	0			1,406
Other non-cash adjustments	2,587			1,978
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable, net	(15,715		)	12,858
Inventories	(1,027		)	6,864
Prepaids and other current assets	(42		)	5,473
Other long-term assets, net	26			(1,046		)
Accounts payable	44,101			(42,110		)
Accrued liabilities	59,657			(8,683		)
Unearned revenue	37,161			(10,066		)
Operating lease liabilities	(4,954		)	(4,086		)
Other long-term liabilities	3,413			(205		)
Net cash provided by (used in) operating activities	198,710			(89,195		)
Cash flows from investing activities:
Purchase of equity securities	(1,553		)	(5,106		)
Proceeds from sale of equity securities and marketable securities	6,306			7,082
Acquisitions of businesses, net of cash acquired	0			4,886
Expenditures for property and equipment	(15,067		)	(17,902		)
Deconsolidation of cash of Medici Land Governance, Inc.	(4,056		)	0
Other investing activities, net	(1,061		)	(3,219		)
Net cash used in investing activities	(15,431		)	(14,259		)
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Overstock.com, Inc. Consolidated Statements of Cash Flows (Unaudited) (in thousands)

	Nine months ended September 30,
	2020			2019
Cash flows from financing activities:
Payments on long-term debt	(1,566		)	(3,141		)
Proceeds from long-term debt	47,500			0
Proceeds from sale of common stock, net of offering costs	195,540			52,112
Payments of taxes withheld upon vesting of restricted stock	(2,317		)	(1,373		)
Other financing activities, net	(5,054		)	(1,161		)
Net cash provided by financing activities	234,103			46,437
Net increase (decrease) in cash, cash equivalents and restricted cash	417,382			(57,017		)
Cash, cash equivalents and restricted cash, beginning of period	114,898			142,814
Cash, cash equivalents and restricted cash, end of period	$	532,280		$	85,797

See accompanying notes to unaudited consolidated financial statements.

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Overstock.com, Inc.

Notes to Unaudited Consolidated Financial Statements

1. ~~BASIS~~DESCRIPTION OF ~~PRESENTATION~~BUSINESS

Overstock.com, Inc. is an online retailer business and ~~advancer~~advocate of blockchain technology. As used herein, "Overstock," "the Company," "we," "our" and similar terms include Overstock.com, Inc. and its majority-owned subsidiaries, unless the context indicates otherwise.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND SUPPLEMENTAL DISCLOSURES

Basis of Presentation

We have prepared the accompanying unaudited consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC") regarding interim financial reporting. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States ("GAAP") have been omitted in accordance with the rules and regulations of the SEC. These financial statements should be read in conjunction with our audited annual consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, ~~2018.~~ 2019. 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, 2019, except as disclosed below.

The accompanying unaudited consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, which are, in our opinion, necessary for a fair presentation of results for the interim periods presented. For purposes of comparability, we reclassified other certain immaterial amounts in the prior periods presented to conform with the current period presentation. The results of operations for the three and nine months ended September 30, ~~2019~~2020 are not necessarily indicative of the results to be expected for any future period or the full fiscal year, due to ~~seasonal~~seasonality and other factors.

In light of a shift in the long-term strategic focus of our organization to transition our retail business to concentrate on the retail partner portion of our business, we no longer consider the split of retail direct and retail partner as a distinct and relevant measure of our business. Accordingly, in the fourth quarter of 2018, revenues and cost of goods sold previously recorded in "Direct" and "Partner and Other" are now split between "Retail" and "Other" on the consolidated statements of operations. "Retail" includes retail revenue and costs of goods sold from both "Direct" and "Partner" transactions. Our revenues and costs of goods sold related to our Medici business remains in "Other". In addition, we have recast the prior period revenues and cost of goods sold to conform with current year presentation.

~~For purposes of comparability, we reclassified other certain immaterial amounts in the prior periods presented to conform with the current period presentation.~~

~~2. ACCOUNTING POLICIES~~

Principles of consolidation

The accompanying consolidated financial statements include our accounts and the accounts of our wholly-owned subsidiaries and other subsidiaries ~~for~~over which we exercise control. All intercompany account balances and transactions have been eliminated in consolidation. ~~Included~~

In February 2020, Medici Land Governance, Inc. ("MLG"), an indirect majority-owned subsidiary, consummated the sale of shares of its common stock to an unrelated third party. Upon completion of the transaction, our indirect ownership in MLG was reduced from 57% to 35% of MLG's issued and outstanding shares of common stock. As a result of our loss of a controlling financial interest in MLG under the voting interest model, we performed an assessment of control under the variable interest entity ("VIE") model and determined MLG does not meet the qualifications of a VIE for purposes of consolidation. Accordingly, we deconsolidated MLG's consolidated net assets and noncontrolling interest from our consolidated financial statements ~~are~~and results beginning on February 22, 2020, the ~~financial results~~date that control ceased. The amount of ~~Bitsy, Inc. from~~gain recognized on the ~~acquisition date~~deconsolidation was $10.7 million, which is included in our consolidated statements of ~~January 1, 2019, Verify Investor, LLC from~~operations in Other income (expense), net. The gain primarily relates to the ~~acquisition date~~remeasurement of ~~February 12, 2018,~~our retained equity interest in MLG at fair value, which was determined based on the same price per share MLG provided for the sale of common stock to the third-party and ~~Mac Warehouse, LLC from the acquisition date~~price per share we received in settling a portion of ~~June 25, 2018.~~our intercompany debt for additional shares in MLG. Post deconsolidation, MLG became one of our equity method investees for which we perform services. See Note 6—Equity Securities for additional information.

Use of estimates

The preparation of financial statements in conformity with GAAP requires estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent liabilities in our consolidated financial statements and accompanying notes. Estimates are used for, but not limited to, receivables valuation, revenue recognition, Club O and gift card breakage, sales returns, vendor incentive discount offers, inventory valuation, depreciable lives and valuation of property and equipment and internally-developed software, goodwill valuation, intangible asset valuation, equity securities valuation, income taxes, stock-based compensation, performance-based compensation, ~~self-funded~~self-

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funded health insurance liabilities and contingencies. Our estimates involving, among other items, forecasted revenues, sales volume, pricing, cost and availability of inventory, consumer demand and spending habits, the continued operations of our supply chain and logistics network, and the overall impact of social distancing on our workforce are even more difficult to estimate as a result of uncertainties associated with the scope and duration of the pandemic and various actions taken by governmental authorities, private business and other third parties in response to the global novel coronavirus ("COVID-19") pandemic, the ultimate geographic spread of the virus, the ongoing economic effect of the pandemic and the post-pandemic economic recovery. Although these estimates are based on our best knowledge of current events and actions that we may undertake in the future, the variability of these factors depends on a number of conditions, including uncertainty associated with the COVID-19 pandemic, how long these conditions will persist, what additional measures may be introduced or reintroduced by governments or private parties or what effect any such additional measures may have on our business and thus our accounting estimates may change from period to period. To the extent there are differences between these estimates and actual results, our consolidated financial statements may ~~differ~~be materially ~~from these estimates.~~affected.

~~Cash equivalents~~Supplemental cash flow information

~~We classify all highly liquid instruments, including instruments with a remaining maturity of three months or less at the time of purchase, as~~The following table shows supplemental cash ~~equivalents. Cash equivalents were $3.0 million and $3.1 million at September 30, 2019 and December 31, 2018, respectively.~~flow information (in thousands):



	Nine months ended September 30,
	2020		2019
Non-cash investing and financing activities:
Recognition of right-of-use assets upon adoption of ASC 842	$	0	$	30,968
Deposit applied to business combination purchase price	0		7,347
Recognition of right-of-use assets obtained in exchange for new operating lease liabilities	5,132		17,238

Recently adopted accounting standards

In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which revises how entities account for credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. Topic 326 was subsequently amended by ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments and ASU 2019-11, Codification Improvements to Topic 326, Financial Instruments—Credit Losses. Under the guidance, the measurement of credit losses will be based on a current expected credit losses methodology. We adopted the changes under the new standard on January 1, 2020. We utilized a prospective transition approach for our debt securities for which other-than-temporary impairment had been recognized prior to January 1, 2020. As a result, the amortized cost basis remains the same before and after the effective date of ASU 2016-13. The implementation of ASU 2016-13 did not have a material impact on our consolidated financial statements and disclosures. We will continue to actively monitor the impact of the COVID-19 pandemic on expected credit losses.

Recently issued accounting standards

In December 2019, the FASB issued ASU 2019-12, Income Taxes ("Topic 740")—Simplifying the Accounting for Income Taxes, which removes certain exceptions to the general principles in Topic 740 and amends existing guidance to improve consistent application. For public entities, ASU 2019-12 is required to be adopted for annual periods beginning after December 15, 2020, including interim periods within those fiscal years. Early adoption is permitted. Management is currently evaluating the impact of the adoption of this ASU on our consolidated financial statements and related disclosures.

In January 2020, the FASB issued ASU 2020-01, Investments—Equity Securities (Topic 321), Investments—Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815): Clarifying the Interactions between Topic 321, Topic 323, and Topic 815, which clarifies the interaction of the accounting for equity securities under Topic 321, the accounting for equity method investments in Topic 323, and the accounting for certain forward contracts and purchased options in Topic 815. For public entities, ASU 2020-01 is required to be adopted for annual periods beginning after December 15, 2020, including interim periods within those fiscal years. Early adoption is permitted. Management is currently evaluating the impact of the adoption of this ASU on our consolidated financial statements and related disclosures.

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3. FAIR VALUE MEASUREMENT

~~Restricted cash~~

~~We consider cash that is legally restricted and cash that is held as compensating balances for credit arrangements, surety bonds, and self-funded health insurance as restricted cash.~~

~~Fair value of~~Our financial ~~instruments~~

~~We account for our~~ assets and liabilities ~~using~~are initially measured at fair value, which is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). To increase the comparability of fair value measures, the following hierarchy ~~of valuation techniques based on whether~~prioritizes 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 usmethodologies used to ~~minimize the use of unobservable inputs and to use observable market data, if available, when determining~~measure fair ~~value.~~value:


•	Level 1—Quoted prices for identical instruments in active markets;


•	Level 2—Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets; and


•	Level 3—Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.

~~Level 1—Quoted prices for identical instruments in active markets;~~

~~Level 2~~—Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets; and

~~Level 3—Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.~~

Our assets and liabilities that are adjusted to fair value on a recurring basis are cash equivalents, certain equity and marketable securities, and deferred compensation liabilities, which fair values are determined using quoted market prices from daily exchange traded markets on the closing price as of the balance sheet date and are classified as Level 1. Our other financial instruments, including cash, restricted cash, accounts receivable, accounts payable, accrued liabilities, finance obligations, and debt are carried at cost, which approximates their fair value. Certain assets, including long-lived assets, certain equity securities, goodwill, cryptocurrencies, and other intangible assets, are measured at fair value on a nonrecurring basis; that is, the assets are not measured at fair value on an ongoing basis, but are subject to fair value adjustments using fair value measurements with unobservable inputs (level 3), apart from cryptocurrencies which use quoted prices from various digital currency exchanges with active markets, in certain circumstances (e.g., when there is evidence of impairment).

The following tables summarize our assets and liabilities measured at fair value on a recurring basis using the following levels of inputs as of September 30, ~~2019~~2020 and December 31, ~~2018,~~2019, as indicated (in thousands):


p	Fair Value Measurements at September 30, 2019:
									Fair Value Measurements at September 30, 2020:
	Total		Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3
Assets:
Cash equivalents - Money market mutual funds	$	3,008	$	3,008	$	—	$	—	$	566	$	566	$	0	$	0
Equity securities, at fair value	818		818		—		—		455		455		0		0
Marketable securities, at fair value									1,355		1,355		0		0
Trading securities held in a "rabbi trust" (1)	103		103		—		—		121		121		0		0
Total assets	$	3,929	$	3,929	$	—	$	—	$	2,497	$	2,497	$	0	$	0
Liabilities:
Deferred compensation accrual "rabbi trust" (2)	$	103	$	103	$	—	$	—	$	138	$	138	$	0	$	0
Total liabilities	$	103	$	103	$	—	$	—	$	138	$	138	$	0	$	0



	Fair Value Measurements at December 31, 2019:
	Total		Level 1		Level 2		Level 3
Assets:
Cash equivalents - Money market mutual funds	$	2,799	$	2,799	$	0	$	0
Equity securities, at fair value	823		823		0		0
Marketable securities, at fair value	10,308		10,308		0		0
Trading securities held in a "rabbi trust" (1)	116		116		0		0
Total assets	$	14,046	$	14,046	$	0	$	0
Liabilities:
Deferred compensation accrual "rabbi trust" (2)	$	116	$	116	$	0	$	0
Total liabilities	$	116	$	116	$	0	$	0

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Fair Value Measurements at December 31, 2018:
Total Level 1 Level 2 Level 3
Assets:

Cash equivalents - Money market mutual funds $ 3,135
$ 3,135
$ —
$ —
Equity securities, at fair value 2,636
2,636
—
—
Trading securities held in a "rabbi trust" (1) 84
84
—
—
Total assets $ 5,855
$ 5,855
$ —
$ —
Liabilities:

Deferred compensation accrual "rabbi trust" (2) $ 85
$ 85
$ —
$ —
Total liabilities $ 85
$ 85
$ —
$ —

___________________________________________


(1)	— Trading securities held in a rabbi trust are included in Prepaids and other current assets and Other long-term assets, net in the consolidated balance sheets.

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(2)	— Non-qualified deferred compensation in a rabbi trust is included in Accrued liabilities and Other long-term liabilities in the consolidated balance sheets.

~~Accounts receivable, net~~

Accounts receivable consist primarily of carrier rebates, trade amounts due from customers in the United States, and uncleared credit card transactions at period end. Accounts receivable are recorded at invoiced amounts and do not bear interest. From time to time, we grant credit to some of our business customers on normal credit terms (typically 30 days). We maintain an allowance for doubtful accounts receivable based upon our business customers' financial condition and payment history, and our historical collection experience and expected collectability of accounts receivable. The allowance for doubtful accounts receivable was $2.4 million and $2.1 million at ~~September 30, 2019~~ ~~and~~ ~~December 31, 2018, respectively.~~

~~Concentration of credit risk~~

One bank held the majority of our cash and cash equivalents at September 30, 2019 and December 31, 2018. Our cash equivalents primarily consist of money market securities which are uninsured. We do not believe that, as a result of this concentration, we are subject to any unusual financial risk beyond the normal risk associated with commercial banking relationships.

~~Inventories, net~~

Inventories, net include merchandise purchased for resale, which are accounted for using a standard costing system which approximates the first-in-first-out ("FIFO") method of accounting, and are valued at the lower of cost and net realizable value. Inventory valuation requires us to make judgments, based on currently available information, about the likely method of disposition, such as through sales to individual customers, returns to product vendors, or liquidations, and expected recoverable values of each disposition category.

~~Prepaids and other current assets~~

Prepaids and other current assets represent expenses paid prior to receipt of the related goods or services, including advertising, license fees, maintenance, packaging, insurance, prepaid inventories, other miscellaneous costs, and cryptocurrency-denominated assets ("cryptocurrencies"). See ~~Cryptocurrencies~~ ~~below.~~

~~Cryptocurrencies~~

We hold cryptocurrency-denominated assets ("cryptocurrencies") such as bitcoin and we include them in Prepaids and other current assets in our consolidated balance sheets. Our cryptocurrencies were $2.5 million and $2.4 million at September 30, 2019 and December 31, 2018, respectively, and are recorded at cost less impairment.

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4. PROPERTY AND EQUIPMENT, NET

We recognize impairment on these assets caused by decreases in market value, determined by taking quoted prices from various digital currency exchanges with active markets, whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. See ~~Fair value of financial instruments~~ above. Such impairment in the value of our cryptocurrencies is recorded in General and administrative expense in our consolidated statements of operations. Impairments on cryptocurrencies were zero and $318,000 for the three and nine months ended September 30, 2019. There was $150,000 and $9.6 million impairment on cryptocurrencies during the three and nine months ended September 30, 2018.

Gains and losses realized upon sale of cryptocurrencies are also recorded in General and administrative expense in our consolidated statements of operations. We occasionally use our cryptocurrencies to purchase other cryptocurrencies. Gains and losses realized with these non-cash transactions are also recorded in General and administrative expense in our consolidated statements of operations. These non-cash transactions as well as gains (losses) from cryptocurrencies received through our tZERO security token offering are also presented as an adjustment to reconcile Net income (loss) to Net cash provided by (used in) operating activities in our consolidated statements of cash flows. Further, the proceeds from the sale of cryptocurrencies received through our tZERO security token offering are presented as a financing activity in our consolidated statements of cash flows due to its near immediate conversion into cash and its economic similarity to the receipt of cash proceeds under the tZERO security token offering. Realized gains on sale of cryptocurrencies were $183,000 and $311,000 for the three and nine months ended September 30, 2019. There were $64,000 and $8.4 million realized gains on sale of cryptocurrencies for the three and nine months ended September 30, 2018.

Property and equipment, net

Property and equipment are recorded at cost and stated net of depreciation and amortization. Upon sale or retirement of assets, cost and related accumulated depreciation and amortization are removed from the balance sheet and the resulting gain or loss is reflected in our consolidated statements of operations. Property and equipment are depreciated using the straight-line method over the estimated useful lives consist of the ~~related assets or the term of the related finance lease, whichever is shorter, as follows:~~ following (in thousands):



	September 30, 2020			December 31, 2019
	September 30, 2020			December 31, 2019
Computer hardware and software	$	234,782		$	223,309
Building	69,245			69,266
Furniture and equipment	16,440			17,739
Land	12,781			12,781
Leasehold improvements	5,400			11,921
Building machinery and equipment	9,785			9,796
Land improvements	7,004			7,003
	355,437			351,815
Less: accumulated depreciation	(230,295		)	(221,787		)
Total property and equipment, net	$	125,142		$	130,028



	~~Life~~ ~~(years)~~
~~Building~~	40
~~Land improvements~~	20
~~Building machinery and equipment~~	~~15-20~~
~~Furniture and equipment~~	~~5-7~~
~~Computer hardware~~	~~3-4~~
~~Computer software, including internal-use software and website development~~	~~2-4~~

~~Leasehold improvements are amortized over the shorter of the term of the related leases or estimated useful lives.~~

Included in property and equipment is the capitalized cost of internal-use software and website development, including software used to upgrade and enhance our Website and processes supporting our business. We capitalize costs incurred during the application development stage of internal-use software and amortize these costs over the estimated useful life. Costs incurred related to design or maintenance of internal-use software are expensed as incurred.

~~During the three months ended September 30, 2019 and 2018, we capitalized $3.3 million and $4.0 million, respectively, of~~Capitalized costs associated with internal-use software and website development, both developed internally and acquired ~~externally. Depreciation~~externally, and depreciation of costs for the same periods associated with internal-use software and website development ~~was $3.2 million~~consist of the following (in thousands):



	Three months ended September 30,				Nine months ended September 30,
	2020		2019		2020		2019
Capitalized internal-use software and website development	$	4,005	$	3,248	$	11,595	$	10,798
Depreciation of internal-use software and website development	$	3,721	$	3,162	$	10,644	$	9,523

Property and $3.4 million, respectively. During the nine months ended September 30, 2019 and 2018, we capitalized $10.8 million and $14.7 million, respectively, of costs associated with internal-use software and website development, both developed internally and acquired externally. Depreciation of internal-use software and website development during the nine months ended September 30, 2019 and 2018 was $9.5 million and $10.0 million, respectively.

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~~Depreciation~~equipment depreciation expense is classified within the corresponding operating expense categories on our consolidated statements of operations as follows (in thousands):



	Three months ended September 30,				Nine months ended September 30,
	2020		2019		2020		2019
Cost of goods sold - retail	$	159	$	170	$	526	$	516
Technology	4,965		5,042		14,504		15,109
General and administrative	1,557		1,261		4,927		3,762
Total depreciation	$	6,681	$	6,473	$	19,957	$	19,387

5. INTANGIBLE ASSETS

Intangible assets, net consist of the following (in thousands):



	September 30, 2020			December 31, 2019
Intangible assets subject to amortization, gross	$	30,267		$	30,284
Less: accumulated amortization of intangible assets subject to amortization	(21,258		)	(18,528		)
Total intangible assets, net	$	9,009		$	11,756

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Three months ended
September 30, Nine months ended
September 30,
2019 2018 2019 2018
Cost of goods sold - retail $ 170
$ 85
$ 516
$ 252
Technology 5,042
5,330
15,109
16,103
General and administrative 1,261
1,038
3,762
3,082
Total depreciation $ 6,473
$ 6,453
$ 19,387
$ 19,437

Amortization of intangible assets is classified within the corresponding operating expense categories in our consolidated statements of operations as follows (in thousands):

~~Total accumulated depreciation~~



	Three months ended September 30,				Nine months ended September 30,
	2020		2019		2020		2019
Technology	$	846	$	896	$	2,539	$	2,687
Sales and marketing	10		16		31		48
General and administrative	55		133		182		(526		)
Total amortization	$	911	$	1,045	$	2,752	$	2,209

In connection with our 2018 acquisition of ~~property~~Mac Warehouse, we received the final valuation information and ~~equipment was $219.8~~completed our determination and allocation of the purchase price during the quarter ended March 31, 2019 and recognized adjustments to the provisional values as of March 31, 2019, which among other items decreased the recognized Intangible assets and resulted in a reversal of previously recognized amortization expense of $1.4 million during the quarter ended March 31, 2019.

During the three and ~~$204.9 million at~~nine months ended September 30, 2019, we realized a $1.4 million impairment loss included in General and ~~December 31, 2018, respectively.~~administrative expense in our consolidated statements of operations related to certain patents held by our Medici Ventures segment. The estimated fair value of the patents were determined based on Level 3 inputs, which were unobservable (see Note 3—Fair Value Measurement), including market participant assumptions for similar assets in an inactive market.

6. EQUITY SECURITIES

Equity securities under ASC 321

~~At September 30, 2019, we held minority interests (less than 20%) in certain privately held entities accounted for under Accounting Standards Codification ("ASC") Topic 321,~~ ~~Investments - Equity Securities~~ ("ASC 321"), which are included in Equity securities in our consolidated balance sheets. Dividends received are reported in earnings if and when received. We review our securities individually for impairment by evaluating if events or circumstances have occurred that may indicate the fair value of the investment is less than its carrying value. If such events or circumstances have occurred, we estimate the fair value of the investment and recognize an impairment loss in Other expense, net on our consolidated statements of operations equal to the difference between the fair value of the investment and its carrying value. In such cases, the estimated fair value of the investment is determined using unobservable inputs including assumptions by the investee's management including quantitative information such as lower valuations in recently completed or proposed financings. These inputs are classified as Level 3. Because several of these private companies are in the early startup or development stages, these entities are subject to potential changes in cash flows and valuation, as well as inability to raise additional capital which may be necessary for the liquidity needed to support their operations.

Certain of our equity securities lack readily determinable fair values and therefore the securities are measured at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or similar equity securities of the same issuer. The carrying amount of our equity securities without readily determinable fair values was approximately ~~$11.9~~$3.9 million and ~~$17.7~~$3.9 million at September 30, ~~2019~~2020 and December 31, ~~2018,~~2019, respectively. Cumulative downward adjustments for price changes and impairments for our equity securities without readily determinable fair values were ~~$11.6~~$6.2 million, and the cumulative upward adjustments for price changes to equity investments were $958,000 as of September 30, ~~2019.~~2020. The impairments and downward adjustments for the period related to equity securities without readily determinable fair values at September 30, ~~2019~~2020 and ~~2018~~2019 is as follows (in thousands):



	Three months ended September 30,					Nine months ended September 30,
	2020		2019			2020		2019
Impairments and downward adjustments of equity securities without readily determinable fair values	$	0	$	(2,750	)	$	0	$	(5,708	)

Three months ended
September 30, Nine months ended
September 30,
2019 2018 2019 2018
Impairments and downward adjustments of equity securities without readily determinable fair values $ (2,750 ) $ (511 ) $ (5,708 ) $ (511 )

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~~One~~Certain of these equity securities and our marketable securities, which had a carrying value of ~~$818,000~~$1.8 million at September 30, ~~2019~~2020 and ~~$2.6~~$11.1 million at December 31, ~~2018, is~~2019, are carried at fair value based on Level 1 inputs. See Note 3—Fair ~~value of financial instruments~~ ~~above.~~Value Measurement. The portion of unrealized gains and losses for the period related to equity securities with readily determinable fair value still held at September 30, ~~2019~~2020 and ~~2018~~2019 is calculated as follows (in thousands):



	Three months ended September 30,						Nine months ended September 30,
	2020			2019			2020			2019
Net losses recognized during the period on equity securities and marketable securities	$	(813	)	$	(700	)	$	(3,268	)	$	(1,818	)
Less: Net gains recognized during the period on equity securities and marketable securities sold	0			0			2,161			0
Unrealized losses during the reporting period on equity securities and marketable securities still held	$	(813	)	$	(700	)	$	(5,429	)	$	(1,818	)

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Three months ended
September 30, Nine months ended
September 30,
2019 2018 2019 2018
Net gains/(losses) recognized during the period on equity securities $ (700 ) $ (72 ) $ (1,818 ) $ 1,764
Less: Net gains recognized during the period on equity securities sold —
—
—
—
Unrealized gains/(losses) during the reporting period on equity securities still held $ (700 ) $ (72 ) $ (1,818 ) $ 1,764

Equity method securities under ASC 323

~~At September 30, 2019, we held minority interests~~ ~~in certain privately held entities accounted for as~~Our equity method securities ~~under ASC Topic 323,~~ ~~Investments - Equity Method and Joint Ventures~~ ~~("ASC 323"), which are included in Equity~~include equity securities in ~~our consolidated balance sheets. We~~which we can exercise significant influence, but not control, over these entities through either holding more than a 20% voting interest in the entity or through our representation on the entity's board of directors. For certain of these entities, we provide developer services. For the three and nine months ended September 30, 2019, we recognized $639,000 and $1.9 million of developer service revenue, respectively, in Other revenue on our consolidated statements of operations. For the three and nine months ended September 30, 2018, we recognized $467,000 and $1.5 million of developer service revenue, respectively, in Other revenue on our consolidated statements of operations.

The following table includes our equity method securities and ~~related~~ ownership interest as of September 30, ~~2019:~~2020:



	Ownership interest
Bitt Inc.	21%
Boston Security Token Exchange LLC	50%
Chainstone Labs, Inc.	29%
FinClusive Capital, Inc.	~~10%~~12%
GrainChain, Inc.	~~10%~~18%
Medici Land Governance, Inc.	35%
Minds, Inc.	~~24%~~23%
PeerNova, Inc.	11%
SettleMint NV	~~30%~~29%
Spera, Inc.	19%
VinX Network Ltd.	~~25%~~29%
Voatz, Inc.	20%

The carrying amount of our equity method securities was approximately ~~$29.0~~$44.6 million and ~~$40.1~~$37.3 million at September 30, ~~2019~~2020 and December 31, ~~2018,~~2019, respectively. The carrying value of our equity method securities exceeded the amount of underlying equity in net assets of our equity method securities and the difference was primarily related to goodwill and the fair value of intangible assets. The basis difference attributable to amortizable intangible assets is amortized over their estimated useful lives. We record our proportionate share of the net income or loss from our equity method securities and the amortization of the basis difference related to intangible assets in Other expense, net in our consolidated statements of operations with corresponding adjustments to their carrying value.

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The following table summarizes the net losses recognized on equity method securities ~~for~~included in Other expense, net in our consolidated statements of operations (in thousands):



	Three months ended September 30,				Nine months ended September 30,
	2020		2019		2020		2019
Net loss recognized on our proportionate share of the net losses of our equity method securities and amortization of the basis difference	$	5,896	$	1,864	$	11,909	$	4,922
Impairments on equity method securities	813		0		813		1,256
Net loss recognized during the period on equity method securities sold	0		0		0		524

For the three and nine months ended September 30, ~~2019~~2020, we recognized $2.6 million and ~~2018 (in thousands):~~

Three months ended
September 30, Nine months ended
September 30,
2019 2018 2019 2018
Net loss recognized on our proportionate share of the net losses of our equity method securities and amortization of the basis difference $ 1,864
$ 1,123
$ 4,922
$ 2,504
Impairments on equity method securities —
—
1,256
—
Net loss recognized during the period on equity method securities sold —
—
524
—

~~Noncontrolling interests in Controlled Subsidiaries~~

Our wholly-owned subsidiary, Medici Ventures, Inc. ("Medici Ventures"), holds a majority ownership interest in tZERO Group, Inc. ("tZERO"), formerly tØ.com, Inc., and Medici Land Governance Inc., a Delaware public benefit corporation ("MLG"). tZERO's subsidiaries include a financial technology company, two related registered broker dealers and a recently incorporated company which has applied to become a registered broker dealer, a digital wallet and exchange services company, and an accredited investor verification company. tZERO, MLG, and their consolidated subsidiaries are included in our consolidated financial statements. For controlled subsidiaries that are not wholly-owned, the noncontrolling interests are included in Net loss and Total equity. Intercompany transactions have been eliminated and the amounts$6.7 million, respectively, of ~~contributions and gains or losses that are attributable to the noncontrolling interests are disclosed in our consolidated financial statements.~~

~~Leases~~

We determine if an arrangement is a lease at inception. We account for lease agreements as either operating or finance leases depending on certain defined criteria. Operating leases are recognized in Operating lease right-of-use ("ROU") assets, Operating lease liabilities, current, and Operating lease liabilities, non-current on our consolidated balance sheets. Finance leases are includedrevenue in Other ~~long-term assets, net, Other current liabilities, and Other long-term liabilities~~Revenue on our consolidated balance sheets. Lease assets and liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. In certain of our lease agreements, we receive rent holidays and other incentives. We recognize lease costs on a straight-line basis over the lease term without regard to deferred payment terms, such as rent holidays, that defer the commencement date of required payments. Our lease terms may include options to extend or terminate the lease, and we adjust our measurement of the lease when it is reasonably certain that we will exercise that option. Lease payments used in measurement of the lease liability typically do not include executory costs, such as taxes, insurance, and maintenance, unless those costs can be reasonably estimated at lease commencement. Leasehold improvements are capitalized at cost and amortized over the lesser of their expected useful life or the life of the lease, without assuming renewal features, if any, are exercised. We do not separate lease and non-lease components for our leases.

~~Treasury stock~~

~~We account for treasury stock of our common shares under the cost method and include treasury stock as a component of stockholders' equity.~~

~~Goodwill~~

Goodwill represents the excess of the purchase price paid over the fair value of the net assets acquired in business combinations (see Note 3—Business Combinations for current period activity). Goodwill is not amortized but is tested for impairment at least annually or when we deem that a triggering event has occurred. When evaluating whether goodwill is impaired, we make a qualitative assessment to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the qualitative assessment determines that it is more likely than not that its fair value is less than its carrying amount, we compare the fair value of the reporting unit to which the goodwill is assigned to its carrying amount. If the carrying amount exceeds its fair value, an impairment loss is recognized in an amount equal to the excess of the carrying

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amount over the fair value of the reporting unit, not to exceed the carrying amount of the goodwill. There were no impairments to goodwill recorded during the nine months ended September 30, 2019 and 2018.

~~The following table provides information about changes in the carrying amount of goodwill for the periods presented (in thousands):~~

Amount
Balances as of December 31, 2017 (1) $ 14,698
Goodwill acquired during year 8,197
Balances as of December 31, 2018 (2) 22,895
Goodwill acquired during year 1,685
Purchase price adjustment 2,540
Balances as of September 30, 2019 (3) $ 27,120

~~(1), (2), (3) — Goodwill is net of an accumulated impairment loss of $3.3 million.~~

~~Intangible assets other than goodwill~~

We capitalize and amortize intangible assets other than goodwill over their estimated useful lives unless such lives are indefinite. Intangible assets other than goodwill acquired separately from third-parties are capitalized at cost while such assets acquired as part of a business combination are capitalized at their acquisition-date fair value. Definite lived intangible assets are amortized using the straight-line method of amortization over their useful lives, with the exception of certain intangibles (such as acquired technology, customer relationships, and trade names) which are amortized using an accelerated method of amortization based on cash flows. These definite lived intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that their carrying amount may not be recoverable as described below under ~~Impairment of long-lived assets~~.

~~Intangible assets, net consist of the following (in thousands):~~

September 30,
2019 December 31,
2018
Intangible assets subject to amortization, gross (1) $ 30,284
$ 29,099
Less: accumulated amortization of intangible assets subject to amortization (17,405 ) (15,729 )
Total intangible assets, net $ 12,879
$ 13,370


~~(1)~~	~~— At September 30, 2019, the weighted average remaining useful life for intangible assets subject to amortization was 5.66 years.~~

~~Amortization of intangible assets other than goodwill is classified within the corresponding operating expense categories in~~ our consolidated statements of operations ~~as follows (in thousands):~~

Three months ended
September 30, Nine months ended
September 30,
2019 2018 2019 2018
Technology $ 896
$ 885
$ 2,687
$ 2,534
Sales and marketing 16
119
48
442
General and administrative 133
542
(526 ) 620
Total amortization $ 1,045
$ 1,546
$ 2,209
$ 3,596

~~General and administrative amortization above was net of reversals due to adjustments to the purchase price allocation~~ for ~~Mac Warehouse, as further described in Note 3—Business Combinations.~~

Estimated amortization expense for the next five years is: $1.1 million for the remainder of 2019, $3.7 million in 2020, $3.3 million in 2021, $2.1 million in 2022, $1.6 million in 2023, and $1.1 million thereafter.

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~~Impairment of long-lived assets~~

~~We review property and equipment, right-of-use assets,~~developer and other ~~long-lived assets, including intangible assets other than goodwill,~~secondment services provided to certain of these entities that are accounted for ~~impairment whenever events or changes in circumstances indicate that~~under the ~~carrying amount of an asset group may not be recoverable. See the~~ ~~Cryptocurrencies~~ section above for our impairment policy over cryptocurrencies. Recoverability is measured by comparison of the assets' carrying amount to future undiscounted net cash flows the asset group is expected to generate. Cash flow forecasts are based on trends of historical performance and management's estimate of future performance, giving consideration to existing and anticipated competitive and economic conditions. If such asset group is considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds their fair values. Duringequity method. For the three and nine months ended September 30, 2019, we ~~realized a $1.4~~recognized $639,000 and $1.9 million, ~~impairment loss included~~respectively, of revenue in ~~General and administrative expense in~~Other Revenue on our consolidated statements of operations ~~related~~for developer and other secondment services provided to certain ~~patents held by our Medici Ventures segment.~~of these entities that are accounted for under the equity method.

We are party to notes receivable agreements with certain of these equity method entities. The ~~estimated fair value~~carrying amount of ~~the patents were determined based on Level 3 inputs, which were unobservable (see Note 2—Accounting Policies,~~ ~~Fair value of financial instruments~~),these notes receivables, including ~~market participant assumptions for similar assets in an inactive market. There were no impairments to long-lived assets recorded during the three~~accrued interest, was $5.7 million and ~~nine months ended~~$4.6 million at September 30, ~~2018.~~

~~Other long-term assets, net~~

2020 and December 31, 2019, respectively, which are included in Other long-term assets, net ~~consist primarily of long-term prepaid expenses, deposits, and assets acquired under finance leases.~~

~~Revenue recognition~~

Revenue is recognized when, or as, control of a promised product or service transfers to a customer, in an amount that reflects the consideration to which the Company expects to be entitled in exchange for transferring those products or services. Revenue excludes taxes that have been assessed by governmental authorities and that are directly imposed on revenue-producing transactions between the Company and its customers, including sales and use taxes. Revenue recognition is evaluated through the following five-step process:

~~1) identification of the contract with a customer;~~

~~2) identification of the performance obligations in the contract;~~

~~3) determination of the transaction price;~~

~~4) allocation of the transaction price to the performance obligations in the contract; and~~

~~5) recognition of revenue when or as a performance obligation is satisfied.~~

~~Product Revenue~~

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

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

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

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

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

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

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

~~Club O loyalty program~~

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

The Club O loyalty program allows members to earn Club O Reward dollars for qualifying purchases made on our Website. Customers may redeem Club O Reward dollars on future purchases made through our Website, which conveys a material right to the customer. As such, the initial transaction price giving rise to the reward dollar is allocated to each separate performance obligation based upon its relative standalone selling price. In determining the stand-alone selling price, we incorporate assumptions about the redemption rates of loyalty points. We recognize revenue for Club O Reward dollars when customers redeem such rewards as part of a purchase on our Website.

We record the standalone value of reward dollars earned in deferred revenue at the time the reward dollars are earned. Club O Reward dollars expire 90 days after the customer's Club O membership expires. We recognize estimated reward dollar breakage, to which we expect to be entitled, over the expected redemption period in proportion to actual redemptions by customers. Upon adoption of Topic 606, ~~Revenue Contracts with Customers~~, on January 1, 2018, we began classifying the breakage income related to Club O Reward dollars and gift cards as a component of Retail revenue in our consolidated statements of operations rather than as a component of Other income (expense), net. Breakage included in revenue was $1.5 million and $1.3 million for the three months ended September 30, 2019 and 2018 and $3.5 million and $4.2 million for the nine months ended September 30, 2019 and 2018.

Our total deferred revenue related to the outstanding Club O Reward dollars was $6.6 million and $6.9 million at September 30, 2019 and December 31, 2018, respectively. The timing of revenue recognition of these reward dollars is driven by actual customer activities, such as redemptions and expirations.

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~~Advertising Revenue~~

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

~~Revenue Disaggregation~~

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

~~Deferred Revenue~~

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

Customer orders are recorded as deferred revenue prior to delivery of products or services ordered. We record amounts received for Club O membership fees as deferred revenue and we recognize it ratably over the membership period. We record Club O Reward dollars earned from purchases as deferred revenue at the time they are earned based upon the relative standalone selling price of the Club O Reward dollar and we recognize it as Retail revenue in proportion to the estimated pattern of rights exercised by the customer. If reward dollars are not redeemed, we recognize Retail revenue upon expiration. In addition, we sell gift cards and record related deferred revenue at the time of the sale. We sell gift cards without expiration dates and we recognize revenue from a gift card upon redemption of the gift card. For the unredeemed portion of our gift cards and loyalty program rewards, we will recognize Retail revenue over the expected redemption period based upon the estimated pattern of rights exercised by the customer.

~~The following table provides information about deferred revenue from contracts with customers, including significant changes in deferred revenue balances during the periods presented (in thousands):~~

Amount
Deferred revenue at December 31, 2017 $ 46,468
Increase due to deferral of revenue at period end 43,216
Decrease due to beginning contract liabilities recognized as revenue (39,106 )
Deferred revenue at December 31, 2018 50,578
Increase due to deferral of revenue at period end 34,789
Decrease due to beginning contract liabilities recognized as revenue (44,855 )
Deferred revenue at September 30, 2019 $ 40,512

~~Sales returns allowance~~

We inspect returned items when they arrive at our processing facilities. We refund the full cost of the merchandise returned and all original shipping charges if the returned item is defective or we or our partners have made an error, such as shipping the wrong product. If the return is not a result of a product defect or a fulfillment error and the customer initiates a return of an unopened item within 30 days of delivery, for most products we refund the full cost of the merchandise minus the original shipping charge and actual return shipping fees. However, we reduce refunds for returns initiated more than 30 days after delivery or that are received at our returns processing facility more than 45 days after initial delivery. If our customer returns an item that has been opened or shows signs of wear, we issue a partial refund minus the original shipping charge and actual return shipping fees.

Revenue is recorded net of estimated returns. We record an allowance for returns based on current period revenues and historical returns experience. We analyze actual historical returns, current economic trends and changes in order volume and acceptance of our products when evaluating the adequacy of the sales returns allowance in any accounting period.

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~~The following table provides additions to and deductions from the sales returns allowance (in thousands):~~

Amount
Allowance for returns at December 31, 2017 $ 17,391
Additions to the allowance 174,864
Deductions from the allowance (176,994 )
Allowance for returns at December 31, 2018 15,261
Additions to the allowance 87,620
Deductions from the allowance (94,984 )
Allowance for returns at September 30, 2019 $ 7,897

~~Cost of goods sold~~

Our Retail cost of goods sold includes product costs, warehousing costs, outbound shipping costs, handling and fulfillment costs, customer service costs, and credit card fees, and is recorded in the same period in which related revenues have been recorded. Our Other cost of goods sold primarily consists of exchange fees, clearing agent fees, and other exchange fees from our broker dealer subsidiaries in our tZERO segment. These fees are primarily for executing, processing, and settling trades on exchanges and other venues. These fees fluctuate based on changes in trade and share volumes, rate of clearance fees charged by clearing brokers, and exchanges (in thousands, except for percentages).

Three months ended
September 30, Nine months ended
September 30,
2019 2018 2019 2018
Total revenue, net $ 347,099
100 % $ 440,580
100 % $ 1,088,537
100 % $ 1,369,044
100 %
Cost of goods sold

Product costs and other cost of goods sold 261,670
75 % 334,156
76 % 822,390
76 % 1,039,518
76 %
Fulfillment and related costs 15,881
5 % 19,708
4 % 49,576
5 % 57,198
4 %
Total cost of goods sold 277,551
80 % 353,864
80 % 871,966
80 % 1,096,716
80 %
Gross profit $ 69,548
20 % $ 86,716
20 % $ 216,571
20 % $ 272,328
20 %

~~Advertising expense~~

We expense the costs of producing advertisements the first time the advertising takes place and expense the cost of communicating advertising in the period during which the advertising space or airtime is used. Internet advertising expenses are recognized as incurred based on the terms of the individual agreements, which are generally: 1) a commission for traffic driven to our Website that generates a sale or 2) a referral fee based on the number of clicks on keywords or links to our Website generated during a given period. Advertising expense is included in Sales and marketing expenses and totaled $29.7 million and $49.7 million during the three months ended September 30, 2019 and 2018, respectively. For the nine months ended September 30, 2019 and 2018, advertising expense totaled $88.1 million and $207.5 million, respectively. Prepaid advertising (included in Prepaids and other current assets in the accompanying consolidated balance sheets) was $677,000 and $961,000 at September 30, 2019 and December 31, 2018, respectively.

~~Stock-based compensation~~

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

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~~Loss contingencies~~

In the normal course of business, we are involved in legal proceedings and other potential loss contingencies. We accrue a liability for such matters when it is probable that a loss has been incurred and the amount, or a range of amounts, can be reasonably estimated. When only a range of probable loss can be estimated, the most probable amount in the range is accrued. If no amount within this range is a better estimate than any other amount within the range, the minimum amount in the range is accrued. We expense legal fees as incurred (see Note 7—Commitments and Contingencies).

~~Income taxes~~

Our income tax provision for interim periods is determined using an estimate of our annual effective tax rate adjusted for discrete items, if any, for relevant interim periods. We update our estimate of the annual effective tax rate each quarter and make cumulative adjustments if our estimated annual effective tax rate changes.

Our quarterly tax provision and our quarterly estimate of our annual effective tax rate are subject to significant variations due to several factors including variability in predicting our pre-tax and taxable income and the mix of jurisdictions to which those items relate, relative changes in expenses or losses for which tax benefits are not recognized, how we do business, fluctuations in our stock price, and changes in law, regulations, and administrative practices. Our effective tax rate can be volatile based on the amount of pre-tax income. For example, the impact of discrete items on our effective tax rate is greater when pre-tax income is lower.

Each quarter we assess the recoverability of our deferred tax assets under ASC Topic 740. We assess the available positive and negative evidence to estimate whether we will generate sufficient future taxable income to use our existing deferred tax assets. We have limited carryback ability and do not have significant taxable temporary differences to recover our existing deferred tax assets, therefore we must rely on future taxable income, including tax planning strategies, to support their realizability. We have established a valuation allowance for our deferred tax assets not supported by carryback ability or taxable temporary differences, primarily due to uncertainty regarding our future taxable income. We have considered, among other things, the cumulative loss incurred over the three-year period ended September 30, 2019 as a significant piece of objective negative evidence. We intend to continue maintaining a valuation allowance on our net deferred tax assets until there is sufficient evidence to support the reversal of all or some portion of these allowances. The amount of the deferred tax asset considered realizable could be adjusted if objective negative evidence in the form of cumulative losses is no longer present and additional weight may be given to subjective evidence such as long-term projections for growth. We will continue to monitor the need for a valuation allowance against our remaining deferred tax assets on a quarterly basis.

We have indefinitely reinvested foreign earnings of $2.3 million at September 30, 2019. We would need to accrue and pay various taxes on this amount if repatriated. We do not intend to repatriate these earnings.

We are subject to taxation in the United States and several state and foreign jurisdictions. Tax years beginning in 2014 are subject to examination by taxing authorities, although net operating loss and credit carryforwards from all years are subject to examinations and adjustments for at least three years following the year in which the attributes are used. An audit by the Ireland Revenue Agency for the calendar year 2016 was finalized during 2019 with no assessment.

~~Net loss per share~~

Our Blockchain Voting Series A Preferred Stock, par value $0.0001 per share (the "Series A Preferred"), Digital Voting Series A-1 Preferred Stock, par value $0.0001 per share (the "Series A-1 Preferred"), and our Voting Series B Preferred Stock, par value $0.0001 per share (the "Series B Preferred" together with the Series A Preferred and Series A-1 Preferred, collectively, the "preferred shares") are considered participating securities, and as a result, net loss per share is calculated using the two-class method. Under this method, we give effect to preferred dividends and then allocate remaining net loss attributable to our stockholders to both common shares and participating securities (based on the percentages outstanding) in determining net loss per common share.

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

~~Table of Contents~~

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

On July 30, 2019, we announced that our Board of Directors had declared a dividend (the "Dividend") payable in shares of our Series A-1 Preferred. The Dividend is payable at a ratio of 1:10, meaning that one share of Series A-1 will be issued for every ten shares of common stock, Series A-1 or Series B Preferred held by all holders of such shares as of the record date for the Dividend. As of September 30, 2019, the Dividend had not been distributed.

~~The following table sets forth the computation of basic and diluted net loss per common share for the periods indicated (in thousands, except per share data):~~

Three months ended
September 30, Nine months ended
September 30,
2019 2018 2019 2018
Net loss attributable to stockholders of Overstock.com, Inc. $ (30,938 ) $ (47,923 ) $ (94,863 ) $ (163,743 )
Less: Preferred stock (Token) repurchase (gain)/loss —
—
(425 ) —
Less: Preferred stock dividends - declared and accumulated 837
27
875
80
Undistributed loss (31,775 ) (47,950 ) (95,313 )
(163,823 )
Less: Undistributed loss allocated to participating securities (428 ) (1,055 ) (1,319 ) (3,728 )
Net loss attributable to common shares $ (31,347 ) $ (46,895 ) $ (93,994 ) $ (160,095 )
Net loss per common share—basic:

Net loss attributable to common shares—basic $ (0.89 ) $ (1.55 ) $ (2.74 ) $ (5.47 )
Weighted average common shares outstanding—basic 35,241
30,279
34,289
29,256
Effect of dilutive securities:

Stock options and restricted stock awards —
—
—
—
Weighted average common shares outstanding—diluted 35,241
30,279
34,289
29,256
Net loss attributable to common shares—diluted $ (0.89 ) $ (1.55 ) $ (2.74 ) $ (5.47 )

~~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,
2019 2018 2019 2018
Stock options and restricted stock units 1,088
498
1,088
578
Common shares issuable under stock warrant —
—
—
28

~~Recently adopted accounting standards~~

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

~~Table of Contents~~

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

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

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

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

~~Recently issued accounting standards~~

~~In June 2016, the FASB issued ASU 2016-13,~~ ~~Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,~~ which revises how entities account for credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. For public entities, ASU 2016-13 is required to be adopted for annual periods beginning after December 15, 2019, including interim periods within those fiscal years. Management is currently evaluating the impact of the adoption of this ASU on our consolidated financial statements and related disclosures.

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~~3. BUSINESS COMBINATIONS~~

~~Bitsy, Inc.~~

Through a series of transactions in 2018, Medici Ventures acquired a 33% equity interest in Bitsy, Inc. ("Bitsy"), a U.S.-based startup cryptocurrency wallet and exchange services company that has built a regulatory-compliant bridge between traditional fiat currencies and cryptocurrencies, allowing customers the ability to store, purchase and sell cryptocurrencies. Bitsy was founded by Steve Hopkins, Medici Ventures' former chief operating officer and general counsel, and current president of tZERO, who held a significant equity interest in Bitsy. On December 21, 2018, tZERO entered into a stock purchase agreement with the owners of Bitsy to acquire the remaining 67% equity interest in Bitsy for $8.0 million with effective control of Bitsy transferring to tZERO effective January 1, 2019. In connection with the December 2018 stock purchase agreement, Medici Ventures transferred its 33% equity interest in Bitsy to tZERO for a $4.0 million convertible promissory note due December 31, 2020 and an assignment of certain intellectual property to Medici Ventures.

tZERO has expanded the wallet's capabilities and launched it as the tZERO Crypto wallet and exchange service. tZERO plans to offer these services as part of a suite of products that includes a digital wallet and exchange service between traditional fiat currencies and cryptocurrencies.

~~We estimated the fair value of the acquired assets based on Level 3 inputs, which were unobservable (see Note 2—Accounting Policies,~~ ~~Fair value of financial instruments~~). These inputs included our estimate of future revenues, operating margins, discount rates, and assumptions about the relative competitive environment. As of March 31, 2019, our determination and allocation of the purchase price to net tangible and intangible assets was based upon preliminary estimates. During the quarter ended June 30, 2019, we received the final valuation information and completed our determination and allocation of the purchase price and recognized adjustments to the provisional values as of June 30, 2019, which decreased Intangible assets by $650,000, increased Deferred tax liabilities by $943,000 and resulted in a corresponding increase to Goodwill of $1.7 million. We recognized an impairment of $1.3 million as a result of remeasuring to fair value our 33% equity interest in Bitsy held before the business combination which was based on Level 3 inputs (see Note 2—Accounting Policies, ~~Fair value of financial instruments). The impairment is included in Other expense, net in our consolidated statement of operations for the nine months ended September 30, 2019.~~

~~The fair values of the assets acquired and liabilities assumed at the acquisition date are as follows (in thousands):~~

Purchase Price Fair Value
Cash paid, net of cash acquired $ 3,115
Fair value of equity interest in Bitsy held before business combination 3,800
Less: Fair value of Overstock.com common stock held by Bitsy at acquisition date (643 )
Less: Settlement of receivable due from tZERO at acquisition date (10 )
Total transaction consideration, net of cash acquired $ 6,262

Allocation
Prepaids and other current assets $ 71
Property and equipment 16
Intangible assets 6,093
Goodwill 1,685
Deferred tax liability (943 )
Other liabilities assumed (660 )
Total net assets, net of cash acquired $ 6,262

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~~The following table details the identifiable intangible assets acquired at their fair value and their corresponding useful lives at the acquisition date (in thousands):~~

Intangible Assets Fair Value Weighted Average Useful Life (years)
Patents $ 4,293
20
Technology 1,500
5
Licenses 300
1
Total acquired intangible assets as of the acquisition date $ 6,093

Acquired intangible assets primarily include patents, technology, and licenses. The acquired assets, liabilities, and associated operating results of Bitsy were consolidated into our financial statements at the acquisition date. The goodwill recognized arises from expected synergies with our tZERO operations that do not qualify for separate recognition as intangible assets and also the deferred tax liabilities arising from the business combination. None of the goodwill recognized is expected to be deductible for tax purposes. Pro forma results of operations have not been presented because the effects of this acquisition were not material to our consolidated results of operations.

~~Mac Warehouse, LLC~~

On June 25, 2018, we acquired 100% of the total equity interests of Mac Warehouse, LLC, an electronics retailer of refurbished Apple products, to complement our retail business. As of December 31, 2018, our determination and allocation of the purchase price to net tangible and intangible assets was based upon preliminary estimates. During the quarter ended March 31, 2019, we received the final valuation information and completed our determination and allocation of the purchase price and recognized adjustments to the provisional values as of March 31, 2019, which decreased the recognized Intangibles assets by $2.8 million, increased Accrued liabilities by $527,000, decreased Deferred tax liabilities by $837,000 and resulted in a corresponding increase to Goodwill of $2.5 million. Additionally, the change to the provisional amount resulted in a decrease in amortization expense and accumulated depreciation of $1.4 million, of which $981,000 relates to the year ended December 31, 2018, and a $459,000 increase in Other Income related to the Accrued Liabilities that were expensed in 2018. We estimated the fair value of the acquired assets and liabilities based on Level 3 inputs, which were unobservable (see Note 2—Accounting Policies, ~~Fair value of financial instruments~~). ~~These inputs included our estimate of future revenues, operating margins, discount rates, royalty rates, and assumptions about the relative competitive environment.~~

~~The fair values of the assets acquired and liabilities assumed at the acquisition date are as follows (in thousands):~~

Purchase Price Fair Value
Cash paid, net of cash acquired $ 1,143
Allocation
Accounts receivable, net $ 399
Inventories, net 1,033
Prepaids and other current assets 29
Property and equipment 154
Intangible assets 653
Goodwill 3,376
Accounts payable and accrued liabilities (1,432 )
Long-term debt, net (3,069 )
Total net assets, net of cash acquired $ 1,143

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4.7. ACCRUED LIABILITIES

Accrued liabilities consist of the following (in thousands):



	September 30, 2020		December 31, 2019

Accrued compensation and other related costs	$	38,364	$	13,012
Accounts payable accruals	27,198		15,692
Accrued marketing expenses	21,057		13,063
Allowance for returns	17,916		11,107
Sales and other taxes payable	15,623		10,105
Accrued freight	12,773		5,954
Other accrued expenses	10,157		9,714
Accrued loss contingencies	2,580		9,550
Total accrued liabilities	$	145,668	$	88,197

September 30,
2019 December 31,
2018

Accounts payable accruals $ 12,235
$ 15,872
Accrued compensation and other related costs 14,854
12,099
Accrued loss contingencies 9,359
10,940
Allowance for returns 7,897
15,261
Sales and other taxes payable 9,813
9,923
Accrued marketing expenses 10,182
14,150
Accrued freight 7,743
5,343
Other accrued expenses 7,357
4,270
Total accrued liabilities $ 79,440
$ 87,858

5.8. BORROWINGS

~~High Bench~~Loan Core Capital Funding Corporation LLC loan agreements

In March 2020, we entered into two loan agreements with Loan Core Capital Funding Corporation LLC. The loan agreements provide a $34.5 million Senior ~~Credit Agreement~~

~~On June 25, 2018, we became party to~~Note, carrying interest at an annual rate of 4.242%, and a ~~senior credit agreement, as amended, with High Bench-Mac Warehouse-Senior Debt, LLC (the "High Bench Loan"), in connection with our acquisition~~$13.0 million Mezzanine Note, carrying interest at an annual rate of ~~Mac Warehouse, LLC. Under the amended agreement, at the time of the acquisition, the loan carried an~~5.002%. The loans carry a blended annual interest rate of ~~11.0%~~4.45%. ~~During July 2019, we repaid~~The Senior Note is for a 10-year term (stated maturity date is March 6, 2030) and requires interest only payments, with the ~~entire outstanding balance~~principal amount and any then unpaid interest due and payable at the end of the ~~High Bench Loan effectively terminating~~10-year term. The Mezzanine Note has a stated 10-year term, though the ~~agreement.~~agreement requires principal and interest payments monthly over approximately a 46-month payment period. Our debt issuance costs and debt discount are amortized using the straight-line basis which approximates the effective interest method.

~~Letters~~As of ~~credit~~

At September 30, ~~2019~~2020, the total outstanding debt on these loans was $45.3 million, net of $624,000 in capitalized debt issuance costs, and ~~December 31, 2018, letters~~the total amount of ~~credit totaling $205,000 and $280,000, respectively, were issued on our behalf collateralized by compensating cash balances held at a bank, which are~~the current portion of these loans included in ~~Restricted cash in~~Other current liabilities on our consolidated balance ~~sheets.~~sheets was $3.2 million.

~~Commercial purchasing card agreement~~Further, the Company will serve as a guarantor under the Senior Note (the "Senior Note Guaranty") and the Mezzanine Note (the "Mezzanine Note Guaranty"). Both loans include certain financial and non-financial covenants and are secured by our corporate headquarters and the related land and rank senior to stockholders. Overstock has agreed under the Senior Note Guaranty to, among other things, maintain, until all of the obligations guaranteed by Overstock under the Senior Note Guaranty have been paid in full, (i) a net worth in excess of $30 million and minimum liquid assets of $3 million for so long as the Mezzanine Note is outstanding, and (ii) a net worth in excess of $15 million and minimum liquid assets of $1 million from and after the date the Mezzanine Note has been paid in full. Overstock has also agreed under the Mezzanine Note Guaranty to, among other things, maintain a net worth in excess of $30 million and minimum liquid assets of $3 million until all obligations guaranteed by Overstock under the Mezzanine Note Guaranty have been paid in full.

We ~~have a commercial purchasing card (the "Purchasing Card") agreement. We use~~are in compliance with our debt covenants and continue to monitor the ~~Purchasing Card for business purpose purchasing~~most recent developments regarding the COVID-19 pandemic and must pay it in full each month. At September 30, 2019, $43,000 was outstanding and $957,000 was available under the Purchasing Card. At December 31, 2018, $48,000 was outstanding and $952,000 was available under the Purchasing Card.potential impact to our ongoing compliance with our debt covenants.

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6.9. LEASES

We have operating ~~and finance~~ leases for warehouses, office space, and data ~~centers, and certain equipment.~~centers. Our leases have remaining lease terms of 1 year to 1211 years, some of which may include options to extend the leases perpetually, and some of which may include options to terminate the leases within 1 year. ~~We note our finance leases are immaterial to our financial statements as a whole and thus are not discussed below.~~

The following table provides a summary of leases by balance sheet location ~~as of September 30, 2019~~ (in thousands):



	September 30, 2020		December 31, 2019
Operating right-of-use assets	$	25,402	$	25,384
Operating lease liabilities, current	5,959		6,603
Operating lease liabilities, non-current	21,640		21,554

September 30, 2019
Operating right-of-use assets $ 43,266
Operating lease liability - current 5,725
Operating lease liability - non-current 42,510

The components of lease expenses ~~for the three and nine months ended September 30, 2019~~ were as follows (in thousands):



	Three months ended September 30,				Nine months ended September 30,
	2020		2019		2020		2019
Operating lease cost	$	1,829	$	2,685	$	5,897	$	7,556
Short-term lease cost	6		28		25		90
Variable lease cost	336		406		1,224		1,378

Three months ended
September 30, 2019 Nine months ended
September 30, 2019
Operating lease cost $ 2,685
$ 7,556
Short-term lease cost 28
90
Variable lease cost 406
1,378

The following ~~tables~~table provides a summary of other information related to leases ~~for the nine months ended September 30, 2019~~ (in ~~thousands, apart from weighted-average lease term and weighted average discount rate)~~thousands):



	Nine months ended September 30,
	2020		2019
Cash payments included in operating cash flows from lease arrangements	$	6,417	$	6,629
Right-of-use assets obtained in exchange for new operating lease liabilities	$	5,132	$	17,238

Nine months ended
September 30, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows used in operating leases $ (6,629 )
Right-of-use assets obtained in exchange for new operating lease liabilities $ 17,238
Weighted-average remaining lease term - operating leases 6.82 years
Weighted-average discount rate - operating leases 8 %

The following table provides supplemental balance sheet information related to leases:



	September 30, 2020		December 31, 2019
Weighted-average remaining lease term - operating leases	5.63 years		5.86 years
Weighted-average discount rate - operating leases	7	%	8	%

Maturity of lease liabilities under our non-cancellable operating leases as of September 30, ~~2019,~~2020, are as follows (in thousands):


Payments due by period				Amount
2019 (Remainder)	$	2,222
2020	9,377
2020 (Remainder)				$	2,375
2021	9,826			7,230
2022	9,820			7,102
2023	8,979			5,716
2024				3,894
Thereafter	22,754			7,628
Total lease payments	62,978			33,945
Less interest	(14,743		)	6,346
Present value of lease liabilities	$	48,235		$	27,599

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

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~~Minimum future payments under all operating leases as of December 31, 2018, were as follows (in thousands):~~

Payments due by period
2019 $ 8,822
2020 7,414
2021 7,654
2022 7,579
2023 6,677
Thereafter 19,571
Total lease payments $ 57,717

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

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10. COMMITMENTS AND CONTINGENCIES

Legal proceedings and contingencies

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

OnIn 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~~California, alleging that we infringed a patent covering search and categorization software. We believe that certain third-party vendors of products and services sold to us are contractually obligated to indemnify us, and we have tendered defense of the case to an indemnitor who accepted the defense. OnIn April ~~21,~~ 2016, the court entered an order partially dismissing the claims against us. OnIn May 4, 2016, the plaintiff filed an amended complaint and we filed an answer. In March 2020, the court entered a judgment of non-infringement in our ~~answer.~~favor and against the plaintiff. In June 2020, the plaintiff filed an appeal to the United States District Court of Appeals for the Federal Circuit. No estimate of the possible loss or range of loss can be ~~made at this time.~~made. We intend to ~~continue~~ vigorously ~~defending~~defend this ~~action and pursuing our indemnification rights with our vendors.~~appeal.

In June 2013, William French ("French") and the State of Delaware ("Delaware") sued us, along with numerous other defendants, in the Superior Court of the State of Delaware for alleged violations of Delaware's unclaimed property laws. French and Delaware alleged that we knowingly refused to fulfill obligations under Delaware's Abandoned Property Law by failing to report and deliver unclaimed gift card funds to the State of Delaware, and knowingly made, used or caused to be made or used, false statements and records to conceal, avoid or decrease an obligation to pay or transmit money to Delaware in violation of the Delaware False Claims and Reporting Act.

On June 28, 2019, the court entered a judgment against us in the amount of approximately $7.3 million (for certain unredeemed gift card balances, treble damages, and penalties) as a result of a jury verdict which was returned September 20, 2018. On October 23, 2019, the court entered an award of attorneys’ fees and costs of $1.3 million and entered final judgment in the amount of $8.6 million. We have commenced an appeal and filed our appellate brief. Our estimated liability for these amounts was included in Accrued liabilities at September 30, 2019. The expense associated with these litigation charges was included in general and administrative expense in our consolidated statement of operations for the year ended December 31, 2018.

In February 2018, the Division of Enforcement of the SEC informed tZERO and subsequently informed us that it is conducting an investigation and requested that we and tZERO voluntarily provide certain information and documents related to tZERO and the tZERO security token offering in connection with its investigation. In December of 2018, we received a ~~follow-~~

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upfollow-up request from the SEC relating to its investigation. OnAs previously disclosed, on October 7, 2019, we received a subpoena from the SEC requesting documents related to the ~~Dividend~~digital dividend of our Series A-1 preferred stock we announced to ~~shareholders~~stockholders in June of 2019 (discussed below in Note 12—Stockholders' Equity) and requesting ~~10b-5-1~~Rule 10b5-1 plans of our officers and directors that were in effect during the period of January 1, 2018 through October 7, 2019. ~~Under~~On December 9, 2019, we received a subpoena from the ~~umbrella of this investigation,~~SEC requesting documents related to the GSR transaction and the alternative trading system run by tZERO ATS, LLC. On December 19, 2019, we ~~have~~received a subpoena from the SEC requesting our insider trading policies as well as certain employment and consulting agreements. We also previously received requests from the SEC regarding ~~both the GSR transaction and~~ our communications with our former chief executive officer and director, Patrick ~~Byrne. We are~~Byrne, and the matters referenced in ~~regular contact with~~the December 2019 subpoenas. On May 27, 2020, we received a subpoena from the SEC requesting further information regarding the alternative trading system run by tZERO's ATS, LLC. We have responded to all subpoenas and ~~are cooperating~~requests for information and will continue to cooperate fully with the SEC in connection with its ~~investigation~~investigations and information requests.

tZERO's broker-dealer subsidiaries are ~~and any broker-dealer subsidiaries that it acquires or forms in the future will be,~~ subject to extensive regulatory requirements under federal and state laws and regulations and self-regulatory organization ("SRO") rules. Each of SpeedRoute LLC ("SpeedRoute"), tZERO Markets, LLC ("tZERO Markets") and ~~PRO Securities~~tZERO ATS, LLC is registered with the SEC as a broker-dealer under the Securities Exchange Act of 1934 ~~("Exchange~~(the "Exchange Act") and in the states in which it conducts securities business and is a member of FINRA and other SROs (as applicable). In addition, ~~PRO Securities~~tZERO ATS, LLC owns and operates ~~the PRO Securities ATS, which is registered with the SEC as~~ an alternative trading system. Each of SpeedRoute, tZERO Markets and ~~PRO Securities~~tZERO ATS, LLC is subject to regulation, examination, investigation, and disciplinary action by the SEC, FINRA, and state securities regulators, as well as other governmental authorities and SROs with which it is registered or licensed or of which it is a member. Moreover, as a result of tZERO's projects seeking to apply distributed ledger technologies to the capital markets, tZERO's subsidiaries have been, and remain involved in, ongoing oral and written communications with regulatory authorities. As previously disclosed, tZERO's broker-dealer subsidiaries are currently undergoing various examinations, inquiries, and/or investigations undertaken by various regulatory authorities, which may result in financial and other settlements or penalties. Any significant failure by tZERO's broker-dealer subsidiaries to satisfy regulatory authorities that they are in compliance with all applicable rules and regulations could have a material adverse effect on tZERO and on us. ~~In addition, a recently incorporated~~

tZERO's subsidiary, tZERO subsidiary has applied for regulatory approvals to operate as a broker-dealer in a variety of areas, including retail activities. The approval process will involve satisfying the regulatory authorities that the tZERO subsidiary can operate in the manner it proposes and, in addition, if approval is granted, the tZERO subsidiary will be subject to a number of legal and regulatory requirements, some of which will be new to tZERO’s broker-dealer subsidiaries.

~~tZERO’s subsidiary, Bitsy~~Crypto, Inc., is registered as or is applying to become a money transmitter (or its equivalent) in many states and is subject to extensive regulatory requirements applicable to money services businesses, including the requirements of the Financial Crimes Enforcement Network of the U.S. Department of the Treasury ("FinCEN"),

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anti-money laundering requirements, know-your-customer requirements, record-keeping, reporting and capital and bonding requirements, and inspection by state and federal regulatory agencies. Compliance with these requirements requires the dedication of significant resources and any material failure by ~~Bitsy~~tZERO Crypto, Inc. to remain in compliance with ~~these~~the applicable regulatory requirements could subject it to liability or limit the services it may offer.

On January 31, 2019, Yassen Traynor filed a putative class action lawsuit against us in the United States District Court, Southern District of New York, alleging that our website violated the Americans with Disabilities Act ("ADA") in addition to other New York specific laws, because it was not accessible to blind and visually impaired people. On October 23, 2019, the case was dismissed.

On September 27, 2019, a purported securities class action lawsuit was filed against us and our former chief executive officer and former chief financial officer in the United States District Court ~~in the Central District~~ of Utah, alleging violations under Section 10(b), Rule 10b-5, Section 20(a), Section 20(A) of the Exchange Act. On October 8, 2019, October 17, 2019, ~~and~~ October 31, 2019, ~~three~~and November 20, 2019, four similar lawsuits were filed in the same court also naming the Company and the above referenced former executives as defendants, bringing similar claims under the Exchange Act, and seeking similar relief. These cases were consolidated into a single lawsuit in December 2019. The Court appointed The Mangrove Partners Master Fund Ltd. as lead plaintiff in January 2020. In March 2020, an amended consolidated complaint was filed against us, our president of retail, our former chief executive officer, and our former chief financial officer. We filed a motion to dismiss and on September 28, 2020, the court granted our motion and entered judgment in our favor. The plaintiffs filed a motion to amend their complaint on October 23, 2020 and filed a notice of appeal on October 26, 2020. No estimates of the possible losses or range of losses can be made at this time. We intend to vigorously defend this action.

On November 22, 2019, a shareholder derivative suit was filed against us and certain past and present directors and officers of the Company in the United States District Court for the District of Delaware, with allegations that include: (i) breach of fiduciary duties, (ii) unjust enrichment, (iii) insider selling and misappropriation of the Company's information, and (iv) contribution under Sections 10(b) and 21D of the Exchange Act. On December 17, 2019, a similar lawsuit was filed in the same court, naming the same defendants, bringing similar claims, and seeking similar relief. These cases were consolidated into a single lawsuit in January 2020. In March 2020, the court entered a stay on litigation, pending the outcome of the securities class action motion to dismiss. No estimates of the possible losses or range of losses can be made at this time. We intend to vigorously defend these actions.

On April 23, 2020, a putative class action lawsuit was filed against us in the Circuit Court of the County of St. Louis, State of Missouri, alleging that we over-collected taxes on products sold into the state of Missouri. No estimate of the possible loss or range of loss can be made at this time. We intend to vigorously defend this action.

We establish liabilities when a particular contingency is probable and estimable. At September 30, ~~2019~~2020 and December 31, ~~2018,~~2019, we have accrued ~~$9.4~~$2.6 million and ~~$10.3~~$9.6 million, respectively, which are included in Accrued liabilities in our consolidated balance sheets. The decrease in our estimated liability for these amounts included in Accrued liabilities was primarily attributable to the reversal of a legal settlement accrual due to a ruling in our favor during the second quarter of 2020. It is reasonably possible that the actual losses may exceed our accrued liabilities.

8.11. 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 loan agreements, various lessors in connection with facility leases for certain claims arising from such facility or lease, the environmental indemnity we entered into in favor of the lenders under our prior loan agreements, customary indemnification arrangements in underwriting agreements and similar agreements, and indemnities to our directors and officers to the maximum

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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.

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12. STOCKHOLDERS' EQUITY

Common ~~Stock~~stock

Each share of common stock has the right to ~~one~~1 vote. The holders of common stock are also entitled to receive dividends declared by the Board of Directors out of funds legally available, subject to prior rights of holders of all classes of stock outstanding having priority rights as to dividends.

On ~~July 30, 2019,~~May 19, 2020, we completed the distribution of our announced ~~that our Board of Directors had declared the Dividend~~digital dividend (the "Dividend") payable in shares of our Series A-1 ~~Preferred Stock. Existing~~preferred stock. The Dividend was paid out at a ratio of 1:10, so that one share of Series A-1 preferred stock was issued for every ten shares ~~can currently only be traded on the PRO Securities ATS. On September 18, 2019, we announced our intent to register the~~of OSTK common stock, for every ten shares of Series A-1 ~~Preferred to be issued pursuant to the Dividend under the Securities Act~~preferred stock, and for every ten shares of ~~1933, and postponed the previously announced record and distribution dates for the Dividend. Accordingly, the Dividend has not been distributed~~Series B preferred stock held by all holders of such shares as of September 30, 2019. On October 28, 2019, we announced that we would seek a shareholder vote at a shareholder special meeting to allow us to amend the certificates of designation for our preferred shares, removing certain restrictions and permitting us to reallocate the number of shares among the series of preferred shares, to facilitate issuance of the Dividend. On November 10, 2019, our Board of Directors approved December 18, 2019 asApril 27, 2020, the record date for the ~~shareholder vote~~Dividend. The number of shares of Series A-1 preferred stock declared as a stock dividend was 4,085 as of December 31, 2019 and ~~February 13, 2020 as~~ the ~~shareholder special meeting date.~~number of shares distributed was 4,079 on May 19, 2020.

Preferred ~~Stock~~stock

~~On May 1, 2019, we informed holders~~Each share of our Series A ~~Preferred of an opportunity to exchange (the "Exchange") outstanding Series A Preferred for newly-issued shares of the Company's~~preferred stock, Series A-1 ~~Preferred. On June 26, 2019, the Exchange was completed for participating stockholders. In connection with the Exchange, 122,526 shares of Series A Preferred were validly tendered~~preferred stock, and ~~accepted for exchange by the Company and the Company issued 122,526 shares of Series A-1 Preferred in exchange therefore.~~

~~On June 26, 2019, in connection with the completion of the Exchange, 1,144 shares of Series A Preferred were converted into shares of~~our Series B ~~Preferred (such transaction,~~preferred stock (collectively, the ~~"Conversion"~~"preferred shares"). Following the Conversion, 2,895 shares of Series A Preferred remained outstanding as of June 30, 2019 and in July 2019, 2,020 of those remaining shares were exchanged for shares of Series A-1 Preferred and 875 of those remaining shares were converted into shares of Series B Preferred. Following that time, the Company eliminated the Series A Preferred by filing a Certificate of Elimination with the Delaware Secretary of State.

~~Except~~, except as required by law, ~~the preferred shares~~ are intended to have voting and dividend rights similar to those of ~~one~~1 share of common stock. Preferred shares rank senior to common stock with respect to dividends. Holders of the preferred shares ~~will be~~are entitled to an annual cash dividend of $0.16 per share, in preference to any dividend payment to the holders of the common stock, out of funds of the Company legally available for payment of dividends and subject to declaration by our Board of Directors. Holders of the preferred shares are also entitled to participate in any cash dividends we pay to the holders of the common stock and are also entitled to participate in non-cash dividends we pay to holders of the common stock, subject to potentially different treatment if we effect a stock dividend, stock split, or combination of the common stock. There are no arrearages in cumulative preferred dividends. We declared and paid a cash dividend of $0.16 per share to the holders of our preferred stock during ~~2017~~2018 and ~~2018.~~2019.

Neither the Series ~~A Preferred, Series~~ A-1 ~~Preferred,~~preferred stock nor Series B ~~Preferred~~preferred stock is required to be converted into or exchanged for shares of our common stock or any other entity; however, at our sole discretion, we may convert the Series ~~A Preferred shares or Series~~ A-1 ~~Preferred shares~~preferred stock into Series B ~~Preferred shares~~preferred stock at any time on a ~~one-to-one~~1-to-one basis. Until December 15, 2019, we may redeem, at our discretion, the Series A, Series A-1, and Series B Preferred shares for an amount equal to the highest of the following: (1) $15.68 plus any accrued but unpaid dividends, (2) 105% of the average trading price of our common stock during a five-trading-day period determined by the Company and (3) 105% of the average trading price of the

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~~series of preferred shares during the same five-day-trading period.~~ In the event of any liquidation, any amount available for distribution to stockholders after payment of all liabilities will be distributed proportionately, with each share of Series ~~A Preferred, each share of Series~~ A-1 ~~Preferred,~~preferred stock and each share of Series B ~~Preferred~~preferred stock being treated as though it were a share of our common stock. If we are party to any merger or consolidation in which our common stock is changed into or exchanged for stock or other securities of any other person (or the Company) or cash or any other property (or a right to receive the foregoing), we will use all commercially reasonable efforts to cause each outstanding share of the preferred stock to be treated as if such share were an additional outstanding share of common stock in connection with any such transaction. Neither the Series A-1 preferred stock nor the Series B preferred stock is registered under the Exchange Act.

Common Stock Offering

We completed a public offering of our common stock on August 14, 2020 and issued 2,415,000 shares of our common stock pursuant to an underwriting agreement, dated August 11, 2020, for proceeds totaling $192.7 million, net of $11.4 million in offering costs.

JonesTrading Sales Agreement

~~In August 2018, we~~We entered into ~~a sales~~an Amended and Restated Capital on Demand^TMSales agreement dated June 26, 2020 with JonesTrading Institutional Services LLC ("JonesTrading") and D.A. Davidson & Co. ("D.A. Davidson"), under which we ~~conducted~~may conduct "at the market" public offerings of our common ~~stock from time to time.~~stock. Under the sales agreement, JonesTrading and D.A. Davidson, acting as our ~~agent, sold 5,843,147 shares of~~agents, may offer our common stock ~~resulting~~ in ~~$146.7 million in proceeds, net of $3.3 million of offering costs, including commissions paid~~the market on a daily basis or otherwise as we request from time to ~~JonesTrading. Of the cumulative amount sold~~time. We have no obligation to sell additional shares under the sales agreement, but we ~~sold shares of common stock for $52.1 million, net of offering expenses (including commissions) during~~may do so from time to time. For the nine months ended September 30, ~~2019. The average gross price per share~~2020, we did not sell any shares of our common stock ~~sold~~ pursuant to the sales agreement ~~during~~but have received $2.8 million of proceeds that was included in Accounts receivable, net on our consolidated balance sheet at December 31, 2019 for the ~~nine months ended~~sale of an aggregate of 415,904 shares of our common stock under the prior iteration of the agreement that were executed in late December 2019. As of September 30, ~~2019 was $17.84.~~2020, we had $150.0 million available under our "at the market" sales program.

~~tZERO Tokens~~Table of Contents

On December 18, 2017, tZERO launched an offering (the "security token offering") of the right to acquire tZERO Preferred Equity Tokens (the "tZERO Security Token") through a Simple Agreement for Future Equity ("SAFE"). The security token offering closed on August 6, 2018 and funded through August 8, 2018, and on October 12, 2018 tZERO distributed the tZERO Security Tokens in settlement of the SAFEs. tZERO Security Token holders have the right to, prior to distributing earnings to tZERO common shareholders, a noncumulative dividend equal to 10% of tZERO's consolidated Adjusted Gross Revenue (as defined by the security token offering documents) for the most recently completed fiscal quarter, if declared by tZERO's Board of Directors, to be paid out of funds lawfully available on a quarterly basis. tZERO Security Token holders are not entitled to participate in any dividends paid to the holders of tZERO's common stock, have no rights to vote, and have no rights to the undistributed earnings of tZERO and are not entitled to any utility functionality as part of the tZERO Security Tokens. Any remaining undistributed earnings or losses of tZERO for a period shall be allocated to the noncontrolling interest held by the tZERO Security Token holders based on the contractual participation rights of the security to share in those earnings as if all the earnings for the period had been distributed and the effect will be reflected in determining net income/(loss) per share under the two-class method. In the event of any liquidation, dissolution or winding up of tZERO, the tZERO Security Token holders will be entitled to the limited preferential liquidation rights equal to USD $0.10 per token to the extent funds are available.

~~At December 31, 2018, cumulative proceeds since December 18, 2017 from the security token offering totaling $104.8 million, net of~~ ~~$22.0 million~~ of withdrawals, were classified as a component of noncontrolling interest within our consolidated financial statements. As of December 31, 2018, tZERO incurred $21.5 million of offering costs associated with the security token offering that are classified as a reduction in proceeds within noncontrolling interest of our consolidated financial statements. During the nine months ended September 30, 2018, proceeds from the security token offering were $104.8 million, net of $22.0 million of withdrawals. During the nine months ended September 30, 2018, tZERO incurred offering costs of $21.3 million.

GSR Agreement

In August 2018, Overstock signed a Token Purchase Agreement with GSR Capital Ltd., a Cayman Islands exempted company ("GSR"). The Token Purchase Agreement sets forth the terms on which GSR had agreed to purchase, for $30 million, on May 6, 2019 or such other date as agreed by the parties, security tokens at a price of $6.67 per security token. On ~~May 8, 2019, the parties executed an Investment Agreement to replace the Token Purchase Agreement under which GSR agreed to purchase~~April 1, 2020, tZERO issued 508,710 shares of tZERO common stock, representing approximately 0.5% of the issued and outstanding common stock of ~~tZERO. In~~tZERO, to GSR Capital Ltd., a Cayman Islands exempted company ("GSR") in exchange ~~GSR agreed to transfer to tZERO a total~~for $5.0 million in consideration ~~consisting of $1.0 million U.S. dollars, $1.0 million U.S. dollars' worth of Chinese Renminbi, and securities traded on the Hong Kong Stock Exchange with a market value on the date~~in full satisfaction of the Investment Agreement ~~of $3.0 million U.S. dollars. As of September 30, 2019, GSR had provided $2.0 million of U.S. dollars pursuant to~~dated May 8, 2019. GSR's installment payments towards the Investment Agreement ~~and such amount is~~were included in Accrued liabilities ~~at September 30, 2019. On September 16, 2019, in recognition of GSR's remaining obligations under~~on our consolidated balance sheet prior to the Investment Agreement, tZERO and GSR entered into a Promissory Note under which GSR promised to pay the remaining $3.0 million in consideration due to tZERO under the Investment Agreement in the form of U.S. dollars in multiple installments by December 6, 2019.

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~~Warrants~~

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

~~10.~~13. STOCK-BASED AWARDS

We have equity incentive plans that provide for the grant to employees and board members of stock-based awards, including stock options and restricted stock. Employee accounting applies to awards granted by the Company or subsidiary inof the ~~company~~Company or subsidiary's shares only to its own employees, respectively. Stock-based compensation expense ~~was~~is classified within the corresponding operating expense categories on our consolidated statements of operations as follows (in thousands):



	Three months ended September 30,					Nine months ended September 30,
	2020			2019		2020		2019
Cost of goods sold — retail	$	50		$	55	$	153	$	156
Sales and marketing	(76		)	486		621		1,460
Technology	460			1,428		1,822		4,325
General and administrative	2,189			2,498		5,760		7,682
Total stock-based compensation	$	2,623		$	4,467	$	8,356	$	13,623

Three months ended
September 30, Nine months ended
September 30,
2019 2018 2019 2018
Overstock restricted stock awards $ 3,821
$ 1,779
$ 12,249
$ 6,863
Medici Ventures stock options 329
138
862
273
tZERO equity awards 317
329
512
4,518
Total stock-based compensation expense $ 4,467
$ 2,246
$ 13,623
$ 11,654

When an award is forfeited prior to the vesting date, we recognize an adjustment for the previously recognized expense in the period of the forfeiture.

Overstock restricted stock awards

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

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

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The following table summarizes restricted stock award activity during the nine months ended September 30, ~~2019~~2020 (in thousands, except per share data):



	Nine months ended September 30, 2020
	Units		Weighted Average Grant Date Fair Value
Outstanding—beginning of year	1,051		$	26.22
Granted at fair value	478		9.82
Vested	(696	)	23.50
Forfeited	(156	)	24.72
Outstanding—end of period	677		$	17.78

Nine months ended
September 30, 2019
Units Weighted
Average
Grant Date
Fair Value
Outstanding—beginning of year 559
$ 44.08
Granted at fair value 981
17.80
Vested (259 ) 35.28
Forfeited (193 ) 23.33
Outstanding—end of period 1,088
$ 26.16

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Medici Ventures stock options

The Medici Ventures, Inc. ("Medici Ventures") 2017 Stock Option Plan, as amended, provides for the grant of options to employees and directors of and consultants to Medici Ventures to acquire up to approximately 9% of the authorized shares of Medici Ventures' common stock. Medici Ventures authorized 1.5 million shares, 900,000 of which are issued and outstanding to Overstock, and 130,000 of which are subject to the 2017 Stock Option Plan. The remaining 470,000 are authorized but unissued. Options vested under this plan expire at the end of ten years. During the nine months ended September 30, ~~2019,~~2020, Medici Ventures granted ~~27,550~~13,650 stock options with a cumulative grant date fair value of ~~$2.4 million~~$282,000 which vest over a three-year period.

tZERO equity awards

The ~~tZERO.com~~tZERO Group, Inc. 2017 Equity Incentive Plan, as amended, provides for ~~grant~~grants of ~~options~~equity awards to employees and directors of and consultants to tZERO to acquire up to 5% of the authorized shares of tZERO's common stock. During the nine months ended September 30, ~~2019,~~2020, tZERO granted 60,000 stock option awards ~~to acquire 3,492,762 shares of its stock~~ with a cumulative grant date fair value of ~~$506,000~~$46,000. In June 2020, tZERO completed the restructuring of its outstanding equity awards through the amendment and cancellation of each of its outstanding stock option awards in favor of the issuance of restricted stock unit awards, with each participant under its plan receiving one restricted stock unit for each stock option canceled. In addition to the original service-based vesting condition (generally three years), the restricted stock unit awards include an added performance-based vesting condition that a liquidity event must occur in order for the restricted stock unit awards to vest. The exchange was accounted for as a Type II modification with an incremental fair value of $6.9 million for the modified awards which will be expensed for the fully vested portion of the grant once the performance-based vesting condition becomes probable and the remaining fair value of the grant will be expensed on a straight-line basis over the remaining vesting ~~period~~period. As such, no incremental compensation cost was recognized on the modification date. The original grant date fair value of ~~three years. Additionally, during~~the stock option awards exchanged for restricted stock unit awards will continue to be expensed on a straight-line basis over their remaining vesting period. During the nine months ended September 30, ~~2019,~~2020, tZERO granted ~~245,500~~11,528,016 restricted stock awards, ~~with~~including 7,851,016 restricted stock unit awards related to the exchange of stock option unit awards for restricted stock awards. The incremental restricted stock unit awards granted that were not part of the exchange totaled 3,677,000 and had a cumulative grant date fair value of ~~$749,000~~$3.5 million which will be expensed for the fully service-based vested portion of the grant once the performance-based vesting condition becomes probable and the remaining fair value of the grant will be expensed on a straight-line basis over ~~a cliff~~the remaining service-based vesting ~~period of two years.~~period.

~~11.~~14. REVENUE AND CONTRACT LIABILITY

Revenue Disaggregation

Disaggregation of revenue by major product line is included in Segment Information in Note 17—Business Segments.

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Unearned Revenue

The following table provides information about unearned revenue from contracts with customers, including significant changes in unearned revenue balances during the periods presented (in thousands):



	Amount
Unearned revenue at December 31, 2018	$	50,578
Increase due to deferral of revenue at period end	36,622
Decrease due to beginning contract liabilities recognized as revenue	(45,379		)
Unearned revenue at December 31, 2019	41,821
Increase due to deferral of revenue at period end	71,200
Decrease due to beginning contract liabilities recognized as revenue	(34,264		)
Unearned revenue at September 30, 2020	$	78,757

Our total unearned revenue related to outstanding Club O Reward dollars was $8.6 million and $6.7 million at September 30, 2020 and December 31, 2019, respectively. Breakage income related to Club O Reward dollars and gift cards is recognized as a component of Retail revenue in our consolidated statements of operations. The timing of revenue recognition of these reward dollars is driven by actual customer activities, such as redemptions and expirations.

Breakage included in revenue was $1.6 million and $1.5 million for the three months ended September 30, 2020 and 2019 and $3.8 million and $3.5 million for the nine months ended September 30, 2020 and 2019.

Sales returns allowance

The following table provides additions to and deductions from the sales returns allowance (in thousands):



	Amount
Allowance for returns at December 31, 2018	$	15,261
Additions to the allowance	117,040
Deductions from the allowance	(121,194		)
Allowance for returns at December 31, 2019	11,107
Additions to the allowance	143,746
Deductions from the allowance	(136,937		)
Allowance for returns at September 30, 2020	$	17,916

15. OTHER EXPENSE, NET

Other expense, net consisted of the following (in thousands):



	Three months ended September 30,						Nine months ended September 30,
	2020			2019			2020			2019
Gain on deconsolidation of net assets of Medici Land Governance, Inc.	$	0		$	0		$	10,741		$	0
Impairment of equity securities	(813		)	(2,750		)	(813		)	(6,964		)
Loss on equity securities and marketable securities	(813		)	(700		)	(3,268		)	(2,076		)
Equity method losses	(5,896		)	(1,864		)	(11,909		)	(4,922		)
Other	(4		)	533			235			(86		)
Total other expense, net	$	(7,526	)	$	(4,781	)	$	(5,014	)	$	(14,048	)

Three months ended
September 30, Nine months ended
September 30,
2019 2018 2019 2018
Equity method losses $ (1,864 ) $ (1,123 ) $ (4,922 ) $ (2,504 )
Impairment of equity securities (2,750 ) (511 ) (6,964 ) (511 )
Unrealized gain/(loss) on equity securities (700 ) (72 ) (1,818 ) 1,764
Allowance on notes receivable —
—
(1,242 ) —
Gain/(loss) on sale of equity securities —
—
(258 ) —
Other 533
(142 ) 1,156
(238 )
Total other expense, net $ (4,781 ) $ (1,848 ) $ (14,048 ) $ (1,489 )

~~12.~~

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16. NET INCOME (LOSS) PER SHARE

Our Series A preferred stock, Series A-1 preferred stock, and Series B preferred stock (collectively, the "preferred shares") are considered participating securities, and as a result, net income (loss) per share is calculated using the two-class method. Under this method, we give effect to preferred dividends and then allocate remaining net income (loss) attributable to our stockholders to both common shares and participating securities (based on the percentages outstanding) in determining net income (loss) per common share.

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

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

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,
	2020		2019			2020		2019
Numerator:
Net income (loss) attributable to stockholders of Overstock.com, Inc.	$	23,391	$	(30,938	)	$	43,414	$	(94,863	)
Less: Preferred stock TZROP repurchase loss	0		0			0		(425		)
Less: Preferred stock dividends - declared and accumulated	179		837			376		875
Undistributed income (loss)	23,212		(31,775		)	43,038		(95,313		)
Less: Undistributed income (loss) allocated to participating securities	2,293		(428		)	2,482		(1,319		)
Net income (loss) attributable to common stockholders	$	20,919	$	(31,347	)	$	40,556	$	(93,994	)
Denominator:
Weighted average shares of common stock outstanding—basic	41,595		35,241			40,697		34,289
Effect of dilutive securities:
Stock options and restricted stock awards	607		0			333		0
Weighted average shares of common stock outstanding—diluted	42,202		35,241			41,030		34,289
Net income (loss) per share of common stock:
Basic	$	0.50	$	(0.89	)	$	1.00	$	(2.74	)
Diluted	$	0.50	$	(0.89	)	$	0.99	$	(2.74	)

The following shares were excluded from the calculation of diluted shares outstanding as their effect would have been anti-dilutive (in thousands):



	Three months ended September 30,		Nine months ended September 30,
	2020	2019	2020	2019
Stock options and restricted stock units	4	1,088	302	1,088

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17. BUSINESS SEGMENTS

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

Our Retail segment primarily consists of amounts earned through e-commerce product sales through our Website, excluding intercompany transactions eliminated in consolidation.

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Our tZERO segment primarily consists of amounts earned through securities transactions through our broker-dealers and costs incurred to execute our tZERO business initiatives, excluding intercompany transactions eliminated in consolidation.

Our MVI segment primarily consists of costs incurred to ~~develop~~create or foster a set of products and ~~advance the concept of "Technology Stack for Civilization",~~solutions that leverage blockchain technology to generate efficiencies and increase security and control through our Medici Ventures business initiatives, excluding intercompany transactions eliminated in consolidation.

Other consists of our unallocated corporate support costs and Medici Land Governance. We deconsolidated Medici Land Governance consolidated net assets and noncontrolling interest from our consolidated financial statements beginning on February 22, 2020, the date that control ceased.

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, ~~2019~~2020 and ~~2018.~~2019.

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The following table summarizes information about reportable segments ~~for three~~ and ~~nine months ended September 30, 2019 and 2018~~a reconciliation to consolidated net income (loss) (in thousands):



	Three months ended September 30,
	Retail			tZERO			MVI			Other			Total
2020
Net revenue	$	717,695		$	11,151		$	2,805		$	0		$	731,651
Cost of goods sold	548,982			9,098			2,803			0			560,883
Gross profit	168,713			2,053			2			0			170,768
Operating expenses	125,458			10,613			2,923			2,225			141,219
Interest and other expense, net (1)	(205		)	(3,848		)	(3,650		)	0			(7,703		)
Income (loss) before income taxes	$	43,050		$	(12,408	)	$	(6,571	)	$	(2,225	)	21,846
Provision for income taxes													620
Net income (2)													$	21,226

2019
Net revenue	$	340,798		$	5,662		$	639		$	0		$	347,099
Cost of goods sold	272,545			4,367			639			0			277,551
Gross profit	68,253			1,295			0			0			69,548
Operating expenses	77,641			14,114			4,427			3,496			99,678
Interest and other income (expense), net (1)	137			(475		)	(4,057		)	6			(4,389		)
Loss before income taxes	$	(9,251	)	$	(13,294	)	$	(8,484	)	$	(3,490	)	(34,519		)
Provision for income taxes													23
Net loss (2)													$	(34,542	)

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Three months ended September 30,
Retail tZERO MVI Other Total
2019

Revenue, net $ 340,798
$ 5,662
$ 639
$ —
$ 347,099
Cost of goods sold 272,545
4,367
639
—
277,551
Gross profit 68,253
1,295
—
—
69,548
Operating expenses (1) 77,641
14,114
4,427
3,496
99,678
Interest and other income (expense), net (2) 137
(475 ) (4,057 ) 6
(4,389 )
Pre-tax loss $ (9,251 ) $ (13,294 ) $ (8,484 ) $ (3,490 ) (34,519 )
Provision for income taxes

23
Net loss (3)

$ (34,542 )

2018

Revenue, net $ 435,775
$ 4,338
$ 467
$ —
$ 440,580
Cost of goods sold 350,651
2,746
467
—
353,864
Gross profit 85,124
1,592
—
—
86,716
Operating expenses 124,571
7,235
1,845
897
134,548
Interest and other income (expense), net (2) (515 ) 96
(1,147 ) —
(1,566 )
Pre-tax loss $ (39,962 ) $ (5,547 ) $ (2,992 ) $ (897 ) (49,398 )
Benefit from income taxes (141 )
Net loss (3) $ (49,257 )

Nine months ended September 30,
Retail tZERO MVI Other Total
2019

Revenue, net $ 1,070,898
$ 15,709
$ 1,930
$ —
$ 1,088,537
Cost of goods sold 858,169
11,867
1,930
—
871,966
Gross profit 212,729
3,842
—
—
216,571
Operating expenses (1) 244,571
41,410
11,583
10,933
308,497
Interest and other income (expense), net (2) 312
(1,098 ) (12,068 ) (1 ) (12,855 )
Pre-tax loss $ (31,530 ) $ (38,666 ) $ (23,651 ) $ (10,934 ) (104,781 )
Provision for income taxes

279
Net loss (3)

$ (105,060 )

2018

Revenue, net $ 1,353,454
$ 14,080
$ 1,510
$ —
$ 1,369,044
Cost of goods sold 1,085,483
9,723
1,510
—
1,096,716
Gross profit 267,971
4,357
—
—
272,328
Operating expenses 399,540
33,119
6,445
1,986
441,090
Interest and other income (expense), net (2) 654
513
(2,479 ) —
(1,312 )
Pre-tax loss $ (130,915 ) $ (28,249 ) $ (8,924 ) $ (1,986 ) (170,074 )
Benefit from income taxes (445 )
Net loss (3) $ (169,629 )



	Nine months ended September 30,
	Retail			tZERO			MVI			Other			Total
2020
Net revenue	$	1,824,249		$	34,127		$	7,230		$	162		$	1,865,768
Cost of goods sold	1,403,418			28,634			7,226			0			1,439,278
Gross profit	420,831			5,493			4			162			426,490
Operating expenses	333,284			34,087			8,374			8,297			384,042
Interest and other income (expense), net (1)	(621		)	(6,898		)	2,423			3			(5,093		)
Income (loss) before income taxes	$	86,926		$	(35,492	)	$	(5,947	)	$	(8,132	)	37,355
Provision for income taxes													1,313
Net income (2)													$	36,042

2019
Net revenue	$	1,070,898		$	15,709		$	1,930		$	0		$	1,088,537
Cost of goods sold	858,169			11,867			1,930			0			871,966
Gross profit	212,729			3,842			0			0			216,571
Operating expenses	244,571			41,410			11,583			10,933			308,497
Interest and other income (expense), net (1)	312			(1,098		)	(12,068		)	(1		)	(12,855		)
Loss before income taxes	$	(31,530	)	$	(38,666	)	$	(23,651	)	$	(10,934	)	(104,781		)
Provision for income taxes													279
Net loss (2)													$	(105,060	)

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(1)

— Corporate support costs for three months ended September 30, 2019 have been allocated $9.4 million, $1.3 million, $0.9 million, and $1.8 million to Retail, tZERO, MVI, and Other, respectively. Unallocated corporate support costs of $1.3 million are included in Other. Corporate support costs for the nine months ended September 30, 2019 have been allocated $31.5 million, $4.5 million, $3.1 million, and $5.8 million to Retail, tZERO, MVI, and Other, respectively. Unallocated corporate support costs of $4.5 million are included in Other.

~~(2)~~

— Excludes intercompany transactions eliminated in consolidation, which consist primarily of service fees and interest. The net amounts of these intercompany transactions were ~~$739,000~~$1.3 million and ~~$539,000~~$739,000 for the three months ended September 30, 2020 and 2019, and ~~2018~~$3.6 million and $1.7 ~~million and $3.0~~ million for the nine months ended September 30, ~~2019~~2020 and ~~2018.~~2019.


~~(3)~~(2)	— Net income (loss) presented for segment reporting purposes is before any adjustments attributable to noncontrolling interests.

Upon deconsolidation of MLG, we recognized our retained equity interest in MLG as an equity method security held by our MVI segment which resulted in a $10.7 million gain included in Interest and other income (expense), net in the table above for our MVI segment for the nine months ended September 30, 2020. See Note 2—Summary of Significant Accounting Policies and Supplemental Disclosures, Principles of consolidation, for additional details on the gain recognized.

For the three and nine months ended September 30, ~~2019~~2020 and ~~2018,~~2019, substantially all of our revenues were attributable to customers in the United States. At September 30, ~~2019~~2020 and December 31, ~~2018,~~2019, substantially all our property and equipment were located in the United States.

~~13.~~

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18. BROKER DEALERS

~~As part of our Medici blockchain~~tZERO wholly owns 3 broker-dealers, SpeedRoute and ~~fintech technology initiatives, we hold a controlling interest in each of two broker dealers, SpeedRoute~~tZERO ATS, LLC, ~~("SpeedRoute") and PRO Securities LLC ("Pro Securities"),~~ which wewere acquired in January ~~2016.~~2016, and tZERO Markets, LLC, whose broker-dealer registration with the SEC became effective in August 2020.

SpeedRoute is an electronic, agency-only, ~~FINRA-registered broker dealer~~FINRA-member 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.~~alternate trading systems. All of SpeedRoute's customers are registered ~~broker dealers.~~broker-dealers. SpeedRoute does not hold, own, or sell securities.

~~PRO Securities~~tZERO ATS, LLC is a ~~FINRA-registered broker dealer~~FINRA-member broker-dealer that owns and operates ~~the PRO Securities~~an alternative trading system ("(the "tZERO ATS")~~, which is registered with the SEC. An ATS~~ and is a ~~trading system that is not regulated as an exchange but is a licensed venue for matching buy and sell orders.~~wholly-owned subsidiary of tZERO. The ~~PRO Securities~~tZERO ATS is a closed trading system available only to ~~its broker dealer~~broker-dealer subscribers. ~~PRO Securities~~The tZERO ATS does not accept orders from ~~non-broker dealers,~~non-broker-dealers, nor does it hold, own or sell securities. The tZERO ATS currently supports the trading of three digital securities, the Series A-1 preferred stock, TZROP, and Aspen Digital, Inc.'s depository receipts for its common stock ("ASPD") and, in the future, is expected to support digital securities from other issuers.

~~SpeedRoute~~tZERO Markets, LLC is a FINRA-member broker-dealer that provides online brokerage services, supporting the trading of digital securities on the tZERO ATS. It launched its web application and ~~PRO Securities~~began to open individual retail accounts in October 2020. tZERO Markets is also approved to act as a placement agent or underwriter in certain securities offerings but has not yet launched these business lines.

Each of tZERO's broker-dealers 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, 2019, SpeedRoute had net capital of $782,105, which was $652,732 in excess of its required net capital of $129,373 and SpeedRoute's~~The following table summarizes the net capital ratio ~~was 2.48 to 1. At September 30, 2019, PRO Securities had~~(in thousands, apart from the net capital ratio):



	September 30, 2020		December 31, 2019
SpeedRoute
Net capital	$	1,725	$	850
Required net capital	229		145
Net capital, in excess of required	$	1,496	$	705
Net capital ratio	1.99		2.56

tZERO ATS, LLC
Net capital	$	863	$	110
Required net capital	5		5
Net capital, in excess of required	$	858	$	105
Net capital ratio	0.03		0.27

tZERO Markets, LLC
Net capital	$	2,418	$	0
Required net capital	50		0
Net capital, in excess of required	$	2,368	$	0
Net capital ratio	0.04		0

Each of $18,739 which was $13,739 in excess of its required net capital of $5,000 and PRO Securities net capital ratio was 1.22 to 1. At December 31, 2018, SpeedRoute had net capital of $1,251,579, which was $1,152,854 in excess of its required net capital of $98,725 and SpeedRoute's net capital ratio was 1.2 to 1. At December 31, 2018, PRO Securities had net capital of $13,958, which was $8,958 in excess of its required net capital of $5,000 and PRO Securities net capital ratio was 2 to 1.

~~SpeedRoute and PRO Securities~~tZERO's broker-dealers did not have any securities owned or securities sold, not yet purchased at September 30, ~~2019~~2020 and December 31, ~~2018,~~2019, respectively.

~~14.~~

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19. SUBSEQUENT EVENTS

OnIn October ~~22, 2019~~2020, Medici Ventures entered into a Subscription Agreement (the "Agreement") with the owners of Bitt Inc. ("Bitt") to acquire a majority equity interest in Bitt for $8.0 million and ~~November 1, 2019, we purchased additional minority interests~~to convert all outstanding convertible notes, bridge loans, and receivables held by Medici Ventures into equity shares of Bitt. The transaction outlined in the Agreement transfers effective control of Bitt to Medici Ventures, bringing our total equity ~~securities~~ownership in Bitt to over 80%. Our purchase accounting has not yet been finalized for the transaction, as we are still finalizing our valuation of ~~certain privately held entities for an aggregate of $9.0 million.~~assets acquired and liabilities assumed.

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

~~Special~~The 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 performance of our business and any other non-historical statements are forward-looking statements. Our actual results may differ materially from those contained in or implied by any forward-looking statements contained herein. These forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, the risks and uncertainties described in "Special Cautionary Note Regarding ~~Forward-Looking Statements~~

~~This~~Forward Looking Statements" and in 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 ~~documents incorporated herein by reference, as well as~~sections entitled "Special Cautionary Note Regarding Forward-Looking Statements," Part II, Item 1A, "Risk Factors," and our ~~other public documents~~consolidated financial statements and related notes included in our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2020 and June 30, 2020, and with the sections entitled "Special Cautionary Note Regarding Forward-Looking Statements," Part I, Item 1A, "Risk Factors," and our consolidated financial 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 relate to our financial condition, liquidity, results of operations, earnings outlook and prospects. You can find many of these statements by looking for words such as "may," "would," "could," "should," "will," "expect," "anticipate," "predict," "project," "potential," "continue," "contemplate," "seek," "assume," "believe," "intend," "plan," "forecast," "goal," "estimate," or other similar expressions which identify these forward-looking statements. These forward-looking statements are not historical facts, and are based on current expectations, estimates and projections about our industry and business, and on management's beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond our control. Accordingly, you are cautioned that any such forward-looking statements are not guarantees of future performance and are subject to assumptions, risks and uncertainties that are difficult to predict, and that actual results may be materially different from the results expressed or implied by any of our forward-looking statements.

Unless otherwise required by law, we also disclaim any obligation to update our view of any such risks or uncertainties or to announce publicly any revisions to any forward-looking statements made or incorporated by reference in this report. A number of important factors could cause actual results to differ materially from those indicated by the forward-looking statements, including the risks set forth in the "Risk Factors" section of this report, the risks describedrelated notes included in our Annual Report on Form 10-K for the year ended December 31, ~~2018, and the risks described in our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2019 and June 30,~~ 2019. ~~Our forward-looking statements include all statements other than statements of historical fact including, without limitation, all statements regarding:~~

~~our strategies and plans for our retail business and our Medici businesses, including our tZERO initiatives;~~

the possibility that we will sell or attempt to sell our retail business or pursue or attempt to pursue one or more other strategic alternatives that could change our business dramatically, as well as the possibility that we will determine not to sell or attempt to sell our retail business or pursue any other strategic alternative at all in the foreseeable future;

~~whether we would or would not submit any sale of our retail business to a vote of our stockholders;~~

~~whether we would or would not distribute any proceeds of any sale of our retail business to our stockholders by any means or use those proceeds in our blockchain initiatives or for other purposes;~~

our plans and expectations around the dividend of shares of our Series A-1 Preferred Stock that we originally announced on July 30, 2019, including specifically, whether we are able to ultimately issue this dividend on substantially similar terms to the terms that were originally announced and the timing of the dividend;

~~our expectations regarding the costs, benefits and risks of Medici Ventures' and tZERO's initiatives, including their acquisitions or purchases of interests in other companies;~~

potential negotiated equity investments in Overstock and/or tZERO, including the amount and structure of any such investments, the timing of such investments and their likelihood of closing on the agreed upon time frames, if at all;

~~the plans of tZERO and Medici Ventures and the costs, benefits and risks of their initiatives, including those of tZERO's ownership of SpeedRoute and PRO Securities;~~

~~our expectations regarding the costs, benefits and risks of the tZERO security token offering completed in 2018;~~

our expectations regarding the costs, benefits and risks of our efforts and plans to advertise or offer other additional businesses, innovations and projects that we or our subsidiaries may engage in, offer or advertise in the future;

~~our expectations regarding Medici Land Governance Inc., a public benefit corporation formed in mid-2018;~~

~~our efforts to improve our natural search results in our retail business;~~

our future operating or financial results, or other GAAP or non-GAAP financial measures or amounts or anticipated changes in any of them, including our recently announced change in guidance for fiscal year 2019;

~~our capital requirements and our ability to fund them;~~

~~the adequacy of our liquidity and our ability, if any, to increase our liquidity or capital resources;~~

~~tZERO's plans, including without limitation its plans regarding efforts to develop blockchain technology, including its joint venture with Box Digital;~~

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our plans and expectations regarding the costs, benefits, and risks of attempting to develop technology applications including applications using or relating to blockchain technology and our plans to commercialize any of these potential applications;

~~the competition we currently face and anticipate;~~

the effects of current and future government regulation, including but not limited to the information requests we received from the Securities and Exchange Commission, and any liabilities or other costs or operational changes that result from any current proceeding, investigations or discussions with regulators in which we are involved;

~~the effects of current and future litigation, including shareholder class action lawsuits, and any liabilities or other costs that result from any such proceedings;~~

~~our expectations for our international sales efforts and the anticipated results of our international operations;~~

~~our plans for further changes to our business;~~

~~our expectations regarding our emphasis on home and garden product offerings;~~

~~our expectations regarding our shipping costs and timing of shipments;~~

~~our expectations regarding our potential liabilities or exposure to claims under Delaware's Abandoned Property Law;~~

~~our expectations regarding the actual costs of our employees' health insurance claims for which we may be liable; and~~

~~our other statements about the anticipated benefits and risks of our business and plans.~~

Further, in some cases, you can identify forward-looking statements by terminology such as may, will, could, should, likely, expect, plan, seek, intend, anticipate, project, believe, estimate, predict, potential, goal, strategy, future or continue, the negative of such terms or other comparable terminology. These statements are only predictions. Actual events or results may differ materially from those contemplated by our forward-looking statements for a variety of reasons, including among others:

the possibility that we may sell our retail business and retain the after-tax proceeds of the sale for use in our blockchain initiatives, which would result in our stockholders owning equity interests in a publicly-held corporation seeking to develop entirely new businesses and revenue streams, without the benefits of our current retail business and the significant annual net revenues that it generates, but with most if not all of the expenses of operating a publicly-held corporation;

~~the potentially substantial corporate level income tax expense we could incur if we were to sell our retail business in a taxable transaction;~~

the possibility that our well-publicized review of potential strategic alternatives including the potential sale of our retail business may distract our management and other employees, may cause members of our management and/or other key employees to seek employment elsewhere, and may have adverse effects on our business and financial results;

the technical, operational, financial, regulatory, legal, reputational, marketing and other obstacles we face in trying to create a profitable business from our blockchain initiatives, including tZERO;

~~our ability to enforce definitive agreements already entered by tZERO on the terms contemplated by the previously-disclosed binding agreements we signed with GSR Capital;~~

difficulties we have encountered and continue to encounter with changes that Google has made to its natural search engine algorithms, which have periodically resulted in lower rankings of our products and may continue to do so, and future changes that Google and other search engine companies may make to their natural search engine algorithms, which may have similar effects on us;

difficulties we may encounter in connection with recent departures of our chief executive officer and director, Patrick Byrne, and our chief financial officer, Gregory Iverson, both of which occurred and were announced in the third quarter;

increasing competition, including from Amazon, from well‑funded companies willing to incur substantial losses in order to build market share, and from others including competitors with delivery capabilities that we cannot currently match and do not expect to be able to match in the foreseeable future;

~~difficulties we may encounter in connection with our efforts to offer services to our customers outside of our retail business;~~

~~difficulties we may encounter in connection with tZERO or its subsidiaries, including those related to expense and any operational or regulatory issues for such entities;~~

technical, operational, regulatory or other difficulties we may encounter with our Medici or tZERO initiatives, including any difficulties we may have marketing any products or services tZERO may offer, whether due to lack of market size or acceptance or as a result of competition from any of the numerous competitors seeking to

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develop competing technologies or systems or as a result of patents that may be granted to other companies or persons, and losses we may continue to incur in connection with our Medici and tZERO initiatives;

uncertainties regarding the dividend of shares of our Series A-1 Preferred Stock, including as to timing and structure of the dividend, the ability of our subsidiary and its business partners to handle the anticipated increased volume of trading of those securities on the alternative trading system operated by our subsidiary, PRO Securities, as well as any potential effect such dividend may have on the market price of our common stock;

~~the difficulties tZERO will face in attempting to generate revenues of any nature;~~

~~impairment charges we may recognize with respect to assets or businesses that we, Medici Ventures or tZERO have acquired or may acquire;~~

~~any liability or expense we may incur as a result of our interests in other companies, whether as a result of regulatory issues or otherwise;~~

~~any downturn in the U.S. housing industry or other changes in U.S. and global economic conditions or U.S. consumer spending;~~

~~the imposition of tariffs or occurrence of other factors that increase the price of importing into the U.S. the types of merchandise we sell in our retail business;~~

~~modifications we may make to our business model from time to time;~~

~~the mix of products purchased by our customers and changes to that mix;~~

any claims we may face regarding cyber security issues or data breaches or difficulties we encounter regarding Internet or other infrastructure or communications impairment problems or the costs of preventing or responding to any such problems;

any problems with or affecting our payment card processors, including cyber-attacks, Internet or other infrastructure or communications impairment or other events that could interrupt the normal operation of the payment card processors or any difficulties we may have maintaining compliance with the rules of the payment card processors;

~~the possibility that we will be unable to raise additional capital or obtain financing adequate to enable us to continue our operations;~~

problems with or affecting the facility where substantially all of our computer and communications hardware is located or other problems that result in the unavailability of our Website or reduced performance of our transaction systems;

any losses or issues we may encounter as a consequence of accepting or holding bitcoin or other cryptocurrencies, whether as a result of regulatory, tax or other legal issues, technological issues, value fluctuations, lack of widespread adoption of bitcoin or other cryptocurrencies as an acceptable medium of exchange or otherwise;

~~any difficulties we may encounter as a result of our reliance on numerous third parties that we do not control for the performance of critical functions material to our business;~~

difficulties we may encounter in connection with our efforts to emphasize our home and garden product offerings and to brand ourselves as a home and garden shopping destination, including the risk that our sales of home and garden product offerings could decrease substantially as a result of a significant downturn in some or all of the U.S. housing market;

~~difficulties we may encounter in connection with our efforts to expand internationally, including claims we may face and liabilities we may incur in connection with those efforts;~~

~~adverse results in legal proceedings, investigations or other claims;~~

~~any difficulties we may have optimizing our warehouse operations;~~

any decrease in the volume of retail sales, particularly in home goods, and the occurrence of any event that would adversely affect e-commerce or discourage or prevent consumers from shopping online or via mobile apps; and

~~the other risks described in this report or in our other public filings.~~

In evaluating all forward-looking statements, you should specifically consider the risks outlined above or elsewhere in this report and the risks described in our Report on Form 10-K for the year ended December 31, 2018 and the risks described in our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2019 and June 30, 2019 filed with the SEC, especially under the headings "Risk Factors," "Legal Proceedings," and "Management's Discussion and Analysis of Financial Condition and Results of Operations." These factors may cause our actual results to differ materially from those contemplated by any forward-looking statement in this report. Although we believe that our expectations reflected in the forward-looking statements are reasonable, we cannot guarantee or offer any assurance of future results, levels of activity, performance or achievements or other future events.

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~~Overview~~

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

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

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

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

Our Retail Business

Our online retail business ~~through September 30, 2019, generated nearly all of our net revenues. In our retail business, our goal is~~seeks to provide goods to furnish and accessorize "dream ~~homes"~~homes for all" of our target customers—consumers who seek quality, stylish merchandise at bargain prices. At September 30, 2019, we offered 2.5 million products (7.6 million SKUs), of which over 99% were in-line products (products in active production), including more than 30,000 private label products offered under twelve private label brands. We believe that the furniture and home ~~goods~~furnishings market, which is highly fragmented and has traditionally been served by brick and mortar stores, will continue transitioning to online sales, particularly as Millennial consumers ~~(defined~~(which we define as those ~~aged 20-36)~~between birth years 1981 - 1996), who are generally comfortable shopping online, start families and move into new homes. As a result of the COVID-19 pandemic and resulting state and local government mandates of home confinement and closure of many brick-and-mortar stores, we have seen strong trends to online sales as consumers migrate to online shopping. We regularly change our home furnishings product assortment to meet the evolving preferences of our customers and current trends. Our products include, among others, furniture, home décor including rugs, bedding and bath, home improvement, and kitchen and dining items. We ~~compete~~sell our products and services primarily ~~based on:~~

~~Quality customer experience with an emphasis on price, value,~~through our Internet websites located at www.overstock.com and ~~a wide assortment of products delivered in a personalized format with~~www.o.co (referred to collectively as the ~~convenience of our mobile app, and with the benefits of our award-winning customer care;~~

~~Proprietary technologies which we believe help us provide our customers with a quality shopping experience;~~

~~Logistics capabilities tailored to the furniture and home goods category and developed over our many years of e-commerce experience;~~

~~Long-term mutually beneficial relationships with our partners; and~~

~~Our Club O Loyalty Program, which we believe increases customer engagement and retention.~~

~~For the quarter ended September 30, 2019, nearly~~"Website"). Nearly all our retail sales through our Website were from transactions in which we fulfilled orders through our network of manufacturers, distributors and other suppliers ("partners") selling on our Website. Our use of the term "partner" does not mean that we have formed any legal partnerships with any of our retail partners. We provide our partners with access to a large customer base and ~~convenient~~a proprietary technology platform and services for order fulfillment, customer service,

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returns handling, and other services. Our supply chain allows us to ship directly to our customers from our suppliers or from our warehouses. ~~Our retail sales also includes sales of~~

Strategies for our ~~own inventory shipped from our warehouses, including some customer returns of partner products.~~Retail Business

During the quarters ended September 30, 2019, and 2018 our sales were almost entirely to customers located in the United States and no single customer accounted for more than 1% of our total net revenue.

~~Additional Offerings~~

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

~~Our international business where we offer products to customers outside the United States using third-party logistics providers;~~

~~Worldstock Fair Trade, a store within our Website that offers handcrafted products made by artisans all over the world to help improve the lives of people in emerging economies;~~

~~Pet Adoptions, a free service and portal within our Website that leverages our technology to display pets available for adoption from shelters across the United States;~~

Overstock Hotels, a free service and portal within our Website that enables customers to search and book hundreds of thousands of properties worldwide, including big box brands, modern boutiques, and more;

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

~~Businesses advertising products or services on our Website.~~

Our Retail revenues are seasonal, with revenues historically being the highest in the fourth quarter, which ends December 31, reflecting higher consumer holiday spending. While we had lower sales volume during the fourth fiscal quarter of 2018, we anticipate the trend of higher sales volume duringbusiness initiatives enable our ~~fourth quarter to continue~~long-term focus on our three brand pillars, "Product Findability," "Smart Value," and "Easy Delivery and Support." Initiatives for the ~~foreseeable future. To the extent possible we maintain supplier relationships and seek new supplier relationships for our retail businesses.~~Retail business include:


•	Improve Mobile Experience - As more website visitors move to mobile, we are focusing on ensuring our mobile experience is fast, frictionless, and meets the unique needs of the mobile shopping journey. We believe an improved mobile experience improves product findability, conversion, search engine rankings, and organic traffic.

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•

Overhaul Discounting and Pricing Experience - "Smart Value" is the central brand pillar of our value proposition. We believe clarifying our pricing and discounting experience allows customers to more confidently purchase at Overstock. Savvy shoppers expect a "smart deal," including saving through coupons, site sales, Club O rewards and financing. We have historically offered free shipping on orders over $45. We initially introduced free shipping on everything to the continental U.S in late March 2020 in response to the COVID-19 pandemic stay-at-home orders, with the goal of easing consumers’ financial burdens. As this shopping benefit continued to resonate with new and existing customers, we made the limited-time offer permanent for shoppers all across the continental U.S. We believe our net promoter score (NPS), repeat purchase rates and conversion will improve as we better optimize the mix of offers and clarify the pricing and discounting experience.


•	Real Time Performance and SKU Profitability - We are improving our ability to address site, assortment and pricing issues more quickly by enhancing our real-time visibility into site, category, and marketing channel performance. We believe this initiative allows us to improve margin by more quickly resolving site issues for an improved customer experience.

•

Expand Partner Sponsored Marketing - We are expanding the "Overstock Sponsored Product" program, a platform for our drop ship partners to promote their products to shoppers through a cost-per-click auction platform. In addition, we have implemented a marketing allowance program across our partner network. This marketing allowance program allows us to optimize the marketing promotion type, mix of acquisition spend and on-sale assortment to better meet the needs of our target customer segments and adapt to seasonal relevance.

Our Medici Ventures Business

Our Medici business initiatives include our wholly-owned subsidiary, Medici Ventures,

Inc. ("Medici Ventures"), which conducts the majority of its business through its majority-owned subsidiary tZERO Group, Inc. ("tZERO"). Medici Ventures' strategy is to ~~develop and advance the concept of "Technology Stack for Civilization" by creating~~create or ~~fostering~~foster a set of products and solutions that leverage blockchain technology to generate efficiencies and increase security and control in six ~~areas of civilizational necessity:~~areas: identity management, property rights and management, central banking and currencies, capital markets, supply chains and commerce, and voting systems. A blockchain is a cryptographically secured, distributed infrastructure, or network, which may be accessed and, in some cases, maintained by each member of the network. Medici ~~Ventures has a~~Ventures' team of ~~approximately 53~~ software engineers, developers and other technologists ~~who~~ work in blockchain development and deployment and enterprise level software development and deployment. Medici Ventures provides the services of some of its software engineers, developers, or other technologists to other blockchain companies. Medici Ventures also owns strategic minority equity interests in several blockchain-related companies, each of which focuses on at least one of the ~~Technology Stack for Civilization~~ areas mentioned above. Medici Ventures takes an active interest in and holds seats on the boards of some of these companies. These companies include technology companies whose focuses include commercial blockchain applications for identity and social media, property and land, money and banking, capital markets, supply chain, and voting. All of the companies in which Medici Ventures holds strategic equity interests are startup businesses, businesses in the development stage, or businesses with a short operating history. ~~The majority of~~

Strategies for our Medici Ventures Business

Medici Ventures' primary business ~~is its 80% interest~~focus continues to be accelerating adoption of blockchain technology to democratize capital, eliminate middlemen, and re-humanize commerce. Medici Ventures accomplishes this by doing the following:

•

Enable existing keiretsu companies to extend runway to profitability - The companies in Medici Ventures' keiretsu continue to release products into production. Medici Ventures supports its keiretsu companies by offering a variety of services including development, design, public relations services, and assistance in raising capital from third parties to extend the companies' runway to profitability.


•	Educate the public and policy makers on blockchain technologies - Medici Ventures works to increase general knowledge of blockchain technology, use cases, and corresponding value through speaking opportunities, article publication, policy maker outreach, and other public relations work.


•	Opportunistically approach future partnerships - Medici Ventures continues to review and seek out strategic opportunities to take ownership interests in seed-stage and startup companies that effectively use blockchain technology. This includes looking for companies that can effectively use Medici Ventures' enterprise-level technology development and design talent.

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Our tZERO ~~which, as described below, is a financial technology company pursuing potential financial applications for blockchain technologies.~~Business

~~tZERO~~

tZERO is a financial technology company ~~pursuing financial applications utilizing~~with the goal of democratizing access to private capital markets whose primary focus is on the development and adoption of digital securities. tZERO offers institutional-grade solutions for issuers looking to digitize their capital table through blockchain technology and the use of digital securities, and trade on a regulated alternative trading system. tZERO democratizes access to private assets by providing a simple, automated, and efficient trading venue to broker-dealers, institutions, and investors. tZERO has developed a suite of technologies (the "tZERO Technology Stack") that enables issuers to issue, and relevant regulated market participants to support the issuance, trading, clearance and settlement of, digital securities. Throughout this report we refer to "digital securities" which are conventional uncertificated securities where the issuer arranges for a digital "courtesy carbon copy" of the transfer agent's share registry to be viewable on the blockchain to enhance the investor experience through added transparency, but which have no controlling legal effect. tZERO and its affiliates are working with regulators and other stakeholders to expand the role of blockchain in the lifecycle of digital securities and to facilitate the infrastructure, issuance, recording, trading, clearing, settlement, and regulatory compliance of "digital asset securities" described in the July 8, 2019 Joint Staff Statement on Broker-Dealer Custody of Digital Asset Securities in a manner consistent with existing market and legal infrastructure.

tZERO also supports the adoption of digital securities by developing the tZERO Technology Stack for use by regulated venues on which those digital securities can trade, as well as ~~non-blockchain technologies. tZERO's primary focus at present is on~~investing in subsidiaries and joint venture entities that own and operate such trading venues. These investments include the alternative trading system (the "tZERO ATS") run by its ~~facility~~wholly-owned subsidiary, tZERO ATS, LLC, which provides a regulated venue for matching buy and sell orders to its broker-dealer subscribers, including for the trading of digital ~~security tokens on an Alternative Trading System ("ATS")~~securities, and on its joint venture with BOX Digital Markets LLC ("BOX Digital"), intended to develop a U.S. national securities exchange facility with regulatory approvals ~~that would enable~~enabling it to ~~trade~~support trading in a type of digital security called a security token. Another wholly-owned subsidiary of tZERO, tZERO Markets, LLC ("tZERO Markets"), is an SEC-registered broker-dealer which offers a website, and, in the future intends to provide a mobile application, that allows retail customers to conduct self-directed trading of digital securities.

In addition, tZERO also maintains certain non-blockchain businesses, including the broker-dealer activities of its subsidiaries, tZERO ATS, LLC and SpeedRoute, LLC ("SpeedRoute"). tZERO's remaining businesses include tZERO Crypto, Inc., a cryptocurrency wallet and exchange services business, and Verify Investor, LLC, an accredited investor verification company.

Strategies for our tZERO Business

tZERO's primary initiatives currently consist of the following:

•

Promote trading - tZERO ATS, LLC is focused on quoting for trading high-quality digital securities. tZERO ATS, LLC is working with prospective issuers spanning various industries, including real estate, technology, health care and sports, as they seek to structure and issue new digital securities using the tZERO Technology Stack, as well as to provide liquidity to existing investors. Additionally, tZERO is enhancing the tZERO Technology Stack to support third party issuance protocols in order to support securities which have been digitally enabled by other technology companies and is cultivating relationships with established investment banks to help prospective issuers raise capital, prior to tokenizing and trading on the tZERO ATS.

•

Enhance liquidity - tZERO ATS, LLC is focused on enhancing liquidity. To achieve this, tZERO ATS, LLC is in continual discussions with additional broker-dealers interested in subscribing to the tZERO ATS, which would enable their customers to trade digital securities traded on the tZERO ATS. tZERO also continues to develop new avenues for traders to access digital securities including tZERO Markets, an SEC-registered broker-dealer able to accept retail customers and BSTX as it seeks regulatory approval for a U.S. national exchange facility and thereby provide a new trading venue for digital securities.

•

Create a world class trading experience - tZERO continues to seek opportunities to enhance the tZERO Technology Stack and improve investors' trading experience for all types of financial products. tZERO is working to allow digital securities to be traded via a mobile application to complement their accessibility via web platform. It is also developing further enhancements of tZERO Crypto's separate wallet and exchange services, such as providing additional features for its mobile application and ensuring it is accessible on a web platform. tZERO believes a world-class combined trading experience will be key to investors' adoption of digital securities and tZERO's other products and services, including cryptocurrencies.

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

•

Advocacy - tZERO operates businesses which are subject to complex and often uncertain legal environments and believes active engagement with regulatory authorities is necessary to realize the full potential of its business. tZERO continues, in partnership with other industry participants, to advocate regulatory reform with legislators and regulators in order to spur market innovation through the adoption of distributed ledger technology and digital asset securities.

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

Executive Commentary

This executive commentary is intended to provide investors with a view of our business through the eyes of our management. As an executive commentary, it necessarily focuses on selected aspects of our business. This executive commentary is intended as a supplement to, but not a substitute for, the more detailed discussion of our business included elsewhere herein. Investors are cautioned to read our entire "Management's Discussion and Analysis of Financial Condition and Results of Operations," as well as our interim and audited financial statements, and the discussion of our business and risk factors and other information included elsewhere or incorporated in this report. This executive commentary includes forward-looking statements, and investors are cautioned to read "Special Cautionary Note Regarding Forward-Looking Statements."

Revenue ~~decreased 21%~~increased 111% in Q3 ~~2019~~2020 compared to ~~Q3 2018.~~the same period in 2019. This ~~decrease~~ increase was primarily due to ~~decreased~~increased retail product sales ~~that resulted~~resulting from a ~~significant reduction~~102% increase in ~~sales and marketing activities, which~~customer orders. This increased order activity was ~~part of our effort to return to retail profitability. In January 2018, we shifted our retail strategy to aggressively pursue revenue~~largely driven by new customer growth and ~~new customers with~~strong repeat customer behavior, both influenced by a ~~large increase in sales and marketing expenses. We discontinued this strategy in August 2018 and have returned to a more disciplined approach to marketing. In addition,~~consumer migration toward online shopping. While we have ~~seen~~observed this recent acceleration of new customer acquisition and demand for our ~~revenues negatively impacted~~products and resulting sales, we cannot estimate the impact that COVID-19 will have on our business in the future due to increased tariffs on goods manufactured in China, search traffic taking longer than expected to translate into purchasing customers, waning consumer confidence decreasing conversion on high dollar purchases industry wide,the unpredictable nature of the ultimate scope and ~~other more general decreases in conversion.~~duration of the pandemic.

Gross profit increased 146% in Q3 ~~2019 decreased 20%~~2020 compared to ~~Q3 2018~~ the same period in 2019 primarily due to ~~the decrease~~an increase in ~~net revenue in the~~ retail ~~business, partially offset by~~product sales and an increase in gross margin. Gross margin increased to ~~20.0% in Q3 2019,~~23.3% for the three months ended September 30, 2020, compared to ~~19.7%~~20.0% for the same period in ~~Q3 2018. The increase in gross margin was~~ 2019, primarily due to ~~improvements~~our new partner marketing allowance program that was fully rolled out in ~~our promotional pricing strategy and a higher proportion~~the second quarter of 2020, which requires all of our ~~revenue coming~~partners to participate and allows us to advertise more strategically to our customers. Gross margin also benefited from ~~marketplace sales, which~~reduced promotional discounting as we ~~recognize on a net basis. These increases~~balanced spend to ~~gross margin were partially offset by increased~~support new customer acquisition efforts, unique items in the third quarter of 2019 that negatively impacted freight costs ~~resulting from the business closure of one of our freight carriers,~~including cancellation of ~~services with~~ a freight carrier ~~that failed to deliver acceptable service levels,~~contract and an increase in ~~volume of~~ large package shipments. Furthermore, we gained leverage in our fixed warehouse infrastructure and realized an increase in fees charged to partners due to unmet contractual service levels.

Sales and marketing expenses as a percentage of revenue ~~decreased~~decrease from ~~12.6% to~~ 9.9% in Q3 2019 ~~as compared~~ to 9.8% in Q3 ~~2018,~~2020, was primarily due to gained leverage on television advertising spend and staff-related expenses, partially offset by increased spending on market partner commissions and paid listing advertisements to support our ~~return~~customer acquisition strategy, resulting in a 141% increase in new customers compared to ~~our historical focus on operational efficiency as we have shifted away from our aggressive retail marketing strategy from early 2018. As part~~the third quarter of ~~this effort, we significantly reduced spending in the sponsored search and display ads on social media marketing channels.~~2019.

Technology expenses ~~in Q3 2019 decreased $1.1~~totaled $35.0 million for the three months ended September 30, 2020, a $2.2 million increase compared to ~~Q3 2018~~ the three months ended September 30, 2019, primarily due to ~~a $435,000 decrease in outside service~~staff-related costs, ~~and a $413,000 decrease in technology licenses and maintenance costs.~~including accrued bonuses.

General and administrative expenses ~~in Q3 2019 decreased $12.7~~increased $1.5 million for the three months ended September 30, 2020 compared to ~~Q3 2018,~~ the three months ended September 30, 2019, primarily due to $10.8 million in special legal costs in Q3 2018 related to our gift card escheatment case in Delaware and capital raising efforts. In addition, we had a $1.8 million decrease in consulting expenses, an $862,000 decrease in staff-related costs ~~and an $834,000 decrease in travel expenses. These decreases~~including accrued bonuses, which were partially offset by a ~~$1.4 million impairment charge on certain intangible assets and an $844,000 increase~~reduction in ~~corporate insurance costs.~~discretionary spending due to adjustments related to the COVID-19 pandemic.

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Liquidity

Our consolidated cash and cash equivalents balance ~~decreased~~increased from ~~$141.5~~$112.3 million as of December 31, ~~2018~~2019, to ~~$83.5~~$529.7 million as of September 30, ~~2019, a decrease~~2020, an increase of ~~$58.0~~$417.4 million, primarily as the result of cash ~~outflows~~flows from operating activities of ~~$89.2~~$198.7 million, $195.5 million in net proceeds primarily from our common stock offering executed during August 2020, and $47.5 million in proceeds from long-term debt, partially offset by a cash outflow of $15.1 million in expenditures for ~~fixed assets~~property and equipment.

Table of ~~$17.9 million for~~Contents

Additional commentary related to Medici Ventures

For the ~~nine~~three months ended September 30, ~~2019, which was partially offset by cash inflows from the sale of common stock under~~2020, our ~~"at the market" sales agreement with JonesTrading of $52.1 million, net of offering costs (including commissions) during the first half of 2019.~~

~~We continue to seek opportunities for growth~~loss before income taxes in our ~~retail~~Medici Ventures business, ~~through our Medici blockchain~~excluding the tZERO business, was $6.6 million, and ~~financial technology initiatives, and through other means. As a result of these initiatives,~~ we ~~will continue to incur additional expenses and may purchase interests in, or make acquisitions of, other technologies or businesses. We anticipate that our initiatives may cause us~~expect to continue to incur significant losses in our Medici Ventures business during 2020 as Medici Ventures' business model of providing technical assistance to companies in which Medici Ventures owns an interest has not yet generated material revenues.

Additional commentary related to tZERO

For the ~~foreseeable future. These losses, additional expenses, acquisitions or purchases may be material, and, coupled with existing marketing expense trends, and potential strategic changes~~three months ended September 30, 2020, our loss before income taxes in our ~~retail~~tZERO business, ~~may lead~~excluding our loss in the non-tZERO portion of our Medici business, was $12.4 million, and we expect to ~~increased consolidated~~continue to incur significant losses in our tZERO business during 2020 as tZERO continues to make progress towards establishing a stable customer base and generating meaningful revenue from its commercially available blockchain applications.

Additional commentary related to COVID-19

Overstock has continued to respond to the challenges and opportunities created by the COVID-19 pandemic. In our Retail business, customer demand continued to increase significantly in the third quarter, particularly in our key home furnishings categories. We have seen a substantial year-over-year increase in our website traffic and number of new customers. Our Retail gross sales again grew more than 100% year over year in Q3. Our online-only platform and partner network with thousands of fulfillment centers has enabled us to meet this increase in demand. Our three warehouses have remained operational based on our sustained implementation of sound safety measures, including staggered shifts and social distancing. We are also hiring in key areas throughout the company to support our current and expected growth. We continue to face challenges created by the sharp increase in volume, in customer service channels and in fulfillment and delivery, stemming from capacity issues from shipping carriers and some ~~periods, and to reduced liquidity.~~

~~Digital Dividend~~

~~On July 30, 2019, we announced that our Board of Directors had declared the Dividend payable in shares~~suppliers, including out-of-stock positions on some of our ~~Series A-1 Preferred Stock. Existing Series A-1 shares can currently only be traded~~top performing products. Most of our Medici Ventures blockchain companies have seen relatively little disruption, and several are working on solutions to problems exacerbated by the ~~PRO Securities ATS. On September 18, 2019, we announced~~global pandemic. We have evaluated and implemented a phased re-entry plan for our ~~intent~~offices; most of our corporate employees continue to ~~register~~work from home without incident. We cannot predict how the ~~Series A-1 Preferred~~COVID-19 pandemic will unfold in the coming months. Nevertheless, the challenges arising from the pandemic have not adversely affected our liquidity, revenues, or capacity to be issued pursuant to the Dividend under the Securities Act of 1933, and postponed the previously announced record and distribution dates for the Dividend. Accordingly, the Dividend has not been distributed as of September 30, 2019. On October 28, 2019, we announced that we would seek a shareholder vote at a shareholder special meeting to allowservice our debt, nor have these conditions required us to ~~amend the certificates of designation for~~reduce our preferred shares, removing certain restrictions and permitting us to reallocate the number of shares among the series of preferred shares, to facilitate issuance of the Dividend. On November 10, 2019, our Board of Directors approved December 18, 2019 as the record date for the shareholder vote and February 13, 2020 as the shareholder special meeting date. Upon approval by the shareholders, we intend to promptly announce the revised dividend record and distribution dates, with the aim of distributing the dividend to investors as soon as reasonably possible.capital expenditures.

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

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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,
2019 2018 2019 2018
(as a percentage of total net revenue) (as a percentage of total net revenue)
Revenue, net

Retail 98.2 % 98.9 % 98.4 % 98.9 %
Other 1.8
1.1
1.6
1.1
Total net revenue 100.0
100.0
100.0
100.0
Cost of goods sold
Retail 78.5
79.6
78.8
79.3
Other 1.5
0.7
1.3
0.8
Total cost of goods sold 80.0
80.3
80.1
80.1
Gross profit 20.0
19.7
19.9
19.9
Operating expenses:
Sales and marketing 9.9
12.6
9.4
16.6
Technology 9.4
7.7
9.3
7.1
General and administrative 9.4
10.3
9.6
8.5
Total operating expenses 28.7
30.5
28.3
32.2
Operating loss (8.7 ) (10.9 ) (8.4 ) (12.3 )
Interest and other income (expense), net (1.3 ) (0.4 ) (1.2 ) (0.1 )
Loss before income taxes (9.9 ) (11.2 ) (9.6 ) (12.4 )
Provision (benefit) from income taxes —
—
—
—
Consolidated net loss (10.0 )% (11.2 )% (9.7 )% (12.4 )%

Comparisons of Three Months Ended September 30, ~~2019~~2020 to Three Months Ended September 30, ~~2018,~~2019, and Nine Months Ended September 30, ~~2019~~2020 to Nine Months Ended September 30, ~~2018~~2019.

Revenue

The following table reflects our net revenues for the three and nine months ended September 30, ~~2019~~2020 and ~~2018~~2019 (in thousands):


	Three months ended September 30,									Nine months ended September 30,									Three months ended September 30,						Nine months ended September 30,
	2019		2018		$ Change			% Change		2019		2018		$ Change			% Change		2020			2019			2020			2019
Revenue, net
Retail	$	340,798	$	435,775	$	(94,977	)	(21.8	)%	$	1,070,898	$	1,353,454	$	(282,556	)	(20.9	)%	$	717,695		$	340,798		$	1,824,249		$	1,070,898
Other	6,301		4,805		1,496			31.1	%	17,639		15,590		2,049			13.1	%	13,956			6,301			41,519			17,639
Total revenue, net	$	347,099	$	440,580	$	(93,481	)	(21.2	)%	$	1,088,537	$	1,369,044	$	(280,507	)	(20.5	)%	$	731,651		$	347,099		$	1,865,768		$	1,088,537
Year-over-year percentage growth
Retail																			110.6		%	(21.8		)%	70.3		%	(20.9		)%
Other																			121.5		%	31.1		%	135.4		%	13.1		%
Total revenue, net																			110.8		%	(21.2		)%	71.4		%	(20.5		)%

The ~~21% decrease~~111% increase in total net revenue for the three months ended September 30, ~~2019,~~2020, as compared to the same period in ~~2018,~~ 2019, was primarily due to ~~decreased~~increased retail product sales ~~that resulted~~resulting from a ~~significant reduction~~102% increase in ~~sales and marketing activities, which~~customer orders. This increased order activity was ~~part of our effort to return to retail profitability. In January 2018, we shifted our retail strategy to aggressively pursue revenue~~largely driven by new customer growth and ~~new customers with~~strong repeat customer behavior, both influenced by a ~~large increase in sales and marketing expenses. We discontinued this strategy in August 2018 and have returned to a more disciplined approach to marketing. In addition,~~consumer migration toward online shopping. While we have ~~seen~~observed this recent acceleration of new customer acquisition and demand for our ~~revenues negatively impacted~~products and resulting sales, we cannot estimate the impact that COVID-19 will have on our business in the future due to ~~increased tariffs on goods manufactured in China, search traffic taking longer than~~the unpredictable nature of the ultimate scope and duration of the pandemic.

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~~expected to translate into purchasing customers, waning consumer confidence decreasing conversion on high dollar purchases industry wide, and other more general decreases in conversion.~~

The ~~20% decrease~~71% increase in total net revenue for the nine months ended September 30, ~~2019,~~2020, as compared to the same period in ~~2018,~~ 2019, was primarily due to ~~decreased~~increased retail product sales ~~that resulted~~resulting from a ~~significant reduction~~71% increase in ~~sales~~customer orders, 117% new customer growth, and ~~marketing activities, which was part of our effort to return to retail profitability, as described above. In addition, we have seen our revenues negatively impacted~~strong repeat customer behavior, largely due to ~~increased tariffs on goods manufactured~~a consumer migration toward online shopping in ~~China, search traffic taking longer than expected~~response to ~~translate into purchasing customers, waning consumer confidence decreasing conversion on high dollar purchases industry wide,~~COVID-19.

The increase in our Other net revenue for the three and ~~other more general decreases~~nine months ended September 30, 2020 as compared to the same period in ~~conversion.~~2019 was primarily due to an increase in SpeedRoute trading volume.

International net revenues were less than 2% of total net revenues for each of the three and nine months ended September 30, ~~2019~~2020 and ~~2018.~~2019.

Change in estimate of average transit times (days)

~~Revenue~~Our retail 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 the COVID-19 pandemic.

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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 before income taxes for the three months ended September 30, ~~2019~~2020 (in thousands):


	Three Months Ended September 30, 2019						Three months ended September 30, 2020
Change in the Estimate of Average Transit Times (Days)	Increase (Decrease) Revenue			Increase (Decrease) Pre-Tax Income			Increase (Decrease) Revenue			Increase (Decrease) Income Before Income Taxes
2	$	(8,171	)	$	(1,429	)	$	(15,098	)	$	(2,857	)
1	$	(3,751	)	$	(659	)	$	(7,635	)	$	(1,434	)
As reported	As reported			As reported			As reported			As reported
-1	$	3,553		$	629		$	13,601		$	2,735
-2	$	7,271		$	1,272		$	25,239		$	5,074

Gross profit and gross margin

Our overall gross margins fluctuate based on changes in supplier cost and / or sales price, including competitive pricing; inventory management decisions; sales coupons and promotions; product mix of sales; and operational and fulfillment costs.

~~Table of Contents~~

The following table reflects our ~~net revenues, cost of goods sold and~~ gross profit for the three and nine months ended September 30, ~~2019~~2020 and ~~2018~~2019 (in thousands):


	Three months ended September 30,									Nine months ended September 30,									Three months ended September 30,						Nine months ended September 30,
	2019		2018		$ Change			% Change		2019		2018		$ Change			% Change		2020			2019			2020			2019
Revenue, net
Retail	$	340,798	$	435,775	$	(94,977	)	(21.8	)%	$	1,070,898	$	1,353,454	$	(282,556	)	(20.9	)%
Other	6,301		4,805		1,496			31.1	%	17,639		15,590		2,049			13.1	%
Total net revenue	$	347,099	$	440,580	$	(93,481	)	(21.2	)%	$	1,088,537	$	1,369,044	$	(280,507	)	(20.5	)%
Cost of goods sold
Retail	$	272,545	$	350,651	$	(78,106	)	(22.3	)%	$	858,169	$	1,085,483	$	(227,314	)	(20.9	)%
Other	5,006		3,213		1,793			55.8	%	13,797		11,233		2,564			22.8	%
Total cost of goods sold	$	277,551	$	353,864	$	(76,313	)	(21.6	)%	$	871,966	$	1,096,716	$	(224,750	)	(20.5	)%
Gross Profit
Gross profit
Retail	$	68,253	$	85,124	$	(16,871	)	(19.8	)%	$	212,729	$	267,971	$	(55,242	)	(20.6	)%	$	168,713		$	68,253		$	420,831		$	212,729
Other	1,295		1,592		(297		)	(18.7	)%	3,842		4,357		(515		)	(11.8	)%	2,055			1,295			5,659			3,842
Total gross profit	$	69,548	$	86,716	$	(17,168	)	(19.8	)%	$	216,571	$	272,328	$	(55,757	)	(20.5	)%	$	170,768		$	69,548		$	426,490		$	216,571
Year-over-year percentage growth
Retail																			147.2		%	(19.8		)%	97.8		%	(20.6		)%
Other																			58.7		%	(18.7		)%	47.3		%	(11.8		)%
Total gross profit																			145.5		%	(19.8		)%	96.9		%	(20.5		)%

Gross margins for the past seven quarterly periods and fiscal year ending ~~2018~~2019 were:


	Q1 2018		Q2 2018		Q3 2018		Q4 2018		FY 2018		Q1 2019		Q2 2019		Q3 2019		Q1 2019		Q2 2019		Q3 2019		Q4 2019		FY 2019		Q1 2020		Q2 2020		Q3 2020
Retail	21.0	%	18.9	%	19.5	%	17.9	%	19.3	%	19.9	%	19.7	%	20.0	%	19.9	%	19.7	%	20.0	%	20.7	%	20.1	%	21.9	%	23.2	%	23.5	%
Other	27.2	%	24.1	%	33.1	%	26.8	%	27.6	%	22.3	%	22.6	%	20.6	%	22.3	%	22.6	%	20.6	%	19.1	%	21.0	%	13.6	%	12.6	%	14.7	%
Combined	21.1	%	19.0	%	19.7	%	18.0	%	19.4	%	19.9	%	19.8	%	20.0	%	19.9	%	19.8	%	20.0	%	20.6	%	20.1	%	21.6	%	23.0	%	23.3	%

Gross profit for the three months ended September 30, ~~2019 decreased 20%~~2020 increased 146% compared to the same period in ~~2018~~ 2019, primarily due to ~~the decrease~~an increase in ~~net revenue in the~~ retail ~~business, partially offset by~~product sales and an increase in gross margin. Gross margin increased to ~~20.0%~~23.3% for the three months ended September 30, ~~2019,~~2020, compared to ~~19.7%~~20.0% for the same period in ~~2018. The increase in gross margin was~~ 2019, primarily due to ~~improvements~~our new partner marketing allowance program that was fully rolled out in ~~our promotional pricing strategy and a higher proportion~~the second quarter of 2020, which requires all of our ~~revenue coming~~partners to participate and allows us to advertise more strategically to our customers. Gross margin also benefited from ~~marketplace sales, which~~reduced promotional discounting as we ~~recognize on a net basis. These increases~~balanced spend to ~~gross margin were partially offset by increased~~support new customer acquisition efforts, unique items in the third quarter of 2019 that negatively impacted freight costs ~~resulting from the business closure of one of our freight carriers,~~including cancellation of ~~services with~~ a freight carrier ~~that failed to deliver acceptable service levels,~~contract and an increase in ~~volume of~~ large package shipments. Furthermore, we gained leverage in our fixed warehouse infrastructure and realized an increase in fees charged to partners due to unmet contractual service levels.

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Gross profit for the nine months ended September 30, ~~2019 decreased 20%~~2020 increased 97% compared to the same period in ~~2018~~ 2019, primarily due to ~~the decrease~~an increase in ~~net revenue~~retail product sales and an increase in ~~the retail business.~~gross margin. Gross margin ~~was 19.9%~~increased to 22.9% for the nine months ended September 30, ~~2019, unchanged from~~2020, compared to 19.9% for the same period in ~~2018.~~2019, primarily due to our new partner marketing allowance program that was fully rolled out in the second quarter of 2020, which requires all of our partners to participate and allows us to advertise more strategically to our customers. Gross margin also benefited from reduced promotional discounting as we balanced spend to support new customer acquisition efforts, gained leverage in our fixed warehouse infrastructure, an increase in fees charged to partners due to unmet contractual service levels, and lower customer service costs due to slower growth in our staffing relative to sales.

Fulfillment costs

Fulfillment costs include all warehousing costs, including fixed overhead and variable handling costs (excluding packaging costs), as well as merchant processing fees associated with customer payments made by credit ~~card~~cards and other payment methods and other variable fees, and customer service costs, all of which we include as costs in calculating gross margin. We believe that some companies in our industry, including some of our competitors, account for fulfillment costs within operating expenses, and therefore exclude fulfillment costs from gross margin. As a result, our gross margin may not be directly comparable to others in our industry.

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The following table has been included to provide investors additional information regarding our classification of fulfillment costs, gross profit and margin, thus enabling investors to better compare our gross margin with others in our industry (in thousands):


	Three months ended September 30,						Nine months ended September 30,						Three months ended September 30,				Nine months ended September 30,
	2019			2018			2019			2018			2020		2019		2020		2019
Total revenue, net	$	347,099	100%	$	440,580	100%	$	1,088,537	100%	$	1,369,044	100%	$	731,651	$	347,099	$	1,865,768	$	1,088,537
Cost of goods sold
Product costs and other cost of goods sold	261,670		75%	334,156		76%	822,390		76%	1,039,518		76%	531,743		261,670		1,367,472		822,390
Fulfillment and related costs	15,881		5%	19,708		4%	49,576		5%	57,198		4%	29,140		15,881		71,806		49,576
Total cost of goods sold	277,551		80%	353,864		80%	871,966		80%	1,096,716		80%	560,883		277,551		1,439,278		871,966
Gross profit	$	69,548	20%	$	86,716	20%	$	216,571	20%	$	272,328	20%	$	170,768	$	69,548	$	426,490	$	216,571
Percent of total revenue, net
Cost of goods sold
Product costs and other cost of goods sold													72.7%		75.4%		73.3%		75.6%
Fulfillment and related costs													4.0%		4.6%		3.8%		4.6%
Total cost of goods sold													76.7%		80.0%		77.1%		80.1%
Gross profit													23.3%		20.0%		22.9%		19.9%

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~~merchant fees. Fulfillment and related costs ~~increased~~decreased slightly as a percentage of revenue during the three and nine months ended September 30, ~~2019~~2020 as compared to the same period in ~~2018.~~2019.

See "Gross ~~profit"~~profit and gross margin" above for additional discussion.

Operating expenses

Sales and marketing expenses

We use a variety of methods to target our consumer audience, including online campaigns, such as advertising through ~~keywords,~~text ads, product listing ads, display ads, ~~search engines,~~native ads, affiliate marketing programs, ~~social coupon websites, portals, banners,~~ e-mail, direct mail, ~~and viral~~video ads, and social media campaigns. We also do brand advertising through television, radio, print ads, and event sponsorships.

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Costs associated with our discounted shipping and other promotions, such as coupons, are not included in sales and marketing expense. Rather, they are accounted for as a reduction in revenue as they reduce the amount of consideration we expect to receive in exchange for goods or services and therefore affect net 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, and intend to continue to offer them as we deem appropriate as part of our overall marketing plan.~~tool.

The following table reflects our sales and marketing expenses for the three and nine months ended September 30, ~~2019~~2020 and ~~2018~~2019 (in thousands):


	Three months ended September 30,											Nine months ended September 30,											Three months ended September 30,						Nine months ended September 30,
	2019			2018			$ Change			% Change		2019			2018			$ Change			% Change		2020			2019			2020			2019
Sales and marketing expenses	$	34,215		$	55,312		$	(21,097	)	(38.1	)%	$	102,252		$	226,942		$	(124,690	)	(54.9	)%	$	72,010		$	34,215		$	188,562		$	102,252
Sales and marketing expenses as a percent of net revenues	9.9		%	12.6		%						9.4		%	16.6		%
Advertising expense included in sales and marketing expenses																							$	67,387		$	29,660		$	175,104		$	88,103
Year-over-year percentage growth
Sales and marketing expenses																							110.5		%	(38.1		)%	84.4		%	(54.9		)%
Advertising expense included in sales and marketing expenses																							127.2		%	(40.3		)%	98.7		%	(57.5		)%
Percentage of net revenues
Sales and marketing expenses																							9.8		%	9.9		%	10.1		%	9.4		%
Advertising expense included in sales and marketing expenses																							9.2		%	8.5		%	9.4		%	8.1		%

The ~~38%~~10 basis point decrease in sales and marketing expenses as a percent of net revenues for the three months ended September 30, ~~2019,~~2020, as compared to the same period in ~~2018,~~ 2019, was primarily due to gained leverage on television advertising spend and staff-related expenses, partially offset by increased spending on market partner commissions and paid listing advertisements to support our ~~return~~customer acquisition strategy, resulting in a 141% increase in new customers compared to ~~our historical focus on operational efficiency as we have shifted away from our aggressive retail marketing strategy from early 2018. As part~~the third quarter of ~~this effort, we significantly reduced spending in the sponsored search and display ads on social media marketing channels.~~2019.

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The ~~55% decrease~~70 basis point increase in sales and marketing expenses as a percent of net revenues for the nine months ended September 30, ~~2019,~~2020, as compared to the same period in ~~2018,~~ 2019, was primarily due to increased spending to support our ~~shift~~customer acquisition strategy, resulting in ~~retail marketing strategy, as described above.~~a 117% increase in new customers compared to the nine months ended September 30, 2019.

Technology expenses

We seek to ~~invest~~deploy our capital resources efficiently in technology, including web services, customer support solutions, website search, expansion of new and existing product categories, and ~~in investments~~ in technology to enhance the customer experience, improve our process efficiency and support and expand our logistics infrastructure. We expect to continue to ~~increase our~~incur technology expenses to support these initiatives and these ~~increases~~expenditures may continue to be material.

The frequency and variety of cyberattacks on our Website, our corporate systems, and on third parties we use to support our technology continues to increase. The impact of such attacks, their costs, and the costs we incur to protect ourselves against future attacks have not been ~~material.~~material to date. However, we consider the risk introduced by cyberattacks to be serious and will continue to incur costs related to efforts to protect ourselves against them.

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The following table reflects our technology expenses for the three and nine months ended September 30, ~~2019~~2020 and ~~2018~~2019 (in thousands):


	Three months ended September 30,											Nine months ended September 30,										Three months ended September 30,						Nine months ended September 30,
	2019			2018			$ Change			% Change		2019			2018			$ Change		% Change		2020			2019			2020			2019
Technology expenses	$	32,782		$	33,880		$	(1,098	)	(3.2	)%	$	101,368		$	97,597		$	3,771	3.9	%	$	34,984		$	32,782		$	101,458		$	101,368
Year-over-year percentage growth
Technology expenses																						6.7		%	(3.2		)%	0.1		%	3.9		%
Technology expenses as a percent of net revenues	9.4		%	7.7		%						9.3		%	7.1		%					4.8		%	9.4		%	5.4		%	9.3		%

The ~~$1.1~~$2.2 million ~~decrease~~increase in technology ~~costs~~expenses for the three months ended September 30, ~~2019,~~2020, as compared to the same period in ~~2018,~~2019, was primarily due to ~~a $435,000 decrease in outside service~~staff-related costs, ~~and a $413,000 decrease in technology licenses and maintenance costs.~~including accrued bonuses.

~~The $3.8 million increase in technology costs~~Technology expenses increased $90,000 for the nine months ended September 30, ~~2019,~~2020, as compared to the same period in ~~2018, was primarily due to a $2.9 million increase in staff-related costs and a $1.0 million increase in technology licenses and maintenance costs.~~2019.

General and administrative expenses

The following table reflects our general and administrative expenses for the three and nine months ended September 30, ~~2019~~2020 and ~~2018~~2019 (in thousands):


	Three months ended September 30,											Nine months ended September 30,											Three months ended September 30,						Nine months ended September 30,
	2019			2018			$ Change			% Change		2019			2018			$ Change			% Change		2020			2019			2020			2019
General and administrative expenses	$	32,681		$	45,356		$	(12,675	)	(27.9	)%	$	104,877		$	116,551		$	(11,674	)	(10.0	)%	$	34,225		$	32,681		$	94,022		$	104,877
Year-over-year percentage growth
General and administrative expenses																							4.7		%	(27.9		)%	(10.4		)%	(10.0		)%
General and administrative expenses as a percent of net revenues	9.4		%	10.3		%						9.6		%	8.5		%						4.7		%	9.4		%	5.0		%	9.6		%

The ~~$12.7~~$1.5 million ~~decrease~~increase in general and administrative expenses for the three months ended September 30, ~~2019,~~2020, as compared to the same period in ~~2018,~~2019 was primarily due to $10.8 million in special legal costs in the third fiscal quarter of 2018 related to our gift card escheatment case in Delaware and capital raising efforts. In addition, we had a $1.8 million decrease in consulting expenses, an $862,000 decrease in staff-related costs ~~and an $834,000 decrease in travel expenses. These decreases~~including accrued bonuses, which were partially offset by a ~~$1.4 million impairment charge on certain intangible assets and an $844,000 increase~~reduction in ~~corporate insurance costs.~~discretionary spending due to adjustments related to the COVID-19 pandemic.

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The ~~$11.7~~$10.9 million decrease in general and administrative expenses for the nine months ended September 30, ~~2019,~~2020, as compared to the same period in ~~2018,~~ 2019 was primarily due to an $8.6 million reversal of a ~~$12.1 million decrease in~~ legal ~~costs largely due to expenses we incurred in 2018 for our gift card escheatment case in Delaware and capital raising efforts, as well as~~settlement accrual, a $2.5 million ~~decrease in travel expenses,~~Visa settlement, a ~~$1.5~~$2.8 million decrease in consulting expenses, and a ~~$1.2 million decrease~~reduction in ~~cryptocurrency losses. These decreases were~~discretionary spending due to adjustments related to the COVID-19 pandemic, partially offset by a ~~$2.4~~$5.8 million increase in ~~corporate insurance~~staff-related costs ~~and a $1.4 million impairment charge on certain intangible assets.~~including accrued bonus.

~~Depreciation and amortization expense~~

~~Depreciation expense is classified within the corresponding operating expense categories on our consolidated statements of operations as follows (in thousands):~~

~~Amortization of intangible assets other than goodwill is classified within the corresponding operating expense categories on our consolidated statements of operations as follows (in thousands):~~

~~General and administrative amortization above was net of reversals due to adjustments to the purchase price allocation for Mac Warehouse.~~

~~Stock-based compensation expense~~

~~Stock-based compensation expense is classified within the corresponding operating expense categories on our consolidated statements of operations as follows (in thousands):~~

Three months ended
September 30, Nine months ended
September 30,
2019 2018 2019 2018
Cost of goods sold — retail $ 55
$ 41
$ 156
$ 152
Sales and marketing 486
277
1,460
1,465
Technology 1,428
583
4,325
1,725
General and administrative 2,498
1,345
7,682
8,312
Total stock-based compensation $ 4,467
$ 2,246
$ 13,623
$ 11,654

Other expense, net

~~Other~~The $2.7 million increase in other expense, net for the three months ended September 30, ~~2019 was $4.8 million~~2020, as compared to ~~$1.8 million for~~ the ~~three months ended September 30, 2018. The increase~~ same period in 2019, was primarily due to ~~a $3.6 million~~an increase in ~~non-cash~~ losses onassociated with our equity ~~holdings and~~securities.

The $9.0 million decrease in other ~~assets.~~

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~~Other~~ expense, net for the nine months ended September 30, ~~2019 was $14.0 million~~2020, as compared to ~~$1.5 million for~~ the ~~nine months ended September 30, 2018. The increase~~ same period in 2019, was primarily due to a ~~$14.0~~$10.7 million gain recognized on the deconsolidation of the Medici Land Governance business, partially offset by an increase in ~~non-cash~~ losses onassociated with our equity ~~holdings and other assets.~~securities.

Income taxes

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Our quarterly tax provision and our quarterly estimate of our annual effective tax rate are subject to significant variations due to several factors including variability in predicting our pre-tax and taxable income and the mix of jurisdictions to which those items relate, relative changes in expenses or losses for which tax benefits are not recognized, how we do business, fluctuations in our stock price, and changes in laws, 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.

Our ~~expense/(benefit)~~provision for income taxes for the three months ended September 30, 2020 and 2019 was $620,000 and $23,000, respectively. Our provision for income taxes for the nine months ended September 30, 2020 and 2019 ~~and 2018~~ was ~~$23,000 and $(141,000)~~$1.3 million and $279,000, ~~and $(445,000),~~ respectively. The effective tax rate for the nine months ended September 30, 2020 and 2019 was 3.5% and ~~2018 was~~ (0.3)% ~~and 0.3%~~, respectively. Our low effective tax rate is primarily attributable to the valuation allowance we ~~are maintaining~~maintain on our net deferred tax ~~assets.~~assets related to our U.S. operations.

We are subject to taxation in the United States and several state and foreign jurisdictions. Tax years beginning in ~~2014~~2015 are subject to examination by taxing authorities, although net operating loss and credit carryforwards from all years are subject to examinations and adjustments for at least three years following the year in which the attributes are used. An audit by the Ireland Revenue Agency for the calendar year 2016 was finalized during 2019 with no assessment. For additional information see Item 1 of Part I, "Financial Statements (Unaudited)"—Note 2. Accounting Policies, ~~Income taxes~~.

~~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. While we had lower sales volume during the fourth quarter of 2018 compared to the comparable period in 2017, we anticipate the trend of higher sales volume during our fourth quarter to continue for the foreseeable future. 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 2019, 2018 and 2017 (in thousands):~~

First
Quarter

Second
Quarter

Third
Quarter

Fourth
Quarter
2019 $ 367,729
$ 373,709
$ 347,099
$ N/A
2018 445,331
483,133
440,580
452,548
2017 432,435
432,024
424,007
456,290

Liquidity and Capital Resources

Overview

We are proactively seeking opportunities to improve the efficiency of our operations and are considering a comprehensive set of actions to do so. During the latter end of 2018 we began taking and continue to take significant steps to realize internal cost savings, including staff reductions and process streamlining. Additionally, we intend to further reduce costs in future periods. We believe that our cash and cash equivalents currently on hand and expected cash flows from future

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operations will be sufficient to continue operations for at least the next twelve months. During the period of uncertainty and volatility related to the COVID-19 pandemic, we have presumed for forecasting purposes that our recent revenue growth rates experienced during the second half of March 2020 and through September 2020 might not continue at these levels for the foreseeable future as we believe these growth rates are driven in part by the COVID-19 pandemic and resulting state and local government mandates of home confinement and closure of many brick-and-mortar stores. We ~~also believe that we may need~~continue to ~~raise additional capital and/or obtain additional debt financing~~monitor, evaluate, and manage our operating plans, forecasts, and liquidity in light of the most recent developments driven by the COVID-19 pandemic. We proactively seek opportunities to ~~be able to fully pursue some or all~~improve the efficiency of our ~~strategies,~~operations and have in the past and may in the future take steps to realize internal cost savings, including ~~plans for~~aligning our ~~retail business while also funding~~staffing needs based on our ~~Medici initiatives, beyond the next twelve months.~~current and expected future levels of operations and process streamlining.

We have developed and implemented initiatives within our retail business around improving our Club O rewards program primarily to increase member benefits and to develop additional personalization programs; improving our organic search engine rankings; additional distribution facilities to speed shipping and improve our customer service; additional automation, technology and engineering resources to improve our customers' shopping experience; and improving our private label initiative to generate significant brand equity and customer loyalty. We believe these initiatives will have significant long-term positive results; however, the expenditures will likely adversely affect our short-term results. See "Our Retail Business" above.

Our Medici initiatives also require substantial funding. Medici Ventures and its majority-owned subsidiary, tZERO, continue to identify, evaluate and pursue various opportunities for strategic acquisitions or purchases of interests to add to the services and expertise they offer their customers. See "Our Medici Business—Medici Ventures" and "Our Medici Business—tZERO" above.

Our ability to pursue some or all of these plans, and the extent to which we would be able to pursue some or all of them, will depend on the resources we have available, and will require significantly more capital than we currently have.

Current sources of liquidity

Our principal sources of liquidity are existing cash and cash ~~equivalents.~~equivalents and accounts receivables, net. At September 30, ~~2019,~~2020, we had cash and cash equivalents of ~~$83.5~~$529.7 million and accounts receivables, net of $35.4 million. Our ability to access the liquidity of our subsidiaries may be limited by tax and legal considerations and other factors.

Cash flow information is as follows (in thousands):


	Nine months ended September 30,						Nine months ended September 30,
	2019			2018			2020			2019
Cash provided by (used in):
Operating activities	$	(89,195	)	$	(120,300	)	$	198,710		$	(89,195	)
Investing activities	(14,259		)	(89,508		)	(15,431		)	(14,259		)
Financing activities	46,437			189,575			234,103			46,437

~~In August 2018,~~At September 30, 2020, we ~~entered into~~had $150.0 million available under our "at the market" sales program which permits us to conduct "at the market" public offerings of our common stock under a sales agreement, dated June 26, 2020, with JonesTrading Institutional Services LLC ("JonesTrading")~~, under which we conducted "at the market"~~ and D.A. Davidson & Co. ("D.A. Davidson").

We completed a public ~~offerings of up to $150 million~~offering of our common ~~stock. As of September 30, 2019, we had sold 5,843,147~~stock on August 14, 2020 and issued 2,415,000 shares of our common stock pursuant to ~~the sales~~an underwriting agreement, ~~and have received $146.7 million in~~dated August 11, 2020, for proceeds ~~net of $3.3 million of offering costs, including commissions paid to JonesTrading. During the nine months ended September 30, 2019, we sold shares of common stock for $52.1~~totaling $192.7 million, net of $11.4 million in offering expenses (including commissions). The average gross price per share of stock sold pursuant to the sales agreement during the nine months ended September 30, 2019 was $17.84. No additional shares are currently available under the sales agreement. We cannot assure you that we will be able to replace, extend, or modify this facility on acceptable terms in a timely manner or at all.costs.

~~Contemplated Financing Transactions~~

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at September 30, 2019. On September 16, 2019, in recognition of GSR's remaining obligations under the Investment Agreement, tZERO and GSR entered into a Promissory Note under which GSR promised to pay the remaining $3.0 million in consideration due to tZERO under the Investment Agreement in the form of U.S. dollars in multiple installments by December 6, 2019.

Upon full payment under the Investment Agreement or, alternatively, the Promissory Note, tZERO expects to issue the shares of its common stock and the amounts included in Accrued liabilities will be reflected as Noncontrolling interest.

The previously-announced memorandum of understanding in which GSR and Makara Capital would co-lead an investment of up to $100 million in tZERO common stock did not close in April as initially expected and, following further discussions, GSR and Makara Capital informed tZERO that they would not be pursuing an investment in tZERO pursuant to the memorandum of understanding.

~~Cash flows from operating~~Operating activities

Our operating cash flows result primarily from cash received from our customers, offset by cash payments we make for employee compensation (less amounts capitalized related to internal-use software that are reflected as cash used in investing activities), and changes in working capital and other related activities. Working capital at any specific point in time is subject to many variables, including seasonality, inventory management, expansion efforts, the timing of cash receipts and payments, and vendor payment terms. 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~~of increased online shopping migration from the COVID-19 pandemic, we saw our ~~typically seasonally strong fourth quarter~~retail product sales accelerate at ~~December 31~~the end of ~~each year,~~March through September 30, 2020, as customers turned to online shopping, which caused our cash, cash equivalents and accounts receivable balances to increase compared to year-end and also resulted in an increase in our accounts payable and ~~accrued liability balances normally reach their highest level (other than~~unearned revenue balance as ~~a result~~ of September 30, 2020.

The $198.7 million of net cash ~~flows~~ provided by ~~or used~~operating activities during the nine months ended September 30, 2020 was primarily due to consolidated net income, adjusted for non-cash items, of $76.1 million and cash provided by changes in ~~investing~~operating assets and ~~financing activities).~~liabilities of $122.6 million.

The $89.2 million of net cash used in operating activities during the nine months ended September 30, 2019 was primarily due to consolidated net loss, adjusted for non-cash items, of ~~$105.1~~$48.2 million and cash used by changes in operating assets and liabilities of $41.0 million, which were partially offset by certain non-cash items including depreciation and amortization expense, including non-cash operating lease costs of $28.0 million, stock-based compensation of $13.6 million, impairments recognized on equity securities of $7.0 million, and losses recognized on equity method securities of $4.9 million.

~~The $120.3 million of net cash used in operating~~Investing activities ~~during~~

For the nine months ended September 30, ~~2018 was~~2020, investing activities resulted in a net cash outflow of $15.4 million, primarily due to ~~consolidated~~$4.1 million in cash outflow from the deconsolidation of MLG's net ~~loss~~assets and $15.1 million of ~~$169.6 million,~~expenditures for property and equipment, partially offset by ~~cash provided by operating assets and liabilities~~$6.3 million in proceeds from the sale of $12.3 million, and certain non-cash items including depreciation and amortization expense of $23.0 million, stock-based compensation of $11.7 million, and impairment losses, net of realized gains, recognized on cryptocurrency holdings of $1.2 million.marketable securities.

Notwithstanding our current negative cash flows from operating activities, 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. However, we also believe that we may need to raise additional capital and/or obtain significant additional debt financing to be able to fully pursue some or all of our plans, including plans for our retail business while also funding our Medici initiatives, beyond the next twelve months.

~~Cash flows from investing activities~~

For the nine months ended September 30, 2019, investing activities resulted in net cash outflows of $14.3 million, primarily due to $17.9 million of expenditures for property and equipment, $5.1 million purchase of equity securities, and $3.3 million disbursement of notes receivable, partially offset by $7.1 million in proceeds from the sale of equity securities and $4.9 million of cash acquired through a business combination that was funded at the end of the fourth quarter of 2018 but closed in the first quarter of 2019.

Financing activities

For the nine months ended September 30, ~~2018, investing~~2020, financing activities resulted in a net cash ~~outflows~~inflow of ~~$89.5~~$234.1 million primarily due to ~~$43.7~~$47.5 million ~~investment~~ in ~~equity securities, $12.9~~proceeds from long-term debt and $195.5 million ~~acquisition~~in net proceeds primarily from our common stock offering executed during August 2020, partially offset by $2.3 million for payment of ~~businesses, net~~taxes withheld upon vesting of ~~cash acquired, $20.7 million of expenditures for fixed assets, and $9.6 million purchase of intangible assets.~~restricted stock.

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~~Cash flows from financing activities~~

For the nine months ended September 30, 2019, financing activities resulted in net cash inflows of $46.4 million primarily due to $52.1 million of net proceeds from the sale of common stock under the at the market offering, partially offset by $1.4 million of taxes withheld upon vesting of restricted stock, and $3.1 million payment on long-term debt.

For the nine months ended September 30, 2018, financing activities resulted in net cash inflows of $189.6 million primarily due to $94.6 million of net proceeds from the sale of common stock under the at the market offering, $82.6 million of net proceeds from the security token offering, $50.6 million of proceeds from the sale and exercise of stock warrants, and $6.7 million of proceeds from capital contributions received by a consolidated subsidiary, partially offset by a $40.0 million repayment of long-term debt and $4.6 million of taxes withheld upon vesting of restricted stock.

Contractual Obligations and Commitments

The following table summarizes our contractual obligations as of September 30, ~~2019~~2020 and the effect such obligations and commitments are expected to have on our liquidity and cash flow in future periods (in thousands):

Contractual Obligations Total Less than 1 year 1-3 years 3-5 years More than 5 years
Operating leases $ 62,978
$ 9,123
$ 19,649
$ 17,351
$ 16,855
Purchase obligations 125
125
—
—
—
Technology services 3,268
3,017
251
—
—
Total contractual cash obligations $ 66,371
$ 12,265
$ 19,900
$ 17,351
$ 16,855



Contractual Obligations	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
Operating leases (1)	$	33,945	$	7,838	$	13,629	$	6,293	$	6,185
Loan agreements (2)	61,174		5,264		10,528		4,207		41,175
Technology services (3)	3,638		2,756		882		—		—
Total contractual cash obligations	$	98,757	$	15,858	$	25,039	$	10,500	$	47,360

__________________________________________

~~Operating leases~~

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From time to time we enter into operating leases for facilities and equipment for use in our operations. During the nine months ended September 30, 2019, we renewed a lease for one of our warehouses and entered into a new office lease that increased our future operating lease payments by $11.4 million.

~~Purchase obligations~~


(1)	— Represents the future minimum lease payments under non-cancellable operating leases. For information regarding our operating lease obligations, see Note 9—Leases, 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.


(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 8—Borrowings, 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.


(3)	— Represents the future payments for enforceable and legally binding long-term contractual agreements for technology services and finance leases for equipment included in such service agreements.

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, 2019. Under different assumptions regarding our rights to cancel our purchase orders or different assumptions regarding the enforceability of the purchase orders under applicable law, the amount of purchase obligations shown in the table above would be less.

~~Technology services~~

~~From time to time we enter into long-term contractual agreements for technology services and finance leases for equipment included in such service agreements.~~

Tax contingencies

We are involved in various tax matters, the outcomes of which are uncertain. As of September 30, ~~2019,~~2020, accrued tax contingencies were ~~$1.6~~$1.4 million. Changes in state, federal, and foreign tax laws may increase our tax contingencies. The timing of the resolution of income tax contingencies is highly uncertain, and the amounts ultimately paid, if any, upon resolution of issues raised by the taxing authorities may differ from the amounts accrued. It is reasonably possible that within the next 12 months we will receive additional assessments by various tax authorities. These assessments may or may not result in changes to our contingencies related to positions on prior years' tax filings.

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~~Letters of credit~~

At September 30, 2019 and December 31, 2018, letters of credit totaling $205,000 and $280,000, were issued on our behalf collateralized by compensating cash balances held at a bank, which are included in Restricted cash in the accompanying consolidated balance sheets.

~~Commercial purchasing card agreement~~

We have a commercial purchasing card (the "Purchasing Card") agreement. We use the Purchasing Card for business purpose purchasing and must pay it in full each month. At September 30, 2019, $43,000 was outstanding and $957,000 was available under the Purchasing Card. At December 31, 2018, $48,000 was outstanding and $952,000 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.

~~Transactions with Related Parties~~

Our related party Transactions include our recent acquisition of Bitsy, Inc. as discussed in Item 1 of Part I, "Financial Statements (Unaudited)"—Note 3. Business Combinations, contained in the "Notes to Unaudited Consolidated Financial Statements" of this Quarterly Report on Form 10-Q.

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~~There have been no material changes to our critical accounting policies ~~are discussed~~and estimates as compared to the critical accounting policies and estimates described in Note 2—Accounting Policies, included in Part II, Item ~~7, "Management's Discussion~~8, Financial Statements and ~~Analysis of Financial Condition and Results of Operations" section~~Supplementary Data, of our Annual Report on Form 10-K for the year ended December 31, ~~2018, and our accounting policies and use~~2019, except as disclosed in Note 2—Summary of ~~estimates are further discussed in Item 1 of Part I, "Financial Statements (Unaudited)"—Note 2.~~Significant Accounting Policies ~~contained in the "Notes to Unaudited Consolidated Financial Statements" of this Quarterly Report on Form 10-Q~~ and ~~elsewhere in this Management's Discussion and Analysis of Financial Condition and Results of Operations.~~

~~For~~Supplemental Disclosures, including information about recently adopted accounting standards, see Recently adopted accounting standards, included in Item 1, of Part I, ~~"Financial~~Financial Statements (Unaudited)~~"—Note 2. Accounting Policies,~~, contained in the ~~"Notes~~Notes to Unaudited Consolidated Financial ~~Statements"~~Statements of this Quarterly Report on Form 10-Q.

Government Regulation

We are subject to a wide variety of laws, rules and regulations, some of which apply or may apply to us as a result of our retail business, some of which apply or may apply to us as a result of our Medici ~~business,~~Ventures or tZERO businesses, and others of which apply to us for other reasons, such as our status as a publicly held company or the places in which we sell certain types or amounts of products. Our retail business is subject to general business regulations and laws, as well as regulations and laws specifically governing the Internet, e-commerce, and other services we offer. Existing and future laws and regulations may result in increasing expense and may impede our growth. Applicable and potentially applicable regulations and laws include regulations and laws regarding taxation, privacy, data protection, pricing, content, copyrights, distribution, mobile communications, electronic device certification, electronic waste, energy consumption, environmental regulation, electronic contracts and other communications, competition, consumer protection, employment, import and export matters, information reporting requirements, access to our services and facilities, the design and operation of websites, health and sanitation standards, the characteristics and quality of products and services, product labeling and unfair and deceptive trade practices.

Our efforts to expand our retail business outside of the U.S. expose us to foreign and additional U.S. laws and regulations, including but not limited to, laws and regulations relating to taxation, business licensing or certification requirements, advertising practices, online services, the use of cryptocurrency, the importation of specified or proscribed items, importation quotas, consumer protection, intellectual property rights, consumer and data protection, privacy, encryption,

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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.

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Our Medici Ventures and tZERO businesses are subject to general business regulations and laws, including some of those described above, but are also affected by a number of other laws and regulations, including but not limited to, laws and regulations relating to money transmitters and money services businesses, including the requirements of the Financial Crimes Enforcement Network of the U.S. Department of Treasury ("FinCEN"), and state requirements applicable to money transmission, cryptocurrencies, ~~public benefit corporations,~~ provisions of various securities laws and other laws and regulations governing ~~broker dealers,~~broker-dealers, alternative trading systems and national securities exchanges, anti-money laundering requirements, know-your-customer requirements, record-keeping, reporting and capital and bonding requirements, and a variety of other matters. Blockchain and distributed ledger platforms are recent technological innovations, and the regulation of ~~securities tokens and other~~peer-to-peer digital assets and conventional securities, insofar as blockchain technologies are applied to conventional securities, is developing. In the U.S., the businesses that we are working to develop are or may be subject to a wide variety of complex statutes and rules, most of which were implemented prior to the development of these technologies, and it is sometimes unclear whether or how various statutes or regulations apply.

~~Pro~~In addition, tZERO Markets is a registered broker-dealer under the Exchange Act and a member of FINRA and the Securities Investor Protection Corporation and is subject to regulation, examination, investigation and disciplinary action by the SEC, FINRA and state securities regulators, as well as other governmental authorities and self-regulatory organizations with which it is registered or licensed or of which it becomes a ~~wholly-owned subsidiary~~member. As a result of the services which tZERO Markets provides, including servicing retail investors, a number of these legal and regulatory requirements are new to tZERO's broker-dealer subsidiaries and we expect federal and state securities regulators will require enhanced supervision, compliance and control procedures for tZERO Markets.

Furthermore, tZERO ATS, LLC operates the ~~PRO Securities~~tZERO ATS ~~which~~and is, therefore, subject to Regulation ATS as well as other regulations, ~~partnering~~and partners with broker-dealers that are also subject to regulation by the SEC and ~~FINRA.~~FINRA and whose regulatory compliance may impact tZERO ATS, LLC. Regulation ATS establishes the regulatory framework for alternative trading systems that match buy and sell orders but are exempt from registering as a national exchange under the Securities Exchange Act of 1934. Regulation ATS subjects tZERO ATS, LLC to various rules and regulations, including, but not limited to, quarterly reporting obligations on Form ATS. The ~~Pro Securities~~tZERO ATS facilitates the current trading of our outstanding Series A-1 ~~Preferred~~preferred stock as well as ~~the tZERO Security Tokens.~~TZROP. Secondary resales of our Series A-1 ~~Preferred to be issued in connection with the Dividend will need to~~preferred stock and TZROP must be conducted in compliance with federal and state securities laws ~~and we are actively coordinating with regulatory authorities for this purpose.~~which may additionally impact tZERO ATS, LLC.

The joint venture that tZERO and BOX Digital announced in June 2018 is seeking regulatory approvals that would enable the parties to operate BSTX, a national securities exchange facility to ~~trade~~support trading in a type of digital security ~~tokens. A national securities exchange, which~~called a security token. BSTX will require approval from the SEC prior to beginning ~~operations,~~operations. The SEC published proposed rule changes relating to BSTX on October 11, 2019, soliciting public comments thereon. The SEC extended the review period on November 29, 2019 to January 16, 2020. BOX Exchange LLC filed an amendment to the proposal on December 26, 2019, and the SEC again extended the review period on January 16, 2020 to April 15, 2020. A subsequent amendment was filed by BOX Exchange LLC on February 19, 2020, after which the SEC extended the review period on April 14, 2020 until June 14, 2020. To allow for further review by the SEC, BOX Exchange LLC withdrew and resubmitted the proposed rule changes on May 12, 2020. The SEC extended the review period for the proposed rule changes on July 16, 2020 to August 30, 2020. BOX Exchange LLC filed an amendment to the proposal on July 31, 2020, and the SEC again extended the review period on August 12, 2020 to November 27, 2020. As a national securities exchange facility, BSTX will be subject to provisions of the Securities Exchange Act of 1934 and ~~regulation substantially greater~~other rules and regulations applicable to national securities exchanges that are different than ~~that~~those applicable to tZERO's current ~~operations. The SEC released proposed rule changes relating~~operations, including, but not limited to, periodic and special examinations by the proposed national securities exchange on October 11, 2019, soliciting public comments thereon. In addition, depending on the digital assets traded, the U.S. Commodity Futures Trading Commission may consider the assets to be commodities or derivatives and subject to additional regulation. Certain aspects of our Medici and tZERO businesses, including Bitsy's operations, are or may become subject to the state and federal laws and regulations applicable to money services businesses, including the requirements of FinCEN.SEC.

~~Other Factors that May Affect Future Results~~

We periodically evaluate opportunities to repurchase our equity securities, obtain credit facilities, or issue additional debt or equity securities. In addition, we may, from time to time, consider the investment in, or acquisition of, complementary businesses, products, services, or technologies, any of which might affect our liquidity requirements or cause us to issue additional debt or equity securities. There can be no assurance that financing arrangements will be available in amounts or on terms acceptable to us, if at all. Our future results may be significantly different from our historical results for several other reasons as well, including the possibility discussed in our Annual Report on Form 10-K that we may sell our retail business, which would have a dramatic effect on our future results.

Other reasons that our future results may be significantly different from our historical results include the potential effects on us of the accounting and tax changes discussed in our Annual Report on Form 10-K, and other reasons described in Item 1. "Business" under "Our Retail Business" and "Our Medici Business", as well as the risk factors described in Item 1A. "Risk Factors" of Part II, "Risk Factors" of this report.

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 report and in our Annual Report on Form 10-K for the year ended December 31, 2018, Part I - Item 1A - "Risk Factors," 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 or in our Annual Report on Form 10-K for the year ended December 31, 2018 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.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

~~Our financial instruments consist~~We are exposed to market risk for the effect of interest rate changes, foreign currency fluctuations, and changes in the market values of our investments. Information relating to quantitative and qualitative disclosures about these market risks is set forth below.

Interest Rate Sensitivity

The fair value of our cash and cash equivalents ~~trade accounts and contracts receivable, accounts payable, and long-term obligations. We consider highly-liquid~~(highly-liquid instruments with a remaining maturity of 90 days or less at the date of ~~purchase~~purchase) would not be significantly affected by either an increase or decrease in interest rates due mainly to ~~be cash equivalents. We currently do not hold any derivative financial instruments or foreign exchange contracts.~~the short-term nature of these instruments.

Our ~~exposure to market~~Loan Core Capital Funding Corporation LLC loan agreements carry a fixed blended annual interest rate of 4.45%. Since the Notes bear interest at a fixed rate, we have no direct financial statement risk ~~for~~associated with changes in interest ~~rates relates primarily~~rates.

Foreign Currency Risk

Most of our sales and operating expenses are denominated in U.S. dollars, and therefore, our total revenue and operating expenses are not currently subject to ~~our short-term investments and short-term obligations; thus, fluctuations in interest rates would not have a material impact on the fair value of these securities. However, the~~significant foreign currency risk.

Investment Risk

The fair values of our ~~investments~~marketable and equity securities may be subject to fluctuations due to volatility of the stock market in general, investment-specific circumstances, and changes in general economic conditions.

Volatile market conditions arising from the COVID-19 pandemic may result in significant changes in the value of our marketable and equity securities. At September 30, 2019, we had $83.5 million in cash and cash equivalents. Hypothetically, an increase or decrease in interest rates of one hundred basis points would have an estimated impact of $835,000 on our earnings or loss, or the cash flows of these instruments.

At September 30, 2019, letters of credit totaling $205,000 were outstanding under collateralized compensating cash balances held at our bank. Hypothetically, an increase or decrease in interest rates of one hundred basis points would have an estimated impact of $2,000 on our earnings or loss if the letters of credit were fully drawn.

At September 30, 2019, we had cryptocurrency-denominated assets totaling $2.5 million. Hypothetically, a decrease in the market value of one hundred basis points would have an estimated impact of $25,000 on our losses, or the recorded value of these instruments. Increases in the market value of cryptocurrency-denominated assets are only recognized when they are sold. It is generally not our policy to hold material amounts of cryptocurrency because of volatility and market risk.

~~At September 30, 2019,~~2020, our recorded value in marketable and equity securities in public and private companies was ~~$41.7 million. Our equity securities in~~$50.3 million, of which $1.8 million relates to publicly traded companies, ~~represent $818,000 of our equity securities as of September 30, 2019, and are~~ recorded at fair value, which isare subject to market price volatility. We perform a qualitative assessment for our equity securities in private companies to identify impairment. If this assessment indicates that an impairment exists, we estimate the fair value of the equity security and, if the fair value is less than carrying value, we write down the equity security to fair value. Our assessment includes a review of recent operating results and trends, recent sales/acquisitions of the equity 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.

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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.

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 control over financial reporting that occurred during the quarter ended September 30, 2020, that have materially affected, or are reasonably likely to materially affect, our disclosure controls and procedures or our internal control over financial reporting. We have not experienced any material impact to our disclosure controls and procedures or our internal controls over financial reporting despite the fact that most of our corporate employees are working remotely due to the COVID-19 pandemic. We are continually monitoring and assessing the COVID-19 situation on our internal controls to minimize the impact on their design and operating effectiveness.

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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

~~The~~From time to time, we are involved in, or become subject to litigation or other legal proceedings concerning consumer protection, employment, intellectual property, claims under the securities laws, and other commercial matters related to the conduct and operation of our business and the sale of products on our Website. We also prosecute lawsuits to enforce our legal rights. In connection with such litigation or other legal proceedings, we have been in the past and we may be in the future subject to significant damages, associated costs, or equitable remedies relating to the operation of our business. Such litigation could be costly and time consuming and could divert or distract our management and key personnel from our business operations. Due to the uncertainty of litigation and depending on the amount and the timing, an unfavorable resolution of some or all of such matters could materially affect our business, results of operations, financial position, or cash flows. For additional details, see the information set forth under Item 1 of Part I, ~~"Financial Statements "—~~Financial Statements—Note ~~7—"~~10—Commitments and Contingencies," subheading ~~"Legal~~Legal Proceedings and Contingencies," contained in the ~~"Notes~~Notes to Unaudited Consolidated Financial ~~Statements"~~Statements of this Quarterly Report on Form 10-Q is incorporated by reference in answer to this Item.

ITEM 1A. RISK FACTORS

Any investment in our securities involves a high degree of risk. Please consider the following risk factors carefully. If any one or more of the following risks were to occur, it could have a material adverse effect on our business, prospects, financial condition and results of operations, and the market price of our securities could decrease significantly. Statements below to the effect that an event could or would harm our business (or have an adverse effect on our business or similar statements) mean that the event could or would have a material adverse effect on our business, prospects, financial condition and results of operations, which in turn could or would have a material adverse effect on the market price of our securities. Many of the risks we face involve more than one type of risk. Consequently, you should read all of the risk factors below carefully, as well as the risk factors described in our Form 10-K for the year ended December 31, ~~2018, the risk factors described in our Form 10-Q for the quarter ended June 30,2019,~~2019, 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. We have included risk factors contained in our Form 10-Q for the quarters ended March 31, 2020 and June 30, 2020, with appropriate revisions, and have added new risk factors. We have not repeated risk factors contained in our Form 10-K for the year ended December 31, 2019, which are incorporated herein by reference. The occurrence of any of these risks could harm our business, the trading price of our securities could decline, and investors could lose part or all of their investment.

~~The following supplements, and, to~~Other than the ~~extent inconsistent, amends~~risk factors set forth below, there are no material changes from the risk factors previously disclosed in Part I - Item 1A - "Risk Factors," of our Annual Report on Form 10-K for the year ended December 31, ~~2018 and our Quarterly Report on Form 10-Q for~~2019.

The resumption of normal business operations after the ~~quarter ended June 30, 2019.~~

We and certain of our former officers and directors have been named in shareholder class action lawsuits, which could require significant additional management time and attention, result in significant additional legal expenses or result in government enforcement actions.

We and certain of our former officers and directors have been named in shareholder class action lawsuits, and may become subject to further litigation, government investigations or proceedings arising therefrom. The pending litigation and any future litigation, investigation or other actions thatdisruptions caused by the COVID-19 pandemic may be ~~filed~~delayed or ~~initiated against us~~constrained by its ongoing effects on our partners, consumers, suppliers or our current or former officers or directors may be time consuming and expensive. We cannot predict what losses, if any, we may incur in these litigation matters, and expect to incur significant legal expenditures in defending and responding to these litigation matters.third-party service providers.

Any ~~such legal proceedings, if decided adversely to us, could result~~of the negative impacts of the COVID-19 pandemic, including those described below, alone or in ~~significant monetary damages, penalties and reputational harm, and will likely involve significant defense and other costs. We have entered into indemnification agreements~~combination with each of our directors and certain of our officers, requiring us to indemnify them. Further, our insurance may not cover all claims that have been or may be brought against us, and insurance coverage may not continue to be available to us at a reasonable cost. As a result, we may be exposed to substantial uninsured liabilities, including pursuant to our indemnification obligations, which could materially adversely affect our business, prospects, results of operations and financial condition.

We are both the subjects of, and parties to, investigations by the SEC Division of Enforcement, which has required us to expend significant financial and legal resources. The resolution of those investigationsothers, may have a material adverse effect on our ~~business,~~results of operations, financial condition and cash flows. Any of these negative impacts, alone or in combination with others, could exacerbate many of the risk factors discussed in Part I - Item 1A - "Risk Factors," of our Annual Report on Form 10-K for the year ended December 31, 2019. The full extent to which the COVID-19 pandemic will negatively affect our results of operations, financial condition and cash flows will depend on future developments that are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken by governmental authorities, private businesses and other third parties in response to the pandemic, the ultimate geographic spread of the virus and the ongoing economic effect of the pandemic.

The duration and extent to which the COVID-19 pandemic might impact our results of operations and ~~cash flows.~~overall financial performance remains uncertain.

~~In February 2018,~~On March 11, 2020, the ~~Division of Enforcement~~World Health Organization ("WHO") declared COVID-19 as a pandemic. This widespread health crisis has profoundly and adversely affected the world economy, employment levels, and financial markets. The duration and extent of the ~~SEC informed tZERO~~impact from the COVID-19 pandemic is currently unknown and ~~subsequently informed us that it is conducting an investigation~~difficult to predict, but could result in a loss of workforce, including key personnel, due to adverse health effects of the disease, a lack of consumer demand for the services and ~~requested that~~products we and ~~tZERO voluntarily provide~~our subsidiaries offer, and an inability to operate our warehouses or other key locations at full capacity, and could adversely affect our business and financial results.

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Our ability to maintain the substantial increase in sales we have experienced since the onset of the COVID-19 pandemic is uncertain.

We have seen a substantial increase in sales from newly acquired customers and existing customers on our online retail website due in large part to the COVID-19 pandemic, with resulting home confinement mandates from state and local governments and closures of many brick-and-mortar stores. The rapid increase in sales volume resulted in a reduction of certain ~~information~~inventory, shipment delays, and ~~documents related~~delays in responding to ~~tZERO~~customer service issues with a corresponding reduction in customer satisfaction. The extent to which our increased sales volume will continue or newly acquired customers will convert into repeat customers as home confinement mandates are lifted and ~~the tZERO security token offering~~brick-and-mortar stores re-open is uncertain. Further, this uncertainty could result in ~~connection with its investigation. In December~~a volatility of ~~2018, we received a follow-up request from the SEC~~our stock price.

New regulations and policies relating to, ~~its investigation~~or arising as a result of, COVID-19 could have a material adverse effect on our business.

Foreign, state and local governments have enacted certain regulations and policies relating to ~~GSR. On October 7, 2019, we received~~COVID-19, which include but are not limited to new immigration policies and regulations on pricing and shipment of goods. Various jurisdictions have imposed restrictions on immigration to contain the spread of COVID-19. Immigration policies vary from jurisdiction to jurisdiction but could negatively impact our ability to retain our existing foreign employees or our ability to recruit new talent from foreign jurisdictions. In addition, so called "price gouging" regulations vary from state to state and seek to limit the amount by which a ~~subpoena from~~price can be increased for certain items. Similarly, certain regulations have been enacted to restrict or limit the ~~SEC’s Division~~shipment of ~~Enforcement pursuant~~non-essential items in the wake of COVID-19. It is difficult to ~~a formal SEC order of investigation requiring us to produce documents~~predict the impact these and other ~~information related~~regulations, including both current and future regulations, relating to, ~~the Dividend we announced to shareholders in June~~or arising as a result of, ~~2019 and requesting 10b5-1 plans entered into by certain officers and directors. We~~COVID-19 might have ~~also received recent requests from the SEC regarding GSR~~on us and our ~~communications~~subsidiaries. If we are unable to both meet consumer demand and comply with such regulations, our ~~former chief executive officer~~reputation could be damaged and ~~director, Patrick Byrne. We are cooperating with the SEC’s investigation and have provided documents and are preparing~~we could be exposed to provide further documents and information requested in the subpoena, as modified by any agreement we have reached or may reach with the SEC. Although we believe that we have fully complied with all relevant

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laws and regulations, there can be no assurance that the SEC will not commence an enforcement action against us or members of our management, or as to the ultimate resolution of any enforcement action that the SEC may decide to bring. Under applicable law, the SEC has the ability to impose significant sanctions on companies and individuals who are found to have violated the provisions of applicable federal securities laws, including cease and desist orders, civil moneyliabilities, penalties, and barring individuals from serving as directors or officers of public companies. We have expended significant financial and legal resources responding to the SEC subpoena. Defending any enforcement action brought by the SEC against us or members of our management would involve further significant expenditures and the resolution of any such enforcement actionfines, which could have a material adverse effect on our business and financial ~~condition, results~~results.

Tariffs, the spread of ~~operations and cash flows.~~

~~The SEC Enforcement Division has requested information from~~illness, including COVID-19, or other governmental measures or events that increase the ~~Company, and if~~effective price of products or limit our ability to access or deliver products we or our suppliers or fulfillment partners import into the ~~SEC chooses to pursue enforcement actions, it~~United States or otherwise source could have a material adverse effect on ~~the Company.~~our business.

~~As set out above, the Company has previously disclosed an investigation by the enforcement staff~~We and many of our suppliers and fulfillment partners source a large percentage of the ~~SEC~~products we offer on our Website from China and other countries. The United States imposed tariffs on goods from China in 2019 which ~~now also covers~~adversely impacted our revenues. If the ~~departure~~United States imposes additional tariffs, or if a disease or illness such as COVID-19 spreads and such measures or events directly or indirectly increase the price of imported products sold on our ~~former chief executive officer. The Company is cooperating~~Website, limit the ability for us or our suppliers and fulfillment partners to source products, limit our ability to access products sold on our Website, or limit or interfere with the ~~staff’s investigation. There can be no assurance that~~timely transportation or delivery of products on our Website, the ~~SEC will not take actions that~~increased prices and/or supply chain challenges could adversely affect the Company as a result of the matters described above. Among other things, if the SEC were to authorize and obtain officer and director bars in a SEC civil injunctive action against any of the members of management, the Company would lose the services of key personnel that could be expected to have a material adverse effect on our financial results, business and prospects. Further, the ~~Company.~~ broader global effects of potentially reduced consumer confidence and spending related to COVID-19 could also have a negative effect on our overall business. At this point, the extent to which COVID-19 may impact our business is uncertain.

The spread of COVID-19 could have technology and security consequences and could negatively impact our operations.

We have ~~incurred significant legal fees~~facilities located in Washington, New York, Pennsylvania, Kansas, Utah, and Ireland. We also have contractors located in California, India and the Philippines. Our employees and contractors working in these facilities may be at risk for exposure to and for contracting COVID-19. Known cases of COVID-19 have been reported in these regions. The spread of COVID-19 in these locations may result in our employees and contractors being forced to work remotely or missing work if they or a member of their family contract COVID-19. Additional risks are inherent when employees and contractors work remotely, including risks that third-party internet and phone service providers may not provide adequate services for employees and contractors to perform their responsibilities, risks that hardware, software, or other ~~expenses in connection with the SEC investigation~~technological problems or failures could prevent employees or contractors from performing their responsibilities and could incur significant legal fees and other expenses or fines or other penalties in connection with the ongoing SEC investigation. In addition, members of our management have devoted in the past, and may need to devote in the future, a significanttake an excessive amount of time to resolve and risks that employees and contractors may not be trained as effectively or monitored as closely from remote locations, creating greater risks for the security of confidential information. Any such occurrences could have a material negative impact on the business. The extent to which COVID-19 may impact our business remains uncertain.

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We may be required to recognize impairment losses or allowances for bad debt relating to our equity interests in or creditor relationships with startup businesses.

We hold minority interests and promissory notes in several companies that are in the startup or development stages and we may acquire additional minority interests in other entities in the future. Minority interests are inherently risky because we may not have the ability to influence business decisions. Further, these ~~matters, which~~interests are inherently risky because the markets for the technologies or products these companies are developing are typically in the early stages, unproven, and may never materialize. These companies may abandon, modify, or alter their product and service mix and overall strategy whether due to COVID-19 or otherwise. Additionally, since these interests are in companies that are in the early startup or development stages, even if their technology or products are viable, they may not be able to obtain the capital or resources necessary to successfully bring their technology or products to market. Furthermore, the economic impact of the COVID-19 pandemic may limit the ability for these entities to raise capital in the future. Furthermore, we have no assurance that the technology or products of companies we have funded would ~~reduce~~be successful, even if they were brought to market. We have previously recognized impairment losses or made allowances for bad debt related to these equity interests and may in the ~~amount of time they can devote~~future recognize additional impairment losses or make allowances for bad debt related to these interests. Any such impairment losses or allowances for bad debt could be material and could have a material adverse effect on our financial results and business.

We depend on third-party companies to perform functions critical to our business, and ~~therefore may~~any failure or increased cost on their part could have ana material adverse effect on our business.

We ~~may not be able to issue the previously-announced dividend~~depend on third-party companies, including third-party carriers and a large number of ~~shares of Series A-1 Preferred Stock, whether on the originally disclosed terms, on modified terms, or at all.~~

~~On July 30, 2019,~~independent fulfillment partners whose products we announced that our Board of Directors had declared a dividend (the “Dividend”) payable in shares of our Digital Voting Series A-1 Preferred Stock (the “Series A-1”). The announcement stated that the Dividend would be payable at a ratio of 1:10, meaning that one share of Series A-1 will be issuedoffer for every ten shares of common stock, Series A-1 or Voting Series B Preferred Stock held by all holders of such shares as of the record date. On September 18, 2019, we announced that, in light of the feedback we had received from industry participants, investors, and regulators, we were working to register the Dividend with the SEC so that the Dividend shares would be freely tradable by non-affiliates immediately upon distribution, and accordingly were postponing the originally-announced record date. On October 28, 2019, the Company announced that it was submitting the Dividend to a shareholder vote at a shareholder special meeting in order to make changes to the Company's Certificate of Designation to facilitate the Dividend. On November 10, 2019, our Board of Directors approved December 18, 2019 as the record date for the shareholder vote and February 13, 2020 as the shareholder special meeting date. No assurance can be given that the shareholders will approve payment of the Dividend, and, until shareholder approval occurs, there can be no certainty as to when the Dividend might be issued. Our inability to issue the Dividend could have a negative impactsale on our ~~stock price and relations with our investors.~~

~~Changes~~Website, to ~~our D&O insurance policy cost and coverage could adversely affect our business.~~

We carry directors and officers liability insurance (D&O insurance) for losses and advancement of defense costs in the event legal actions are brought against the company’s directors and officers for alleged wrongful acts in their capacity as directors or officers. Our current annual D&O insurance policy, effective on October 1, 2019, contains significantly larger self-insured-retention amounts and more exclusionsperform functions critical to ~~coverage than in the past. As such, our D&O insurance may not be adequate to fully protect the company against liability for the conduct of its directors and officers.~~

The costs of our D&O insurance policy premiums increased substantially in the current year, renewal effective October 1, 2019, compared to the prior year policy premiums. If the costs of maintaining adequate insurance coverage increases significantly in the future, our operating results could be materially adversely affected.

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~~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~~deliver products and services to our ~~business.~~

~~Our performance is substantially dependent~~customers on time and at a reasonable cost. We depend on our carriers and fulfillment partners to perform traditional retail operations such as maintaining inventory, preparing merchandise for shipment to our customers and delivering purchased merchandise on a timely and cost-effective basis. We also depend on the ~~continued~~delivery and product assembly services that we and they utilize, on the payment processors that facilitate our customers' payments for their purchases, and on other third parties over which we have no control, for the ~~performance~~operation of our senior management and other key personnel. Our performance also depends on our ability to retain and motivate our officers and key employees. Our former chief executive officer and director, Dr. Patrick Byrne, and our former chief financial officer, Gregory Iverson, resigned from their positions with the company in August 2019 and September 2019, respectively. The loss of the services of these executive officers, and any of our executive officers or other key employees for any reason, could harm our business. ~~We do not have employment agreements~~Difficulties with any of our ~~key personnel. Our future success, in both our e-commerce business and~~significant fulfillment partners or third-party carriers, delivery or product assembly services, payment processors or other third parties involved in our ~~Medici~~ business, also depends on our ability to identify, attract, hire, train, retain and motivate other highly-skilled technical, managerial, editorial, merchandising, marketing and customer service personnel. Our failure to attract and retainregardless of the ~~necessary personnel~~reason, could have a material adverse effect on our financial results, business and prospects.

~~We rely upon paid and unpaid natural search engines to rank our product offerings, and our financial results may suffer if we are unable to regain our prior rankings in natural searches.~~

We rely on paid and unpaid natural search engines to attract consumer interest in our product offerings, including Google, Bing, and Yahoo!. Changes to their ranking algorithms and ranking methodologies may further adversely affect our product offerings in paid and/or unpaid searches, and we may at times be subject to ranking penalties if the operators of search engines believe we are not in compliance with their guidelines. Search engine companies change their natural search engine algorithms and ranking methodologies periodically, and our ranking in natural searchestZERO may be adversely affected as a result of the COVID-19 pandemic.

The potential negative impacts of COVID-19 and its related political and economic responses on tZERO may include increased stress on tZERO's broker-dealer subsidiaries' and tZERO Crypto's technology due to increased trading volatility and volume which they have and are expected to continue to experience and increases in attempted cyber-attacks or a decrease in worker productivity as a result of remote work. Further, the global economic impacts of COVID-19 could also negatively affect tZERO's business. Such impacts may include a reduced willingness by ~~those changes, as has occurred from time to time, and which have led us~~potential securities issuers to pursue ~~revenue growth~~capital raising transactions or seek secondary liquidity for existing capital (thereby reducing tZERO's ability to commercialize the tZERO Technology Stack), shift in attention by regulators and other market participants from regulatory innovation initiatives, decreased interest by third-party broker-dealers in subscribing to the tZERO ATS or a decline in investor appetite or available capital for trading in securities, including securities that use the tZERO Technology Stack, that trade on the tZERO ATS and are accessible via tZERO Markets, or that are bearer digital assets such as cryptocurrencies.

Additionally, certain tZERO management and employees have, and in the future others may, contract COVID-19. This may contribute to a disruption in tZERO's ordinary business activities and slow development of tZERO's products and technology and may be particularly pronounced in the event of the death or extended incapacity of any officer or employee performing a key function.

At this point, while the COVID-19 pandemic may have an adverse impact on tZERO's operations, the extent, duration and nature of such impacts remain uncertain.

There can be no assurance that BSTX will receive the regulatory approval it requires to operate.

tZERO and BOX Digital have entered into a joint venture intended to develop a national securities exchange facility of BOX Exchange LLC (Boston Security Token Exchange or "BSTX") that would facilitate the trading of a type of digital security called a security token that would utilize the tZERO Technology Stack. The SEC published proposed rule changes related to BSTX on October 11, 2019, soliciting public comments thereon. The SEC extended the review period on November 29, 2019 to January 16, 2020, BOX Exchange LLC filed an amendment to the proposal on December 26, 2019, and the SEC again

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extended the review period on January 16, 2020 to April 15, 2020. A subsequent amendment was filed by BOX Exchange LLC on February 19, 2020, after which the SEC extended the review period on April 14, 2020 until June 14, 2020. To allow for further review by the SEC, BOX Exchange LLC withdrew and resubmitted the proposed rule changes on May 12, 2020. The SEC extended the review period for the proposed rule changes on July 16, 2020 to August 30, 2020. BOX Exchange LLC filed an amendment to the proposal on July 31, 2020, and the SEC again extended the review period on August 12, 2020 to November 27, 2020.

The application of federal securities law and other bodies of law to assets enhanced by blockchain technology is subject to significant uncertainty and likely to rapidly evolve as government agencies take greater interest in them. As a result, there may be a delay in the receipt of the regulatory approvals BSTX requires to operate, if they are received at all. In the event BSTX is not able to receive the regulatory approvals it requires to begin operations or there is significant delay in BSTX's receipt of such approvals it may be forced to revise its anticipated operations. Any such revision could have a material adverse effect on tZERO's operations and financial condition and a material adverse effect on us.

tZERO Markets is registered as a broker-dealer and is subject to extensive regulation, which is more rigorous and expensive ~~marketing channels. Google's search engine~~to comply with than the regulation applicable to tZERO's other broker-dealer subsidiaries.

tZERO Markets is ~~dominant~~a registered broker-dealer under the Exchange Act and a member of FINRA and the Securities Investor Protection Corporation and is subject to regulation, examination, investigation and disciplinary action by the SEC, FINRA and state securities regulators, as well as other governmental authorities and SROs with which it is registered or licensed or of which it becomes a member. In addition, because tZERO Markets provides broker-dealer services that tZERO's other broker-dealer subsidiaries have not historically provided, in particular by providing broker-dealer services to retail investors, certain of these legal and regulatory requirements are new to tZERO. Federal and state securities regulators require different supervision, compliance and control procedures for tZERO Markets as a result of its business servicing retail investors, and such requirements are more rigorous and expensive to establish, implement and maintain than those for tZERO ATS, LLC and SpeedRoute.

Any failure of tZERO Markets to comply with all applicable rules and regulations or satisfy FINRA, the SEC, or any other regulatory authority with which it must comply could have a material adverse effect on tZERO's operations and financial condition and a material adverse effect on us.

Risks related to software developed by our Medici Ventures businesses could contain flaws or vulnerabilities and expose us or Medici Ventures’ customers to cyber security risks and risks of data loss, other security breaches, or damages that could negatively impact our business.

Our Medici Ventures businesses offer certain products and services, which include the development and sale of certain software products which could contain flaws or vulnerabilities that could present cyber security-related risks, data loss, other security breaches, or damages to our own business or our customers. Any flaws or vulnerabilities in the software developed by our Medici Ventures businesses and any data breaches, cyber security breaches, malfunctions, or errors could result in a loss of opportunity, damages, or an improper or illegal use of ours or our customer’s data and could expose our business to a risk of loss and could result in claims, fines, penalties, and litigation. Any flaw, vulnerability, or compromise of our Medici Ventures business software or security could result in a violation of applicable privacy and other laws, significant legal and financial exposure, damage to reputation, and a loss of confidence in our business, ~~and has historically been a significant source~~any of traffic to our website, much of it at essentially no incremental cost to us. If the algorithm changes we believe Google made in 2017, or the changes Google made in the fourth quarter of 2019 that base our ranking positions on our mobile website rather than our desktop website, prevent us from regaining our prior rankings in Google's natural search engine, we may have to utilize more expensive marketing channels or otherwise compensate for the loss of some of the natural search traffic, and if we are unable to do so, our financial results may suffer and the changes maywhich could have a material adverse effect on our financial results and business.

~~If we fail to comply with ongoing Nasdaq listing standards and corporate governance requirements, we could be subject to de-listing.~~

Our common stock is currently listed on the Nasdaq Global Market. In order to maintain this listing, we are required to comply with various continued listing standards, including corporate governance requirements, set forth in the Nasdaq Listing Rules. These standards and requirements include an obligation to maintain a Board of Directors, a majority of whom are deemed to be independent and that we maintain an Audit Committee consisting of at least three independent Board Members. Our Board of Directors currently has five members, three of whom are deemed independent, and our Audit Committee consists of these three independent directors. If one of our independent directors should cease to be on the Board, we would no longer have a majority of independent Directors on our Board and our Audit Committee would no longer have at least three independent directors. If such a scenario was not rectified in accordance with applicable Nasdaq Listing Rules, we could become subject to Nasdaq delisting procedures.

~~Future sales of our common or preferred stock may depress our stock price.~~

Sales of a substantial number of shares of our common stock or our preferred stock in the public market or otherwise, by us or by a significant stockholder, could depress the trading price of our common or preferred stock and impair our ability to raise capital through the sale of additional equity securities.

In addition, we may issue additional shares of our common or preferred stock from time to time in the future in amounts that may be significant. The sale of substantial amounts of our common or preferred stock, or the perception that these sales may occur, could adversely affect the trading prices of either or both of these securities.

~~Additional Risks Related Primarily to our Series A-1 Preferred Stock~~

~~Our Series A-1 Preferred may only be sold through the PRO Securities ATS.~~

By virtue of the Amended and Restated Certificate of Designation setting forth its rights, powers, preferences and privileges, shares of our Series A-1 Preferred can be sold only on the PRO Securities ATS utilizing the tZERO Platform, with the record of beneficial ownership updated and recorded by a stockholder’s PRO Securities ATS-subscribing broker-dealer on a

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book-entry basis. As a result, we expect that sales of the Series A-1 Preferred will settle on the trade date. The Series A-1 Preferred is not and will not be listed on any national securities exchange or other trading market of any kind. The limitation on trading Series A-1 Preferred through the PRO Securities ATS may adversely affect the liquidity for, and the market price of shares of the Series A-1 Preferred. It may at times be very difficult to sell any shares of the Series A-1 Preferred.

The Series A-1 Preferred may only be sold through an online brokerage account established with a broker-dealer that subscribes to the PRO Securities ATS. Currently, Dinosaur Financial Group, LLC (“Dinosaur”) is the only broker-dealer that facilitates trades of any security on the PRO Securities ATS. Unless and until another broker-dealer subscribes to the PRO Securities ATS or maintains an account with a PRO Securities ATS-subscribing broker-dealer, any holder of Series A-1 Preferred that wishes to sell its shares must open an account at Dinosaur. If Dinosaur for any reason ceases to operate, there would be no broker-dealer to effect sales of the Series A-1 Preferred on PRO Securities ATS. This could prevent all trading in the Series A-1 Preferred and would likely materially and adversely affect the trading prices of the Series A-1 Preferred.

Likewise, Electronic Transaction Clearing, Inc. ("ETC") is the only clearing firm for the PRO Securities ATS. If for any reason ETC ceases to clear trades for subscribers of PRO Securities ATS and no clearing firm succeeds to ETC, trading in the Series A-1 Preferred on the PRO Securities ATS may be interrupted and such an interruption would likely materially and adversely affect the trading price of the Series A-1 Preferred.

The PRO Securities ATS has had limited volume. Even if a more liquid trading market for the Series A-1 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-1 Preferred may nevertheless be limited, which may have a material adverse effect on the liquidity for, and the market price of, the Series A-1 Preferred.

Moreover, peer-to-peer transfers of the Series A-1 Preferred outside of orders submitted to the PRO Securities ATS by a subscribing broker-dealer, or with a broker-dealer that itself maintains an account with a PRO Securities ATS-subscribing broker-dealer, on behalf of its customers, are not permitted, subject to limited circumstances. Outside of the following limited circumstances, Computershare (as our transfer agent) will not register peer-to-peer transfers of record ownership of the Series A-1 Preferred, and the only way to effect a sale of the Series A-1 Preferred is through an order submitted to the PRO Securities ATS’ order matching system by a PRO Securities ATS-subscribing broker-dealer on behalf of its customer. Computershare may register peer-to-peer transfers in its official record only in limited circumstances, such as a transfer from broker-dealer to broker-dealer, with the stockholder’s carrying broker-dealer being reflected as the record holder, or a transfer by a stockholder who is the record holder pursuant to a divorce decree or other transfers from record holders that do not constitute a “sale” for securities laws purposes, such as gifts (and then only following compliance with Computershare’s procedures, including delivery of appropriate documentation).

~~We have the right to convert the outstanding shares of Series A-1 Preferred into shares of Series B Preferred at any time.~~

We have the right to convert the Series A-1 Preferred into Series B Preferred at any time, and the terms of the Series B Preferred may be amended at any time without the consent of the holders of the Series A-1 Preferred. Any such conversion and any such amendment of the Series B Preferred could have a material adverse effect on the trading price of the Series A-1 Preferred. 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-1 Preferred, holders of Series A-1 Preferred would likely experience an immediate and potentially material decrease in the market value of the Series A-1 Preferred they hold and of the Series B Preferred they would receive upon the conversion. Moreover, the existence of this conversion right could have a negative impact on the liquidity for, and market value of, our Series A-1 Preferred.

~~Our obligation to pay dividends on the Series A-1 Preferred is limited, and our ability to pay dividends on the Series A-1 Preferred may be limited.~~

Our obligation to pay preferential dividends on the Series A-1 Preferred is subject to our Board declaring such dividend payments. Further, although we will be contractually restricted from paying a dividend on the common stock unless we have paid preferential cumulative $0.16 per share annual dividends on the Series A-1 Preferred and preferential cumulative 1.0% annual dividends on the Series B Preferred, we have never paid a dividend on the common stock and we have no intention of doing so. Consequently, our failure to pay preferential dividends on the Series A-1 Preferred and on the Series B Preferred might have no legal effect on us at all, although it could adversely affect the liquidity for, and trading prices of, the Series A-1 Preferred 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. Further, we may elect not to pay dividends on the Series A-1 Preferred, the Series B Preferred or both rather than limiting other proposed expenditures, including expenditures that may not be contractually required. Moreover, agreements governing any future indebtedness of ours may further limit our ability to pay

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dividends on our capital stock, including the Series A-1 Preferred and the Series B Preferred. In addition, our ability to pay dividends is limited by applicable law. Although there are no arrearages in cumulative preferred dividends and we declared and paid a cash dividend of $0.16 per share to the holders of our then outstanding preferred stock during 2017 and 2018, there is no assurance that we will be able or that our board will decide to do so in the future. Any of the foregoing facts or events could have a material adverse effect on the holders of the Series A-1 Preferred and the holders of the Series B Preferred and on the liquidity for, and trading prices of, the Series A-1 Preferred and the Series B Preferred.

Voting rights on the Series A-1 Preferred generally will be limited to voting together with the holders of the common stock and Series B Preferred as a single class, and the holders of the Series A-1 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-1 Preferred and Series B Preferred, voting together as a single class.

Voting rights of the Series A-1 Preferred generally will be limited to voting together with the holders of the common stock and Series B Preferred, as a single class. If an amendment requiring stockholder approval is proposed to our Amended and Restated Certificate of Incorporation, the holders of the Series A-1 Preferred 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-1 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-1 Preferred or Series B Preferred, respectively, or increase or decrease the aggregate number of authorized shares of Series A-1 Preferred or Series B Preferred. These limited voting rights could have a material adverse effect on holders of Series A-1 Preferred and holders of Series B Preferred and on the trading prices of the Series A-1 Preferred and the Series B Preferred.

~~Holders of the Series A-1 Preferred will not have any right, as a separate class, to elect any members of our board of directors.~~

The holders of the Series A-1 Preferred will have no right as a separate class to elect any members of our board of directors under any circumstances, including upon any failure of our board to declare or pay any dividend on the Series A-1 Preferred. Further, the holders of the Series A-1 Preferred and the holders of the Series B Preferred, together, also will have no right by themselves to elect any members of our board of directors under any circumstances. The holders of the Series A-1 Preferred and the holders of the Series B Preferred will be entitled only to vote with the holders of the common stock as a single class in the election of directors and on any other matter coming before a vote of the holders of the common stock. Holders’ lack of such rights could have a material adverse effect on holders of the Series A-1 Preferred and the holders of the Series B Preferred and the liquidity for, and trading prices of, the Series A-1 Preferred and the Series B Preferred.

~~Holders of Series A-1 Preferred will have no rights with respect to our common stock.~~

Holders of Series A-1 Preferred will have no rights with respect to our common stock, and no right to convert shares of Series A-1 Preferred into shares of common stock or to exchange shares of Series A-1 Preferred for shares of common stock, except that holders of Series A-1 Preferred will have the right to vote with the common stock on any matter submitted to a vote of the holders of the common stock, the right to receive payments upon liquidation equally with the holders of the common stock and the right to receive dividends in preference to the holders of the common stock and to participate in dividends, if any, paid on the common stock, subject to the limitations set forth in the Amended and Restated Certificate of Designation relating to the Series A-1 Preferred.

The Series A-1 Preferred and the Series B Preferred will rank junior to all of our and our subsidiaries’ liabilities in the event of a bankruptcy, liquidation or winding up of our or our subsidiaries’ business.

In the event of our bankruptcy, liquidation or winding up, our assets will be available to make payments to holders of Series A-1 Preferred and to holders of Series B Preferred only after all of our liabilities have been paid, and neither the Series A-1 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-1 Preferred and Series B Preferred will rank structurally junior to all existing and future liabilities of our subsidiaries. The rights of holders of Series A-1 Preferred to participate in the assets of our subsidiaries upon any liquidation or reorganization of any subsidiary will rank junior to the claims of creditors. In the event of our bankruptcy, liquidation or winding up, there may not be sufficient assets remaining, after paying our and our subsidiaries’ liabilities, to pay any amounts to the holders of Series A-1 Preferred or Series B Preferred then outstanding. We may incur significant debt or other liabilities in the future, and the Series A-1 Preferred and Series B Preferred contain no covenant or restriction on our ability to incur debt or other obligations. Any bankruptcy, liquidation or winding up of our company or any of its wholly or partially owned subsidiaries would have a material adverse effect on the liquidity for, and trading prices of, the Series A-1 Preferred.

~~Table of Contents~~

Moreover, we do not own all of the equity securities of our subsidiaries, including our majority owned subsidiary, tZERO. For example, we have adopted an employee equity incentive plan pursuant to which tZERO has issued, and may continue to issue, shares or other equity interests or awards having the economic effects of equity interests to employees. As a result, following satisfaction of the claims of creditors of those subsidiaries as discussed above, our right to receive distributions as a shareholder with respect to our equity interests in those majority owned subsidiaries will be shared with third party equity holders of tZERO and our other subsidiaries, whether now existing or created in the future, including our employees holding shares of any of them.

The restrictions on the tax reporting of holder’s cost basis in shares of Series A-1 Preferred will not allow normal tax planning in the sale of shares of Series A-1 Preferred and may result in disadvantageous tax consequences to a seller of Series A-1 Preferred.

Only one method of cost basis reporting (the first-in, first-out, or FIFO, method) is available for the Series A-1 Preferred. As a result, sellers of Series A-1 Preferred may be required to pay more tax on their sales or to pay taxes earlier than if other normal methods of cost basis reporting had been available, which could have an adverse tax effect on sellers of Series A-1 Preferred and the market price of the Series A-1 Preferred.

~~The record of ownership of each digital wallet will be available to the general public and it may be possible for members of the public to determine the identity of the record holders of wallets.~~

Although the record of ownership included in the blockchain is a non-controlling “courtesy copy” of the records maintained by Computershare, it will be made publicly available. The publicly available information will include the digital wallet address of each holder of record transacting in Series A-1 Preferred and the entire history of each digital wallet, but it will not include any personal identifiable information. As a result, it may be possible for members of the public to determine the identity of the record holders of certain wallets based on the publicly available information in the blockchain copy, as well as other publicly available information, including any ownership reports required to be filed with the SEC regarding the Series A-1 Preferred.

~~The Series A-1 Preferred depends on Computershare as the transfer agent for the Series A-1 Preferred.~~

Computershare serves as the transfer agent for the Series A-1 Preferred and ownership of the Series A-1 Preferred is based upon the books and records of Computershare. Our agreement with Computershare can be terminated by either party on 60 days’ notice. If Computershare chooses to exercise its termination rights or otherwise ceases to operate as a transfer agent, we would seek to engage a successor transfer agent. In the absence of finding such a successor, Overstock would need to assume the role of transfer agent. While we believe we could successfully assume the role of transfer agent, no assurance can be given that we would be able to do so and if we are unable to do so the trading market for the Series A-1 Preferred would be adversely affected and it may be difficult or impossible for Overstock to pay dividends or liquidation preference or provide voting rights to the correct holders of record of the Series A-1 Preferred.

~~The potential application of U.S. laws regarding traditional investment securities to the Series A-1 Preferred is unclear.~~

We believe that the Series A-1 Preferred should be treated as any other conventional, uncertificated book-entry security. However, various regulators may disagree with this assertion and conclude that the Series A-1 Preferred should not be treated as any other traditional investment security. For example, we believe that the Series A-1 Preferred is not a “digital asset security” within the meaning of the July 8, 2019 Joint Staff Statement on Broker-Dealer Custody of Digital Asset Securities (the “July Statement”), and that as a result, broker-dealers will have a good control location consistent with the July Statement. However, federal securities regulatory authorities may disagree with that conclusion and we could be required to take further steps with regulators to establish a good control location. The occurrence of any such issue or dispute could have a material adverse effect on the liquidity for, and market price of, the Series A-1 Preferred. In addition, if regulatory authorities take the position that Series A-1 Preferred is a “digital asset security,” then broker-dealers may need to submit a Form CMA with FINRA in order to hold the Series A-1 Preferred, and that could prevent other broker-dealers from becoming subscribers to the PRO Securities ATS. As a result, holders of the Series A-1 Preferred may not be able to open an account with another subscribing broker-dealer authorized to facilitate trading of the Series A-1 Preferred on the PRO Securities ATS.

~~If we elect to repurchase the Series A-1 Preferred on the PRO Securities ATS, it could have a material adverse effect on the liquidity in, and trading prices of, the Series A-1 Preferred.~~

~~Table of Contents~~

We do not currently intend to repurchase any of the Series A-1 Preferred on the PRO Securities ATS after they are issued. However, we could do so, subject to applicable regulations regarding issuer repurchases of their capital stock. If we do so, we would do so only at prices lower than the prices at which we are entitled to redeem the shares. If we repurchase shares of Series A-1 Preferred, the trading market for the Series A-1 Preferred could become less liquid, which would likely cause the trading prices of the Series A-1 Preferred to decrease, which would give us an economic incentive to repurchase additional shares. The occurrence of the foregoing could have a material adverse effect on the liquidity in, and trading prices of, the Series A-1 Preferred. There are no restrictions on our repurchase of shares of Series A-1 Preferred while there is any arrearage in the payment of dividends.

~~PRO Securities and tZERO are involved in ongoing discussions with regulatory authorities.~~

PRO Securities and tZERO have been and remain involved in ongoing oral and written communications with regulatory authorities in connection with ongoing examinations, inquiries, or investigations. Any failure of PRO Securities, PRO Securities ATS, or tZERO to satisfy the requirements of FINRA, the SEC, or any other regulatory could result in trading halts on PRO Securities ATS. Any such trading halt would adversely affect the trading market for the Series A-1 Preferred and may prevent the sale of Series A-1 Preferred until the failure is rectified.

~~Technology on which PRO Securities ATS relies for its operations may not function properly.~~

The technology on which PRO Securities ATS relies may not function properly because of internal problems or as a result of cyber-attacks or external security breaches. Any such malfunction may adversely affect the ability of holders to execute trades of the Series A-1 Preferred on PRO Securities ATS. Moreover, since trading in the Series A-1 Preferred has been limited, the PRO Securities ATS platform may not function properly in cases of increased trading volume. If the technology used by PRO Securities ATS does not work as anticipated, trading of the Series A-1 Preferred could be limited or even suspended.

The technology on which the PRO Securities ATS depends has been developed by our indirectly held majority-owned subsidiary, tZERO, and is licensed to its wholly-owned subsidiary, PRO Securities, and the Series A-1 Preferred depends on both tZERO and PRO Securities, neither of which has substantial resources.

tZERO is an indirectly held majority-owned subsidiary of ours and owns 100% of the equity interest in PRO Securities. tZERO licenses the technology to PRO Securities, and PRO Securities uses tZERO technology to operate the PRO Securities ATS. tZERO is a growth-stage company, and neither tZERO nor PRO Securities has substantial resources. If any one or more of our 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 PRO Securities ATS, and the Series A-1 Preferred could be materially adversely affected. In any such event, or if the PRO Securities ATS or the tZERO Platform were to be unable to operate as intended for any reason, holders of our capital stock, including the Series A-1 Preferred, could lose their ability to trade our Series A-1 Preferred, which would have a material adverse effect on the market value of that stock, and may have a material adverse effect on the liquidity for, and the price of, our common stock.

~~Transactions involving the Series A-1 Preferred may not be properly reflected in the digital wallet.~~

A significant feature of the Series A-1 Preferred is that, while the records of Computershare (as our transfer agent) govern record ownership of the Series A-1 Preferred, for all record holders on the transfer agent’s controlling records there is a digital wallet which is shown as a non-controlling digital “courtesy copy” on the blockchain. Following Computershare’s approval of any change in record ownership, the digital wallets on the blockchain are updated to match Computershare’s conventional books and records. To the extent that Computershare’s records and the duplicative records on the blockchain get out of sync, there could be a delay while we correct any such errors, and such errors may cause investors confusion with respect to their record holdings of the Series A-1 Preferred, which could adversely affect the liquidity for, and market value of, the Series A-1 Preferred.

~~The potential application of U.S. laws regarding virtual currencies and money transmission to PRO Securities’ use of the Ethereum blockchain is unclear.~~

The tZERO Platform used by the PRO Securities ATS uses the Ethereum blockchain for the blockchain’s non-controlling “courtesy copy” records maintained by Computershare. Although tZERO’s wholly owned subsidiary, Bitsy, Inc, maintains certain licenses in connection with virtual currency applications, none of the parties involved in the operation of the PRO Securities ATS using the tZERO Platform is licensed under the virtual currency or money transmission regulations of any

~~Table of Contents~~

state in the United States or registered with FinCEN. If any regulatory authority were to assert that additional licensing or registration was required by PRO Securities or tZERO, it could affect the operations or viability of either of them and could adversely affect the availability of the PRO Securities ATS as a trading venue for the Series A-1 Preferred. This in turn would have a material adverse effect on the liquidity of the Series A-1 Preferred and the holders’ ability to trade such securities. In addition, because PRO Securities is a wholly-owned subsidiary of tZERO, any negative impact on the value of the PRO Securities ATS or the tZERO Platform could have an adverse impact on the value of Overstock, which would cause our stock price to decrease.

~~Although the Series A-1 Preferred has characteristics similar to those of our common stock, the differences may adversely affect the trading prices of the Series A-1 Preferred.~~

Each share of Series A-1 Preferred is intended to have voting and dividend rights and rights upon liquidation substantially similar to those of one share of our common stock, except that the Series A-1 Preferred will have a dividend preference over the common stock, the Series A-1 Preferred will be limited to trading on the PRO Securities ATS, and we will have the right to redeem shares of Series A-1 Preferred, in whole or in part, at the Redemption Price as set forth in the Amended and Restated Certificate of Designation, prior to December 15, 2019 and to convert the Series A-1 Preferred into Series B Preferred. These provisions may have a material adverse effect on the liquidity for, and trading price of, the Series A-1 Preferred.

~~Table of Contents~~

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Unregistered issuance of equity securities

None.

Issuer purchases of equity securities

None.

Limitations upon the payment of dividends

None.

Table of Contents

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS



(a)	~~Exhibits~~Exhibit Number
	~~3.1~~	~~Amended and Restated Certificate of Designation of Voting Series B Preferred Stock of Overstock.com, Inc., incorporated by reference to~~ Exhibit ~~3.1 to our Form 8-K filed on July 30, 2019.~~
	~~3.2~~	~~Certificate of Elimination of Blockchain Voting Series A Preferred Stock of Overstock.com, Inc., incorporated by reference to Exhibit 3.2 to our Form 8-K filed on July 30, 2019.~~
	~~3.3~~	~~Amended and Restated Certificate of Designation of Digital Voting Series A-1 Preferred Stock of Overstock.com, Inc., incorporated by reference to Exhibit 3.3 to our Form 8-K filed on July 30, 2019.~~ Description
	31.1*	Exhibit 31.1 Certification of Chief Executive Officer
	31.2*	Exhibit 31.2 Certification of Chief Financial Officer
	32.1**	Exhibit 32.1 Section 1350 Certification of Chief Executive Officer
	32.2**	Exhibit 32.2 Section 1350 Certification of Chief Financial Officer
	101	~~Attached as Exhibit 101 to this report are~~The following financial statements from the ~~following documents~~Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2020 formatted in ~~XBRL (Extensible Business Reporting Language):~~Inline XBRL: (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.~~ Statements tagged as blocks of text and including detailed tags
	104	The cover page from the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2020, formatted in Inline XBRL (included as Exhibit 101)

* Filed herewith.

** Furnished herewith.

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



Date:	November ~~12, 2019~~5, 2020	OVERSTOCK.COM, INC.

		/s/ ~~ROBERT P. HUGHES~~ADRIANNE B. LEE
		~~Robert P. Hughes~~Adrianne B. Lee
		~~Acting~~ Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)

6852



	September 30, 2019			December 31, 2018
Assets
Current assets:
Cash and cash equivalents	$	83,546		$	141,512
Restricted cash	2,251			1,302
Accounts receivable, net	22,407			35,930
Inventories, net	7,244			14,108
Prepaids and other current assets	18,233			22,415
Total current assets	133,681			215,267
Property and equipment, net	132,696			134,687
Intangible assets, net	12,879			13,370
Goodwill	27,120			22,895
Equity securities	41,713			60,427
Operating lease right-of-use assets	43,266			—
Other long-term assets, net	8,446			14,573
Total assets	$	399,801		$	461,219
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable	$	60,557		$	102,574
Accrued liabilities	79,440			87,858
Deferred revenue	40,512			50,578
Operating lease liabilities, current	5,725			—
Other current liabilities	489			476
Total current liabilities	186,723			241,486
Long-term debt, net	—			3,069
Operating lease liabilities, non-current	42,510			—
Other long-term liabilities	1,616			5,958
Total liabilities	230,849			250,513
Commitments and contingencies (Note 7)
Stockholders' equity:
Preferred stock, $0.0001 par value, authorized shares - 5,000
Series A, issued and outstanding - 0 and 127	—			—
Series A-1, issued and outstanding - 3,702 and 0 (including 3,577 shares declared as a stock dividend, not yet distributed)	—			—
Series B, issued and outstanding - 357 and 355	—			—
Common stock, $0.0001 par value, authorized shares - 100,000
Issued shares - 38,565 and 35,346
Outstanding shares - 35,242 and 32,146	3			3
Additional paid-in capital	726,132			657,981
Accumulated deficit	(553,335		)	(458,897		)
Accumulated other comprehensive loss	(572		)	(584		)
Treasury stock at cost - 3,323 and 3,200	(68,773		)	(66,757		)
Equity attributable to stockholders of Overstock.com, Inc.	103,455			131,746
Equity attributable to noncontrolling interests	65,497			78,960
Total stockholders' equity	168,952			210,706
Total liabilities and stockholders' equity	$	399,801		$	461,219



	Amount
Balances as of December 31, 2017 (1)	$	14,698
Goodwill acquired during year	8,197
Balances as of December 31, 2018 (2)	22,895
Goodwill acquired during year	1,685
Purchase price adjustment	2,540
Balances as of September 30, 2019 (3)	$	27,120



	Amount
Deferred revenue at December 31, 2017	$	46,468
Increase due to deferral of revenue at period end	43,216
Decrease due to beginning contract liabilities recognized as revenue	(39,106		)
Deferred revenue at December 31, 2018	50,578
Increase due to deferral of revenue at period end	34,789
Decrease due to beginning contract liabilities recognized as revenue	(44,855		)
Deferred revenue at September 30, 2019	$	40,512



	Amount
Allowance for returns at December 31, 2017	$	17,391
Additions to the allowance	174,864
Deductions from the allowance	(176,994		)
Allowance for returns at December 31, 2018	15,261
Additions to the allowance	87,620
Deductions from the allowance	(94,984		)
Allowance for returns at September 30, 2019	$	7,897



Purchase Price	Fair Value
Cash paid, net of cash acquired	$	3,115
Fair value of equity interest in Bitsy held before business combination	3,800
Less: Fair value of Overstock.com common stock held by Bitsy at acquisition date	(643		)
Less: Settlement of receivable due from tZERO at acquisition date	(10		)
Total transaction consideration, net of cash acquired	$	6,262

Allocation
Prepaids and other current assets	$	71
Property and equipment	16
Intangible assets	6,093
Goodwill	1,685
Deferred tax liability	(943		)
Other liabilities assumed	(660		)
Total net assets, net of cash acquired	$	6,262



Intangible Assets	Fair Value		Weighted Average Useful Life (years)
Patents	$	4,293	20
Technology	1,500		5
Licenses	300		1
Total acquired intangible assets as of the acquisition date	$	6,093



	September 30, 2019
Operating right-of-use assets	$	43,266
Operating lease liability - current	5,725
Operating lease liability - non-current	42,510



	Three months ended September 30, 2019		Nine months ended September 30, 2019
Operating lease cost	$	2,685	$	7,556
Short-term lease cost	28		90
Variable lease cost	406		1,378



	Nine months ended September 30, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows used in operating leases	$	(6,629	)
Right-of-use assets obtained in exchange for new operating lease liabilities	$	17,238
Weighted-average remaining lease term - operating leases	6.82 years
Weighted-average discount rate - operating leases	8		%



Payments due by period
2019	$	8,822
2020	7,414
2021	7,654
2022	7,579
2023	6,677
Thereafter	19,571
Total lease payments	$	57,717



	First Quarter		Second Quarter		Third Quarter		Fourth Quarter
2019	$	367,729	$	373,709	$	347,099	$	N/A
2018		445,331		483,133		440,580		452,548
2017		432,435		432,024		424,007		456,290




Contractual Obligations	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
Operating leases	$	62,978	$	9,123	$	19,649	$	17,351	$	16,855
Purchase obligations	125		125		—		—		—
Technology services	3,268		3,017		251		—		—
Total contractual cash obligations	$	66,371	$	12,265	$	19,900	$	17,351	$	16,855