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EX-32.2 - EXHIBIT 32.2 - OVERSTOCK.COM, INCostk-20180630xexx322.htm
EX-32.1 - EXHIBIT 32.1 - OVERSTOCK.COM, INCostk-20180630xexx321.htm
EX-31.2 - EXHIBIT 31.2 - OVERSTOCK.COM, INCostk-20180630xexx312.htm
EX-31.1 - EXHIBIT 31.1 - OVERSTOCK.COM, INCostk-20180630xexx311.htm
EX-10.5(A) - EXHIBIT 10.5(A) - OVERSTOCK.COM, INCostk-20180630xexx105a.htm
EX-10.4(A) - EXHIBIT 10.4(A) - OVERSTOCK.COM, INCostk-20180630xexx104a.htm
EX-10.2(A) - EXHIBIT 10.2(A) - OVERSTOCK.COM, INCostk-20180630xexx102a.htm

 
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 June 30, 2018
 
Or 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from                        to                        
 
Commission file number: 000-49799
overstocklogoa03.jpg
OVERSTOCK.COM, INC.
(Exact name of registrant as specified in its charter) 
Delaware
 
87-0634302
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification Number)
 
 
 
799 West Coliseum Way, Midvale, Utah
 
84047
(Address of principal executive offices)
 
(Zip Code)
 
 
 
(801) 947-3100
(Registrant's telephone number, including area code)
 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), (2) has been subject to such filing requirements for the past 90 days. Yes ý   No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý   No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer o
 
Accelerated filer x
 
 
 
Non-accelerated filer o
 
Smaller reporting company o
 
 
 
Emerging growth company o
 
 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o  No ý

There were 29,009,814 shares of the Registrant's common stock, par value $0.0001, outstanding on August 8, 2018.





OVERSTOCK.COM, INC.
FORM 10-Q
For the quarterly period ended June 30, 2018

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

2


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

Overstock.com, Inc.
Consolidated Balance Sheets (Unaudited)
(in thousands)
 
June 30,
2018
 
December 31,
2017
Assets
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
152,228

 
$
203,215

Restricted cash
468

 
455

Accounts receivable, net
28,597

 
30,080

Inventories, net
15,355

 
13,703

Prepaid inventories, net
1,071

 
1,625

Prepaids and other current assets
25,419

 
16,119

Total current assets
223,138

 
265,197

Fixed assets, net
131,923

 
129,343

Intangible assets, net
26,343

 
7,337

Goodwill
22,058

 
14,698

Equity Investments
43,543

 
13,024

Other long-term assets, net
5,888

 
4,216

Total assets
$
452,893

 
$
433,815

Liabilities and Stockholders’ Equity
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
92,712

 
$
85,406

Accrued liabilities
109,732

 
82,611

Deferred revenue
42,644

 
46,468

Other current liabilities, net
468

 
178

Total current liabilities
245,556

 
214,663

Long-term debt, net
3,069

 

Long-term debt, net - related party

 
39,909

Other long-term liabilities
6,160

 
7,120

Total liabilities
254,785

 
261,692

Commitments and contingencies (Note 6)


 


Stockholders’ equity:
 

 
 

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

 
 

Series A, issued and outstanding - 127 and 127

 

Series B, issued and outstanding - 555 and 555

 

Common stock, $0.0001 par value
 

 
 

Authorized shares - 100,000
 

 
 

Issued shares - 32,203 and 30,632
 

 
 

Outstanding shares - 29,007 and 27,497
3

 
3

Additional paid-in capital
553,112

 
494,732

Accumulated deficit
(365,472
)
 
(254,692
)
Accumulated other comprehensive loss
(591
)
 
(599
)
Treasury stock:
 

 
 

Shares at cost - 3,196 and 3,135
(66,662
)
 
(63,816
)
Equity attributable to stockholders of Overstock.com, Inc.
120,390

 
175,628

Equity attributable to noncontrolling interests
77,718

 
(3,505
)
Total equity
198,108

 
172,123

Total liabilities and stockholders’ equity
$
452,893

 
$
433,815


See accompanying notes to unaudited consolidated financial statements.

3


Overstock.com, Inc.
Consolidated Statements of Operations (Unaudited)
(in thousands, except per share data)
 
 
Three months ended
 June 30,
 
Six months ended
 June 30,
 
2018
 
2017
 
2018
 
2017
Revenue, net
 

 
 

 
 

 
 

Direct
$
14,715

 
$
22,099

 
$
30,985

 
$
44,927

Partner and other
468,418

 
409,925

 
897,479

 
819,532

Total net revenue
483,133

 
432,024

 
928,464

 
864,459

Cost of goods sold
 

 
 

 
 

 
 

Direct(1)
14,672

 
21,147

 
29,444

 
42,110

Partner and other
376,718

 
326,706

 
713,408

 
651,271

Total cost of goods sold
391,390

 
347,853

 
742,852

 
693,381

Gross profit
91,743

 
84,171

 
185,612

 
171,078

Operating expenses:
 

 
 

 
 

 
 

Sales and marketing(1)
94,416

 
43,297

 
171,630

 
80,915

Technology(1)
32,423

 
28,244

 
63,717

 
57,236

General and administrative(1)
31,440

 
22,361

 
71,195

 
44,971

Total operating expenses
158,279

 
93,902

 
306,542

 
183,122

Operating loss
(66,536
)
 
(9,731
)
 
(120,930
)
 
(12,044
)
Interest income
620

 
136

 
1,164

 
261

Interest expense
(395
)
 
(716
)
 
(1,269
)
 
(1,426
)
Other income (expense), net
368

 
593

 
359

 
(3,131
)
Loss before income taxes
(65,943
)
 
(9,718
)
 
(120,676
)
 
(16,340
)
Benefit from income taxes
(27
)
 
(1,975
)
 
(304
)
 
(2,315
)
Consolidated net loss
$
(65,916
)
 
$
(7,743
)
 
$
(120,372
)
 
$
(14,025
)
Less: Net loss attributable to noncontrolling interests
(1,005
)
 
(244
)
 
(4,552
)
 
(623
)
Net loss attributable to stockholders of Overstock.com, Inc.
$
(64,911
)
 
$
(7,499
)
 
$
(115,820
)
 
$
(13,402
)
Net loss per common share—basic:
 

 
 

 
 

 
 

Net loss attributable to common shares—basic
$
(2.20
)
 
$
(0.29
)
 
$
(3.94
)
 
$
(0.52
)
Weighted average common shares outstanding—basic
28,903

 
24,996

 
28,736

 
25,035

Net loss per common share—diluted:
 

 
 

 
 

 
 

Net loss attributable to common shares—diluted
$
(2.20
)
 
$
(0.29
)
 
$
(3.94
)
 
$
(0.52
)
Weighted average common shares outstanding—diluted
28,903

 
24,996

 
28,736

 
25,035

________________________________________
(1) Includes stock-based compensation as follows (Note 8):
 

 
 

 
 

 
 

 Cost of goods sold — direct
$
41

 
$
39

 
$
111

 
$
88

 Sales and marketing
315

 
113

 
1,188

 
209

 Technology
621

 
150

 
1,142

 
310

 General and administrative
1,996

 
743

 
6,967

 
1,378

 Total
$
2,973

 
$
1,045

 
$
9,408

 
$
1,985


See accompanying notes to unaudited consolidated financial statements.

4


Overstock.com, Inc.
Consolidated Statements of Comprehensive Loss (Unaudited)
(in thousands)
 
 
Three months ended
 June 30,
 
Six months ended
 June 30,
 
2018
 
2017
 
2018
 
2017
Consolidated net loss
$
(65,916
)
 
$
(7,743
)
 
$
(120,372
)
 
$
(14,025
)
Other comprehensive loss:
 
 
 
 
 
 
 
Unrealized gain on cash flow hedges, net of expense for taxes of $0, $55, $0, and $(40)
4

 
(81
)
 
8

 
68

Other comprehensive income
4

 
(81
)
 
8

 
68

Comprehensive loss
$
(65,912
)
 
$
(7,824
)
 
$
(120,364
)
 
$
(13,957
)
Less: Comprehensive loss attributable to noncontrolling interests
(1,005
)
 
(244
)
 
(4,552
)
 
(623
)
Comprehensive loss attributable to stockholders of Overstock.com, Inc.
$
(64,907
)
 
$
(7,580
)
 
$
(115,812
)
 
$
(13,334
)

See accompanying notes to unaudited consolidated financial statements.


5


Overstock.com, Inc.
Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)
(in thousands)
 
Six months ended
 June 30, 2018
Equity attributable to stockholders of Overstock.com, Inc.
 

Number of common shares issued
 
Balance at beginning of period
30,632

Common stock issued upon vesting of restricted stock
221

Common stock issued for asset purchase
100

Exercise of stock warrants
1,250

Balance at end of period
32,203

 
 
Number of treasury stock shares
 
Balance at beginning of period
3,135

Tax withholding upon vesting of restricted stock
61

Balance at end of period
3,196

Total number of outstanding shares
29,007

 
 
Common stock
$
3

 
 
Number of Series A preferred shares issued and outstanding
127

 
 
Number of Series B preferred shares issued and outstanding
555

 
 
Preferred stock
$

 
 
Additional paid-in capital
 
Balance at beginning of period
$
494,732

Stock-based compensation to employees and directors
5,368

Common stock issued for asset purchase
2,930

Exercise of stock warrants
50,562

Sale of stock warrants
25

Other
(505
)
Balance at end of period
$
553,112

 
 
Accumulated deficit
 
Balance at beginning of period
$
(254,692
)
Cumulative effect of change in accounting principle
5,040

Net loss attributable to stockholders of Overstock.com, Inc.
(115,820
)
Balance at end of period
$
(365,472
)
 
 
Accumulated other comprehensive loss
 
Balance at beginning of period
$
(599
)
Net other comprehensive income
8

Balance at end of period
$
(591
)
 
 
Treasury stock
 
Balance at beginning of period
$
(63,816
)
Tax withholding upon vesting of restricted stock

(2,846
)
Balance at end of period
(66,662
)
Total equity attributable to stockholders of Overstock.com, Inc.
$
120,390

 
 
Equity attributable to noncontrolling interests
 
Balance at beginning of period
$
(3,505
)
Proceeds from security token offering, net of offering costs (Note 2 - Noncontrolling Interest)
78,442

Stock-based compensation to employees and directors
4,040

Tax withholding upon vesting of restricted stock
(1,680
)
Net loss attributable to noncontrolling interests
(4,552
)
Fair value of noncontrolling interests at acquisition
4,468

Other
505

Total equity attributable to noncontrolling interests
$
77,718

 
 
Total equity
$
198,108

See accompanying notes to unaudited consolidated financial statements.

6


Overstock.com, Inc.
Consolidated Statements of Cash Flows (Unaudited)
(in thousands)
 
Six months ended
 June 30,
 
Twelve months ended
 June 30,
 
2018
 
2017
 
2018
 
2017
Cash flows from operating activities:
 

 
 

 
 

 
 

Consolidated net loss
$
(120,372
)
 
$
(14,025
)
 
$
(218,269
)
 
$
(14,656
)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
 

 
 

 
 

 
 

Depreciation of fixed assets
12,983

 
14,909

 
26,922

 
29,896

Amortization of intangible assets
2,051

 
1,891

 
4,159

 
3,637

Stock-based compensation to employees and directors
9,408

 
1,985

 
11,500

 
4,161

Deferred income taxes, net
(298
)
 
(2,796
)
 
67,697

 
(2,445
)
Gain on investment in precious metals

 

 
(1,971
)
 
(201
)
Impairment of cryptocurrencies
9,491

 

 
9,491

 

Gain on sale of cryptocurrencies
(8,348
)
 

 
(10,343
)
 

Impairment of equity securities

 
4,500

 
987

 
7,350

Early extinguishment costs of long term debts
283

 

 
2,747

 

Other
(609
)
 
65

 
202

 
423

Changes in operating assets and liabilities, net of acquisitions:
 

 
 

 
 

 
 

Accounts receivable, net
1,882

 
7,391

 
(7,447
)
 
(1,446
)
Inventories, net
120

 
3,785

 
1,569

 
2,366

Prepaid inventories, net
554

 
897

 
144

 
3

Prepaids and other current assets
(8,234
)
 
(9,213
)
 
(2,307
)
 
(3,809
)
Other long-term assets, net
(3,827
)
 
(147
)
 
(5,987
)
 
(729
)
Accounts payable
6,686

 
(30,601
)
 
16,292

 
(3,127
)
Accrued liabilities
26,911

 
(22,391
)
 
36,991

 
3,578

Deferred revenue
1,216

 
(2,643
)
 
8,547

 
(4,933
)
Other long-term liabilities
(476
)
 
136

 
(467
)
 
194

Net cash (used in) provided by operating activities
(70,579
)
 
(46,257
)
 
(59,543
)
 
20,262

Cash flows from investing activities:
 

 
 

 
 

 
 

Purchases of intangible assets
(9,241
)
 

 
(9,664
)
 

Proceeds from sale of precious metals

 

 
11,917

 
1,610

Investment in precious metals

 

 

 
(1,633
)
Disbursement of note receivable
(200
)
 
(250
)
 
(700
)
 
(868
)
Investment in equity securities
(29,570
)
 
(3,188
)
 
(31,570
)
 
(3,938
)
Acquisitions of businesses, net of cash acquired
(12,912
)
 

 
(12,912
)
 
28

Expenditures for fixed assets, including internal-use software and website development
(12,749
)
 
(16,450
)
 
(19,885
)
 
(45,883
)
Other
22

 
(115
)
 
207

 
(118
)
Net cash used in investing activities
(64,650
)
 
(20,003
)
 
(62,607
)
 
(50,802
)
Cash flows from financing activities:
 

 
 

 
 

 
 

Payments on capital lease obligations
(248
)
 

 
(331
)
 

Payments on interest swap

 

 
(1,535
)
 
(224
)
Proceeds from finance obligations

 

 

 
5,325

Payments on finance obligations

 
(1,622
)
 
(13,694
)
 
(2,731
)
Proceeds from long-term debt

 

 
40,000

 
12,621

Payments on long-term debt
(40,000
)
 
(469
)
 
(85,297
)
 
(469
)
Payments of preferred dividends


 

 
(109
)
 

Proceeds from exercise of stock options

 
654

 
10

 
1,473

Proceeds from rights offering, net of offering costs

 

 

 
7,591

Proceeds from issuance and exercise of stock warrants
50,587

 

 
157,049

 

Proceeds from security token offering, net of offering costs

78,442

 

 
79,347

 

Purchase of treasury stock

 
(10,000
)
 

 
(10,000
)
Payments of taxes withheld upon vesting of restricted stock
(4,526
)
 
(1,085
)
 
(4,670
)
 
(1,323
)
Payment of debt issuance costs

 
(251
)
 
(419
)
 
(251
)
Net cash provided by (used in) financing activities
84,255

 
(12,773
)
 
170,351

 
12,012

Net increase (decrease) in cash, cash equivalents and restricted cash
(50,974
)
 
(79,033
)
 
48,201

 
(18,528
)
Cash, cash equivalents and restricted cash, beginning of period
203,670

 
183,528

 
104,495

 
123,023

Cash, cash equivalents and restricted cash, end of period
$
152,696

 
$
104,495

 
$
152,696

 
$
104,495

Continued on the following page
Overstock.com, Inc.
Consolidated Statements of Cash Flows (Unaudited)
(Continued)
(in thousands)
 
Six months ended
 June 30,
 
Twelve months ended
 June 30,
 
2018
 
2017
 
2018
 
2017
Supplemental disclosures of cash flow information:
 

 
 

 
 

 
 

Cash paid during the period:
 

 
 

 
 

 
 

Interest paid, net of amounts capitalized
$
1,113

 
$
1,308

 
$
2,745

 
$
2,238

Income taxes paid, net of refunds
7

 
183

 
311

 
977

Non-cash investing and financing activities:
 

 
 

 
 

 
 

Fixed assets, including internal-use software and website development, costs financed through accounts payable and accrued liabilities
$
735

 
$
690

 
$
735

 
$
690

Equipment acquired under capital lease obligations

 

 
1,421

 

Capitalized interest cost

 

 

 
27

Change in fair value of cash flow hedge

 
(100
)
 
(1,638
)
 
(3,044
)
Note receivable converted to equity investment
200

 
869

 
699

 
3,719

Acquisition of assets through stock issuance
2,930

 

 
2,930

 


See accompanying notes to unaudited consolidated financial statements.


7


Overstock.com, Inc.
Notes to Unaudited Consolidated Financial Statements
 
1. BASIS OF PRESENTATION
 
Overstock.com, Inc. is an online retailer and advancer of blockchain technology. As used herein, "Overstock," "the Company," "we," "our" and similar terms include Overstock.com, Inc. and its majority-owned subsidiaries, unless the context indicates otherwise.

We have prepared the accompanying unaudited consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC") regarding interim financial reporting. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) have been omitted in accordance with the rules and regulations of the SEC. 
These financial statements should be read in conjunction with our audited annual consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2017. The accompanying unaudited consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, which are, in our opinion, necessary for a fair presentation of results for the interim periods presented. The results of operations for the three and six months ended June 30, 2018 are not necessarily indicative of the results to be expected for any future period or the full fiscal year.

For purposes of comparability, the presentation of certain immaterial amounts in the prior periods have been conformed with the current period presentation. We retrospectively applied certain accounting standard updates as discussed in Note 2—Accounting Policies, Recently adopted accounting standards.

2. ACCOUNTING POLICIES
 
Principles of consolidation
 
The accompanying consolidated financial statements include our accounts and the accounts of our wholly-owned and majority-owned subsidiaries. All intercompany account balances and transactions have been eliminated in consolidation. The financial results of Verify Investor, LLC have been included in our consolidated financial statements from the date of acquisition on February 12, 2018. The financial results of Mac Warehouse, LLC have been included in our consolidated financial statements from the date of acquisition on June 25, 2018.
 
Use of estimates
 
The preparation of financial statements in conformity with generally accepted accounting principles requires estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent liabilities in our consolidated financial statements and accompanying notes. Estimates are used for, but not limited to, investment valuation, receivables valuation, revenue recognition, sales returns, incentive discount offers, inventory valuation, depreciable lives of fixed assets and internally-developed software, goodwill valuation, intangible asset valuation, equity investment valuation, income taxes, stock-based compensation, performance-based compensation, self-funded health insurance liabilities and contingencies. Although these estimates are based on our best knowledge of current events and actions that we may undertake in the future, actual results may differ materially from these estimates.

Cash equivalents

We classify all highly liquid instruments, including instruments with a remaining maturity of three months or less at the time of purchase, as cash equivalents. Cash equivalents were $31.2 million and $25.5 million at June 30, 2018 and December 31, 2017, respectively.
 
Restricted cash
 
We consider cash that is legally restricted and cash that is held as compensating balances for letter of credit arrangements and self-funded health insurance as restricted cash.
 

8


Fair value of financial instruments

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

Level 1—Quoted prices for identical instruments in active markets; 
Level 2—Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets; and
Level 3—Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.

Under GAAP, certain assets and liabilities are required to be recorded at fair value on a recurring basis. Our assets and liabilities that are adjusted to fair value on a recurring basis are cash equivalents, trading 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, and debt are carried at cost, which approximates their fair value.

The following tables summarize our assets and liabilities measured at fair value on a recurring basis using the fair value hierarchy as of June 30, 2018 and December 31, 2017 as indicated (in thousands):
p
Fair Value Measurements at June 30, 2018:
 
Total
 
Level 1
 
Level 2
 
Level 3
Assets:
 

 
 

 
 

 
 

Cash equivalents - Money market mutual funds
$
31,188

 
$
31,188

 
$

 
$

Investments in equity securities, at fair value
4,336

 
4,336

 

 

Trading securities held in a "rabbi trust" (1)
83

 
83

 

 

Total assets
$
35,607

 
$
35,607

 
$

 
$

Liabilities:
 

 
 

 
 

 
 

Deferred compensation accrual "rabbi trust" (2)
$
90

 
$
90

 
$

 
$

Total liabilities
$
90

 
$
90

 
$

 
$


 
Fair Value Measurements at December 31, 2017:
 
Total
 
Level 1
 
Level 2
 
Level 3
Assets:
 

 
 

 
 

 
 

Cash equivalents - Money market mutual funds
$
25,455

 
$
25,455

 
$

 
$

Trading securities held in a "rabbi trust" (1)
74

 
74

 

 

Total assets
$
25,529

 
$
25,529

 
$

 
$

Liabilities:
 

 
 

 
 

 
 

Deferred compensation accrual "rabbi trust" (2)
$
92

 
$
92

 
$

 
$

Total liabilities
$
92

 
$
92

 
$

 
$

 ___________________________________________
(1)
 — Trading securities held in a rabbi trust are included in Prepaids and other current assets and Other long-term assets, net in our consolidated balance sheets.
(2)
— Non-qualified deferred compensation in a rabbi trust is included in Accrued liabilities and Other long-term liabilities in our consolidated balance sheets.


9


Accounts receivable, net
 
Accounts receivable consist primarily of trade amounts due from customers in the United States, uncleared credit card transactions at period end, and carrier rebates. 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 $1.5 million and $1.3 million at June 30, 2018 and December 31, 2017, respectively.

Concentration of credit risk
 
Three banks held the majority of our cash and cash equivalents at June 30, 2018. Two banks held the majority of our cash and cash equivalents at December 31, 2017. 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.
 
Prepaid inventories, net
 
Prepaid inventories, net represent inventories paid for in advance of receipt.

Prepaids and other current assets

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

Cryptocurrencies

Cryptocurrency holdings are included in Prepaids and other current assets in our consolidated balance sheets and totaled $3.0 million and $1.5 million at June 30, 2018 and December 31, 2017, respectively. Cryptocurrency holdings are recorded at cost less impairment.

We recognize impairment on these assets caused by decreases in market value based upon Level 1 inputs. 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 $702,000 and $9.5 million for the three and six months ended June 30, 2018. There was no impairment on cryptocurrencies during the three and six months ended June 30, 2017.

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 and are also presented as an adjustment to reconcile Consolidated net loss to Net cash provided by (used in) operating activities in our consolidated statements of cash flows. Realized gains on sale of cryptocurrencies were $6.8 million and $8.3 million for the three and six months ended June 30, 2018. There were no realized gains or losses on sale of cryptocurrencies during the three and six months ended June 30, 2017.
 

10


Fixed assets, net
 
Fixed assets are recorded at cost and stated net of depreciation and amortization. Fixed assets are depreciated using the straight-line method over the estimated useful lives of the related assets or the term of the related capital lease, whichever is shorter, as follows: 
 
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 fixed assets is the capitalized cost of internal-use software and website development, including software used to upgrade and enhance our Website and processes supporting our business. We capitalize costs incurred during the application development stage of internal-use software and amortize these costs over the estimated useful life. Costs incurred related to design or maintenance of internal-use software are expensed as incurred.

During the three months ended June 30, 2018 and 2017, we capitalized $8.3 million and $2.4 million, respectively, of costs associated with internal-use software and website development, both developed internally and acquired externally. Amortization of costs for the same periods associated with internal-use software and website development was $3.2 million and $4.1 million, respectively. During the six months ended June 30, 2018 and 2017, we capitalized $10.6 million and $5.9 million, respectively, of costs associated with internal-use software and website development, both developed internally and acquired externally. Amortization of costs associated with internal-use software and website development was $6.7 million and $8.3 million, respectively.

Depreciation expense is classified within the corresponding operating expense categories on our consolidated statements of operations as follows (in thousands): 
 
Three months ended
 June 30,
 
Six months ended
 June 30,
 
2018
 
2017
 
2018
 
2017
Cost of goods sold - direct
$
83

 
$
75

 
$
167

 
$
158

Technology
5,296

 
6,177

 
10,772

 
12,862

General and administrative
1,023

 
959

 
2,044

 
1,889

Total depreciation, including internal-use software and website development
$
6,402

 
$
7,211

 
$
12,983

 
$
14,909


Total accumulated depreciation of fixed assets was $198.4 million and $186.4 million at June 30, 2018 and December 31, 2017, respectively.

Upon sale or retirement of assets, cost and related accumulated depreciation and amortization are removed from the balance sheet and the resulting gain or loss is reflected in our consolidated statements of operations.

Fixed assets included assets under capital leases were $1.8 million and $1.8 million at June 30, 2018 and December 31, 2017. Accumulated depreciation related to assets under capital leases was $722,000 and $458,000 at June 30, 2018 and December 31, 2017, respectively.

Depreciation expense of assets recorded under capital leases was $120,000 and $1.1 million for the three months ended June 30, 2018 and 2017, respectively, and $264,000 and $2.4 million for the six months ended June 30, 2018 and 2017, respectively.


11


Equity investments under ASC 321

At June 30, 2018, we held minority interests (less than 20%) in twelve privately held entities accounted for under ASC Topic 321, Investments - Equity Securities ("ASC 321"), which are included in Equity investments in our consolidated balance sheets. One of these equity investments is carried at fair value based on Level 1 inputs. See Fair value of financial instruments above. The remaining equity investments lack readily determinable fair values and therefore the investments are measured at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or similar equity securities of the same issuer. Dividends received are reported in current earnings. We review our investments individually for impairment by evaluating if events or circumstances have occurred that may indicate the fair value of the investment is less than its carrying value. If such events or circumstances have occurred, we estimate the fair value of the investment and recognize an impairment loss equal to the difference between the fair value of the investment and its carrying value. In such cases, the estimated fair value of the investment is determined using unobservable inputs including assumptions by the investee's management including quantitative information such as lower valuations in recently completed or proposed financings. These inputs are classified as Level 3. Because several of our investees are in the early startup or development stages, these entities are subject to potential changes in cash flows, valuation, and inability to attract new investors which may be necessary for the liquidity needed to support their operations.

The carrying amount of our investments under ASC 321 was approximately $18.6 million and $6.5 million at June 30, 2018 and December 31, 2017, respectively. We recognized unrealized gains of $1.8 million on investments carried at fair value during the three and six months ended June 30, 2018. There was no impairment loss during the six months ended June 30, 2018. We recognized $4.5 million impairment loss during the six months ended June 30, 2017. The impairment loss or other adjustment to our investments are recorded in Other expense, net on our consolidated statements of operations.

Equity method investments under ASC 323

At June 30, 2018, we held minority interests in six privately held entities accounted for as equity method investments under ASC Topic 323, Investments - Equity Method and Joint Ventures ("ASC 323"), which are included in Equity investments in our consolidated balance sheets. We can exercise significant influence, but not control, over the investees through either holding more than a 20% voting interest in the entity or through our representation on the entity's board of directors. Based on the nature of our ownership interests, we have variable interests in these entities. However, because we do not have power to direct the investee's activities and we are not the investee's primary beneficiary, we therefore do not consolidate the investee in our financial statements.

The carrying value of our equity method investments exceeded the amount of underlying equity in net assets of the investees and the difference was primarily related to goodwill and the fair value of intangible assets. The difference related to intangible assets is amortized over their estimated useful lives. We record our proportionate share of the net income or loss of the investee 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 the carrying value of the investment.

The carrying amount of our equity method investments was approximately $25.0 million and $6.5 million at June 30, 2018 and December 31, 2017, respectively, and the difference between the carrying value and the amount of underlying equity in net assets of each investee was not significant. Our proportionate share of the net income or loss of our equity method investees for the six months ended June 30, 2018 and the six months ended June 30, 2017 was not significant.

Noncontrolling interests

Our wholly-owned subsidiary, Medici Ventures, Inc. ("Medici Ventures"), conducts its primary business through its majority-owned subsidiary, tØ.com, Inc. ("tZERO"), which includes a financial technology company, two related registered broker dealers, a registered investment advisor, and an accredited investor verification company. tZERO and its consolidated subsidiaries are included in our consolidated financial statements. Intercompany transactions have been eliminated and the amounts of contributions and gains or losses that are attributable to the noncontrolling interests are disclosed in our consolidated financial statements.

On December 18, 2017, tZERO launched an offering (the "security token offering") of the right to acquire, if issued in the future, tZERO Preferred Equity Tokens (the "tZERO Security Token") through a Simple Agreement for Future Equity ("SAFE"). At June 30, 2018, the SAFEs were classified as equity by tZERO. At June 30, 2018, cumulative proceeds, net of withdrawals, from the security token offering totaling $95.9 million, have been classified as a component of noncontrolling

12


interest within our consolidated financial statements. As of June 30, 2018, tZERO has incurred $16.5 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. The security token offering closed on August 6, 2018 and we received an additional $7.5 million of proceeds, before deducting additional offering costs, prior to the close.

During the first quarter of 2018, tZERO purchased 65.8% of ES Capital Advisors, LLC ("ES Capital"), a registered investment advisor under the Investment Advisers Act of 1940, which was accounted for as an asset acquisition. tZERO operates the ES Capital business under the name tZERO Advisors and offers automated investment advisory services under the FinanceHub tab on our Website. tZERO also purchased 81.0% of Verify Investor, LLC, an accredited investor verification company. This transaction is described further in Note 3—Acquisitions, Goodwill, and Acquired Intangible Assets. These entities are included in our consolidated financial statements. Intercompany transactions have been eliminated and the amounts of contributions and gains or losses that are attributable to the noncontrolling interests are disclosed in our consolidated financial statements.

Leases
 
We account for lease agreements as either operating or capital leases depending on certain defined criteria. In certain of our lease agreements, we receive rent holidays and other incentives. We recognize lease costs on a straight-line basis without regard to deferred payment terms, such as rent holidays, that defer the commencement date of required payments. Additionally, tenant improvement allowances are amortized as a reduction in rent expense over the term of the lease. Leasehold improvements are capitalized at cost and amortized over the lesser of their expected useful life or the life of the lease, without assuming renewal features, if any, are exercised.

Treasury stock
 
We account for treasury stock under the cost method and include treasury stock as a component of stockholders' equity.
 
Goodwill

Goodwill represents the excess of the purchase price paid over the fair value of the net assets acquired in business combinations. Goodwill is not amortized but is tested for impairment at least annually. 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, then the amount of the impairment loss must be measured. The impairment loss, if any, is calculated by comparing the implied fair value of the goodwill to its carrying amount. In calculating the implied fair value of goodwill, the fair value of the reporting unit is allocated to the other assets and liabilities within the reporting unit based on estimated fair value. The excess of the fair value of a reporting unit over the amount allocated to its other assets and liabilities is the implied fair value of goodwill. An impairment loss is recognized when the carrying amount of goodwill exceeds its implied fair value.
 
We test for impairment of goodwill annually or when we deem that a triggering event has occurred. There were no impairments to goodwill recorded during the six months ended June 30, 2018 and 2017.

For six months ended June 30, 2018, we recognized $7.4 million in goodwill related to a business acquisition as described in Note 3—Acquisitions, Goodwill, and Acquired Intangible Assets. The change in goodwill relates to a non-reportable segment, included in Other as described in Note 9—Business Segments.

Intangible assets other than goodwill

We capitalize and amortize intangible assets other than goodwill over their estimated useful lives unless such lives are indefinite. Intangible assets other than goodwill acquired separately from third-parties are capitalized at cost while such assets acquired as part of a business combination are capitalized at their acquisition-date fair value. Indefinite lived intangible assets include intellectual property and investment advisor licenses purchased in connection with our tZERO Advisors and Medici Ventures' portfolio company in the blockchain property titling businesses. Certain licenses are subject to annual renewal terms with immaterial fees which are expensed as incurred. Indefinite-lived intangible assets are tested for impairment annually or

13


more frequently when events or circumstances indicate that the carrying value more likely than not exceeds its fair value. In addition, we routinely evaluate the remaining useful life of intangible assets not being amortized to determine whether events or circumstances continue to support an indefinite useful life, including any legal, regulatory, contractual, competitive, economic, or other factors that may limit their useful lives. Definite lived intangible assets are amortized using the straight-line method of amortization over their useful lives, with the exception of certain intangibles (such as acquired technology, customer relationships, and trade names) which are amortized using an accelerated method of amortization based on cash flows. 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):
 
June 30,
2018
 
December 31,
2017
Intangible assets subject to amortization, gross (1)
$
28,004

 
$
17,779

Less: accumulated amortization of intangible assets subject to amortization
(12,494
)
 
(10,442
)
Intangible assets subject to amortization, net
15,510

 
7,337

Intangible assets not subject to amortization
10,833

 

Total intangible assets, net
$
26,343

 
$
7,337

___________________________________________
(1)
 — At June 30, 2018, the weighted average remaining useful life for intangible assets subject to amortization, excluding fully amortized intangible assets, was 5.70 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
 June 30,
 
Six months ended
 June 30,
 
2018
 
2017
 
2018
 
2017
Technology
$
895

 
$
905

 
$
1,650

 
$
1,810

Sales and marketing
204

 
20

 
323

 
40

General and administrative
34

 
21

 
78

 
41

Total amortization
$
1,133

 
$
946

 
$
2,051

 
$
1,891


Estimated amortization expense for the next five years is: $2.9 million for the remainder of 2018, $5.1 million in 2019, $2.7 million in 2020, $2.4 million in 2021, $1.1 million in 2022, and $1.3 million thereafter.

Impairment of long-lived assets
 
We review property and equipment and other long-lived assets, including amortizable intangible assets other than goodwill, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. Recoverability is measured by comparison of the assets' carrying amount to future undiscounted net cash flows the asset group is expected to generate. Cash flow forecasts are based on trends of historical performance and management's estimate of future performance, giving consideration to existing and anticipated competitive and economic conditions. If such asset group is considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds their fair values. There were no impairments to long-lived assets recorded during the six months ended June 30, 2018 and 2017.

Other long-term assets, net
 
Other long-term assets, net consist primarily of long-term prepaid expenses.


14


Revenue recognition
 
We derive our revenue primarily from retail merchandise sales on our Website. We also earn revenue from advertising on our Website and from other sources. We have organized our operations into two principal reporting segments based on the primary source of revenue: (i) direct revenue and (ii) partner and other revenue. Net revenue from contracts with customers is further disaggregated by Retail and Other net revenue as disclosed in Note 9—Business Segments.

On January 1, 2018, we adopted ASU 2014-09, Revenue from Contracts with Customers (Topic 606). See Recently adopted accounting standards, below. Under Topic 606, revenue is recognized when control of the product passes to the customer or the service is provided and is recognized in an amount that reflects the expected consideration to be received in exchange for such goods or services. Shipping and handling is considered a fulfillment activity 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. 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.

 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). For sales in our partner business, we generally receive payments from our customers before our payments to our suppliers are due.

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. Currently, the majority of both direct revenue and partner revenue is recorded on a gross basis.

Revenue related to merchandise sales is recognized upon transfer of control to our customers which generally occurs upon delivery of the product to our customers. 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.
 
During the six months ended June 30, 2018, we recognized $36.8 million of net revenue included in Deferred revenue at December 31, 2017.

The allowance for returns was $15.5 million and $17.4 million at June 30, 2018 and December 31, 2017, respectively.

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.
 
Direct revenue
 
Direct revenue is derived from merchandise sales of our owned inventory to individual consumers and businesses. Direct revenue comes from merchandise sales that occur primarily through our Website, but may also occur through offline and other channels.
 
Partner and other revenue
 
Partner and other revenue is derived primarily from merchandise sales of inventory sourced through our partners which are generally shipped directly to our consumers and businesses. Through contractual terms with our partners, we have the

15


ability to control the promised goods or services and as a result record the majority of our partner revenue on a gross basis. Partner and other revenue comes from merchandise sales that occur primarily through our Website, but may also occur through offline and other channels, including through our broker dealer subsidiaries in our Other segment.

Club O loyalty program
 
We have a customer loyalty program called Club O Gold for which we sell annual memberships. For Club O Gold memberships, we record membership fees as deferred revenue, and we recognize revenue ratably over the membership period. The Club O Gold loyalty program allows members to earn Club O Reward dollars for qualifying purchases made on our Website. We also have a co-branded credit card program which provides Club O Gold members additional reward dollars for purchases made on our Website, and from other merchants.

Earned Club O Reward dollars may be redeemed on future purchases made through our Website. We recognize revenue for Club O Reward dollars when customers redeem such rewards as part of a purchase on our Website. We account for these transactions as multiple element arrangements and allocate the transaction price to separated performance obligations using their relative fair values. We include the fair value of reward dollars earned in deferred revenue at the time the reward dollars are earned. Club O Reward dollars expire 90 days after the customer's Club O Gold membership expires. We recognize estimated reward dollar breakage, to which we expected 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 revenue in our consolidated statements of operations rather than as a component of Other expense, net. Breakage included in revenue was $1.3 million and $3.0 million for the three and six months ended June 30, 2018. We also recognized a cumulative adjustment that reduced Accumulated deficit by approximately $5.0 million upon adoption related to the unredeemed portion of our gift cards and loyalty program rewards.

Our total deferred revenue related to the outstanding Club O Reward dollars was $6.5 million and $8.7 million at June 30, 2018 and December 31, 2017, respectively. The timing of revenue recognition of these reward dollars is driven by actual customer activities, such as redemptions and expirations.

Advertising Revenue

Advertising revenues is 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 net revenue when the advertising services are rendered. Advertising revenues were less than 2% of total net revenues for all periods presented.

Cost of goods sold
 
Cost of goods sold includes product costs, warehousing costs, outbound shipping costs, handling and fulfillment costs, customer service costs and credit card fees, and is recorded in the same period in which related revenues have been recorded.

Cost of goods sold, including product cost and other costs and fulfillment and related costs are as follows (in thousands):
 
Three months ended
 June 30,
 
Six months ended
 June 30,
 
2018
 
2017
 
2018
 
2017
Total revenue, net
$
483,133

 
100
%
 
$
432,024

 
100
%
 
$
928,464

 
100
%
 
$
864,459

 
100
%
Cost of goods sold
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Product costs and other cost of goods sold
371,841

 
77
%
 
329,346

 
76
%
 
705,361

 
76
%
 
656,150

 
76
%
Fulfillment and related costs
19,549

 
4
%
 
18,507

 
4
%
 
37,491

 
4
%
 
37,231

 
4
%
Total cost of goods sold
391,390

 
81
%
 
347,853

 
81
%
 
742,852

 
80
%
 
693,381

 
80
%
Gross profit
$
91,743

 
19
%
 
$
84,171

 
19
%
 
$
185,612

 
20
%
 
$
171,078

 
20
%
 

16


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 $88.9 million and $39.5 million during the three months ended June 30, 2018 and 2017, respectively. For the six months ended June 30, 2018 and 2017, advertising expenses totaled $157.8 million and $73.3 million, respectively. Prepaid advertising (included in Prepaids and other current assets in the accompanying consolidated balance sheets) was $992,000 and $987,000 at June 30, 2018 and December 31, 2017, respectively.
 
Stock-based compensation
 
We measure compensation expense for all outstanding unvested share-based awards at fair value on the date of grant and recognize compensation expense over the service period for awards at the greater of a straight-line basis or on an accelerated schedule when vesting of the share-based awards exceeds a straight-line basis. When an award is forfeited prior to the vesting date, we recognize an adjustment for the previously recognized expense in the period of the forfeiture. See Note 8—Stock-Based Awards.

Self-funded health insurance
 
We have a partially self-funded health insurance plan for our employees. We maintain a stop-loss insurance policy through an insurance company that limits our losses both on a per employee basis and an aggregate basis. Although we intend to maintain this plan indefinitely, we may terminate, modify, suspend, or discontinue this plan at any time and for any reason.
 
We are responsible for estimating our liability for unpaid costs of insured events that have occurred, which includes known cases on a case-by-case basis, and also for events that have occurred, but have not yet been reported. The accrued liability related to the self-funded health insurance plan was $1.4 million and $1.0 million at June 30, 2018 and December 31, 2017, respectively, and is included in Accrued liabilities in the accompanying consolidated balance sheets. Actual claims may differ from the amount accrued and any difference could be significant.
 
Loss contingencies
 
In the normal course of business, we are involved in legal proceedings and other potential loss contingencies. We accrue a liability for such matters when it is probable that a loss has been incurred and the amount can be reasonably estimated. When only a range of probable loss can be estimated, the most probable amount in the range is accrued. If no amount within this range is a better estimate than any other amount within the range, the minimum amount in the range is accrued. We expense legal fees as incurred (see Note 6—Commitments and Contingencies).

Income taxes

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

Our quarterly tax provision and our quarterly estimate of our annual effective tax rate are subject to significant variations due to several factors including variability in predicting our pre-tax and taxable income and the mix of jurisdictions to which those items relate, relative changes 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

17


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 June 30, 2018 as a significant piece of objective negative evidence. We intend to continue maintaining a valuation allowance on our net deferred tax assets until there is sufficient evidence to support the reversal of all or some portion of these allowances. The amount of the deferred tax asset considered realizable could be adjusted if objective negative evidence in the form of cumulative losses is no longer present and additional weight may be given to subjective evidence such as long-term projections for growth. We will continue to monitor the need for a valuation allowance against our remaining deferred tax assets on a quarterly basis.

Tax laws and regulations themselves are subject to change as a result of changes in fiscal policy, changes in legislation, the evolution of regulations, and court rulings. On December 22, 2017, the President signed into law Public Law No. 115-97, commonly referred to as the Tax Cuts and Jobs Act ("TCJA"), following its passage by the United States Congress. The TCJA made significant changes to U.S. federal income tax laws, mostly effective for tax years beginning after December 31, 2017. Among many other changes, the new law lowers the corporate tax rate from 35% to 21% for tax years beginning in 2018, transitions U.S international taxation from a worldwide tax system to a territorial system, and includes a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings as of December 31, 2017. Staff Accounting Bulletin No. 118 ("SAB 118") was issued to address the application of US GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the TCJA. In accordance with SAB 118, we calculated our best estimate of the impact of the TCJA in accordance with our understanding of the law and guidance available and as a result recorded $25.3 million as additional income tax expense in the fourth quarter of 2017. The amount related to the remeasurement of certain deferred tax assets and liabilities, based on the rates at which they are expected to reverse in the future, was $25.2 million. Although the tax rate reduction was known, our analysis may also be affected by other analyses related to the TCJA, including, but not limited to, our calculation of the mandatory deemed repatriation of cumulative foreign earnings and the state tax effect of adjustments made to federal temporary differences, which are uncertain at this time. The provisional amount related to the one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings was $41,000.

As of the date of this filing, our accounting for the TCJA has not been finalized. As noted at year-end, however, we were able to reasonably estimate certain effects and, therefore, recorded adjustments associated with the remeasurement of certain deferred tax assets and liabilities and the mandatory deemed repatriation of cumulative foreign earnings. We have not made any additional measurement-period adjustments related to these items during the quarter because additional time is needed to complete our analysis of the TCJA, collect and prepare necessary data, and interpret any additional guidance issued by the U.S. Treasury Department, Internal Revenue Service ("IRS"), FASB, and other standard-setting and regulatory bodies. Any subsequent adjustment to these amounts will be recorded to tax expense in the quarter when the analysis is complete. Our accounting for the tax effects of the TCJA will be completed during the measurement period, which should not extend beyond one year from the enactment date.

The TCJA includes a provision to tax global intangible low-taxed income ("GILTI") of foreign subsidiaries beginning in 2018. Under GAAP, we can make an accounting policy election to either treat taxes due on the GILTI inclusion as a current period expense, or factor such amounts into our measurement of deferred taxes. Due to the complexity of the new GILTI tax rules, we are continuing to evaluate this provision of the TCJA and the application of GAAP and we have not yet elected an accounting policy nor have we recorded any potential deferred tax effects related to GILTI in our financial statements. We have, however, included the estimated 2018 current GILTI impact in our annual effective tax rate for 2018. We expect to complete our accounting within the prescribed measurement period.

The TCJA included a mandatory deemed repatriation of cumulative foreign earnings for the year ended December 31, 2017, for which we accrued provisional tax expense. However, we would still need to accrue and pay various other taxes on this amount if repatriated. We are currently analyzing our global working capital and cash requirements and the potential tax liabilities attributable to a repatriation, but we have yet to determine whether we plan to change our prior assertion and repatriate earnings. Accordingly, we have not recorded any deferred taxes attributable to our investments in our foreign subsidiaries. We will record the tax effects of any change in our prior assertion in the period that we complete our analysis and are able to make a reasonable estimate, no later than December 2018.

We are subject to taxation in the United States and several state and foreign jurisdictions. Tax years beginning in 2013 are subject to examination by taxing authorities, although net operating loss and credit carryforwards from all years are subject to examinations and adjustments for at least three years following the year in which the attributes are used. We are under audit by the Ireland Revenue Agency for the calendar year 2016. We expect the audit to continue during 2018.

18



Net loss per share
 
In 2016, we issued shares of our Blockchain Voting Series A Preferred Stock and our Voting Series B Preferred Stock (collectively the "preferred shares"). These shares are considered participating securities, and as a result, net loss per share is calculated using the two-class method. Under this method, we give effect to preferred dividends and then allocate remaining net loss attributable to our stockholders to both common shares and participating securities (based on the percentages outstanding) in determining net loss per common share.

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

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

The following table sets forth the computation of basic and diluted net loss per common share for the periods indicated (in thousands, except per share data):
 
Three months ended
 June 30,
 
Six months ended
 June 30,
 
2018
 
2017
 
2018
 
2017
Net loss attributable to stockholders of Overstock.com, Inc.
$
(64,911
)
 
$
(7,499
)
 
$
(115,820
)
 
$
(13,402
)
Less: Preferred stock dividends - declared and accumulated
27

 
27

 
53

 
55

Undistributed loss
(64,938
)
 
(7,526
)
 
(115,873
)
 
(13,457
)
Less: Undistributed loss allocated to participating securities
(1,495
)
 
(204
)
 
(2,683
)
 
(364
)
Net loss attributable to common shares
$
(63,443
)
 
$
(7,322
)
 
$
(113,190
)
 
$
(13,093
)
Net loss per common share—basic:
 

 
 

 
 

 
 

Net loss attributable to common shares—basic
$
(2.20
)
 
$
(0.29
)
 
$
(3.94
)
 
$
(0.52
)
Weighted average common shares outstanding—basic
28,903

 
24,996

 
28,736

 
25,035

Effect of dilutive securities:
 

 
 

 
 

 
 

Stock options and restricted stock awards

 

 

 

Weighted average common shares outstanding—diluted
28,903

 
24,996

 
28,736

 
25,035

Net loss attributable to common shares—diluted
$
(2.20
)
 
$
(0.29
)
 
$
(3.94
)
 
$
(0.52
)
 
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
 June 30,
 
Six months ended
 June 30,
 
2018
 
2017
 
2018
 
2017
Stock options and restricted stock units
550

 
103

 
617

 
151

Common shares issuable under stock warrant

 

 
42

 



19


Warrants

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

Recently adopted accounting standards

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. We adopted the new standard on January 1, 2018 with a cumulative adjustment that reduced Accumulated deficit by approximately $5.0 million as opposed to retrospectively adjusting prior periods. The adjustment primarily relates to the unredeemed portion of our gift cards and loyalty program rewards, which we will recognize over the expected redemption period, rather than waiting until the likelihood of redemption becomes remote or the rewards expire. We have also updated revenue disclosures in the notes to our financial statements as required under the new standard.

The implementation did not impact our gross and net recognition for our revenue transactions. In addition, we continue to recognize revenue related to merchandise sales upon delivery to our customers. However, we now present breakage on our Club O Rewards and gift cards in Partner and other revenue in our consolidated statement of operations rather as a component of Other expense, net. Breakage revenue included in revenue was $1.3 million and $3.0 million for the three and six months ended June 30, 2018.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, which requires equity investments previously recognized under the cost method to be measured at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or similar investment of the same issuer. We adopted the changes under the new standard on January 1, 2018 on a prospective basis. The implementation of ASU 2016-01 did not have a material impact on our consolidated financial statements and related disclosures.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, which requires amounts generally described as restricted cash be included with cash and cash equivalents when reconciling beginning-of-period and end-of-period total amounts shown in the statement of cash flows. We adopted the new standard on January 1, 2018 retrospectively to each period presented in the statement of cash flows. The implementation of ASU 2016-18 did not have a material impact on our consolidated financial statements and related disclosures.

Recently issued accounting standards

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which, among other things, requires lessees to recognize most leases on their balance sheets related to the rights and obligations created by those leases. The new standard also requires new disclosures to help financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. The new standard becomes effective for us on January 1, 2019, with early adoption permitted. We plan to adopt this ASU beginning on January 1, 2019. The amendments in this update should be applied under a modified retrospective approach. We are evaluating the effect that ASU 2016-02 will have on our consolidated financial statements and related disclosures.

In June 2018, the FASB issued ASU 2018- 07, Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting; which aligns the measurement and classification guidance for share-based payments to nonemployees with the guidance for share-based payments to employees, with certain exceptions. Under the guidance, the measurement of equity-classified nonemployee awards will be fixed at the grant date. The new standard becomes effective for us on January 1, 2019, with early adoption permitted. We plan to adopt this ASU beginning on January 1, 2019. We do not expect the adoption to have a material impact on our consolidated financial statements and related disclosures.


20


3. ACQUISITIONS, GOODWILL, AND ACQUIRED INTANGIBLE ASSETS
    
Verify Investor, LLC

On February 12, 2018, tZERO acquired 81% of the total equity interests of Verify Investor, LLC, an accredited investor verification company, for a total purchase price of $12.0 million in cash. With the acquisition of the majority interest in Verify Investor, LLC, tZERO plans to integrate the software and technology of Verify Investor, LLC with the Token Trading System that tZERO plans to develop and deploy. We estimated the fair value of the acquired assets based on Level 3 inputs, which were unobservable (see Note 2—Accounting Policies, Fair value of financial instruments). These inputs included our estimate of future revenues, operating margins, discount rates, royalty rates and assumptions about the relative competitive environment.

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

The preliminary estimated fair values of the assets acquired and liabilities assumed at the acquisition date are as follows (in thousands):
Purchase Price
Fair Value
Cash paid, net of cash acquired
$
11,769

Allocation
 
Intangibles
$
7,400

Goodwill
7,360

Other assets acquired
3

Other liabilities assumed
(179
)
Total net assets, net of cash acquired
14,584

Less: noncontrolling interest
(2,815
)
Total net assets attributable to tZERO, net of cash acquired
$
11,769


The following table details the identifiable intangible assets acquired at their fair value and remaining useful lives as of June 30, 2018 (amounts in thousands):
Intangible Assets
Fair Value
 
Estimated Useful Life (in years)
Technology and developed software
$
6,300

 
10
Trade name
700

 
10
Customer relationships
400

 
0.5
Total acquired intangible assets at the acquisition date
7,400

 
 
Less: accumulated amortization of acquired intangible assets
(313
)
 
 
Total acquired intangible assets, net
$
7,087

 
 

The expense for amortizing intangible assets acquired in connection with this acquisition was $126,000 and $313,000 for the three and six months ended June 30, 2018, respectively.

Acquired intangible assets primarily include technology, trade name, and customer relationships. As described above, we determined the fair value of these assets using an income approach method to determine the present value of expected future cash flows for each identifiable intangible asset. This method was based on discount rates which incorporate a risk premium to take into account the risks inherent in those expected cash flows. The expected cash flows were estimated based on the company's historical operating results.


21


The acquired assets, liabilities, and associated operating results were consolidated into our financial statements at the acquisition dates, or the dates on which we obtained control of the acquired assets or interests.

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, for a total purchase price of $1.2 million in cash. With the acquisition of Mac Warehouse, LLC, we plan to integrate the inventory and business processes of Mac Warehouse, LLC in our direct retail business. We estimated the fair value of the acquired assets based on Level 3 inputs, which were unobservable (see Note 2—Accounting Policies, Fair value of financial instruments). These inputs included our estimate of future revenues, operating margins, discount rates, royalty rates and assumptions about the relative competitive environment.

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

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

Allocation
 
Accounts receivable, net
$
399

Inventories, net
1,772

Prepaids and other current assets
29

Fixed assets
154

Intangibles
2,763

Accounts payable
(682
)
Accrued liabilities
(223
)
Long-term debt, net
(3,069
)
Total net assets, net of cash acquired
$
1,143


Acquired intangible assets primarily include trade name and customer relationships which have an estimated useful life of 1.5 years.

The acquired assets, liabilities, and associated operating results were consolidated into our financial statements at the acquisition dates, or the dates on which we obtained control of the acquired assets or interests.

The following unaudited pro forma financial information presents our results as if the current year acquisitions of Mac Warehouse, LLC had occurred at the beginning of 2017 (amounts in thousands):
 
Three months ended
 June 30,
 
Six months ended
 June 30,
 
2018
 
2017
 
2018
 
2017
Total revenue
$
485,152

 
$
435,987

 
$
932,537

 
$
872,056

Consolidated net loss
$
(67,218
)
 
$
(7,514
)
 
$
(122,336
)
 
$
(13,694
)

The unaudited pro forma financial information is not intended to represent or be indicative of our consolidated results of operations that would have been reported had the acquisition been completed during the periods indicated, nor should it be taken as indicative of our future consolidated results of operations.


22


4. ACCRUED LIABILITIES

Accrued liabilities consist of the following (in thousands):
 
June 30,
2018
 
December 31,
2017
Accrued marketing expenses
$
42,311

 
$
25,959

Accounts payable accruals
19,847

 
16,614

Allowance for returns
15,539

 
17,391

Other accrued expenses
14,110

 
6,283

Accrued compensation and other related costs
12,814

 
10,716

Accrued freight
4,470

 
5,040

Accrued loss contingencies
641

 
608

Total accrued liabilities
$
109,732

 
$
82,611


5. BORROWINGS

High Bench Senior Credit Agreement

On June 25, 2018, we became party to a senior credit agreement, as amended, with High Bench-Mac Warehouse-Senior Debt, LLC ("High Bench Loan"), in connection with our acquisition of Mac Warehouse, LLC. Under the amended agreement, the loan carries an annual interest rate of 11.0% and a default rate of 18.0%. The High Bench Loan is subject to monthly interest only payments with the remaining principal amount and any then unpaid interest due and payable on April 18, 2020. The High Bench Loan is subject to mandatory prepayment under certain circumstances, and is prepayable at our election at any time without penalty or premium. There are no financial covenants associated the High Bench Loan. At June 30, 2018, our outstanding balance on the High Bench Loan was $3.1 million.

Letters of credit

At June 30, 2018 and December 31, 2017, letters of credit totaling $280,000 and $355,000, respectively, were issued on our behalf collateralized by compensating cash balances held at a bank, which are included in Restricted cash in our consolidated balance sheets.
 
Commercial purchasing card agreement
 
We have a commercial purchasing card (the "Purchasing Card") agreement. We use the Purchasing Card for business purpose purchasing and must pay it in full each month. At June 30, 2018, $877,000 was outstanding and $4.1 million was available under the Purchasing Card. At December 31, 2017, $822,000 was outstanding and $4.2 million was available under the Purchasing Card.

Capital lease

During the year ended December 31, 2017, we entered into a capital lease arrangement of computer equipment for $1.4 million. The arrangement will expire in 2020. At June 30, 2018, the outstanding balance under the capital lease was $1.1 million and is included in Other current liabilities, net and Other long-term liabilities on our consolidated balance sheets. Future payment obligations, including interest, under the capital lease are $248,000, $496,000 and $413,000 for the rest of 2018, 2019 and 2020, respectively.


23


6. COMMITMENTS AND CONTINGENCIES
 
Summary of future minimum lease payments for all operating leases

Minimum future payments under all operating leases as of June 30, 2018, are as follows (in thousands):
Payments due by period
 
 
2018 (Remainder)
 
$
3,525

2019
 
6,819

2020
 
4,379

2021
 
4,355

2022
 
4,439

Thereafter
 
16,356

 
 
$
39,873

 

Rental expense for operating leases totaled $1.7 million and $2.4 million for the three months ended June 30, 2018 and 2017, respectively, and $3.4 million and $4.9 million for the six months ended June 30, 2018 and 2017, respectively.

Legal proceedings and contingencies

From time to time, we are involved in litigation concerning consumer protection, employment, intellectual property, claims under the securities laws, and other commercial matters related to the conduct and operation of our business and the sale of products on our Website. In connection with such litigation, we may be 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 these matters could materially affect our business, results of operations, financial position, or cash flows. The nature of the loss contingencies relating to claims that have been asserted against us are described below.

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

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

In June 2013, William French filed suit against us and 46 other defendants under seal in the Superior Court of the State of Delaware. The filing was unsealed on March 24, 2014. French brought the action on Delaware's behalf for violations of Delaware's unclaimed property laws and for recovery of the unredeemed gift card value allegedly attributable to Delaware residents. French's complaint alleges that we, and other defendants, knowingly refused to fulfill obligations under Delaware's Abandoned Property Law by failing to report and deliver unclaimed gift card funds 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. The complaint seeks an injunction, monetary damages (including treble damages and penalties), and attorney's fees and costs. In the early stages of the case, we, along with others, filed motions to dismiss the case. The court dismissed one count, but allowed one count to remain. We filed two motions for summary judgment, along with other defendants, one of which was denied. The court has not yet ruled on the

24


second motion. The court has set tentative trial date commencing September 12, 2018. We intend to vigorously defend this action.

On June 21, 2018, the U.S. Supreme Court issued an opinion in our South Dakota sales tax case and ruled against us. The State of South Dakota sued us along with three other defendants in the Sixth Judicial Circuit Court of South Dakota alleging that U.S. constitutional law should be revised to permit South Dakota to require out-of-state e-commerce websites to collect and remit sales tax in South Dakota in accordance with South Dakota's sales tax statute. Under the U.S. Supreme Court’s ruling, the longstanding Quill Corp v. North Dakota sales tax case was overruled, and states may now require remote sellers to collect sales tax under certain circumstances. We began collecting sales tax in all 45 states that have sales tax. Pursuant to South Dakota’s statute, we are not required to pay sales tax retroactively. The U.S. Supreme Court’s opinion vacated and remanded the case back to the South Dakota Supreme Court for further proceedings.

On July 7, 2017, the State of Wyoming sued us along with five other defendants in the Second Judicial District Court of Wyoming. Wyoming alleged that U.S. constitutional law should be revised to permit Wyoming to require out-of-state e-commerce retailers to collect and remit sales tax in Wyoming in accordance with Wyoming's sales tax statute. After the U.S. Supreme Court’s ruling in our South Dakota case listed above, we began collecting sales tax in Wyoming. Wyoming’s statute does not require us to pay sales tax retroactively. The Wyoming court has not issued any subsequent rulings in the case.

On August 28, 2017, the State of Indiana sued us along with one other defendant in the Superior Court of Indiana, Marion County. Indiana alleged that U.S. constitutional law should be revised to permit Indiana to require out-of-state e-commerce retailers to collect and remit sales tax in Indiana in accordance with Indiana's sales tax statute. After the U.S. Supreme Court’s ruling in our South Dakota case listed above, we began collecting sales tax in Indiana. Indiana’s statute does not require us to pay sales tax retroactively. The Indiana court has not issued any subsequent rulings in the case.

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. We are cooperating fully with the SEC in connection with its investigation.

tZERO's broker-dealer subsidiaries are, and any broker-dealer subsidiaries that it acquires or forms in the future will be, subject to extensive regulatory requirements under federal and state laws and regulations and self-regulatory organization ("SRO") rules. Each of SpeedRoute and PRO Securities is registered with the SEC as a broker-dealer under the Exchange Act and in the states in which it conducts securities business and is a member of FINRA and other SROs. In addition, PRO Securities owns and operates the PRO Securities ATS, which is registered with the SEC as an alternative trading system. Each of SpeedRoute and PRO Securities is subject to regulation, examination 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. On February 22, 2018, the SEC's New York Regional Office notified PRO Securities that it is conducting an examination of PRO Securities, and on March 6, 2018 the SEC's Boston Regional Office notified tZERO Advisors that it is conducting an examination of tZERO Advisors.
 
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 discussions with regulatory authorities. While certain of the discussions have been relatively informal, tZERO's broker-dealer subsidiaries have also received and responded to several written inquiries from FINRA relating to such projects. While tZERO considers these continuing inquiries to be ordinary course in light of the non-traditional nature of tZERO's distributed ledger projects, any failure by tZERO's broker-dealer subsidiaries to satisfy their regulatory authorities that they are in compliance with all applicable rules and regulations could have a material adverse effect on tZERO and on us.
 
In addition, in December 2017, SpeedRoute received a letter from FINRA stating that the Department of Enforcement at FINRA has received a referral from the staff of FINRA's Department of Market Regulation relating to rules applicable to supervision and required supervisory procedures for review of certain potential trading activity, such as pre-arranged trades or wash trades. In addition, SpeedRoute continues to have discussions with FINRA about several matters, including a matter related to potential violations of FINRA rules relating to Order Audit Trail System reporting and trading practice matters, and has received document requests from FINRA in connection with certain ongoing matters. SpeedRoute has received and responded to inquiries from FINRA and the SEC. In an unrelated matter, SpeedRoute and PRO Securities have been named in a FINRA investigatory matter in which FINRA has conducted on the record interviews of certain senior officers of SpeedRoute and PRO Securities, who are also senior officers of tZERO.

25



On March 29, 2018, a purported securities class action lawsuit was filed against us and two of our executives in the United States District Court in the Central District of Utah, alleging violations of the Securities Exchange Act of 1934 ("Exchange Act"). On April 6, 2018, a substantially similar lawsuit was filed in the same court also naming the Company, and two of our executives as defendants, bringing the same claims under the Exchange Act, and seeking substantially similar relief. On June 20, 2018, the Court consolidated the two cases and appointed a lead plaintiff in the case. On August 7, 2018, the plaintiffs voluntarily dismissed the lawsuit without prejudice.

We have recognized liabilities for contingencies deemed probable and estimable totaling $641,000 and $608,000 at June 30, 2018 and December 31, 2017, which are included in Accrued liabilities in our consolidated balance sheets. It is reasonably possible that the actual losses may exceed our accrued liabilities.
 
7. INDEMNIFICATIONS AND GUARANTEES
 
During our normal course of business, we have made certain indemnities, commitments, and guarantees under which we may be required to make payments in relation to certain transactions. These indemnities include, but are not limited to, indemnities to various lessors in connection with facility leases for certain claims arising from such facility or lease, the environmental indemnity we entered into in favor of the lenders under our prior loan agreements, customary indemnification arrangements in underwriting agreements and similar agreements, and indemnities to our directors and officers to the maximum extent permitted under the laws of the State of Delaware. The duration of these indemnities, commitments, and guarantees varies, and in certain cases, is indefinite. In addition, the majority of these indemnities, commitments, and guarantees do not provide for any limitation of the maximum potential future payments we could be obligated to make. As such, we are unable to estimate with any reasonableness our potential exposure under these items. We have not recorded any liability for these indemnities, commitments, and guarantees in the accompanying consolidated balance sheets. We do, however, accrue for losses for any known contingent liability, including those that may arise from indemnification provisions, when future payment is both probable and reasonably estimable.

8. STOCK-BASED AWARDS
 
We have equity incentive plans that provide for the grant to employees and board members of stock-based awards, including stock options and restricted stock. Stock-based compensation expense was as follows (in thousands):
 
Three months ended
 June 30,
 
Six months ended
 June 30,
 
2018
 
2017
 
2018
 
2017
Overstock restricted stock awards
$
2,700

 
$
1,045

 
$
5,084

 
$
1,985

Medici Ventures stock options
123

 

 
134

 

tZERO equity awards
150

 

 
4,190

 

Total stock-based compensation expense
$
2,973

 
$
1,045

 
$
9,408

 
$
1,985


Overstock restricted stock awards

The Overstock.com, Inc. Amended and Restated 2005 Equity Incentive Plan provides for the grant of restricted stock units and other types of equity awards of the Company. The 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.


26


The following table summarizes restricted stock award activity during the six months ended June 30, 2018 (in thousands):
 
Six months ended
 June 30, 2018
 
Units
 
Weighted
Average
Grant Date
Fair Value
Outstanding—beginning of year
540

 
$
17.05

Granted at fair value
346

 
70.06

Vested
(222
)
 
17.30

Forfeited
(12
)
 
47.76

Outstanding—end of period
652

 
$
44.53


Medici Ventures stock options
 
The Medici Ventures, Inc. 2017 Stock Option Plan provides for the grant of options to employees and directors of and consultants to Medici Ventures to acquire up to 10% of the authorized shares of Medici Ventures' common stock. During the six months ended June 30, 2018, Medici Ventures granted 19,700 stock options with a cumulative grant date fair value of $1.7 million which vest over a three year period. During the year ended December 31, 2017, Medici Ventures granted 74,750 stock options to certain Medici Ventures and Overstock employees with a cumulative grant date fair value of $91,000 which will be expensed on a straight-line basis over the vesting period of three years.

tZERO equity awards

The tZERO.com 2017 Equity Incentive Plan provides for grant of options to employees and directors of and consultants to tZERO to acquire up to 5% of the authorized shares of tZERO’s common stock. In January 2018, tZERO granted stock awards under the equity incentive plan for an aggregate of approximately 1.0% of tZERO’s common stock all of which vested on January 23, 2018. In January 2018, tZERO recognized $4.0 million in compensation expense associated with these awards, which was the entire estimated fair value at the grant date. Accordingly, there is no expense to be recognized in future periods related to these awards. As a result of these vested awards, our indirect ownership interest in tZERO was reduced from 81% to approximately 80%. During the six months ended June 30, 2018, tZERO granted awards to acquire 382 shares of its stock with a cumulative grant date fair value of $3.1 million which will be expensed on a straight-line basis over the vesting period of two to three years. No awards were issued during the year ended December 31, 2017.
 
9. BUSINESS SEGMENTS

Segment information has been prepared in accordance with ASC Topic 280 Segment Reporting. We determined our segments based on how we manage our business, which, in our view, consists primarily of our Retail and Medici businesses. Our Retail business consists of our Direct and Partner reportable segments. We use gross profit as the measure to determine our reportable segments because there is not discrete financial information available below gross profit for our Direct and Partner segments. As a result, our Medici business is not significant as compared to our Direct and Partner segments and is included in Other. Our Other segment consists of Medici Ventures and its subsidiaries, including tZERO. Although our Direct and Partner segments both relate to our Retail business, we do not combine these segments because they have dissimilar economic characteristics, such as gross profit margins. We do not allocate assets between our segments for our internal management purposes, and as such, they are not presented here. There were no significant inter-segment sales or transfers during the three and six months ended June 30, 2018 and 2017.


27


The following table summarizes information about reportable segments for three and six months ended June 30, 2018 and 2017 (in thousands):

 
Three months ended
 June 30,
 
Direct
 
Partner
 
Retail Total
 
Other
 
Total
2018
 

 
 

 
 
 
 
 
 

Revenue, net
$
14,715

 
$
462,968

 
$
477,683

 
$
5,450

 
$
483,133

Cost of goods sold
14,672

 
372,580

 
387,252

 
4,138

 
391,390

Gross profit
$
43

 
$
90,388

 
$
90,431

 
$
1,312

 
$
91,743

Operating expenses
 

 
 

 
149,437

 
8,842

 
158,279

Interest and other income (expense), net (1)
 

 
 

 
1,624

 
(1,031
)
 
593

Pre-tax loss
 
 
 
 
(57,382
)
 
(8,561
)
 
(65,943
)
Provision for (benefit from) income taxes
 

 
 

 
(40
)
 
13

 
(27
)
Net loss (2)
 

 
 

 
$
(57,342
)
 
$
(8,574
)
 
$
(65,916
)
 
 
 
 
 
 
 
 
 
 
2017
 

 
 

 
 
 
 
 
 

Revenue, net
$
22,099

 
$
405,856

 
$
427,955

 
$
4,069

 
$
432,024

Cost of goods sold
21,147

 
323,892

 
345,039

 
2,814

 
347,853

Gross profit
$
952

 
$
81,964

 
$
82,916

 
$
1,255

 
$
84,171

Operating expenses
 

 
 

 
89,325

 
4,577

 
93,902

Interest and other income, net (1)
 

 
 

 
13

 

 
13

Pre-tax loss
 
 
 
 
(6,396
)
 
(3,322
)
 
(9,718
)
Benefit from income taxes
 

 
 

 
(176
)
 
(1,799
)
 
(1,975
)
Net loss (2)
 

 
 

 
$
(6,220
)
 
$
(1,523
)
 
$
(7,743
)

 
Six months ended
 June 30,
 
Direct
 
Partner
 
Retail Total
 
Other
 
Total
2018
 

 
 

 
 
 
 
 
 

Revenue, net
$
30,985

 
$
886,694

 
$
917,679

 
$
10,785

 
$
928,464

Cost of goods sold
29,444

 
705,388

 
734,832

 
8,020

 
742,852

Gross profit
$
1,541

 
$
181,306

 
$
182,847

 
$
2,765

 
$
185,612

Operating expenses