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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 March 31, 2020
 
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
https://cdn.kscope.io/edaf8ad5c51b1ad1f7591c9571a39e17-overstocklogoa14.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)
 

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading Symbol(s)
 
Name of each exchange on which registered
Common Stock, $0.0001 par value
 
OSTK
 
NASDAQ Global Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý   No o
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ý   No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
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

40,325,793 shares of the Registrant's common stock, par value $0.0001, outstanding on April 29, 2020.





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OVERSTOCK.COM, INC.
TABLE OF CONTENTS TO QUARTERLY REPORT ON FORM 10-Q
For the Quarterly Period Ended March 31, 2020
 
 
 
Page
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 

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Special Cautionary Note Regarding Forward-Looking Statements
This Report on Form 10-Q and the documents incorporated herein by reference, as well as other public documents and statements our officers and representatives may make from time to time, contain forward-looking statements within the meaning of the federal securities laws. These statements are therefore entitled to the protection of the safe harbor provisions of these laws. You can find many of these statements by looking for words such as "may," "would," "could," "should," "will," "expect," "anticipate," "predict," "project," "potential," "continue," "contemplate," "seek," "assume," "believe," "intend," "plan," "forecast," "goal," "estimate," or other similar expressions which identify these forward-looking statements. These forward-looking statements involve risks and uncertainties and relate to future events or our future financial or operating performance. These forward-looking statements are not historical facts, and are based on current expectations, estimates and projections about our industry and business, and on management's beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond our control. Accordingly, you are cautioned that any such forward-looking statements are not guarantees of future performance and are subject to assumptions, risks and uncertainties that are difficult to predict, and that actual results may be materially different from the results expressed or implied by any of our forward-looking statements.

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

the impact that the novel coronavirus, or COVID-19, pandemic may have on our business and the industries in which we and our subsidiaries and investee entities operate;
the impact that any litigation or regulatory matters could have on our business, financial condition, results of operations, and cash flows;
the possibility that we will be unable to generate sufficient cash flow from operations, raise any required additional capital or borrow additional funds, in the case of capital-raising or borrowing on acceptable terms, to successfully conduct our business or pursue our initiatives in a timely manner or at all;
any increases in the price of importing into the U.S. the types of merchandise we sell in our retail business or other supply chain challenges that limit our access to merchandise we sell in our retail business;
any difficulties we may encounter as a result of our reliance on third-parties that we do not control for the performance of critical functions material to our business;
any strategic transactions, restructurings or other changes we may make to our business;
any downturn in the U.S. housing industry or other changes in U.S. and global economic conditions or U.S. consumer spending, as a result of the COVID-19 pandemic or otherwise;
our exposure to cyber security risks, risks of data loss and other security breaches;
any challenges that result in the unavailability of our Website or reduced performance of our transaction systems;
the possibility that we are unable to protect our proprietary technology and to obtain trademark protection for our marks;
current claims of intellectual property infringement to which we are subject and additional infringement claims to which we may become subject in the future;
the commercial, competitive, technical, operational, financial, regulatory, legal, reputational, marketing and other obstacles we face in trying to create a profitable business from our blockchain initiatives, including tZERO;
the extensive regulatory regimes applicable to tZERO and the possibility that various tZERO subsidiaries or ventures do not receive the regulatory approval required to operate their anticipated businesses;
any losses or issues we may encounter as a consequence of accepting or holding bitcoin or other cryptocurrencies;
our inability to attract and retain key personnel;
the possibility that the cost of our current insurance policies may increase significantly or fail to adequately protect us as expected; and
the other risks described in this report or in our other public filings.

In evaluating all forward-looking statements, you should specifically consider the risks outlined above and in this Report, especially under the headings "Special Cautionary Note Regarding Forward-Looking Statements," "Risk Factors," "Legal Proceedings," and "Management's Discussion and Analysis of Financial Condition and Results of Operations." These factors may cause our actual results to differ materially from those contemplated by any forward-looking statement. Although we believe that our expectations reflected in the forward-looking statements are reasonable, we cannot guarantee or offer any assurance of future results, levels of activity, performance or achievements or other future events. Our forward-looking statements contained in this report speak only as of the date of this report and, except as required by law, we undertake no

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obligation to update forward-looking statements to reflect events or circumstances occurring after the date of this report or any changes in our expectations or any change in any events, conditions or circumstances on which any of our forward-looking statements are based.

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

Overstock.com, Inc.
Consolidated Balance Sheets (Unaudited)
(in thousands, except per share data)
 
March 31,
2020
 
December 31,
2019
Assets
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
141,260

 
$
112,266

Restricted cash
2,661

 
2,632

Marketable securities at fair value
3,838

 
10,308

Accounts receivable, net
37,664

 
24,728

Inventories
4,678

 
5,840

Prepaids and other current assets
20,783

 
21,589

Total current assets
210,884

 
177,363

Property and equipment, net
126,621

 
130,028

Intangible assets, net
10,837

 
11,756

Goodwill
27,120

 
27,120

Equity securities
53,840

 
42,043

Operating lease right-of-use assets
23,726

 
25,384

Other long-term assets, net
3,707

 
4,033

Total assets
$
456,735

 
$
417,727

Liabilities and Stockholders' Equity
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
74,254

 
$
75,416

Accrued liabilities
88,457

 
88,197

Deferred revenue
54,143

 
41,821

Operating lease liabilities, current
5,968

 
6,603

Other current liabilities
5,826

 
3,962

Total current liabilities
228,648

 
215,999

Long-term debt, net
43,739

 

Operating lease liabilities, non-current
20,409

 
21,554

Other long-term liabilities
2,284

 
2,319

Total liabilities
295,080

 
239,872

Commitments and contingencies (Note 6)
 
 
 
 
Continued on the following page


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Overstock.com, Inc.
Consolidated Balance Sheets (Unaudited)
(in thousands, except per share data)
 
March 31,
2020
 
December 31,
2019
Stockholders' equity:
 

 
 

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

 
 

Series A-1, issued and outstanding - 4,210 and 4,210 (including 4,085 shares declared as a stock dividend, not yet distributed)

 

Series B, issued and outstanding - 357 and 357

 

Common stock, $0.0001 par value, authorized shares - 100,000
 

 
 

Issued shares - 43,877 and 42,790
 

 
 

Outstanding shares - 40,326 and 39,464
4

 
4

Additional paid-in capital
768,055

 
764,845

Accumulated deficit
(596,723
)
 
(580,390
)
Accumulated other comprehensive loss
(564
)
 
(568
)
Treasury stock at cost - 3,551 and 3,326
(70,493
)
 
(68,807
)
Equity attributable to stockholders of Overstock.com, Inc.
100,279

 
115,084

Equity attributable to noncontrolling interests
61,376

 
62,771

Total stockholders' equity
161,655

 
177,855

Total liabilities and stockholders' equity
$
456,735

 
$
417,727


See accompanying notes to unaudited consolidated financial statements.

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Overstock.com, Inc.
Consolidated Statements of Operations (Unaudited)
(in thousands, except per share data)
 
 
Three months ended
March 31,
 
2020
 
2019
Revenue, net
 

 
 

Retail
$
339,598

 
$
362,625

Other
11,975

 
5,104

Total net revenue
351,573

 
367,729

Cost of goods sold


 


Retail
265,392

 
290,640

Other
10,341

 
3,965

Total cost of goods sold
275,733

 
294,605

Gross profit
75,840

 
73,124

Operating expenses
 

 
 

Sales and marketing
36,762

 
33,477

Technology
32,796

 
35,433

General and administrative
32,426

 
40,232

Total operating expenses
101,984

 
109,142

Operating loss
(26,144
)
 
(36,018
)
Interest income
272

 
403

Interest expense
(200
)
 
(127
)
Other income (expense), net
6,683

 
(6,272
)
Loss before income taxes
(19,389
)
 
(42,014
)
Provision for income taxes
176

 
878

Net loss
(19,565
)
 
(42,892
)
Less: Net loss attributable to noncontrolling interests
(3,232
)
 
(3,648
)
Net loss attributable to stockholders of Overstock.com, Inc.
$
(16,333
)
 
$
(39,244
)
Net loss per common share—basic:
 

 
 

Net loss attributable to common shares—basic
$
(0.40
)
 
$
(1.18
)
Weighted average common shares outstanding—basic
40,158

 
32,370

Net loss per common share—diluted:
 
 
 
Net loss attributable to common shares—diluted
$
(0.40
)
 
$
(1.18
)
Weighted average common shares outstanding—diluted
40,158

 
32,370


See accompanying notes to unaudited consolidated financial statements.

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Overstock.com, Inc.
Consolidated Statements of Comprehensive Loss (Unaudited)
(in thousands)
 
 
Three months ended
March 31,
 
2020
 
2019
Net loss
$
(19,565
)
 
$
(42,892
)
Other comprehensive income
 
 
 
Unrealized gain on cash flow hedges, net of expense for taxes of $0, and $0
4

 
4

Other comprehensive income
4

 
4

Comprehensive loss
(19,561
)
 
(42,888
)
Less: Comprehensive loss attributable to noncontrolling interests
(3,232
)
 
(3,648
)
Comprehensive loss attributable to stockholders of Overstock.com, Inc.
$
(16,329
)
 
$
(39,240
)

See accompanying notes to unaudited consolidated financial statements.


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Overstock.com, Inc.
Consolidated Statements of Changes in Stockholders' Equity (Unaudited)
(in thousands)
 
Three months ended
March 31,

2020
 
2019
Equity attributable to stockholders of Overstock.com, Inc.
 
 
 
Number of common shares issued
 
 
 
Balance at beginning of period
42,790

 
35,346

Common stock issued upon vesting of restricted stock
671

 
242

Common stock sold through ATM offering
416

 
2,214

Balance at end of period
43,877

 
37,802

Number of treasury stock shares
 
 
 
Balance at beginning of period
3,326

 
3,200

Common stock repurchased through business combination

 
47

Tax withholding upon vesting of restricted stock
225

 
72

Balance at end of period
3,551

 
3,319

Total number of outstanding shares
40,326

 
34,483

 
 
 
 
Common stock
$
4

 
$
3

 
 
 
 
Number of Series A preferred shares issued and outstanding

 
127

Number of Series A-1 preferred shares issued and outstanding (including 4,085 shares declared as a stock dividend, not yet distributed)
4,210

 

Number of Series B preferred shares issued and outstanding
357

 
355

 
 
 
 
Preferred stock
$

 
$

 
 
 
 
Additional paid-in capital
 
 
 
Balance at beginning of period
$
764,845

 
$
657,981

Stock-based compensation to employees and directors
3,268

 
3,985

Common stock sold through ATM offering, net

 
39,914

Other
(58
)
 
(3
)
Balance at end of period
$
768,055

 
$
701,877

 
 
 
 
Accumulated deficit
 
 
 
Balance at beginning of period
$
(580,390
)
 
$
(458,897
)
Net loss attributable to stockholders of Overstock.com, Inc.
(16,333
)
 
(39,244
)
Other

 
425

Balance at end of period
$
(596,723
)
 
$
(497,716
)
 
Continued on the following page

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Overstock.com, Inc.
Consolidated Statements of Changes in Stockholders' Equity (Unaudited)
(in thousands)
 
Three months ended
March 31,
 
2020
 
2019
Accumulated other comprehensive loss
 
 
 
Balance at beginning of period
$
(568
)
 
$
(584
)
Net other comprehensive income
4

 
4

Balance at end of period
$
(564
)
 
$
(580
)
Treasury stock
 
 
 
Balance at beginning of period
$
(68,807
)
 
$
(66,757
)
Common stock repurchased through business combination

 
(643
)
Tax withholding upon vesting of restricted stock
(1,686
)
 
(1,353
)
Balance at end of period
(70,493
)
 
(68,753
)
Total equity attributable to stockholders of Overstock.com, Inc.
$
100,279

 
$
134,831

 
 
 
 
Equity attributable to noncontrolling interests
 
 
 
Balance at beginning of period
$
62,771

 
$
78,960

Net loss attributable to noncontrolling interests
(3,232
)
 
(3,648
)
Other
1,837

 
(581
)
Total equity attributable to noncontrolling interests
$
61,376

 
$
74,731

 
 
 
 
Total stockholders' equity
$
161,655

 
$
209,562


See accompanying notes to unaudited consolidated financial statements.

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Overstock.com, Inc.
Consolidated Statements of Cash Flows (Unaudited)
(in thousands)
 
Three months ended
March 31,
 
2020
 
2019
Cash flows from operating activities:
 

 
 

Consolidated net loss
$
(19,565
)
 
$
(42,892
)
Adjustments to reconcile net loss to net cash used in operating activities:
 

 
 

Depreciation of property and equipment
6,646

 
6,575

Amortization of intangible assets
923

 
1,481

Non-cash operating lease cost
1,630

 
1,667

Stock-based compensation to employees and directors
3,268

 
3,985

Deferred income taxes, net
8

 
895

(Gain)/loss on sale of cryptocurrencies
(219
)
 
9

Impairment of cryptocurrencies
21

 
318

Impairment of equity securities

 
2,958

Losses on equity method securities
2,468

 
1,025

Gain on disposal of business
(10,705
)
 

Other non-cash adjustments
1,625

 
1,858

Changes in operating assets and liabilities, net of acquisitions:
 

 
 

Accounts receivable, net
(11,141
)
 
14,068

Inventories
1,162

 
554

Prepaids and other current assets
1,542

 
3,106

Other long-term assets, net
457

 
(189
)
Accounts payable
(1,310
)
 
(28,023
)
Accrued liabilities
338

 
(6,962
)
Deferred revenue
12,547

 
(10,640
)
Operating lease liabilities
(1,751
)
 
(1,249
)
Other long-term liabilities
(171
)
 
27

Net cash used in operating activities
(12,227
)
 
(51,429
)
Cash flows from investing activities:
 

 
 

Purchase of equity securities
(85
)
 
(2,500
)
Proceeds from sale of equity securities and marketable securities
2,179

 
5,535

Disbursement for notes receivable
(300
)
 
(2,000
)
Acquisitions of businesses, net of cash acquired

 
4,885

Expenditures for property and equipment
(3,638
)
 
(4,144
)
Deconsolidation of cash of Medici Land Governance, Inc.
(4,056
)
 

Other investing activities, net
(99
)
 
(2
)
Net cash (used in) provided by investing activities
(5,999
)
 
1,774



Continued on the following page
 

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Overstock.com, Inc.
Consolidated Statements of Cash Flows (Unaudited)
(in thousands)
 
Three months ended
March 31,
 
2020
 
2019
Cash flows from financing activities:
 

 
 

Proceeds from long-term debt
47,500

 

Proceeds from sale of common stock, net of offering costs
2,848

 
30,957

Payments of taxes withheld upon vesting of restricted stock
(1,686
)
 
(1,353
)
Other financing activities, net
(1,413
)
 
(648
)
Net cash provided by financing activities
47,249

 
28,956

Net increase (decrease) in cash, cash equivalents and restricted cash
29,023

 
(20,699
)
Cash, cash equivalents and restricted cash, beginning of period
114,898

 
142,814

Cash, cash equivalents and restricted cash, end of period
$
143,921

 
$
122,115

 
 
 
 
Supplemental disclosures of cash flow information:
 
 
 
Cash paid during the period:
 
 
 
Interest paid, net of amounts capitalized
$
32

 
$
86

Income taxes paid, net
4

 
130

Non-cash investing and financing activities:
 

 
 

Property and equipment financed through accounts payable and accrued liabilities
$
190

 
$
304

Common stock repurchased through business combination

 
643

Receivables converted to equity securities
186

 
359

Recognition of ROU Asset and Liabilities for new lease (Operating)
41

 
7,961

Recognition of ROU Asset and Liabilities for new lease (Financing)
517

 

Recognition of right-of-use assets upon adoption of ASC 842

 
30,968

Proceeds from sale of common stock included in accounts receivable

 
8,957

Proceeds from the sale of marketable securities included in accounts receivable
3,081

 

Deposit applied to business combination purchase price

 
7,347

Equity method security applied to business combination purchase price

 
3,707


See accompanying notes to unaudited consolidated financial statements.


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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, 2019. 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 months ended March 31, 2020 are not necessarily indicative of the results to be expected for any future period or the full fiscal year, due to seasonal and other factors.

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

2. ACCOUNTING POLICIES
 
Principles of consolidation
 
The accompanying consolidated financial statements include our accounts and the accounts of our wholly-owned subsidiaries and other subsidiaries for which we exercise control. All intercompany account balances and transactions have been eliminated in consolidation.
 
In February 2020, Medici Land Governance, Inc. ("MLG"), an indirect majority-owned subsidiary, consummated the sale of shares of its common stock to an unrelated third-party. Upon completion of the transaction, our indirect ownership in MLG was reduced from 57% to 35% of MLG's issued and outstanding shares of common stock. As a result of our loss of a controlling financial interest in MLG under the voting interest model, we performed an assessment of control under the variable interest entity ("VIE") model and determined MLG does not meet the qualifications of a VIE for purposes of our consolidation. Accordingly, we deconsolidated MLG's consolidated net assets and noncontrolling interest from our consolidated financial statements and results beginning on February 22, 2020, the date that control ceased. The amount of gain recognized on the deconsolidation was $10.7 million, which is included in our consolidated statements of operations in Other income (expense), net. The gain primarily relates to the remeasurement of our retained equity interest in MLG at fair value, which was determined based on the same price per share MLG provided for the sale of common stock to the third-party and price per share we received in settling a portion of our intercompany debt for additional shares in MLG. Post deconsolidation, MLG became one of our equity method investees for which we perform services. See Equity method securities under ASC 323 below for additional information.

Use of estimates
 
The preparation of financial statements in conformity with GAAP requires estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent liabilities in our consolidated financial statements and accompanying notes. Estimates are used for, but not limited to, receivables valuation, revenue recognition, Club O and gift card breakage, sales returns, vendor incentive discount offers, inventory valuation, depreciable lives of property and equipment and internally-developed software, goodwill valuation, intangible asset valuation, equity securities valuation, income taxes, stock-based compensation, performance-based compensation, self-funded health insurance liabilities and contingencies. Our estimates involving, among other items, sales volume, pricing, cost and availability of inventory, consumer demand and spending habits, and the continued operations of our supply chain and logistics network are even more difficult to estimate as a result of uncertainties associated with the duration of the various shelter-in-place orders across the globe related to the novel coronavirus ("COVID-19") pandemic and the post-pandemic economic recovery. Although

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these estimates are based on our best knowledge of current events and actions that we may undertake in the future, the variability of these factors depends on a number of conditions, including uncertainty associated with the recent COVID-19 pandemic, and thus our accounting estimates may change from period to period. To the extent there are differences between these estimates and actual results, our consolidated financial statements may be materially affected.

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 $2.8 million and $2.8 million at March 31, 2020 and December 31, 2019, respectively.
 
Restricted cash
 
We consider cash that is legally restricted and cash that is held as compensating balances for credit arrangements, surety bonds, and self-funded health insurance as restricted cash.
 
Fair value of financial instruments

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

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

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

The following tables summarize our assets and liabilities measured at fair value on a recurring basis using the following levels of inputs as of March 31, 2020 and December 31, 2019, as indicated (in thousands):
 
Fair Value Measurements at March 31, 2020:
 
Total
 
Level 1
 
Level 2
 
Level 3
Assets:
 

 
 

 
 

 
 

Cash equivalents - Money market mutual funds
$
2,811

 
$
2,811

 
$

 
$

Equity securities, at fair value
414

 
414

 

 

Marketable securities, at fair value
3,838

 
3,838

 

 

Trading securities held in a "rabbi trust" (1)
85

 
85

 

 

Total assets
$
7,148

 
$
7,148

 
$

 
$

Liabilities:
 

 
 

 
 

 
 

Deferred compensation accrual "rabbi trust" (2)
$
84

 
$
84

 
$

 
$

Total liabilities
$
84

 
$
84

 
$

 
$


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Fair Value Measurements at December 31, 2019:
 
Total
 
Level 1
 
Level 2
 
Level 3
Assets:
 

 
 

 
 

 
 

Cash equivalents - Money market mutual funds
$
2,799

 
$
2,799

 
$

 
$

Equity securities, at fair value
823

 
823

 

 

Marketable securities, at fair value
10,308

 
10,308

 

 

Trading securities held in a "rabbi trust" (1)
116

 
116

 

 

Total assets
$
14,046

 
$
14,046

 
$

 
$

Liabilities:
 

 
 

 
 

 
 

Deferred compensation accrual "rabbi trust" (2)
$
116

 
$
116

 
$

 
$

Total liabilities
$
116

 
$
116

 
$

 
$

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

Accounts receivable, net
 
Accounts receivable consist primarily of trade amounts due from customers in the United States and uncleared credit card transactions at period end. Accounts receivable are recorded at invoiced amounts and do not bear interest. From time to time, we grant credit to some of our business customers on normal credit terms (typically 30 days). We maintain an allowance for expected credit losses based upon our business customers' financial condition, payment history, our historical collection experience, and any future expected economic conditions. The allowance for credit losses was $1.0 million and $2.5 million at March 31, 2020 and December 31, 2019, respectively.

Concentration of credit risk
 
One bank held the majority of our cash and cash equivalents at March 31, 2020 and December 31, 2019. Our cash equivalents primarily consist of money market securities which are uninsured. We do not believe that, as a result of this concentration, we are subject to any unusual financial risk beyond the normal risk associated with commercial banking relationships.

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

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


15


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Property and equipment, net
 
Property and equipment are recorded at cost and stated net of depreciation and amortization. Upon sale or retirement of assets, cost and related accumulated depreciation and amortization are removed from the balance sheet and the resulting gain or loss is reflected in our consolidated statements of operations. Property and equipment are depreciated using the straight-line method over the estimated useful lives of the related assets or the term of the related finance 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 property and equipment is the capitalized cost of internal-use software and website development, including software used to upgrade and enhance our Website and processes supporting our business. We capitalize costs incurred during the application development stage of internal-use software and amortize these costs over the estimated useful life. Costs incurred related to design or maintenance of internal-use software are expensed as incurred.

During the three months ended March 31, 2020 and 2019, we capitalized $2.9 million and $3.5 million, respectively, of costs associated with internal-use software and website development, both developed internally and acquired externally. Depreciation of costs for the same periods associated with internal-use software and website development was $3.4 million and $3.2 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
March 31,
 
2020
 
2019
Cost of goods sold - retail
$
190

 
$
175

Technology
4,771

 
5,175

General and administrative
1,685

 
1,225

Total depreciation
$
6,646

 
$
6,575


Total accumulated depreciation of property and equipment was $226.4 million and $221.8 million at March 31, 2020 and December 31, 2019, 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.

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Equity securities under ASC 321

At March 31, 2020, we held minority interests (less than 20%) in certain public and privately held entities, accounted for under ASC Topic 321, InvestmentsEquity Securities ("ASC 321"), which are included in Equity securities and Marketable securities in our consolidated balance sheets. We measure our ASC 321 equity securities and marketable securities at fair value, unless there is no readily determinable fair value for the underlying security. Where there is no readily determinable fair value, we have elected the measurement alternative described in ASC 321 and below. Dividends received are reported in earnings if and when received. We review our securities individually for impairment by evaluating if events or circumstances have occurred that may indicate the fair value of the security is less than its carrying value. If such events or circumstances have occurred, we estimate the fair value of the security and recognize an impairment loss equal to the difference between the fair value of the security and its carrying value which is recorded in Other income (expense), net in our consolidated statements of operations. In such cases, the estimated fair value of the security is determined using unobservable inputs including assumptions by the investee's management including quantitative information such as lower valuations in recently completed or proposed financings. These inputs are classified as Level 3. Because several of these private companies are in the early startup or development stages, these entities are subject to potential changes in cash flows, valuation, as well as inability to raise additional capital which may be necessary for the liquidity needed to support their operations.

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

 
$
(2,958
)

Certain of these equity securities and our marketable securities, which had a carrying value of $4.3 million at March 31, 2020 and $11.1 million at December 31, 2019, are carried at fair value based on Level 1 inputs. See Fair value of financial instruments above. The portion of unrealized gains and losses for the period related to equity securities with readily determinable fair value still held at March 31, 2020 and 2019 is calculated as follows (in thousands):
 
Three months ended
March 31,
 
2020
 
2019
Net losses recognized during the period on equity securities
$
(1,619
)
 
$
(618
)
Less: Net losses recognized during the period on equity securities sold
(90
)
 

Unrealized losses during the reporting period on equity securities still held
$
(1,529
)
 
$
(618
)

Equity method securities under ASC 323

At March 31, 2020, we held minority interests in certain privately held entities accounted for as equity method securities under ASC Topic 323, Investments - Equity Method and Joint Ventures ("ASC 323"), which are included in Equity securities in our consolidated balance sheets. We can exercise significant influence, but not control, over these entities through either holding more than a 20% voting interest in the entity or through our representation on the entity's board of directors. For certain of these entities, we provide developer and other secondment services. For the three months ended March 31, 2020 and 2019, we recognized $1.6 million and $608,000 of developer and other secondment services revenue, respectively, in Other revenue on our consolidated statements of operations.


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The following table includes our equity method securities and related ownership interest as of March 31, 2020:
 
Ownership
interest
Bitt Inc.
21%
Boston Security Token Exchange LLC
50%
Chainstone Labs, Inc.
29%
FinClusive Capital, Inc.
10%
GrainChain, Inc.
18%
Medici Land Governance
35%
Minds, Inc.
24%
PeerNova, Inc.
11%
SettleMint NV
29%
Spera, Inc.
19%
VinX Network Ltd.
29%
Voatz, Inc.
20%

The carrying amount of our equity method securities was approximately $49.5 million and $37.3 million at March 31, 2020 and December 31, 2019, respectively. The carrying value of our equity method securities exceeded the amount of underlying equity in net assets of our equity method securities and the difference was primarily related to goodwill and the fair value of intangible assets. The basis difference attributable to amortizable intangible assets is amortized over their estimated useful lives. We record our proportionate share of the net income or loss from our equity method securities and the amortization of the basis difference related to intangible assets in Other income (expense), net in our consolidated statements of operations with corresponding adjustments to the carrying value of the asset. We review our securities individually for impairment by evaluating if events or circumstances have occurred that may indicate the fair value of the security is less than its carrying value. If such events or circumstances have occurred and deemed to be "other-than-temporary," we estimate the fair value of the security and recognize an impairment loss equal to the difference between the fair value of the security and its carrying value which is recorded in Other income (expense), net in our consolidated statements of operations.

The following table summarizes the net losses recognized on equity method securities for the three months ended March 31, 2020 and 2019 (in thousands):
 
Three months ended
March 31,
 
2020
 
2019
Net loss recognized on our proportionate share of the net losses of our equity method securities and amortization of the basis difference
$
2,468

 
$
1,025

Net loss recognized during the period on equity method securities sold

 
524


At March 31, 2020, we had a $5 million contractual off-balance sheet contingent obligation to provide additional funding in the future to our Boston Security Token Exchange LLC ("BSTX") joint venture if and when, during the first 48 months after the establishment of the entity, the aggregate cash balance of BSTX's combined bank accounts fall below $2 million for any reason. Such obligation has not been accrued for as the timing of the resolution of the contingency and payment of such obligation is not determinable as of the balance sheet date.

Noncontrolling interests in Controlled Subsidiaries

Our wholly-owned subsidiary, Medici Ventures, Inc. ("Medici Ventures"), conducts its primary business through its majority-owned subsidiaries, tZERO Group, Inc. ("tZERO"), which includes a financial technology company, two related registered broker-dealers and another entity which has applied to become a registered broker-dealer, a digital wallet and exchange services company, and certain strategic interests in other entities which support or align with tZERO's objectives and strategies. Medici Ventures and tZERO, and their respective consolidated subsidiaries are included in our consolidated financial statements. We deconsolidated MLG's consolidated net assets and noncontrolling interest from our consolidated financial statements and results beginning on February 22, 2020, the date that control ceased. Intercompany transactions have been

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eliminated and the amounts of contributions and gains or losses that are attributable to the noncontrolling interests are disclosed in our consolidated financial statements.

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

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

Goodwill represents the excess of the purchase price paid over the fair value of the net assets acquired in business combinations. Goodwill is not amortized but is tested for impairment at least annually or when we deem that a triggering event has occurred. When evaluating whether goodwill is impaired, we make a qualitative assessment to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the qualitative assessment determines that it is more likely than not that its fair value is less than its carrying amount, we compare the fair value of the reporting unit to which the goodwill is assigned to its carrying amount. If the carrying amount exceeds its fair value, an impairment loss is recognized in an amount equal to the excess of the carrying amount over the fair value of the reporting unit, not to exceed the carrying amount of the goodwill. Our December 2019 annual impairment tests of goodwill indicated no impairment of our goodwill at December 31, 2019.

Due to the impact of the COVID-19 pandemic on the retail sector, overall economy, and our market capitalization, we performed an interim goodwill impairment assessment to determine whether an impairment loss may have been incurred. We qualitatively assessed whether it was more likely than not that goodwill was impaired as of March 31, 2020. We reviewed our forecasts and assumptions based on our current projections that are subject to various risks and uncertainties, including: (1) forecasted revenues, expenses and cash flows, including the duration and extent of impact to our business from the COVID-19 pandemic, (2) the reduction in our market capitalization, (3) the impact of social distancing on our workforce, along with any other government mandated measures and (4) the impact the COVID-19 pandemic has had to our supply chain. Based on our interim impairment assessment as of March 31, 2020, we have determined that our goodwill is not impaired. However, we are unable to predict how long these conditions will persist, what additional measures may be introduced by governments or private parties or what effect any such additional measures may have on our business. There were no impairments to goodwill recorded during the three months ended March 31, 2020 and 2019.


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Intangible assets other than goodwill

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

Intangible assets, net consist of the following (in thousands):
 
March 31,
2020
 
December 31,
2019
Intangible assets subject to amortization, gross (1)
$
30,267

 
$
30,284

Less: accumulated amortization of intangible assets subject to amortization
(19,430
)
 
(18,528
)
Total intangible assets, net
$
10,837

 
$
11,756

___________________________________________
(1)
 — At March 31, 2020, the weighted average remaining useful life for intangible assets subject to amortization was 5.52 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
March 31,
 
2020
 
2019
Technology
$
847

 
$
853

Sales and marketing
11

 
16

General and administrative
65

 
(830
)
Total amortization
$
923

 
$
39


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

Estimated amortization expense for the next five years is: $2.7 million for the remainder of 2020, $3.3 million in 2021, $2.1 million in 2022, $1.6 million in 2023, $804,000 in 2024, and $323,000 thereafter.

Impairment of long-lived assets
 
We review property and equipment, right-of-use assets, and other long-lived assets, including intangible assets other than goodwill, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. 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. Although these estimates are based on our best knowledge of current events and actions that we may undertake in the future, the variability of these factors depends on a number of conditions, including uncertainty associated with the recent COVID-19 pandemic, and thus our accounting estimates may change from period to period. 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 three months ended March 31, 2020 and 2019.


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Other long-term assets, net
 
Other long-term assets, net consist primarily of long-term prepaid expenses, deposits, and assets acquired under finance leases.

Revenue recognition
 
Revenue is recognized when, or as, control of a promised product or service transfers to a customer, in an amount that reflects the consideration to which the Company expects to be entitled in exchange for transferring those products or services. Revenue excludes taxes that have been assessed by governmental authorities and that are directly imposed on revenue-producing transactions between the Company and its customers, including sales and use taxes. Revenue recognition is evaluated through the following five-step process:
 
1) identification of the contract with a customer;
2) identification of the performance obligations in the contract;
3) determination of the transaction price;
4) allocation of the transaction price to the performance obligations in the contract; and
5) recognition of revenue when or as a performance obligation is satisfied.

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

Revenue is recognized when control of the product passes to the customer, typically at the date of delivery of the merchandise to the customer or the date a service is provided, and is recognized in an amount that reflects the expected consideration to be received in exchange for such goods or services. As such, customer orders are recorded as deferred revenue prior to delivery of products or services ordered. As we ship high volumes of packages through multiple carriers, it is not practical for us to track the actual delivery date of each shipment. Therefore, we use estimates to determine which shipments are delivered and, therefore, recognized as revenue at the end of the period. Our delivery date estimates are based on average shipping transit times, which are calculated using the following factors: (i) the type of shipping carrier (as carriers have different in-transit times); (ii) the fulfillment source (either our warehouses, those warehouses we control, or those of our partners); (iii) the delivery destination; and (iv) actual transit time experience, which shows that delivery date is typically one to eight business days from the date of shipment. We review and update our estimates on a quarterly basis based on our actual transit time experience. However, actual shipping times may differ from our estimates which can be further impacted by uncertainty, volatility, and any disruption to our carriers caused by the COVID-19 pandemic.

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

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

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

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

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

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

We record the standalone value of reward dollars earned in deferred revenue at the time the reward dollars are earned. Club O Reward dollars expire 90 days after the customer's Club O membership expires. We recognize estimated reward dollar breakage, to which we expect to be entitled, over the expected redemption period in proportion to actual redemptions by customers. Breakage income related to Club O Reward dollars and gift cards are recognized as a component of Retail revenue in our consolidated statements of operations. Breakage included in revenue was $905,000 and $1.1 million for the three months ended March 31, 2020 and 2019.

Our total deferred revenue related to the outstanding Club O Reward dollars was $6.8 million and $6.7 million at March 31, 2020 and December 31, 2019, respectively. The timing of revenue recognition of these reward dollars is driven by actual customer activities, such as redemptions and expirations.

Advertising Revenue

Advertising revenues are derived primarily from sponsored links and display advertisements that are placed on our Website, distributed via email, or sent out as direct mailers. Advertising revenue is recognized in Retail revenue when the advertising services are rendered. Advertising revenues were less than 3% of total net revenues for all periods presented.

Revenue Disaggregation

Disaggregation of revenue by major product line is included in Segment Information in Note 11—Business Segments.

Deferred Revenue

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

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


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The following table provides information about deferred revenue from contracts with customers, including significant changes in deferred revenue balances during the periods presented (in thousands):
 
Amount
Deferred revenue at December 31, 2018
$
50,578

Increase due to deferral of revenue at period end
36,622

Decrease due to beginning contract liabilities recognized as revenue
(45,379
)
Deferred revenue at December 31, 2019
41,821

Increase due to deferral of revenue at period end
41,520

Decrease due to beginning contract liabilities recognized as revenue
(29,198
)
Deferred revenue at March 31, 2020
$
54,143


Sales returns allowance
 
We inspect returned items when they arrive at our processing facilities. We refund the full cost of the merchandise returned and all original shipping charges if the returned item is defective or we or our partners have made an error, such as shipping the wrong product. If the return is not a result of a product defect or a fulfillment error and the customer initiates a return of an unopened item within 30 days of delivery, for most products we refund the full cost of the merchandise minus the original shipping charge and actual return shipping fees. However, we reduce refunds for returns initiated more than 30 days after delivery or that are received at our returns processing facility more than 45 days after initial delivery. If our customer returns an item that has been opened or shows signs of wear, we issue a partial refund minus the original shipping charge and actual return shipping fees.
 
Revenue is recorded net of estimated returns. We record an allowance for returns based on current period revenues and historical returns experience. We analyze actual historical returns, current economic trends and changes in order volume and acceptance of our products when evaluating the adequacy of the sales returns allowance in any accounting period.

The following table provides additions to and deductions from the sales returns allowance (in thousands):
 
Amount
Allowance for returns at December 31, 2018
$
15,261

Additions to the allowance
117,040

Deductions from the allowance
(121,194
)
Allowance for returns at December 31, 2019
11,107

Additions to the allowance
25,688

Deductions from the allowance
(26,643
)
Allowance for returns at March 31, 2020
$
10,152


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

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Three months ended
March 31,
 
2020
 
2019
Total revenue, net
$
351,573

 
100
%
 
$
367,729

 
100
%
Cost of goods sold
 

 
 

 
 

 
 

Product costs and other cost of goods sold
259,946

 
74
%
 
277,218

 
75
%
Fulfillment and related costs
15,787

 
4
%
 
17,387

 
5
%
Total cost of goods sold
275,733

 
78
%
 
294,605

 
80
%
Gross profit
$
75,840

 
22
%
 
$
73,124

 
20
%
 
Advertising expense
 
We expense the costs of producing advertisements the first time the advertising takes place and expense the cost of communicating advertising in the period during which the advertising space or airtime is used. Internet advertising expenses are recognized as incurred based on the terms of the individual agreements, which are generally: 1) a commission for traffic driven to our Website that generates a sale or 2) a referral fee based on the number of clicks on keywords or links to our Website generated during a given period. Advertising expense is included in Sales and marketing expenses and totaled $32.6 million and $28.5 million during the three months ended March 31, 2020 and 2019, respectively. Prepaid advertising (included in Prepaids and other current assets in the accompanying consolidated balance sheets) was $245,000 and $138,000 at March 31, 2020 and December 31, 2019, 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 9—Stock-Based Awards.

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


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Each quarter we assess the recoverability of our deferred tax assets under ASC Topic 740. We assess the available positive and negative evidence to estimate whether we will generate sufficient future taxable income to use our existing deferred tax assets. We have limited carryback ability and do not have significant taxable temporary differences to recover our existing deferred tax assets, therefore we must rely on future taxable income, including tax planning strategies, to support their realizability. We have established a valuation allowance for our deferred tax assets not supported by carryback ability or taxable temporary differences, primarily due to uncertainty regarding our future taxable income. We have considered, among other things, the cumulative loss incurred over the three-year period ended March 31, 2020 as a significant piece of objective negative evidence. We intend to continue maintaining a valuation allowance on our net deferred tax assets until there is sufficient evidence to support the reversal of all or some portion of these allowances. The amount of the deferred tax asset considered realizable could be adjusted if objective negative evidence in the form of cumulative losses is no longer present and additional weight may be given to subjective evidence such as long-term projections for growth. We will continue to monitor the need for a valuation allowance against our remaining deferred tax assets on a quarterly basis.

We have indefinitely reinvested foreign earnings of $2.7 million at March 31, 2020. We would need to accrue and pay various taxes on this amount if repatriated. We do not intend to repatriate these earnings.

We are subject to taxation in the United States and several state and foreign jurisdictions. Tax years beginning in 2015 are subject to examination by taxing authorities, although net operating loss and credit carryforwards from all years are subject to examinations and adjustments for at least three years following the year in which the attributes are used.

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

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

Diluted net loss per share is computed by dividing net loss attributable to common shares (after allocating between common shares and participating securities) by the weighted average number of common and potential common shares outstanding during the period (after allocating total dilutive shares between our common shares outstanding and our preferred shares outstanding). Potential common shares, comprising incremental common shares issuable upon the exercise of stock options, warrants, and restricted stock awards are included in the calculation of diluted net loss per common share to the extent such shares are dilutive. Net loss attributable to common shares is adjusted for options and restricted stock awards issued by our subsidiaries when the effect of our subsidiary's diluted earnings per share is dilutive.
    
On July 30, 2019, we announced that our Board of Directors had declared a dividend (the "Dividend") payable in shares of our Series A-1 Preferred Stock. The Dividend is payable at a ratio of 1:10, meaning that one share of Series A-1 Preferred Stock will be issued for every ten shares of OSTK common stock, ten shares of Series A-1 Preferred Stock, or ten shares of Series B Preferred Stock held by all holders of such shares as of the record date for the Dividend. The record date for the Dividend was April 27, 2020, and the distribution date for the Dividend will be May 19, 2020.


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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
March 31,
 
2020
 
2019
Net loss attributable to stockholders of Overstock.com, Inc.
$
(16,333
)
 
$
(39,244
)
Less: Preferred stock TZROP repurchase gain

 
(425
)
Less: Preferred stock dividends - declared and accumulated
19

 
19

Undistributed loss
(16,352
)
 
(38,838
)
Less: Undistributed loss allocated to participating securities
(194
)
 
(569
)
Net loss attributable to common shares
$
(16,158
)
 
$
(38,269
)
Net loss per common share—basic:
 

 
 

Net loss attributable to common shares—basic
$
(0.40
)
 
$
(1.18
)
Weighted average common shares outstanding—basic
40,158

 
32,370

Effect of dilutive securities:
 

 
 
Stock options and restricted stock awards

 

Weighted average common shares outstanding—diluted
40,158

 
32,370

Net loss attributable to common shares—diluted
$
(0.40
)
 
$
(1.18
)
 
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
March 31,
 
2020
 
2019
Stock options and restricted stock units
737

 
1,030


Recently adopted accounting standards

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

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

In January 2020, the FASB issued ASU 2020-01, InvestmentsEquity Securities (Topic 321), InvestmentsEquity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815): Clarifying the Interactions between Topic 321, Topic 323, and Topic 815, which clarifies the interaction of the accounting for equity securities under Topic 321, the

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accounting for equity method investments in Topic 323, and the accounting for certain forward contracts and purchased options in Topic 815. For public entities, ASU 2020-01 is required to be adopted for annual periods beginning after December 15, 2020, including interim periods within those fiscal years. Early adoption is permitted. Management is currently evaluating the impact of the adoption of this ASU on our consolidated financial statements and related disclosures.

3. ACCRUED LIABILITIES

Accrued liabilities consist of the following (in thousands):
 
March 31,
2020
 
December 31,
2019
 
 
 
 
Accrued compensation and other related costs
$
18,224

 
$
13,012

Accrued marketing expenses
12,109

 
13,063

Other accrued expenses
10,862

 
9,714

Allowance for returns
10,152

 
11,107

Accounts payable accruals
9,855

 
15,692

Accrued loss contingencies
9,555

 
9,550

Sales and other taxes payable
9,058

 
10,105

Accrued freight
8,642

 
5,954

Total accrued liabilities
$
88,457

 
$
88,197


4. BORROWINGS

Loan Core Capital Funding Corporation LLC loan agreements

In March 2020, we entered into two loan agreements with Loan Core Capital Funding Corporation LLC. The loan agreements provide a $34.5 million Senior Note, carrying interest at an annual rate of 4.242%, and a $13.0 million Mezzanine Note, carrying interest at an annual rate of 5.002%. The loans carry a blended annual interest rate of 4.45%. The Senior Note is for a 10-year term (stated maturity date is March 6, 2030) and requires interest only payments, with the principal amount and any then unpaid interest due and payable at the end of the 10-year term. The Mezzanine Note has a stated 10-year term, though the agreement requires principal and interest payments monthly over approximately a 46 month payment period. Both loans include certain financial and non-financial covenants and are secured by our corporate headquarters and the related land and rank senior to stockholders. As of March 31, 2020, the total outstanding debt on these loans was $46.8 million, and the total amount of the current portion of these loans included in Other current liabilities on our consolidated balance sheets was $3.1 million. Our debt issuance costs and debt discount are amortized using the straight-line basis which approximates the effective interest method.

While the ultimate impact of the COVID-19 pandemic on our business, financial condition, liquidity and results of operations is dependent on future developments which are highly uncertain, we are in compliance with our debt covenants and we are closely monitoring the most recent developments regarding the COVID-19 pandemic, and potential impact to our ongoing compliance with debt covenants and ability to continue to meet our loan payment obligations as they become due.


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5. LEASES

We have operating and finance leases for warehouses, office space, data centers, and certain equipment. Our leases have remaining lease terms of 1 year to 11 years, some of which may include options to extend the leases perpetually, and some of which may include options to terminate the leases within 1 year. We note our finance leases are immaterial to our financial statements as a whole and thus are not discussed below.

The following table provides a summary of leases by balance sheet location (in thousands):
 
March 31, 2020
 
December 31, 2019
Operating right-of-use assets
$
23,726

 
$
25,384

Operating lease liabilities - current
5,968

 
6,603

Operating lease liabilities - non-current
20,409

 
21,554


The components of lease expenses were as follows (in thousands):
 
Three months ended
March 31,
 
2020
 
2019
Operating lease cost
$
2,132

 
$
2,505

Short-term lease cost
11

 
34

Variable lease cost
405

 
528


The following tables provides a summary of other information related to leases (in thousands, apart from weighted-average lease term and weighted average discount rate):
 
Three months ended
March 31,
 
2020
 
2019
Cash paid for amounts included in the measurement of lease liabilities:
 
 
 
Operating cash flows used in operating leases
$
(2,261
)
 
$
(2,018
)
Right-of-use assets obtained in exchange for new operating lease liabilities
$
41

 
$
7,961

Weighted-average remaining lease term - operating leases
5.91 years

 
7.27 years

Weighted-average discount rate - operating leases
8
%
 
8
%

Maturity of lease liabilities under our non-cancellable operating leases as of March 31, 2020, are as follows (in thousands):
Payments due by period
 
Amount
2020 (Remainder)
 
$
6,382

2021
 
5,777

2022
 
5,628

2023
 
4,683

2024
 
3,485

Thereafter
 
7,358

Total lease payments
 
33,313

Less interest
 
6,936

Present value of lease liabilities
 
$
26,377

 
    

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6. COMMITMENTS AND CONTINGENCIES
 
Legal proceedings and contingencies

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

In September 2009, SpeedTrack, Inc. sued us along with 27 other defendants in the United States District Court in the Northern District of California, alleging that we infringed a patent covering search and categorization software. We believe that certain third-party vendors of products and services sold to us are contractually obligated to indemnify us, and we have tendered defense of the case to an indemnitor who accepted the defense. In April 2016, the court entered an order partially dismissing the claims against us. In May 2016, the plaintiff filed an amended complaint and we filed an answer. In March 2020, the court entered a judgment of non-infringement in our favor and against the plaintiff.

In June 2013, William French ("French") and the State of Delaware ("Delaware") sued us, along with numerous other defendants, in the Superior Court of the State of Delaware for alleged violations of Delaware's unclaimed property laws. French and Delaware alleged that we knowingly refused to fulfill obligations under Delaware's Abandoned Property Law by failing to report and deliver unclaimed gift card funds to the State of Delaware, and knowingly made, used or caused to be made or used, false statements and records to conceal, avoid or decrease an obligation to pay or transmit money to Delaware in violation of the Delaware False Claims and Reporting Act. On June 28, 2019, the court entered a judgment against us in the amount of approximately $7.3 million (for certain unredeemed gift card balances, treble damages, and penalties) as a result of a jury verdict which was returned September 20, 2018. On October 23, 2019, the court entered an award of attorneys' fees and costs of $1.3 million and entered final judgment in the amount of $8.6 million. We filed an appeal in October 2019, and are awaiting a ruling from the Court. Our estimated liability for these amounts was included in Accrued liabilities at March 31, 2020. The expense associated with these litigation charges was included in general and administrative expense in our consolidated statement of operations for the year ended December 31, 2018.

In February 2018, the Division of Enforcement of the SEC informed tZERO and subsequently informed us that it is conducting an investigation and requested that we and tZERO voluntarily provide certain information and documents related to tZERO and the tZERO security token offering in connection with its investigation. In December 2018, we received a follow-up request from the SEC relating to its investigation. As previously disclosed, on October 7, 2019, we received a subpoena from the SEC requesting documents related to the Dividend we announced to stockholders in June 2019 and requesting 10b-5-1 plans of our officers and directors that were in effect during the period of January 1, 2018 through October 7, 2019. On December 9, 2019, we received a subpoena from the SEC requesting documents related to the GSR transaction and the alternative trading system run by tZERO ATS, LLC. On December 19, 2019, we received a subpoena from the SEC requesting our insider trading policies as well as certain employment and consulting agreements. We have also previously received requests from the SEC regarding our communications with our former chief executive officer and director, Patrick Byrne and the matters referenced in the December 2019 subpoenas. We are in regular, active communication with the SEC and are cooperating fully with it in connection with its investigations and information requests.

tZERO's broker-dealer subsidiaries are subject to extensive regulatory requirements under federal and state laws and regulations and self-regulatory organization ("SRO") rules. Each of SpeedRoute LLC ("SpeedRoute") and tZERO ATS, LLC is registered with the SEC as a broker-dealer under the Securities Exchange Act of 1934 (the "Exchange Act") and in the states in which it conducts securities business and is a member of FINRA and other SROs (as applicable). In addition, tZERO ATS, LLC owns and operates an alternative trading system registered with the SEC. Each of SpeedRoute and tZERO ATS, LLC is subject to regulation, examination, investigation, and disciplinary action by the SEC, FINRA, and state securities regulators, as well as other governmental authorities and SROs with which it is registered or licensed or of which it is a member. Moreover, as a result of tZERO's projects seeking to apply distributed ledger technologies to the capital markets, tZERO's subsidiaries have

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been, and remain involved in, ongoing oral and written communications with regulatory authorities. As previously disclosed, tZERO's broker-dealer subsidiaries are currently undergoing various examinations, inquiries, and/or investigations undertaken by various regulatory authorities, which may result in financial and other settlements or penalties. Any significant failure by tZERO's broker-dealer subsidiaries to satisfy regulatory authorities that they are in compliance with all applicable rules and regulations could have a material adverse effect on tZERO and on us.

tZERO's subsidiary, tZERO Crypto, Inc., is registered as or is applying to become a money transmitter (or its equivalent) in many states and is subject to extensive regulatory requirements applicable to money services businesses, including the requirements of the Financial Crimes Enforcement Network of the U.S. Department of the Treasury ("FinCEN"), anti-money laundering requirements, know-your-customer requirements, record-keeping, reporting and capital and bonding requirements, and inspection by state and federal regulatory agencies. Compliance with these requirements requires the dedication of significant resources and any material failure by tZERO Crypto, Inc. to remain in compliance with the applicable regulatory requirements could subject it to liability or limit the services it may offer.

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

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

On April 23, 2020, a putative class action lawsuit was filed against us in the Circuit Court of the County of St. Louis, State of Missouri, alleging that we over-collected taxes on products sold into the state of Missouri. No estimate of the possible loss or range of loss can be made at this time. We intend to vigorously defend this action.
    
We establish liabilities when a particular contingency is probable and estimable. At March 31, 2020 and December 31, 2019, we have accrued $9.6 million and $9.6 million, respectively, 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 we entered into in favor of Loan Core Capital Funding Corporation LLC under our loan agreements, various lessors in connection with facility leases for certain claims arising from such facility or lease, the environmental indemnity we entered into in favor of the lenders under our prior loan agreements, customary indemnification arrangements in underwriting agreements and similar agreements, and indemnities to our directors and officers to the maximum extent permitted under the laws of the State of Delaware. The duration of these indemnities, commitments, and guarantees varies, and in certain cases, is indefinite. In addition, the majority of these indemnities, commitments, and guarantees do not provide for any limitation of the maximum potential future payments we could be obligated to make. As such, we are unable to estimate with any reasonableness our potential exposure under these items. We have not recorded any liability for these indemnities, commitments, and guarantees in the accompanying consolidated balance sheets. We do, however, accrue for losses for any known contingent liability, including those that may arise from indemnification provisions, when future payment is both probable and reasonably estimable.


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8. STOCKHOLDERS' EQUITY

Common Stock

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

On July 30, 2019, we announced that our Board of Directors had declared the Dividend payable in shares of our Series A-1 Preferred stock. On September 18, 2019, we announced our intent to register the Series A-1 Preferred stock to be issued pursuant to the Dividend under the Securities Act of 1933 and postponed the previously announced record and distribution dates for the Dividend. On October 28, 2019, we announced that we would seek a stockholder vote at a stockholder special meeting to allow us to amend the certificates of designation for our preferred shares and removing certain restrictions, to facilitate issuance of the Dividend. On February 13, 2020, a special meeting of stockholders was held, where the stockholders approved amendments to our certificate of designation allowing us to proceed with issuing the Dividend. On April 7, 2020, we announced a record date of April 27, 2020 for the Dividend and a distribution date for the Dividend of May 19, 2020.

Preferred Stock

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

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

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

Neither the Series A-1 Preferred stock nor Series B Preferred stock is required to be converted into or exchanged for shares of our common stock or any other entity; however, at our sole discretion, we may convert the Series A-1 Preferred stock into Series B Preferred stock at any time on a one-to-one basis. In the event of any liquidation, any amount available for distribution to stockholders after payment of all liabilities will be distributed proportionately, with each share of Series A-1 Preferred stock and each share of Series B Preferred stock being treated as though it were a share of our common stock. If we are party to any merger or consolidation in which our common stock is changed into or exchanged for stock or other securities of any other person (or the Company) or cash or any other property (or a right to receive the foregoing), we will use all commercially reasonable efforts to cause each outstanding share of the Preferred Stock to be treated as if such share were an additional outstanding share of common stock in connection with any such transaction. Neither the Series A-1 Preferred stock nor the Series B Preferred stock is registered under the Exchange Act.


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JonesTrading Sales Agreement

We entered into a Capital on DemandTM Sales agreement dated August 9, 2018 (which was subsequently amended on March 15, 2019, November 12, 2019, and April 9, 2020) with JonesTrading Institutional Services LLC ("JonesTrading"), under which we may conduct "at the market" public offerings of our common stock. Under the sales agreement, JonesTrading, acting as our agent, may offer our common stock in the market on a daily basis or otherwise as we request from time to time. We have no obligation to sell additional shares under the sales agreement, but we may do so from time to time. For the three months ended March 31, 2020, we did not sell any shares of our common stock pursuant to the sales agreement but have received $2.8 million of proceeds that was included in Accounts receivable, net on our consolidated balance sheet at December 31, 2019 for the sale of an aggregate of 415,904 shares of our common stock under the agreement that were executed in late December 2019. As of the effective date of the amended agreement, April 9, 2020, we had $80.0 million remaining available under our "at the market" sales program.

GSR Agreement

In August 2018, Overstock signed a Token Purchase Agreement with GSR Capital Ltd., a Cayman Islands exempted company ("GSR"). The Token Purchase Agreement sets forth the terms on which GSR agreed to purchase, for $30.0 million, on May 6, 2019 or such other date as agreed by the parties, security tokens at a price of $6.67 per security token. On May 8, 2019, the parties executed an Investment Agreement to replace the Token Purchase Agreement under which GSR agreed to purchase 508,710 shares of tZERO common stock, representing approximately 0.5% of the issued and outstanding common stock of tZERO. In exchange, GSR agreed to transfer to tZERO a total of $5.0 million in consideration. On September 16, 2019, in recognition of GSR's remaining obligations under the Investment Agreement, tZERO and GSR entered into a Promissory Note under which GSR promised to pay the remaining consideration due to tZERO under the Investment Agreement in the form of U.S. dollars in multiple installments by December 6, 2019. A further letter agreement was entered into by tZERO and GSR in March 2020 obligating GSR to make the remaining payments by March 31, 2020 to avoid all payments becoming non-exclusive damages and relieving tZERO of any obligation to issue shares to GSR. GSR completed their final payment of principal and accrued interest on March 31, 2020, satisfying its obligations under the Promissory Note and Investment Agreement. tZERO issued the shares of tZERO common stock to GSR on April 1, 2020 in full satisfaction of the Investment Agreement.

9. STOCK-BASED AWARDS
 
We have equity incentive plans that provide for the grant to employees and board members of stock-based awards, including stock options and restricted stock. Employee accounting applies to awards granted by the Company or subsidiary of the Company or subsidiary's shares only to its own employees, respectively. Stock-based compensation expense is classified within the corresponding operating expense categories on our consolidated statements of operations as follows (in thousands):
 
Three months ended
March 31,
 
2020
 
2019
Cost of goods sold — retail
$
53

 
$
47

Sales and marketing
389

 
441

Technology
915

 
1,227

General and administrative
1,911

 
2,270

Total stock-based compensation
$
3,268

 
$
3,985


Overstock restricted stock awards

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


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

The following table summarizes restricted stock award activity during the three months ended March 31, 2020 (in thousands, except per share data):
 
Three months ended
March 31, 2020
 
Units
 
Weighted
Average
Grant Date
Fair Value
Outstanding—beginning of year
1,051

 
$
26.22

Granted at fair value
436

 
9.03

Vested
(671
)
 
23.96

Forfeited
(79
)
 
28.35

Outstanding—end of period
737

 
$
17.88


Medici Ventures stock options
 
The Medici Ventures, Inc. 2017 Stock Option Plan, as amended, provides for the grant of options to employees and directors of and consultants to Medici Ventures to acquire up to approximately 9% of the authorized shares of Medici Ventures' common stock. Medici Ventures authorized 1.5 million shares, 900,000 of which are issued and outstanding to Overstock, and 130,000 of which are subject to the 2017 Stock Option Plan. The remaining 470,000 are authorized but unissued. Options vested under this plan expire at the end of ten years. No stock option awards were granted during the three months ended March 31, 2020.

tZERO equity awards

The tZERO Group, Inc. 2017 Equity Incentive Plan, as amended, provides for grant of options and restricted stock to employees and directors of and consultants to tZERO to acquire up to 5% of the authorized shares of tZERO's common stock. During the three months ended March 31, 2020, tZERO granted 10,000 restricted stock awards with a cumulative grant date fair value of $30,500 which will be expensed on a straight-line basis over a cliff vesting period of two years. No stock option awards were issued during the three months ended March 31, 2020.
 
10. OTHER INCOME (EXPENSE), NET

Other income (expense), net consisted of the following (in thousands):
 
 
Three months ended
March 31,
 
 
2020
 
2019
Gain on deconsolidation of net assets of Medici Land Governance, Inc.
 
$
10,741

 
$

Other
 
44

 
543

Impairment of equity securities
 

 
(2,958
)
Impairment of notes receivable
 
(15
)
 
(1,237
)
Loss on sale of equity securities and marketable securities
 
(90
)
 
(977
)
Unrealized loss on equity securities and marketable securities
 
(1,529
)
 
(618
)
Equity method losses
 
(2,468
)
 
(1,025
)
Total other income (expense), net
 
$
6,683

 
$
(6,272
)


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11. 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. We allocate corporate support costs (administrative functions such as finance, human resources, and legal) to our operating segments based on their estimated usage and based on how we manage our business. Our Medici business includes two reportable segments, tZERO and the unconsolidated financial information for Medici Ventures ("MVI"). MVI was identified as a reportable segment separate from Other during 2019. We have recast prior period segment information to conform with current year presentation. MVI consists of the Medici business not associated with tZERO or MLG. We deconsolidated MLG's consolidated net assets and noncontrolling interest from our consolidated financial statements beginning on February 22, 2020, the date that control ceased. We use pre-tax net income (loss) as the measure to determine our reportable segments. Other consists of MLG, which was deconsolidated beginning February 22, 2020, and our unallocated corporate support costs.

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

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

Our MVI segment primarily consists of costs incurred to create or foster a set of products and solutions that leverage blockchain technology to generate efficiencies and increase security and control, excluding intercompany transactions eliminated in consolidation.

We do not allocate assets between our segments for our internal management purposes, and as such, they are not presented here. There were no significant inter-segment sales or transfers during the three months ended March 31, 2020 and 2019.

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The following table summarizes information about reportable segments and a reconciliation to consolidated net income (loss) for the three months ended March 31, 2020 and 2019 (in thousands):

 
Three months ended March 31,
 
Retail
 
tZERO
 
MVI
 
Other
 
Total
2020
 
 
 
 
 
 
 
 
 
Revenue, net
$
339,598

 
$
10,239

 
$
1,574

 
$
162

 
$
351,573

Cost of goods sold
265,392

 
8,767

 
1,574

 

 
275,733

Gross profit
74,206

 
1,472

 

 
162

 
75,840

Operating expenses
82,835

 
12,258

 
2,908

 
3,983

 
101,984

Interest and other income (expense), net (1)
(299
)
 
(1,782
)
 
8,833

 
3

 
6,755

Pre-tax income (loss)
$
(8,928
)
 
$
(12,568
)
 
$
5,925

 
$
(3,818
)
 
(19,389
)
Provision for income taxes
 
 
 
 
 
 
 
 
176

Net loss (2)
 
 
 
 
 
 
 
 
$
(19,565
)
 
 
 
 
 
 
 
 
 
 
2019
 
 
 
 
 
 
 
 
 

Revenue, net
$
362,625

 
$
4,496

 
$
608

 
$

 
$
367,729

Cost of goods sold
290,640

 
3,357

 
608

 

 
294,605

Gross profit
71,985

 
1,139

 

 

 
73,124

Operating expenses
85,336

 
15,553

 
4,253

 
4,000

 
109,142

Interest and other income (expense), net (1)
135

 
(963
)
 
(5,164
)
 
(4
)
 
(5,996
)
Pre-tax loss
$
(13,216
)
 
$
(15,377
)
 
$
(9,417
)
 
$
(4,004
)
 
(42,014
)
Provision for income taxes
 
 
 
 
 
 
 
 
878

Net loss (2)
 
 
 
 
 
 
 
 
$
(42,892
)
__________________________________________
(1)
 — Excludes intercompany transactions eliminated in consolidation, which consist primarily of service fees and interest. The net amounts of these intercompany transactions were $1.1 million and $415,000 for the three months ended March 31, 2020 and 2019.
(2)
 — Net loss presented for segment reporting purposes is before any adjustments attributable to noncontrolling interests.

Upon deconsolidation of MLG, we recognized our retained equity interest in MLG as an equity method security held by our MVI segment which resulted in a $10.7 million gain included in Interest and other income (expense), net in the table above for our MVI segment for the three months ended March 31, 2020. See Note 2. Accounting Policies, Principles of consolidation, for additional details on the gain recognized.
    
For the three months ended March 31, 2020 and 2019, substantially all of our revenues were attributable to customers in the United States. At March 31, 2020 and December 31, 2019, substantially all our property and equipment were located in the United States.

12. BROKER DEALERS
 
tZERO wholly owns two broker-dealers, SpeedRoute and tZERO ATS, LLC, which were acquired in January 2016.

SpeedRoute is an electronic, agency-only, FINRA-registered broker-dealer that provides connectivity for its customers to U.S. equity exchanges as well as off-exchange sources of liquidity such as dark pools. All of SpeedRoute's customers are registered broker-dealers. SpeedRoute does not hold, own, or sell securities.

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tZERO ATS, LLC is a FINRA-registered broker-dealer that owns and operates the tZERO ATS and is a wholly-owned subsidiary of tZERO. The tZERO ATS is a closed trading system available only to broker-dealer subscribers. The tZERO ATS does not accept orders from non-broker-dealers, nor does it hold, own or sell securities. The tZERO ATS currently supports the trading of two digital securities, the Series A-1 Preferred stock and TZROP and, in the future, is expected to support digital securities from other issuers.

SpeedRoute and tZERO ATS, LLC are subject to the SEC's Uniform Net Capital Rule (SEC Rule 15c3-1), which requires the maintenance of minimum net capital and requires that the ratio of aggregate indebtedness to net capital, both as defined, shall not exceed 15 to 1 and that equity capital may not be withdrawn or cash dividends paid if the resulting net capital ratio would exceed 10 to 1. The following table summarizes the net capital ratio (in thousands, apart from the net capital ratio):
 
March 31,
2020
 
December 31,
2019
SpeedRoute
 
 
 
Net capital
$
1,427

 
$
850

Required net capital
370

 
145

Net capital, in excess of required
$
1,057

 
$
705

Net capital ratio
3.88

 
2.56

 
 
 
 
tZERO ATS, LLC
 
 
 
Net capital
$
66

 
$
110

Required net capital
5

 
5

Net capital, in excess of required
$
61

 
$
105

Net capital ratio
0.28

 
0.27


SpeedRoute and tZERO ATS, LLC Securities did not have any securities owned or securities sold, not yet purchased at March 31, 2020 and December 31, 2019, respectively.


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

The following discussion provides information that we believe to be relevant to an understanding of our consolidated financial condition and results of operations. The statements in this section regarding industry outlook, our expectations regarding the performance of our business and any other non-historical statements are forward-looking statements. Our actual results may differ materially from those contained in or implied by any forward-looking statements contained herein. These forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, the risks and uncertainties described in "Special Cautionary Note Regarding Forward Looking Statements" and in Part II, Item 1A, "Risk Factors" included in this Quarterly Report on Form 10-Q. You should read the following discussion together with our consolidated financial statements and related notes included in this Quarterly Report on Form 10-Q and with the sections entitled "Special Cautionary Note Regarding Forward-Looking Statements," Part I, Item 1A, "Risk Factors," and our consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2019.

Overview

We are an online retailer and advancer of blockchain technology. As used herein, "Overstock", "Overstock.com", "O.co", "the Company", "we," "our" and similar terms include Overstock.com, Inc. and our majority-owned subsidiaries, unless the context indicates otherwise.

Our Retail Business

Our online retail business seeks to provide goods to furnish and accessorize "dream homes" for our target customers—consumers who seek quality, stylish merchandise at bargain prices. We believe that the furniture and home goods market, which

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is highly fragmented and has traditionally been served by brick and mortar stores, will continue transitioning to online sales, particularly as Millennial consumers (which we define as those aged 21-37), who are generally comfortable shopping online, start families and move into new homes. As a result of the COVID-19 pandemic and resulting state and local government mandates of home confinement and closure of many brick-and-mortar stores, we have seen strong trends to online sales as consumers migrate to online shopping. We regularly change our product assortment to meet the evolving preferences of our customers and current trends. Our products include, among others, furniture, home décor including rugs, bedding and bath, home improvement, and kitchen items. We sell our products and services through our Internet websites located at www.overstock.com, www.o.co and www.o.biz (referred to collectively as the "Website"). Nearly all our retail sales through our Website were from transactions in which we fulfilled orders through our network of manufacturers, distributors and other suppliers ("partners") selling on our Website. Our use of the term "partner" does not mean that we have formed any legal partnerships with any of our retail partners. We provide our partners with access to a large customer base and convenient services for order fulfillment, customer service, returns handling, and other services. Our supply chain allows us to ship directly to our customers from our suppliers or from our warehouses. Our retail sales also includes sales of our own inventory shipped from our warehouses, including some customer returns of partner products.

Our Medici Ventures Business

Our Medici business initiatives include our wholly-owned subsidiary, Medici Ventures, Inc. ("Medici Ventures"), which conducts the majority of its business through its majority-owned subsidiary tZERO Group, Inc. ("tZERO"). Medici Ventures' strategy is to create or foster a set of products and solutions that leverage blockchain technology to generate efficiencies and increase security and control in six areas: identity management, property rights and management, central banking and currencies, capital markets, supply chains and commerce, and voting systems. A blockchain is a cryptographically secured, distributed infrastructure, or network, which may be accessed and, in some cases, maintained by each member of the network. Medici Ventures' team of software engineers, developers and other technologists work in blockchain development and deployment and enterprise level software development and deployment. Medici Ventures provides the services of some of its software engineers, developers, or other technologists to other blockchain companies. Medici Ventures also owns strategic minority equity interests in several blockchain-related companies, each of which focuses on at least one of the areas mentioned above. Medici Ventures takes an active interest in and holds seats on the boards of some of these companies. All the companies in which Medici Ventures holds strategic equity interests are startup businesses, businesses in the development stage, or businesses with a short operating history. The majority of Medici Ventures' business is its 80% interest in tZERO, as described below.
    
Our tZERO Business

tZERO is a financial technology company pursuing initiatives to develop and commercialize financial applications of blockchain technologies. tZERO's primary focus is on the development and adoption of digital securities. tZERO focuses on developing the supply side of this marketplace by creating, marketing and licensing a suite of technologies (the "tZERO Technology Stack") that enables issuers to issue, and relevant regulated market participants to support the issuance, trading, clearance and settlement of digital securities. Throughout this report we refer to "digital securities" which are conventional uncertificated securities where the issuer arranges for a digital "courtesy carbon copy" of the transfer agent's share registry to be viewable on the blockchain and may also be referred to as "digitally-enhanced securities".
    
tZERO also supports the demand for and adoption of such assets by developing the tZERO Technology Stack for use by regulated venues on which those digital securities can trade, as well as investing in subsidiaries and joint venture entities that own and operate such trading venues. These investments include the alternative trading system (the "tZERO ATS") run by its wholly-owned subsidiary, tZERO ATS, LLC, which provides a licensed venue for matching buy and sell orders to its broker-dealer subscribers, including for the trading of digital securities, and its joint venture with BOX Digital Markets LLC ("BOX Digital"), intended to develop a U.S. national securities exchange facility with regulatory approvals enabling it to support trading in a type of digital security called a security token. Another wholly-owned subsidiary of tZERO, tZERO Markets, LLC ("tZERO Markets"), is in the process of seeking regulatory approvals from FINRA and the SEC and, subject to such approval, intends to offer a website and mobile application that allows retail customers to conduct self-directed trading of conventional and digital securities, along with other activities.

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

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For additional information regarding the description of our businesses, see Item 7 of Part II, "Management's Discussion and Analysis of Financial Condition and Results of Operations" of our 2019 Annual Report on Form 10-K.

Strategies for our Retail Business

Our Retail business initiatives enable our long-term focus on our three brand pillars, "Product Findability," "Smart Value," and "Easy Delivery and Support." Initiatives for the Retail business include:

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

Overhaul Discounting and Pricing Experience - "Smart Value" is the central brand pillar of our value proposition. We believe clarifying our pricing and discounting experience allows customers to more confidently purchase at Overstock. Savvy shoppers expect a "smart deal," including saving through coupons, site sales, Club O rewards and financing. We have historically offered free shipping (over $45) but during the COVID-19 pandemic, in order to serve our customers during this challenging time, we are offering free shipping on everything to the continental U.S. We believe our net promoter score (NPS), repeat purchase rates and conversion will improve as we better optimize the mix of offers and clarify the pricing and discounting experience.

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

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

Strategies for our Medici Business

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

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

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

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

Strategies for our tZERO Business

tZERO is a financial technology company pursuing initiatives to develop and commercialize the financial applications of blockchain technologies. tZERO's primary initiatives currently consist of the following:


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

Enhance liquidity - tZERO ATS is focused on enhancing liquidity. To achieve this, tZERO ATS, LLC is in discussions with several broker-dealers interested in subscribing to the tZERO ATS, which would enable their customers to trade digital securities traded on the ATS. tZERO is also supporting the distribution of Overstock's digital dividend, which it believes will serve as a catalyst for greater participation on the tZERO ATS. tZERO also continues to develop new trading venues for digital securities such as BSTX as it seeks regulatory approval for a U.S. national exchange facility, as well as working to launch tZERO Markets (subject to regulatory approval) to support further investors who wish to access such trading venues.

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

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

Critical Accounting Policies and Estimates
 
The preparation of our financial statements requires that we make estimates and judgments. We base these on historical experience and on other assumptions that we believe to be reasonable. Our critical accounting policies are discussed in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" section of our Annual Report on Form 10-K for the year ended December 31, 2019, and our accounting policies and use of estimates are further discussed in Item 1 of Part I, "Financial Statements (Unaudited)"—Note 2. Accounting Policies, contained in the "Notes to Unaudited Consolidated Financial Statements" of this Quarterly Report on Form 10-Q and elsewhere in this Management's Discussion and Analysis of Financial Condition and Results of Operations.

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

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

Revenue decreased approximately 4% in Q1 2020 compared to the same period in 2019. This decrease was primarily due to decreased retail product sales resulting from a 2% decrease in customer orders and an increase in deferred revenue, partially offset by an increase in tZERO revenue mostly attributable to SpeedRoute trading revenue. Retail product sales and new customer growth accelerated significantly at the end of March corresponding to the impact of the COVID-19 pandemic, which trend has continued into April 2020, as discussed further under "—Additional commentary related to COVID-19" below. Due to the timing of this customer activity and in accordance with our revenue recognition policy, a portion of revenue will be

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recognized in Q2 when products were delivered. While we have observed this recent acceleration of demand for our products and resulting sales, we cannot estimate the impact that COVID-19 will have on our business in the future.

Gross profit increased approximately 4% in Q1 2020 compared to the same period in 2019 primarily due to an increase in gross margin. Gross margin increased to 21.6% in Q1 2020, compared to 19.9% in Q1 2019, primarily due to a decrease in shipping and returns costs and an increase in volume through our Overstock Sponsored Product platform.

Sales and marketing expenses as a percentage of revenue increased from 9.1% in Q1 2019 to 10.5% in Q1 2020 primarily driven by increased spending in the sponsored search and display ads on social media marketing channels, partially offset by decreased spending in the television marketing channel. These changes in marketing spending were particularly effective in our customer acquisition efforts, resulting in a 16% increase in traffic and a 9% increase in new customers compared to the first quarter of 2019.

Technology expenses decreased $2.6 million for the three months ended March 31, 2020 compared to the three months ended March 31, 2019 primarily due to a $1.2 million decrease in technology licenses and maintenance costs, a $404,000 decrease in depreciation expense, a $326,000 decrease in technology staff-related costs, and a $299,000 decrease in consulting costs.

General and administrative expenses decreased $7.8 million for the three months ended March 31, 2020 compared to the three months ended March 31, 2019, primarily due to a $2.5 million legal settlement, a $2.1 million decrease in consulting expenses, and a $1.9 million decrease in staff-related costs.

Liquidity

Our consolidated cash and cash equivalents balance increased from $112.3 million as of December 31, 2019 to $141.3 million, as of March 31, 2020, an increase of $29.0 million, primarily as the result of $47.5 million in proceeds from long-term debt, $2.8 million in proceeds received in January from the sale of common stock executed in late December 2019 under our "at the market" sales agreement with JonesTrading, net of offering costs, and $2.2 million in proceeds from the sale of marketable securities, partially offset by cash outflows from operating activities of $12.2 million, cash outflow of $4.1 million from the deconsolidation of MLG's net assets, and $3.6 million in expenditures for property and equipment.
    
Additional commentary related to Medici Ventures

The majority of Medici Ventures' business is its 80% interest in tZERO, which is described below. The remaining business activities of Medici Ventures are focused on developing and advancing blockchain technology. As a result of its business model of providing technical assistance to companies in which Medici Ventures owns an interest, as well as the early stage of development of the companies in which it owns interests, Medici Ventures has not yet generated material revenues. Medici Ventures intends to continue to acquire strategic equity interests in blockchain-related companies, with a focus on companies to which Medici Ventures believes it can provide technical or managerial assistance from time to time.
For the quarter ended March 31, 2020, our pre-tax income in our Medici Ventures business, excluding our loss in our tZERO business, was $5.9 million primarily as a result of a $10.7 million gain recognized on the deconsolidation of MLG; however, we expect to continue to incur significant losses in our Medici Ventures business during 2020.

Additional commentary related to tZERO

To date, tZERO has focused primarily on developing its blockchain businesses and exploring opportunities for novel financial applications of blockchain technology. tZERO does not yet have a stable customer base or backlog orders and has not yet generated any meaningful revenue from any commercially available applications of its blockchain initiatives. The businesses, products, and services that tZERO is pursuing or contemplating will require substantial additional funding, initially for technology development and regulatory compliance, as well as for working capital, marketing and sales, and other substantial costs of developing new products and businesses in emerging areas of technology. For the three months ended March 31, 2020, our pre-tax loss in our tZERO business, excluding our loss in the non-tZERO portion of our Medici business, was $12.6 million, and we expect to continue to incur significant losses in our tZERO business during 2020.


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Additional commentary related to COVID-19

Overstock has responded well to the opportunities and challenges brought by COVID-19. In our retail business, customer demand has increased significantly, particularly in our key home furnishings categories. As a result, we have seen an increase in website traffic and new customers, and our retail sales have accelerated to over 120% year over year growth in April. Our online-only platform and partner network of more than 4,500 drop-ship facilities has allowed us to meet this surge in demand without significant operational disruption. However, we have faced challenges with increased volume through our customer service channels and with capacity issues from our shipping carriers. We have seen little interruption at tZERO and its subsidiaries, some of which have seen significantly increased trading activity due to market volatility. However, market depression, volatility, and delays in trading and capital raises pose some risk to tZERO going forward. Most of our Medici Ventures keiretsu companies have seen little disruption; some are working to solve some of the global problems exacerbated by this pandemic. All corporate staff is working remotely and we are hiring in key areas to support the growth we are seeing in our retail business. We are unsure of the duration of these impacts and how the evolving COVID-19 situation will affect our business in the future.

Series A-1 Dividend

On July 30, 2019, we announced that our Board of Directors had declared a dividend (the "Dividend") payable in shares of our Series A-1 Preferred Stock. The Dividend is payable at a ratio of 1:10, meaning that one share of Series A-1 Preferred Stock will be issued for every ten shares of OSTK common stock, ten shares of Series A-1 Preferred Stock, or ten shares of Series B Preferred Stock held by all holders of such shares as of the record date for the Dividend. The record date for the Dividend was April 27, 2020, and the distribution date for the Dividend will be May 19, 2020.


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Results of Operations
 
Comparisons of Three Months Ended March 31, 2020 to Three Months Ended March 31, 2019

Revenue
 
The following table reflects our net revenues for the three months ended March 31, 2020 and 2019 (in thousands):
 
 
Three months ended
March 31,
 
 
 
 
 
 
2020
 
2019
 
$ Change
 
% Change
Revenue, net
 
 

 
 

 
 

 
 

Retail
 
$
339,598

 
$
362,625

 
$
(23,027
)
 
(6.4
)%
Other
 
11,975

 
5,104

 
6,871

 
134.6
 %
Total revenue, net
 
$
351,573

 
$
367,729

 
$
(16,156
)
 
(4.4
)%

The approximately 4% decrease in total net revenue for the three months ended March 31, 2020, as compared to the same period in 2019, was primarily due to decreased retail product sales resulting from a 2% decrease in customer orders, and an increase in deferred revenue, partially offset by an increase in tZERO revenue mostly attributable to SpeedRoute trading revenue. Retail product sales and new customer growth accelerated significantly at the end of March aligning to the impact of the COVID-19 pandemic. Due to the timing of this customer activity and in accordance with our revenue recognition policy, a portion of revenue will be recognized in Q2 when products were delivered. While we have observed this recent acceleration of demand for our products and resulting sales, we cannot estimate the impact that COVID-19 will have on our business in the future.

International net revenues were less than 2% of total net revenues for each of the three months ended March 31, 2020 and 2019.

Change in estimate of average transit times (days)
 
Our retail revenue related to merchandise sales is recognized upon delivery to our customers. As we ship high volumes of packages through multiple carriers, it is not practical for us to track the actual delivery date of each shipment. Therefore, we use estimates to determine which shipments are delivered and, therefore, recognized as revenue at the end of the period. Our delivery date estimates are based on average shipping transit times. We review and update our estimates on a quarterly basis based on our actual transit time experience. However, actual shipping times may differ from our estimates, which can be further impacted by uncertainty, volatility, and any disruption to our carriers caused by the COVID-19 pandemic.
 
The following table shows the effect that hypothetical changes in the estimate of average shipping transit times would have had on the reported amount of revenue and pre-tax income for the three months ended March 31, 2020 (in thousands):
 
 
Three months ended
March 31, 2020
Change in the Estimate of Average Transit Times (Days)
 
Increase (Decrease)
Revenue
 
Increase (Decrease)
 Pre-Tax Income
2
 
$
(9,539
)
 
$
(1,716
)
1
 
$
(4,712
)
 
$
(846
)
As reported
 
 As reported

 
As reported

-1
 
$
6,266

 
$
1,093

-2
 
$
18,286

 
$
3,284

 

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Gross profit and gross margin

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

The following table reflects our net revenues, cost of goods sold and gross profit for the three months ended March 31, 2020 and 2019 (in thousands):
 
 
Three months ended
March 31,
 
 
 
 
 
 
2020
 
2019
 
$ Change
 
% Change
Revenue, net
 
 

 
 

 
 

 
 

Retail
 
$
339,598

 
$
362,625

 
$
(23,027
)
 
(6.4
)%
Other
 
11,975

 
5,104

 
6,871

 
134.6
 %
Total net revenue
 
351,573


367,729

 
(16,156
)
 
(4.4
)%
Cost of goods sold
 
 

 
 

 
 

 
 

Retail
 
265,392

 
290,640

 
(25,248
)
 
(8.7
)%
Other
 
10,341

 
3,965

 
6,376

 
160.8
 %
Total cost of goods sold
 
275,733

 
294,605

 
(18,872
)
 
(6.4
)%
Gross Profit
 
 

 
 

 
 

 
 

Retail
 
74,206

 
71,985

 
2,221

 
3.1
 %
Other
 
1,634

 
1,139

 
495

 
43.5
 %
Total gross profit
 
$
75,840

 
$
73,124

 
$
2,716

 
3.7
 %

Gross margins for the past five quarterly periods and fiscal year ending 2019 were:
 
 
Q1 2019
 
Q2 2019
 
Q3 2019
 
Q4 2019
 
FY 2019
 
Q1 2020
Retail
 
19.9
%
 
19.7
%
 
20.0
%
 
20.7
%
 
20.1
%
 
21.9
%
Other
 
22.3
%
 
22.6
%
 
20.6
%
 
19.1
%
 
21.0
%
 
13.6
%
Combined
 
19.9
%
 
19.8
%
 
20.0
%
 
20.6
%
 
20.1
%
 
21.6
%

Gross profit for the three months ended March 31, 2020 increased approximately 4% compared to the same period in 2019, primarily due to an increase in gross margin. Gross margin increased to 21.6% for the three months ended March 31, 2020, compared to 19.9% for the same period in 2019. This increase in gross margin was primarily due to a decrease in shipping and returns costs and an increase in volume through our Overstock Sponsored Product platform.

Fulfillment costs

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

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