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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis contains forward-looking statements relating to future events or our future financial or operating performance that involve risks and uncertainties, as set forth above under "Special Cautionary Note Regarding Forward-Looking Statements." Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors described in this Annual Report on Form 10-K, including those set forth above under "Special Cautionary Note Regarding Forward-Looking Statements" or in Item 1A under the heading "Risk Factors" or elsewhere in this Annual Report on Form 10-K. In addition, our future results may be significantly different from our historical results.

Financial Reporting Presentation Relating to the Pelion Transaction

Unless otherwise specified, disclosures throughout Management's Discussion and Analysis of Financial Condition and Results of Operations, including disclosures under “Liquidity and Capital Resources,” reflect continuing operations only. See Note 4—Discontinued Operations in the "Notes to Consolidated Financial Statements" included in Item 8 of Part II, "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K for further information.

Overview

Overstock seeks to provide goods to furnish and accessorize "Dream Homes for All," particularly for our target customers—consumers who seek smart value on quality, stylish merchandise at competitive prices, and who want an easy shopping experience. We believe that the furniture and home furnishings market, which is highly fragmented and has traditionally been served by brick and mortar stores, will continue transitioning to online sales as consumers become increasingly comfortable shopping online. Additionally, the COVID-19 pandemic has expedited consumer migration to online shopping. We regularly update our product assortment to meet the evolving preferences of our customers and current trends. Our products include furniture, décor, area rugs, bedding and bath, home improvement, outdoor, and kitchen and dining items, among others. Our supply chain allows us to ship directly to our customers from our suppliers or from our warehouses. See Item 1—"Business—Our Business" for an additional overview on our business.

Strategies for our Business

Our business initiatives enable our long-term focus on our three brand pillars, "Product Findability," "Smart Value," and "Easy Delivery and Support." 2021 initiatives for the business included:

•Improve Product Findability – Directly supporting our "Product Findability" brand pillar by improving customer search and navigation through refinement of our search taxonomy and product attribute infrastructure with the goal of enhanced search relevancy and recommendations.

•Grow Canada Market Share – Expanding geographical engagement to grow our Canadian customer base by providing a wholesale change in our Canadian "Smart Value" and "Easy Delivery and Support" customer shopping experience.

•Grow Government Market Share – Improving our Government website with more competitive market features and products that offer an intuitive procurement experience, and provide the flexibility to expand the platform to additional government customers.

•Improve Enterprise Platform – Improving our data strategy to connect high-quality, intuitive data with our business users to enable faster insights. Additionally, embracing the public cloud in order to promote greater resilience for the business in the event of unforeseen circumstances.

Our ability to pursue some or all of the strategies described above, and the extent to which we would be able to pursue some or all of them, will depend on the resources we have available, and may require significantly more capital than we currently have. These costs have been and are expected to continue to be material.

Executive Commentary

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

Our consolidated cash and cash equivalents balance increased from $495.4 million as of December 31, 2020 to $503.3 million as of December 31, 2021, an increase of $7.9 million, primarily as the result of cash inflows from operating activities of $98.0 million, which was partially offset by contributions for capital calls relating to our limited partnership interest in the Medici Ventures, L.P. fund of $41.1 million, expenditures for property and equipment of $13.6 million, and deconsolidation of discontinued operations cash of $34.3 million during the year ended December 31, 2021.

Revenue increased 11% in 2021 compared to 2020. This increase was primarily due to increased product sales resulting from a 23% increase in average order value driven by a continued product mix shift into home furniture categories, partially offset by a 10% decrease in customer orders. This decreased order activity was largely driven by tapering of the accelerated customer growth and online penetration we experienced during the early days of the COVID-19 pandemic in 2020.

Gross profit increased 9% in 2021 compared to 2020 primarily due to increased sales volume, partially offset by a decrease in gross margin. Gross margin decreased to 22.6% in 2021, compared to 22.9% in 2020, primarily due to one-time benefits realized in 2020 such as reduced promotional discounting and fees charged to partners due to unmet contractual service levels, partially offset by lower returns activity in 2021 consistent with order declines.

Sales and marketing expenses as a percentage of revenue increased to 11.0% in 2021 compared to 10.5% in 2020 primarily due to increased spending on paid listing advertisements and keywords to support our customer acquisition strategy, partially offset by less broadcast media spend and gained leverage in staff-related expenses.

Technology expenses increased $6.8 million in 2021 compared to 2020 primarily due to staff-related costs to support strategic initiatives and increased cloud adoption.

General and administrative expenses decreased $10.3 million in 2021 compared to 2020 primarily driven by a reduction in staff-related expenses, including accrued bonus and reduced discretionary consulting spend, partially offset by a beneficial $8.6 million reversal of a legal settlement accrual in 2020 and a $2.5 million legal settlement realized in 2020.

Additional commentary related to COVID-19

Overstock has continued to respond to the challenges and opportunities created by the COVID-19 pandemic. In fiscal year 2020, we saw a substantial year-over-year increase in our Website traffic, number of new customers, and customer demand, particularly in our home furniture and furnishings categories. While many of our key metrics remain positive, some have receded from the elevated 2020 levels during 2021. Our online-only platform and partner network with thousands of fulfillment centers have enabled us to meet this increase in demand. Our three warehouses have remained operational based on our sustained implementation of sound safety measures, including staggered shifts and social distancing. These measures are continuously updated based on CDC guidelines. There remain continued challenges throughout the supply chain in factory production capacity, inbound freight delays, as well as carrier delivery constraints and fulfillment performance from some suppliers. We have evaluated and implemented a remote working plan for our employees; most of our corporate employees are continuing to work from home remotely without incident. We cannot predict how the COVID-19 pandemic, including the spread of variants thereof, or the vaccination rate will unfold in the coming months, regionally, nationally and internationally. Nevertheless, the challenges arising from the pandemic have not adversely affected our liquidity, revenues, or capacity to service our debt, nor have these conditions required us to reduce our capital expenditures.

Liquidity and Capital Resources

We believe that our cash and cash equivalents currently on hand and expected cash flows from future operations will be sufficient to continue operations for the next twelve months and beyond. We continue to monitor, evaluate, and manage our operating plans, forecasts, and liquidity in light of our strategic objectives, industry and economic changes, including the most recent developments driven by the COVID-19 pandemic. We proactively seek opportunities to improve the efficiency of our

operations and have in the past and may in the future take steps to realize internal cost savings, including aligning our staffing needs based on our current and expected future levels of operations and process streamlining.

We periodically evaluate opportunities to repurchase our equity securities, obtain credit facilities, or issue additional debt or equity securities which may impact our future operations and cash flows. In addition, we may, from time to time, consider the investment in, or acquisition of, complementary businesses, products, services, or technologies to expand our business, any of which might affect our liquidity requirements or cause us to issue additional debt or equity securities that would be dilutive to shareholders. There can be no assurance that financing arrangements will be available in amounts or on terms acceptable to us, if at all. Our future results may be significantly different from our historical results for several other reasons as well as the risk factors described in Item 1A. "Risk Factors."

Cash flows from discontinued operations are disclosed on our statement of cash flows as separate line items in the operating, investing, and financing activities sections. We anticipate that the absence of cash flows from discontinued operations will positively affect future liquidity and capital resources.

Current sources of liquidity

Our principal sources of liquidity are cash flows generated from operations, existing cash and cash equivalents, and accounts receivable, net. At December 31, 2021, we had cash and cash equivalents of $503.3 million and accounts receivable, net of $21.2 million.

Cash flow information is as follows (in thousands):

Year ended December 31,

Cash provided by (used in):

At December 31, 2021, we had $150.0 million available under our "at the market" sales program which permits us to conduct "at the market" public offerings of our common stock under a sales agreement, dated June 26, 2020, with JonesTrading Institutional Services LLC ("JonesTrading") and D.A. Davidson & Co. ("D.A. Davidson"). We did not sell any shares under our at the market sales program during the years ended December 31, 2021 and 2020.

Cash flows from operating activities

Cash received from customers generally corresponds to our net revenues as our customers primarily use credit cards to buy from us causing our receivables from these sales transactions to settle quickly. We have payment terms with our partners that generally extend beyond the amount of time necessary to collect proceeds from our customers. As a result of increased online shopping migration from the COVID-19 pandemic, we saw our revenue accelerate beginning in the second half of March 2020, as customers turned to online shopping, which caused our cash, cash equivalents, and accounts receivable balances to increase during 2020 compared to balances prior to the pandemic. While many of our key metrics that contribute to positive cash flow remain positive, some have receded from the elevated 2020 levels during 2021. We continue to monitor, evaluate, and manage our operating plans, forecasts, and liquidity in light of the most recent developments driven by the COVID-19 pandemic.

The $98.0 million of net cash provided by continuing operating activities during the year ended December 31, 2021 was primarily due to income from continuing operations, adjusted for non-cash items, of $141.6 million, offset by cash used by changes in operating assets and liabilities of $43.6 million.

The $226.6 million of net cash provided by continuing operating activities during the year ended December 31, 2020 was primarily due to income from continuing operations, adjusted for non-cash items, of $129.2 million and cash provided by changes in operating assets and liabilities of $97.4 million.

Cash flows from investing activities

The $56.4 million of net cash used in investing activities during the year ended December 31, 2021 was primarily due to contributions for capital calls relating to our limited partnership interest in the Medici Ventures, L.P. fund of $41.1 million and expenditures for property and equipment of $13.6 million.

The $15.3 million of net cash used in investing activities during the year ended December 31, 2020 was primarily due to expenditures for property and equipment of $14.9 million.

Cash flows from financing activities

The $12.7 million used in financing activities during the year ended December 31, 2021 resulted primarily from $8.3 million of payments of taxes withheld upon vesting of restricted stock and $3.0 million of payments on long-term debt.

The $231.4 million provided by financing activities during the year ended December 31, 2020 resulted primarily from $195.5 million of net proceeds from sales of our common stock, net of offering costs (including commissions), and $47.5 million of proceeds from our long-term debt secured by our building and land, partially offset by $2.6 million of payments on long-term debt and $2.6 million of payments of taxes withheld upon vesting of restricted stock.

Contractual Obligations and Commitments

The following table summarizes our contractual obligations as of December 31, 2021 and the effect such obligations and commitments are expected to have on our liquidity and cash flow in future periods (in thousands):

Payments due by period

___________________________________________

(1) — Represents the future minimum lease payments under non-cancellable operating leases. For information regarding our operating lease obligations, see Item 8 of Part II, "Financial Statements and Supplementary Data"—Note 12—Leases contained in the "Notes to Consolidated Financial Statements" of this Annual Report on Form 10-K.

(2) — Represents future interest and principal payments on our financing agreements. For information regarding our financing agreements, see Item 8 of Part II, "Financial Statements and Supplementary Data"—Note 11—Borrowings contained in the "Notes to Consolidated Financial Statements" of this Annual Report on Form 10-K.

Tax contingencies

We are involved in various tax matters, the outcomes of which are uncertain. As of December 31, 2021, and 2020, tax contingencies were $3.2 million and $900,000, respectively, which are included in our reconciliation of unrecognized tax benefits (see Item 8 of Part II, "Financial Statements and Supplementary Data"—Note 20—Income Taxes contained in the "Notes to Consolidated Financial Statements" of this Annual Report on Form 10-K). The increase in tax contingencies in 2021 was primarily a result of COVID-19 tax protections expiring during the year. Changes in state, federal, and foreign tax laws may increase our tax contingencies. The timing of the resolution of income tax contingencies is highly uncertain, and the amounts ultimately paid, if any, upon resolution of issues raised by the taxing authorities may differ from the amounts accrued. It is reasonably possible that within the next 12 months we will receive additional assessments by various tax authorities. These assessments may or may not result in changes to our contingencies related to positions on prior years' tax filings.

Results of Operations

Net revenue, costs of goods sold, gross profit and gross margin

The following table reflects our net revenue, costs of goods sold, gross profit and gross margin for the years ended December 31, 2021 and 2020 (in thousands):

Year ended December 31,

Cost of goods sold

Year-over-year percentage growth

Revenue, net 10.5 %

Gross profit 9.2 %

Percent of total revenue, net

Cost of goods sold

Product costs and other cost of goods sold 73.5 % 73.1 %

Fulfillment and related costs 3.9 % 4.0 %

Total cost of goods sold 77.4 % 77.1 %

The 11% increase in net revenue for the year ended December 31, 2021, as compared to the same period in 2020, was primarily due to increased product sales resulting from a 23% increase in average order value driven by a continued product mix shift into home furniture categories, partially offset by a 10% decrease in customer orders. This decreased order activity was largely driven by tapering of the accelerated customer growth and online penetration we experienced during the early days of the COVID-19 pandemic in 2020.

We cannot estimate the impact that the ongoing COVID-19 pandemic, the intensity of additional waves of the pandemic or the subsiding of the pandemic and return to prior patterns of economic activity will have on our business in the future due to the unpredictable nature of the ultimate development and duration of the COVID-19 pandemic.

International sales were less than 1% of total net revenues for 2021 and 2020.

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

Fulfillment costs as a percentage of sales may vary due to several factors, such as our ability to manage costs at our warehouses, significant changes in the number of units received and fulfilled, the extent to which we use third-party fulfillment services and warehouses, and our ability to effectively manage customer service costs and merchant fees. Fulfillment and related costs remained relatively consistent as a percentage of revenue during the year ended December 31, 2021 as compared to 2020.

Gross margins for the past eight quarterly periods and years ending December 31, 2021 and 2020 were:

Gross profit for the year ended December 31, 2021 increased 9% compared to the same period in 2020, primarily due to increased sales volume, partially offset by a decrease in gross margin. Gross margin decreased to 22.6% for the year ended December 31, 2021, compared to 22.9% for the same period in 2020, primarily due to one-time benefits realized in 2020 such as reduced promotional discounting and fees charged to partners due to unmet contractual service levels, partially offset by lower returns activity in 2021 consistent with order declines.

Operating expenses

Sales and marketing expenses

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

The following table reflects our sales and marketing expenses for the years ended December 31, 2021 and 2020 (in thousands):

Year ended December 31,

Advertising expense included in sales and marketing expenses 289,019 245,190

Year-over-year percentage growth

Sales and marketing expenses 16.0 %

Advertising expense included in sales and marketing expenses 17.9 %

Percentage of net revenues

Sales and marketing expenses 11.0 % 10.5 %

Advertising expense included in sales and marketing expenses 10.5 % 9.8 %

The 50 basis point increase in sales and marketing expenses for the year ended December 31, 2021, as compared to the same period in 2020, was primarily due to increased spending on paid listing advertisements and keywords to support our customer acquisition strategy, partially offset by less broadcast media spend and gained leverage in staff-related expenses.

We are also experiencing an increasingly competitive digital marketing landscape. We have competitors who are spending significant amounts on advertising, bidding up the cost of certain marketing channels, such as paid keywords, and expect this trend to continue. While we may not choose to match their levels of spending, this has increased our marketing costs in recent years.

We do not include costs associated with our discounted shipping and other promotions, such as coupons in sales and marketing expense. Rather, we account for them as a reduction of revenue and therefore affect sales and gross margin. We consider promotions, such as coupons, etc. and our policy of free shipping on all orders, as an effective marketing tool, and intend to continue to offer them as we deem appropriate as part of our overall marketing plan.

Technology expenses

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

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

The following table reflects our technology expenses for the years ended December 31, 2021 and 2020 (in thousands):

Year ended December 31,

Year-over-year percentage growth

Technology expenses 5.8 %

Technology expenses as a percent of net revenues 4.5 % 4.7 %

Technology expenses increased $6.8 million for the year ended December 31, 2021, as compared to the same period in 2020, primarily due to staff-related costs to support strategic initiatives and increased cloud adoption.

General and administrative expenses

The following table reflects our general and administrative expenses for the years ended December 31, 2021 and 2020 (in thousands):

Year ended December 31,

General and administrative expenses $ 87,399 $ 97,679

Year-over-year percentage growth

General and administrative expenses (10.5) %

General and administrative expenses as a percent of net revenues 3.2 % 3.9 %

The $10.3 million decrease in general and administrative expenses for the year ended December 31, 2021, as compared to the same period in 2020, was primarily driven by a reduction in staff-related expenses, including accrued bonus and reduced discretionary consulting spend, partially offset by a beneficial $8.6 million reversal of a legal settlement accrual in 2020 and a $2.5 million legal settlement realized in 2020.

Other income (expense), net

The $11.9 million increase in other income (expense), net for the year ended December 31, 2021, as compared to the same period in 2020, is primarily due to the $12.6 million income from our equity interests in Medici Ventures, L.P. and tZERO.

Income taxes

Our effective tax rate for the years ended December 31, 2021 and 2020 was (39.6)% and 1.4%, respectively. Our effective tax rate is affected by recurring items such as research tax credits and non-recurring items such as changes in valuation allowances. We record valuation allowances against deferred tax assets when there is uncertainty about our ability to generate future income in relevant jurisdictions, and the effects of the COVID-19 pandemic on our business make estimates of future income more challenging due to the unpredictable nature of the ultimate scope and duration of the pandemic. It is also affected to a lesser extent by tax rates in foreign jurisdictions and the relative amount of income we earn in those jurisdictions, which we expect to be fairly consistent in the near term. Our high effective tax rate is primarily attributable to the valuation allowance release for certain federal and state deferred tax assets in the current year.

We have indefinitely reinvested foreign earnings of $5.7 million at December 31, 2021. We would need to accrue and pay various taxes on this amount if repatriated. We do not intend to repatriate these earnings.

Comparison of Years Ended December 31, 2020 and 2019

Net revenue, costs of goods sold, gross profit and gross margin

The following table reflects our net revenue, costs of goods sold, gross profit and gross margin for the years ended December 31, 2020 and 2019 (in thousands):

Year ended December 31,

Cost of goods sold

Year-over-year percentage growth

Net revenue 73.8 %

Gross profit 98.4 %

Percent of total net revenue

Cost of goods sold

Product costs and other cost of goods sold 73.1 % 75.3 %

Fulfillment and related costs 4.0 % 4.6 %

Total cost of goods sold 77.1 % 79.9 %

The 74% increase in net revenue for the year ended December 31, 2020, as compared to the same period in 2019, was primarily due to increased retail product sales resulting from a 71% increase in customer orders, 111% new customer growth, and strong repeat customer behavior, largely due to a consumer migration toward online shopping in response to COVID-19.

International sales were less than 1% of total net revenues for 2020 and less than 2% of total net revenues for 2019.

Gross margins for the past eight quarterly periods and years ending December 31, 2020 and 2019 were:

Gross profit for the year ended December 31, 2020 increased 98% compared to the same period in 2019, primarily due to an increase in retail product sales and an increase in gross margin. Gross margin increased to 22.9% for the year ended December 31, 2020, compared to 20.1% for the same period in 2019, primarily due to our new partner marketing allowance program that was fully rolled out in the second quarter of 2020, which requires all of our partners to participate and allows us to advertise more strategically to our customers. Gross margin also benefited from reduced promotional discounting as we balanced spend to support new customer acquisition efforts, gained leverage in our fixed warehouse infrastructure, an increase in fees charged to partners due to unmet contractual service levels, and lower customer service costs due to slower growth in our staffing relative to sales.

Operating expenses

Sales and marketing expenses

The following table reflects our sales and marketing expenses for the years ended December 31, 2020 and 2019 (in thousands):

Year ended December 31,

Advertising expense included in sales and marketing expenses 245,190 124,276

Year-over-year percentage growth

Sales and marketing expenses 85.4 %

Advertising expense included in sales and marketing expenses 97.3 %

Percentage of net revenues

Sales and marketing expenses 10.5 % 9.8 %

Advertising expense included in sales and marketing expenses 9.8 % 8.7 %

The 70 basis point increase in sales and marketing expenses for the year ended December 31, 2020, as compared to the same period in 2019, was primarily due to increased spending to support our customer acquisition strategy, resulting in a 111% increase in new customers compared to the twelve months ended December 31, 2019.

Technology expenses

The following table reflects our technology expenses for the years ended December 31, 2020 and 2019 (in thousands):

Year ended December 31,

Year-over-year percentage growth

Technology expenses 2.9 %

Technology expenses as a percent of net revenues 4.7 % 7.9 %

Technology expenses increased $3.2 million for the year ended December 31, 2020, as compared to the same period in 2019, primarily due to staff-related costs, including accrued bonuses.

General and administrative expenses

The following table reflects our general and administrative expenses for the years ended December 31, 2020 and 2019 (in thousands):

Year ended December 31,

General and administrative expenses $ 97,679 $ 96,729

Year-over-year percentage growth

General and administrative expenses 1.0 %

General and administrative expenses as a percent of net revenues 3.9 % 6.7 %

The $1.0 million increase in general and administrative expenses for the year ended December 31, 2020, as compared to the same period in 2019, primarily due to an increase in staff-related costs, including accrued bonuses, partially offset by an $8.6 million reversal of a legal settlement accrual, a $2.5 million legal settlement, a $1.9 million decrease in consulting expenses, and a reduction in discretionary spending due to adjustments related to the COVID-19 pandemic.

Other income, net

Other income, net had a $1.3 million increase for the year ended December 31, 2020, as compared to the same period in 2019.

Income taxes

Our effective tax rate for the years ended December 31, 2020 and 2019 was 1.4% and (1.7%), respectively. Our effective tax rate is affected by recurring items such as research tax credits and non-recurring items such as changes in valuation allowances. Our low effective tax rate is primarily attributable to the valuation allowance we are maintaining on our net deferred assets.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles ("GAAP") requires estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities in the consolidated financial statements and accompanying notes. The SEC has defined a company's critical accounting policies as the ones that are most important to the portrayal of the company's financial condition and results of operations, and which require the company to make its most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Based on this definition, we have identified the critical accounting policies, estimates and judgments addressed below. We also have other key accounting policies, which involve the use of estimates, judgments, and assumptions that are significant to understanding our results. For additional information, see Item 8 of Part II, "Financial Statements and Supplementary Data"—Note 2—Accounting Policies and Supplemental Disclosures. We believe that our estimates, assumptions, and judgments are reasonable. We evaluate our estimates and assumptions on an ongoing basis. Actual results may differ significantly from these estimates. Our critical accounting policies are as follows:

•estimate of unearned product revenue on undelivered product;

•assessment of control under the VIE model for retained noncontrolling interests; and

•initial valuation of retained noncontrolling interest in former subsidiaries.

Estimate of unearned product revenue on undelivered product

The following table shows the effect that hypothetical changes in the estimate of average shipping transit times would have had on the reported amount of revenue and income before taxes for the year ended December 31, 2021 (in thousands):

As reported As reported As reported

Assessment of control under the VIE model for retained noncontrolling interests

Initial valuation of retained noncontrolling interest in former subsidiaries

We measured our retained noncontrolling interest in former subsidiaries at fair value at the date of deconsolidation. In the absence of quoted market prices (e.g., a privately held entity), the fair value was determined in good faith under our valuation policy and process using generally accepted valuation approaches. We utilized an independent third party valuation firm to assist us in determining the fair values of our retained noncontrolling interest in former subsidiaries using a combination of a market approach and income approach. The market approach relied upon a comparison with guideline public companies or guideline transactions and entails selecting relevant financial information of the subject company, and capitalizing those amounts using valuation multiples that are based on empirical market observations. The income approach relied upon an analysis of its projected economic earnings discounted to present value (discounted cash flows). The fair value determination of our retained noncontrolling interest required the use of significant unobservable inputs (Level 3 inputs) as shown in the table within Note 4—Discontinued Operations. Due to the inherent uncertainty of determining the fair value of Level 3 securities that do not have a readily available market value, the determination of fair value required significant judgment or estimation and changes in the estimates and assumptions used in the valuation models could materially affect the determination of fair value for these assets. See Note 4—Discontinued Operations for further information.

For information about recent accounting pronouncements, see Item 8 of Part II, "Financial Statements and Supplementary Data"—Note 2—Accounting Policies and Supplemental Disclosures.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

Interest Rate Sensitivity

The fair value of our cash and cash equivalents (highly-liquid instruments with an original maturity of 90 days or less at the date of purchase) would not be significantly affected by either an increase or decrease in interest rates due mainly to the short-term nature of these instruments.

Our loan agreements carry a fixed blended annual interest rate of 4.45%. Since the Notes bear interest at a fixed rate, we have no direct financial statement risk associated with changes in interest rates.

Foreign Currency Risk

Most of our sales and operating expenses are denominated in U.S. dollars, and therefore, our total revenue and operating expenses are not currently subject to significant foreign currency risk.

Investment Risk

The fair values of our equity securities may be subject to fluctuations due to volatility of the stock market in general, investment-specific circumstances, and changes in general economic conditions. Volatile market conditions arising from the COVID-19 pandemic may result in significant changes in the value of our equity securities. At December 31, 2021, our recorded value in equity securities in public and private companies was $342.7 million, compared to $1.4 million at December 31, 2020, of which $174,000 relates to publicly traded companies, compared to $1.1 million at December 31, 2020, recorded at fair value, which are subject to market price volatility. For our equity interest in Medici Ventures, L.P., we record our proportionate share of the entity's reported net income or loss, which reflects the fair value changes of the underlying investments of the entity and any other income or losses of the entity. We have elected to account for our direct equity interest in tZERO using the fair value option. Our assessment includes a review of recent operating results and trends, recent sales/acquisitions of the equity securities, and other publicly available data. Valuations of private companies are inherently more complex due to the lack of readily available market data. As such, we believe that market sensitivities are not practicable.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Report of Independent Registered Public Accounting Firm 43

Consolidated Balance Sheets 46

Consolidated Statements of Operations 47

Consolidated Statements of Comprehensive Income (Loss) 48

Consolidated Statements of Changes in Stockholders' Equity 49

Consolidated Statements of Cash Flows 51

Notes to Consolidated Financial Statements 53

Schedule II Valuation and Qualifying Accounts 84

Report of Independent Registered Public Accounting Firm

To the Stockholders and Board of Directors

Overstock.com, Inc.:

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of Overstock.com, Inc. and subsidiaries (the Company) as of December 31, 2021 and 2020, the related consolidated statements of operations, comprehensive income (loss), changes in stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2021, and the related notes and financial statement schedule II (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2021, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 25, 2022 expressed an unqualified opinion on the effectiveness of the Company's internal control over financial reporting.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Estimate of unearned product revenue on undelivered product

As discussed in Notes 2, 10, and 18 to the consolidated financial statements, the Company recognizes product revenue when control of the product passes to the customer, typically at the date of delivery of the merchandise to the customer. As the Company ships high volumes of packages, the Company uses estimates to determine which shipments are delivered and recognized as product revenue at the end of the period. The Company's delivery estimates are based on average transit times, which are calculated using the following factors: (i) the type of shipping carrier, (ii) the fulfillment source, (iii) the delivery destination, and (iv) actual transit time experience. Unearned product revenue on undelivered product is included as a component of unearned revenue in the Company's consolidated balance sheet. The Company's unearned product revenue on undelivered product was $20.7 million at December 31, 2021.

We identified the evaluation of the estimate of unearned product revenue on undelivered product as a critical audit matter. There was a high degree of subjective auditor judgment required, specifically related to the estimate of the average transit times.

The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the Company's process to estimate unearned product revenue on undelivered product. This included management's controls over the estimate of average transit times and the associated judgment applied around adjustments to the estimate of average transit times. In addition, we assessed the estimate of average transit times by:

•comparing the estimate of average transit times at period-end to the estimate of average transit times at prior period-ends

•evaluating the estimate of average transit times at period-end to the Company's actual historical transit time experience

•assessing the impact to the estimate of average transit times at period-end by evaluating internal and external information including factors that may cause shipment disruptions such as seasonal demands, significant weather conditions, mandated restrictions on travel and work, supply chain constraints, or carrier reported logistical issues

•inspecting sales and shipping documents for a selection of product shipments that were used in the transit time estimate, recalculating the transit time by delivery type, and comparing to the Company's estimate of average transit times.

Assessment of control under the variable interest entity model

As discussed in Notes 1, 2, and 4 to the consolidated financial statements, on April 23, 2021, the Company entered into a Limited Partnership Agreement with Pelion MV GP, L.L.C. (Pelion), in connection with the closing of the Transaction Agreement dated January 25, 2021 between the Company, Medici Ventures, Inc. (Medici Ventures), Pelion, and Pelion, Inc. As a result of this transaction, the Company performed a reassessment of control over both Medici Ventures and tZERO Group, Inc. (tZERO), and determined that both entities met the definition of variable interest entities (VIE) in which the Company held a variable interest. The assessment further showed that the Company was not the primary beneficiary of and should not consolidate either entity because the Company does not have the power, either explicit or implicit through voting rights or otherwise, to direct the activities that most significantly impact the economic performance of Medici Ventures or tZERO. Accordingly, the Company deconsolidated these entities' consolidated net assets and noncontrolling interest from the Company's consolidated financial statements and results on April 23, 2021. The Company's retained equity interests in these entities are classified as equity method investments. At April 23, 2021, the Company's retained equity interests had a fair value of $288.8 million.

We identified the determination of the primary beneficiary under the VIE model for the Company's retained interests in these entities as a critical audit matter. Evaluating whether the Company had the substantive power to direct the activities of the VIEs that most significantly impacted their economic performance required a high degree of complex auditor judgment.

The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the Company's process to assess control under the VIE model, including the Company's control related to its determination of the primary beneficiary. In addition, we performed the following:

•inquired of management to obtain an understanding of and evaluate the business purpose of the transaction and the activities that most significantly impact the economic performance of the entities

•evaluated management's determination of how decisions about the most significant activities are made and the party or parties that make them, including whether the Company's economic interest in the VIEs provides actual or effective power beyond its stated power

•evaluated the governing documents of Medici Ventures and tZERO, including the Limited Partnership Agreement, Transaction Agreement, and other publicly disclosed information to determine whether the Company held any substantive participating rights or had substantive power to direct the activities of the VIEs that most significantly impact their economic performance.

Initial valuation of retained noncontrolling interest in former subsidiaries

As discussed in Notes 2 and 4 to the consolidated financial statements, the Company measured its retained noncontrolling interest in former subsidiaries at fair value at the date of the deconsolidation of Medici Ventures and tZERO. The Company determined the fair values of former subsidiaries using a combination of market and income approaches. The income approaches relied on projected financial information discounted to present value (discounted cash flows). The fair value determination of the noncontrolling interest in former subsidiaries used Level 3 inputs that required significant judgment or

estimation. At April 23, 2021, the Company recognized a $243.5 million gain upon the deconsolidation of Medici Ventures and tZERO, which was included in the consolidated statements of income as part of Income (loss) from discontinued operations, net of income taxes and recorded a retained equity interest of $288.8 million, which was classified as equity method securities.

We identified the initial valuation of retained noncontrolling interest in the former subsidiaries upon deconsolidation as a critical audit matter. A high degree of subjective auditor judgment was required in evaluating one of the Company's discounted cash flow models used in the valuation. Specifically, the model was sensitive to reasonably possible changes to significant assumptions, including the annual revenue growth rate, the discount rate, and the enterprise value to revenue multiple.

The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls over the Company's fair value determination process for former subsidiaries upon deconsolidation, including the development of the annual revenue growth rate, the discount rate, and the enterprise value to revenue multiple. We evaluated the reasonableness of the revenue growth assumptions by comparing them to (1) historical revenues of the business, (2) relevant industry and economic conditions and trends, and (3) recent experience and events, including progress towards planned milestones. In addition, we involved valuation professionals with specialized skills and knowledge, who assisted in:

•evaluating the Company's selected discount rate by comparing the discount rate to publicly available data for comparable entities and assessing the resulting discount rate

•testing the enterprise value to revenue multiple by comparison to guideline public company multiples and transactions, in addition to independently sourced transactions.

/s/ KPMG LLP

We have served as the Company's auditor since 2009.

Salt Lake City, Utah

February 25, 2022

Overstock.com, Inc.

Consolidated Balance Sheets

(in thousands, except share data)

Assets

Current assets:

Current assets of discontinued operations — 34,129

Long-term assets of discontinued operations — 106,155

Liabilities and Stockholders' Equity

Current liabilities:

Operating lease liabilities, current 5,402 5,152

Current liabilities of discontinued operations — 13,924

Operating lease liabilities, non-current 7,960 13,206

Long-term liabilities of discontinued operations — 7,685

Commitments and Contingencies (Note 13)

Stockholders' equity:

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

Series A-1, issued and outstanding - 4,204 and 4,204 — —

Series B, issued and outstanding - 357 and 357 — —

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

Accumulated other comprehensive loss (537) (553)

Equity attributable to stockholders of Overstock.com, Inc. 744,386 373,692

Equity attributable to noncontrolling interests — 62,634

See accompanying notes to consolidated financial statements.

Overstock.com, Inc.

Consolidated Statements of Operations

(in thousands, except per share data)

Year Ended December 31,

Operating expenses:

Net income (loss) attributable to common shares—basic

Net income (loss) attributable to common shares—diluted

Weighted average shares of common stock outstanding:

See accompanying notes to consolidated financial statements.

Overstock.com, Inc.

Consolidated Statements of Comprehensive Income (Loss)

(in thousands)

Year Ended December 31,

Other comprehensive income:

Unrealized gain on cash flow hedges, net of tax of $0, $0 and $0 16 15 16

Other comprehensive income 16 15 16

See accompanying notes to consolidated financial statements.

Year Ended December 31,

Equity attributable to stockholders of Overstock.com, Inc.

Shares of common stock issued

Common stock issued upon vesting of restricted stock 294 710 270

Common stock sold through offerings — 2,831 7,174

Shares of treasury stock

Common stock repurchased — — 47

Tax withholding upon vesting of restricted stock 86 237 79

Sale of treasury stock (47) — —

Common stock

Balance at beginning of year $ 4 $ 4 $ 3

Common stock sold through ATM offering — — 1

Balance at end of year $ 4 $ 4 $ 4

Shares of Series A Preferred stock issued and outstanding

Balance at beginning of year — — 127

Exchange of shares to Series A-1 — — (125)

Conversion of shares to Series B — — (2)

Balance at end of year — — —

Shares of Series A-1 Preferred stock issued and outstanding

Balance at beginning of year 4,204 4,210 —

Exchange of shares from Series A — — 125

Dividend declared, not yet distributed — — 4,085

Shares declared, not distributed (Note 15) — (6) —

Shares of Series B Preferred stock issued and outstanding

Conversion of shares from Series A — — 2

Preferred stock $ — $ — $ —

Continued on the following page

Year Ended December 31,

Additional paid-in capital

Sale of treasury stock 2,726 — —

Subsidiary equity award tender offer (2,130) — —

Change in noncontrolling interest ownership (22,625) — —

Common stock sold through offerings, net — 192,692 85,801

Accumulated deficit

Declaration and payment of preferred dividends (729) (731) (77)

Accumulated other comprehensive loss

Balance at beginning of year $ (553) $ (568) $ (584)

Net other comprehensive income 16 15 16

Balance at end of year $ (537) $ (553) $ (568)

Treasury stock

Tax withholding upon vesting of restricted stock (8,279) (2,592) (1,407)

Sale of treasury stock 643 — —

Common stock repurchased — — (643)

Equity attributable to noncontrolling interests

Paid in capital for noncontrolling interest — 5,000 —

Fair value of noncontrolling interest at acquisition — 3,320 —

Net loss attributable to noncontrolling interests (335) (9,830) (12,879)

Change in noncontrolling interest ownership 22,625 — —

Deconsolidation of subsidiaries (84,924) 1,837 —

Total equity attributable to noncontrolling interests $ — $ 62,634 $ 62,771

See accompanying notes to consolidated financial statements.

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

Year ended December 31,

Cash flows from operating activities:

Stock-based compensation to employees and directors 11,133 7,841 16,160

(Increase)/decrease in deferred income taxes, net (53,829) 35 972

Income from equity method securities (12,585) — —

Changes in operating assets and liabilities:

Net cash used in discontinued operating activities (17,128) (30,152) (46,769)

Cash flows from investing activities:

Contributions for capital calls (41,122) — —

Other investing activities, net (1,694) (397) 34

Net cash used in discontinued investing activities (29,703) (8,284) (14,051)

Continued on the following page

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

Year ended December 31,

Cash flows from financing activities:

Proceeds from long-term debt — 47,500 —

Proceeds from sale of common stock, net of offering costs — 195,540 82,954

Net cash provided by (used in) discontinued financing activities 2,085 — (785)

See accompanying notes to consolidated financial statements.

Overstock.com, Inc.

Notes to Consolidated Financial Statements

1. BASIS OF PRESENTATION

Business and organization

As used herein, "Overstock," "Overstock.com," "the Company," "we," "our" and similar terms include Overstock.com, Inc. and our majority-owned subsidiaries, unless the context indicates otherwise. We were formed on May 5, 1997 as D2-Discounts Direct, a limited liability company ("LLC"). On December 30, 1998, we were reorganized as a C Corporation in the State of Utah and reincorporated in Delaware in May 2002. On October 25, 1999, we changed our name to Overstock.com, Inc.

Through our online business, we offer a broad range of price-competitive products, including furniture, décor, area rugs, bedding and bath, home improvement, outdoor, and kitchen and dining items, among others. We sell our products and services through our Internet websites located at www.overstock.com, www.o.co, www.overstock.ca, and www.overstockgovernment.com (referred to collectively as the "Website") and through our mobile app. Although our four websites are located at different domain addresses with different interfaces, the technology, equipment, and processes supporting the Website and the process of order fulfillment described herein are the same for all four websites.

Basis of presentation

We have prepared the accompanying consolidated financial statements pursuant to generally accepted accounting principles in the United States ("GAAP"). Preparing financial statements requires us to make estimates and assumptions that affect the amounts that are reported in the consolidated financial statements and accompanying disclosures. Although these estimates are based on our best knowledge of current events and actions that we may undertake in the future, our actual results may be different from our estimates. The results of operations presented herein are not necessarily indicative of our results for any future period.

On April 23, 2021, we entered into a Limited Partnership Agreement (the "Limited Partnership Agreement") with Pelion MV GP, L.L.C. ("Pelion"), in connection with the closing (the "Medici Closing") of the Transaction Agreement dated January 25, 2021 between the Company, Medici Ventures, Inc. ("Medici Ventures"), Pelion, and Pelion, Inc. (the "Transaction Agreement"). In connection with the execution of the Limited Partnership Agreement, Pelion acquired control over Medici Ventures and its blockchain assets. As a result of this transaction, we performed an assessment of control under the variable interest entity ("VIE") model and determined that effective as of the Medici Closing, we held a variable interest in both Medici Ventures and tZERO Group, Inc. ("tZERO") (collectively, the "Disposal Group"), both of which meet the definition of variable interest entities; however, we are not the primary beneficiary of either entity for purposes of consolidation. Accordingly, we deconsolidated the Disposal Group's consolidated net assets and noncontrolling interest from our consolidated financial statements and results beginning on April 23, 2021, the date that control ceased. The Disposal Group met the criteria to be reported as held for sale and discontinued operations as of March 31, 2021. As a result of closing the transaction during the second quarter of 2021, the Disposal Group's operating results for the periods prior to deconsolidation have been reflected in our consolidated statements of operations as discontinued operations for all periods presented. Additionally, the related assets and liabilities of the Disposal Group associated with the prior periods are classified as discontinued operations in our consolidated balance sheets. The majority of the Disposal Group was previously included in the Medici Ventures and tZERO reportable segments, and the remainder was included in Other. Effective as of the first quarter of fiscal year 2021, the Company has one reportable segment: Retail. See Note 22—Business Segments for additional segment information.

Unless otherwise specified, disclosures in these consolidated financial statements reflect continuing operations only. Certain prior period data, primarily related to discontinued operations, have been reclassified in the consolidated financial statements and accompanying notes to conform to the current period presentation. See Note 4—Discontinued Operations for further information.

2. ACCOUNTING POLICIES AND SUPPLEMENTAL DISCLOSURES

Principles of consolidation

The accompanying consolidated financial statements include our accounts and the accounts of our wholly-owned subsidiaries. All intercompany account balances and transactions have been eliminated in consolidation.

Use of estimates

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

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

Supplemental cash flow information

The following table shows supplemental cash flow information (in thousands):

Year Ended December 31,

Supplemental disclosures of cash flow information:

Cash paid during the period:

Interest paid, net of amounts capitalized $ 1,775 $ 1,808 $ 264

Non-cash investing and financing activities:

Proceeds from sale of common stock included in accounts receivable — — 2,848

Recognition of right-of-use assets upon adoption of ASC 842 — — 29,965

See also Note 12—Leases for additional supplemental disclosures of cash flow information related to our leases.

Cash equivalents

We classify all highly liquid instruments, including instruments with an original maturity of three months or less at the time of purchase, as cash equivalents.

Restricted cash

We consider cash that is legally restricted and cash that is held as compensating balances for credit arrangements as restricted cash.

Fair value of financial instruments

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

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

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

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

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

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.We maintain an allowance for expected credit losses based upon our business customers' financial condition and payment history, our historical collection experience, and any future expected economic conditions.

Inventories

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

Prepaids and other current assets

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

Property and equipment, net

Property and equipment are recorded at cost and stated net of depreciation and amortization. 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.

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.

Initial valuation of retained noncontrolling interest in former subsidiaries

Equity securities under ASC 321

At December 31, 2021, we held minority interests (less than 20%) in certain public entities, accounted for under ASC Topic 321, Investments—Equity Securities ("ASC 321"), which are included in Equity securities at fair value in our consolidated balance sheets. We measure our ASC 321 equity securities at fair value with changes in fair value recorded in Other income (expense), net in our consolidated statements of operations. Dividends received are reported in earnings if and when received.

Equity securities accounted for under the equity method under ASC 323

At December 31, 2021, we held minority interests in privately held entities, Medici Ventures, L.P. and tZERO, accounted for under the equity method 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 holding more than a 20% voting interest.

Based on the nature of our ownership interests and the extent of our contributed capital, we held a variable interest in both Medici Ventures, L.P. and tZERO which meet the definition of variable interest entities; however, we are not the primary beneficiary of either entity for purposes of consolidation as we do not have the power (either explicit or implicit), through voting rights or otherwise, to direct the activities of Medici Ventures, L.P. or tZERO that most significantly impact their economic performance. Our investments in these variable interest entities totaled $342.5 million as of December 31, 2021, representing our maximum exposures to loss.

We record our proportionate share of Medici Ventures, L.P.'s reported net income or loss, which reflects the fair value changes of the underlying investments of the entity and any other operating income or losses of the entity, in Other income (expense), net in our consolidated statements of operations with corresponding adjustments to the carrying value of the asset. There is no difference between the carrying amount of our investment in the entity and the amount of underlying equity we have in the entity's net assets.

We have elected to apply the fair value option for valuing our direct minority interest in tZERO as we determined that accounting for our direct minority equity interest in tZERO under the fair value option would approximate the same valuation approach used by Medici Ventures, L.P. for valuing our indirect interest in tZERO and would be the most meaningful and transparent option for evaluating our continued exposure to the economics of tZERO. The methods and significant assumptions to estimate the fair value of tZERO include using guideline public companies for the market approach and discounted cash flow model for the income approach. Inputs for the market approach include assumptions made for the enterprise value to revenue multiple. Inputs for the income approach include assumptions made for discount rate, revenue growth rate, EBITDA margin, and discount period.

If such events or circumstances have occurred that may indicate the fair value of the security is less than its carrying value, 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.

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 the 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 the 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. There were no impairments to goodwill recorded during the years ended December 31, 2021, 2020 and 2019 and no other changes to the carrying amount of goodwill during the years ended December 31, 2021 and 2020. Our goodwill balance of $6.2 million as of December 31, 2021 and 2020 is net of accumulated impairment losses and other adjustments of $3.3 million.

Intangible assets other than goodwill

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

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 a comparison of the assets' carrying amount to future undiscounted net cash flows the asset group is expected to generate. Cash flow forecasts are based on trends of historical performance and management's estimate of future performance, giving consideration to existing and anticipated competitive and economic conditions. If such asset group is considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds their fair values. There were no impairments to long-lived assets recorded during the years ended December 31, 2021, 2020 and 2019.

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 through our Website but may also derive revenue from sales of merchandise through other channels. Our 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. The vast 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 unearned revenue prior to delivery of products or services ordered. As we ship high volumes of packages through multiple carriers, we use estimates to determine which shipments are delivered and, therefore, recognized as revenue at the end of the period. Our delivery date estimates are based on average shipping transit times, 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.

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

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

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

We evaluate the criteria outlined in ASC 606-10-55, Principal versus Agent Considerations, in determining whether it is appropriate to record the gross amount of merchandise sales and related costs or the net amount earned as commissions. When we are the principal in a transaction and control the specific good or service before it is transferred to the customer, revenue is recorded gross; otherwise, revenue is recorded on a net basis. Through contractual terms with our partners, we have the ability to control the promised goods or services and as a result record the majority of our revenue on a gross 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 unearned 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. As such, the initial transaction price giving rise to the reward dollar is allocated to each separate performance obligation based upon its relative standalone selling price. In determining the stand-alone selling price, we incorporate assumptions about the redemption rates of loyalty points. We recognize revenue for Club O Reward dollars when customers redeem such rewards as part of a purchase on our Website.

We record the standalone value of reward dollars earned in unearned 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.

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

Unearned 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 unearned revenue when payment is received prior to delivery of products or services ordered. We record amounts received for Club O membership fees as unearned revenue and we recognize it ratably over the membership period. We record Club O Reward dollars earned from purchases as unearned 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 revenue in proportion to the estimated pattern of rights exercised by the customer. If reward dollars are not redeemed, we recognize revenue upon expiration. In addition, we sell gift cards and record related unearned 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. The unredeemed portion of our gift cards are recognized in revenue over the expected redemption period based upon the estimated pattern of rights exercised by the customer, if the gift cards are not subject to escheat laws.

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.

Cost of goods sold

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

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 in our consolidated statements of operations. Prepaid advertising is included in Prepaids and other current assets in our consolidated balance sheets.

Stock-based compensation

We measure compensation expense for our outstanding unvested restricted stock 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 16—Stock-Based Awards.

We use the Black-Scholes option pricing model to determine the fair value of our employee stock purchase plan shares. The determination of the fair value of stock-based payment awards on the date of grant using an option pricing model is affected by our stock price as well as assumptions regarding a number of complex and subjective variables. These variables include our expected stock price volatility over the expected term of the awards, actual and projected employee stock option exercise behaviors, a risk-free interest rate and any expected dividends.

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 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 13—Commitments and Contingencies).

Income taxes

Income taxes are accounted for under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined on the basis of the differences between the financial statements and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.

We recognize deferred tax assets to the extent that we believe these assets are more likely than not to be realized. In evaluating our ability to recover our deferred tax assets within the jurisdiction from which they arise, we consider all available positive and negative evidence, including projected future taxable income, scheduled reversals of our deferred tax liabilities, tax planning strategies, and results of recent operations. Our projections of future taxable income are subject to change due to economic, political, and other conditions, such as the COVID-19 pandemic, and judgment is required in determining our ability to use our deferred tax assets.

We record uncertain tax positions in accordance with ASC 740 on the basis of a two-step process whereby (1) we determine whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, we recognize the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority. We recognize interest and penalties related to unrecognized tax benefits within the income tax expense line in the accompanying consolidated income statements. Accrued interest and penalties are included within the related tax liability line in our consolidated balance sheets.

Net income (loss) per share

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

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

Diluted net income (loss) per share is computed by dividing net income (loss) attributable to common shares (after allocating between common shares and participating securities) by the weighted average number of common and potential common shares outstanding during the period (after allocating total dilutive shares between our common shares outstanding and our preferred shares outstanding). Potential common shares, comprising incremental common shares issuable from the employee stock purchase plan and restricted stock awards are included in the calculation of diluted net income (loss) per common share to the extent such shares are dilutive.

Recently adopted 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. We adopted the changes under the new standard on January 1, 2021. The implementation of ASU 2019-12 did not have a material impact on our consolidated financial statements and disclosures.

In January 2020, the FASB issued ASU 2020-01, Investments—Equity Securities (Topic 321), Investments—Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815): Clarifying the Interactions between Topic 321, Topic 323, and Topic 815, which clarifies the interaction of the accounting for equity securities under Topic 321, the accounting for equity method investments in Topic 323, and the accounting for certain forward contracts and purchased options in Topic 815. We adopted the changes under the new standard on January 1, 2021. The implementation of ASU 2020-01 did not have a material impact on our consolidated financial statements and disclosures.

In October 2020, the FASB issued ASU 2020-10, Codification Improvements, which amends and provides Codification improvements in order to either clarify the Codification or correct unintended application of guidance that are not expected to have a significant effect on current accounting practice or create a significant administrative cost to most entities. We adopted the changes under the new standard on January 1, 2021. The implementation of ASU 2020-10 did not have a material impact on our consolidated financial statements and disclosures.

3. FAIR VALUE MEASUREMENT

The following tables summarize our assets and liabilities measured at fair value on a recurring basis using the following levels of inputs as of December 31, 2021 and 2020, as indicated (in thousands):

Fair Value Measurements at December 31, 2021

Total Level 1 Level 2 Level 3

Assets:

Cash equivalents—Money market mutual funds $ — $ — $ — $ —

Trading securities held in a "rabbi trust" (1) 179 179 — —

Liabilities:

Deferred compensation accrual "rabbi trust" (2) $ 188 $ 188 $ — $ —

Total liabilities $ 188 $ 188 $ — $ —

Fair Value Measurements at December 31, 2020

Total Level 1 Level 2 Level 3

Assets:

Cash equivalents—Money market mutual funds $ — $ — $ — $ —

Equity securities, at fair value 1,127 1,127 — —

Trading securities held in a "rabbi trust" (1) 139 139 — —

Liabilities:

Deferred compensation accrual "rabbi trust" (2) $ 148 $ 148 $ — $ —

Total liabilities $ 148 $ 148 $ — $ —

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(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.

The activity for our Level 3 investments for the year ended December 31, 2021 is as follows:

Amount

Level 3 investments at December 31, 2020 $ —

Increase due to acquisition of Level 3 investments 99,723

Increase in fair value of Level 3 investments 2,632

4. DISCONTINUED OPERATIONS

On January 25, 2021, we entered into the Transaction Agreement with Medici Ventures, Pelion, and Pelion, Inc., pursuant to which the parties agreed, among other things, that: (i) Medici Ventures would convert to a Delaware limited partnership (the "Partnership"), (ii) pursuant to the terms and subject to the conditions of the Limited Partnership Agreement which was entered into on the date of the Medici Closing, Pelion would become the sole general partner of the Partnership, and we (along with any other stockholders of Medici Ventures at the time of the Medici Closing), would become the limited partners of the Partnership, (iii) prior to the Medici Closing, Overstock would convert the outstanding intercompany debt owed to us by Medici Ventures into shares of common stock in Medici Ventures; and (iv) prior to the Medici Closing, Overstock would convert the outstanding intercompany debt owed to us by tZERO into shares of common stock in tZERO, in each case, on the terms and subject to the conditions set forth in the Transaction Agreement and the relevant definitive agreements to be entered into in connection therewith. Pursuant to the terms of the Limited Partnership Agreement, we and any other partners subsequently admitted to the Partnership agreed to make a capital commitment of $45 million to the Partnership in proportion to our equity interest in the Partnership in order to fund the Partnership's capital needs. The term of the Partnership is eight years. The debt conversion outlined in (iii) and (iv) above was completed during the quarter ended March 31, 2021, following which Medici Ventures and Overstock held approximately 42% and 41%, respectively, of tZERO's common stock.

The Transaction Agreement represents a strategic shift for Overstock and a substantive change in the purpose and design of Medici Ventures and its interplay with Overstock’s overall business objectives. The Board of Directors has determined that it is in the best interest of Overstock and its shareholders to have the Overstock management team focus on Overstock’s core e-commerce home furnishings business and strategies. Accordingly, after six years of committed effort to advance blockchain technology, Overstock has determined that the Medici Ventures businesses will be better served under the management of Pelion, a professional asset manager with technology expertise in early-stage companies. From and after the Medici Closing, Pelion has sole authority and responsibility regarding investing decisions, appointing board members of the portfolio companies, and exercising all shareholder rights for assets held by the Partnership, with the intent of generating capital appreciation for the held entities and investment income for the partners.

On April 23, 2021, we entered into the Limited Partnership Agreement with Pelion, as part of the Medici Closing, pursuant to which Pelion became the sole general partner, holding a 1% equity interest in the Partnership, and Overstock became a limited partner, holding a 99% equity interest in the Partnership. The Partnership meets the definition of an investment company under ASC Subtopic 946 - Financial Services - Investment Companies. As a result of the Medici Closing, we performed an assessment of control under the VIE model and determined that upon the Medici Closing, we held a variable interest in both Medici Ventures and tZERO which meet the definition of variable interest entities; however, we are not the primary beneficiary of either entity for purposes of consolidation as we do not have the power (either explicit or implicit), through voting rights or otherwise, to direct the activities of the Partnership or tZERO that most significantly impact their economic performance. Pelion was not a related party at the time of the Medici Closing and apart from its capacity as the general partner of the Partnership, we have no other relationship with Pelion. We may not voluntarily withdraw from the Partnership without the consent of the general partner or upon certain limited events as outlined in the Limited Partnership Agreement. Any proceeds from the sales of assets by the Partnership will be allocated on an asset-by-asset basis to the partners of the Partnership in accordance with the Limited Partnership Agreement following such events.

At the Medici Closing, our retained equity interest in the Partnership and our direct minority interest in tZERO had a fair value of $288.8 million, inclusive of $3.4 million of capital calls funded at the Medici Closing. The fair value of these equity securities at the Medici Closing was estimated by taking the mid-point from a valuation range using a weighting of multiple valuation techniques on the underlying components of the equity securities to calculate a fair value for the whole, including discounted cash flow models and market transactional data, both of which incorporate significant unobservable inputs (Level 3). Approximately $149.9 million of the total $288.8 million Level 3 equity securities have been valued using unadjusted inputs that have not been internally developed by management, including third-party transactions and quotations.

The significant unobservable inputs used in the $288.8 million fair value measurement of these Level 3 equity securities at the Medici Closing are summarized as follows:

Valuation technique Unobservable inputs Range (1) Weighted average (2)

Market approach Enterprise value to revenue multiple 0.88x 0.88x

Discounted cash flows - exit multiple Discount rate 9.0% - 35.0% 32.4%

Enterprise value to revenue multiple 0.75x - 5.00x 4.40x

Annual EBITDA % of revenues 5.2% - 41.2% 36.3%

Discounted cash flows - perpetual growth Discount rate 30.0% 30.0%

Perpetual revenue growth rate 3.0% 3.0%

Annual revenue growth rate 25.7% 25.7%

Annual EBITDA % of revenues 14.9% 14.9%

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(1) — The range for the Annual revenue growth rate and Annual EBITDA % of revenues are based on the weighted average metrics for the annual periods of the separate cash flow models for the respective component.

(2) — Unobservable inputs were weighted by the relative fair value based on the fair value of the underlying components subjected to the identified valuation technique. For projected terminal year, the amount represents the median of the inputs and is not a weighted average.

We recognized a $243.5 million gain upon deconsolidation of these entities which primarily relates to the remeasurement of our retained equity method interest in the Partnership and our direct minority interest in tZERO at fair value, which was included in our consolidated statements of operations as part of Income (loss) from discontinued operations, net of income taxes. We completed the entire funding of our $44.6 million capital commitment consistent with our proportional ownership interest, which was completed and funded in the second quarter of 2021.

Our retained equity interest in these entities is classified as equity method securities as we can exercise significant influence, but not control, over these entities through holding more than a 20% interest in the entity.

As of December 31, 2021, our 99% equity interest in the Partnership and the 40% direct minority interest in tZERO had a carrying value of $342.5 million which is included in Equity securities on our consolidated balance sheets, of which, $102.4 million is valued under the fair value option. Our direct equity interest in tZERO is valued using Level 3 inputs, which interest represents 99.7% of assets measured at fair value. This amount also constitutes our maximum exposure to loss as a result of our involvement in these entities as we have no additional financing obligations to these entities. During the period ended December 31, 2021 we recognized an increase in the valuation of our direct equity interest in tZERO of $2.6 million that was recorded in Other income (expense), net on our consolidated statements of operations. The operations of the Partnership subsequent to the Medici Closing include a net increase in partners' capital from operations of $10.1 million through the period ended December 31, 2021. We recognized $10.0 million of income from equity method securities due to our proportionate share of this increase associated with our equity interest in the Partnership through the period ended December 31, 2021, which was recorded in Other income (expense), net on our consolidated statements of operations.

Results of discontinued operations through the Medici Closing were as follows (in thousands):

Year ended December 31,

Operating expenses

Gain on deconsolidation 243,541 — —

Assets and liabilities of discontinued operations were as follows (in thousands):

Cash and cash equivalents $ — $ 21,075

Other current assets — 13,054

Total current assets of discontinued operations $ — $ 34,129

Property and equipment, net $ — $ 8,783

Intangible assets, net — 13,852

Equity securities — 45,878

Operating lease right-of-use assets — 7,226

Other long-term assets, net — 1,626

Total long-term assets of discontinued operations $ — $ 106,155

Accounts payable and accrued liabilities $ — $ 11,939

Other current liabilities — 1,985

Total current liabilities of discontinued operations $ — $ 13,924

Operating lease liabilities, non-current — 7,099

Other long-term liabilities — 586

Total long-term liabilities of discontinued operations $ — $ 7,685

5. ACCOUNTS RECEIVABLE, NET

Accounts receivable, net consist of the following (in thousands):

December 31,

Less: allowance for credit losses (2,429) (1,417)

6. PREPAIDS AND OTHER CURRENT ASSETS

Prepaids and other current assets consist of the following (in thousands):

December 31,

Total prepaids and other current assets $ 22,097 $ 22,879

7. PROPERTY AND EQUIPMENT, NET

Property and equipment, net consist of the following (in thousands):

December 31,

Building machinery and equipment 9,809 9,793

Capitalized costs associated with internal-use software and website development, both developed internally and acquired externally, and depreciation of costs for the same periods associated with internal-use software and website development consist of the following (in thousands):

Year ended December 31,

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

Year ended December 31,

During the years ended December 31, 2021 and 2020, we retired $1.6 million and $25.1 million, respectively, of fully depreciated property and equipment that were removed from service in 2021 and 2020.

8. EQUITY SECURITIES

Our equity securities accounted for under the equity method under ASC 323 include equity securities in which we can exercise significant influence, but not control, over these entities through holding more than a 20% voting interest in the entity. The following table includes our equity securities accounted for under the equity method and related ownership interest as of December 31, 2021:

Ownershipinterest

Medici Ventures, L.P. 99%

tZERO Group, Inc. 40%

The carrying amount of our equity method securities was $342.5 million at December 31, 2021.

The following table summarizes the net income recognized on equity method securities recorded in Other income (expense), net in our consolidated statements of operations for the year ended December 31, 2021 (in thousands):

Year ended December 31,

Certain of our equity securities accounted for under ASC 321, which had a carrying value of $174,000 and $1.1 million at December 31, 2021 and 2020, respectively, are carried at fair value based on Level 1 inputs. See Note 2—Accounting Policies and Supplemental Disclosures, Fair value of financial instruments above.

Regulation S-X Rule 4-08(g)

For the period ended December 31, 2021, certain investments subject to Regulation S-X Rule 4-08(g) held by the Company in aggregate have met the significance criteria as defined under SEC guidance. As such, the Company is required to present summarized financial information for these significant investees that qualified as equity method securities during the respective periods presented as practicable (including the pre-deconsolidation results of operations for those investments that qualified prior to the Medici Closing) that were for the years ended December 31, 2021 and 2020 and such information is as follows (in thousands):

December 31,

Year ended December 31,

For our investments in Medici Ventures, L.P. and tZERO there is no difference in the carrying amount of the assets and liabilities and our maximum exposure to loss.

Regulation S-X Rule 3-09

For the period ended December 31, 2021, certain investments subject to Regulation S-X Rule 3-09 held by the Company have met the significance criteria as defined under SEC guidance. As such, the Company is required to present separate audited financial statement for these significant investees that qualified as equity method securities during the respective periods presented as practicable for the year ended December 31, 2021. As a result and in accordance with Rule 3-09 of Regulation S-X, separate audited financial statements of Medici Ventures, L.P. for the period ended September 30, 2021, their fiscal year-end, are being filed herewith as Exhibit 99.1.

BBBY US Equity

BBBY · 10-K · period ended 2021-12-31

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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BBBY · 10-K · period ended 2021-12-31

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

BBBY US Equity