The following discussion provides information that we believe to be relevant to an understanding of our consolidated financial condition and results of operations. The statements in this section regarding industry outlook, our expectations regarding the performance of our business and any other non-historical statements are forward-looking statements. Our actual results and outcomes may differ materially from those contained in or implied by any forward-looking statements contained herein. These forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, the risks and uncertainties described in "Special Cautionary Note Regarding Forward Looking Statements" and in Part II, Item 1A, "Risk Factors" included in this Quarterly Report on Form 10-Q. You should read the following discussion together with our consolidated financial statements and related notes included in this Quarterly Report on Form 10-Q and with the sections entitled "Special Cautionary Note Regarding Forward-Looking Statements," Part I, Item 1A, "Risk Factors," and our consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year endedDecember 31, 2021 . We are an online retailer and technology company. As used herein, "Overstock," "the Company," "we," "our" and similar terms includeOverstock.com, Inc. and our majority-owned subsidiaries, unless the context indicates otherwise.
Overview
Overstock provides furniture and home furnishings to assist consumers in creating "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. 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. We sell our products and services primarily through our internet websites located at www.overstock.com, www.o.co, www.overstock.ca, and www.overstockgovernment.com (referred to collectively as the "Website") and through our mobile app. Nearly all of our retail sales through our Website were from transactions in which we fulfilled orders through our network of manufacturers, distributors and other suppliers ("partners") selling on our Website. Our use of the term "partner" does not mean that we have formed any legal partnerships with any of our retail partners. We provide our partners with access to a large customer base and convenient services for order fulfillment, customer service, returns handling, and other services. Our supply chain allows us to ship directly to our customers from our suppliers or from our warehouses. Our warehouses primarily fulfill orders from direct sales of our partners' owned inventory, including some customer returns of partner products.
Strategies for our Business
Our business initiatives and objectives enable our long-term vision of "Dream Homes for All" by focusing on our three brand pillars: "Product Findability," "Smart Value," and "Easy Delivery and Support." These include increasing our home assortment to improve our brand association with home, making it easier for our customers to find and view a broad assortment of products, increasing mobile app adoption, driving higher customer retention and brand loyalty, and optimizing our marketing spend to grow the Overstock brand. In addition to these key objectives, we are focused on growing our Canadian customer base and market share by improving and showcasing our unique brand pillars of "Smart Value", "Easy Delivery and Support", and "Product Findability". 25 --------------------------------------------------------------------------------
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Financial Reporting Presentation Relating to Discontinued Operations
Unless otherwise specified, disclosures throughout Management's Discussion and Analysis of Financial Conditions, Results of Operations, and Liquidity and Capital Resources, reflect continuing operations only. See Note 3-Discontinued Operations in the Notes to Unaudited Consolidated Financial Statements included in Item 1, Part I, Financial Statements (Unaudited) of this Quarterly Report on Form 10-Q for further information.
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," our interim and audited financial statements, and the discussion of our business and risk factors and other information included elsewhere or incorporated in this report. This executive commentary includes forward-looking statements, and investors are cautioned to read "Special Cautionary Note Regarding Forward-Looking Statements." Revenue decreased 33.5% for the three months endedJune 30, 2022 , compared to the same period in 2021. This decrease was primarily due to a 43% decrease in the number of customer orders delivered, partially offset by a 16% increase in average order value driven by a continued product mix shift into furniture and home furnishings categories. This decreased order activity was largely driven by normalization of shopping behavior following the acceleration in customer growth during the COVID-19 pandemic, impact on consumer sentiment from macroeconomic and geopolitical factors, a heightened inflationary environment, our non-home exit strategy, and government stimulus activity in 2021. Gross profit decreased 30.7% for the three months endedJune 30, 2022 , compared to the same period in 2021, primarily due to lower sales and partially offset by an increase in gross margin. Gross margin increased to 22.9% for the three months endedJune 30, 2022 , compared to 22.0% for the same period in 2021, primarily due to operational efficiencies in merchandising, customer service, and advertising revenue. The increase was partially offset by higher promotional discounting. Sales and marketing expenses as a percentage of revenue increased from 10.7% for the three months endedJune 30, 2021 to 11.0% for the three months endedJune 30, 2022 , primarily due to increased costs associated with paid listing advertisements, partially offset by decreased costs associated with display and social advertising.
Technology expenses totaled
General and administrative expenses decreased$1.6 million for the three months endedJune 30, 2022 compared to the three months endedJune 30, 2021 , primarily driven by reduced legal and other third party expenses, partially offset by increased training and travel expenses.
Our consolidated cash and cash equivalents balance decreased from
Additional commentary related to macroeconomic trends
We continue to monitor recent macroeconomic trends, including the impact caused by the COVID-19 pandemic and other global developments such as the current conflict betweenRussia andUkraine (including the related heightened geopolitical tensions and economic actions in response thereto by various countries), and their impact on our supply chain, customers, and employees. While we have no operations in or direct exposure toRussia orUkraine , we believe the conflict betweenRussia andUkraine combined with higher consumer price inflation has resulted in reduced consumer confidence and consumer spending which negatively impacted our sales during the second quarter of 2022. In addition, we have experienced increased employee turnover, inflation in product costs, higher wages, higher share-based compensation expenses, and higher energy and fuel costs, each at a higher rate than what we have experienced in recent years. However, we continue to work with our partners to limit price increases in response to higher costs and have been able to improve gross margins year over year. Due to the uncertain and constantly evolving nature and extreme volatility created by these disruptions in the capital markets, we cannot currently predict the long-term impact of these events on our operations and financial results. Nevertheless, 26 --------------------------------------------------------------------------------
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as of
Results of Operations
Comparisons of Three Months Ended
Net revenue, cost of goods sold, gross profit and gross margin
The following table summarizes our net revenue, cost of goods sold, and gross profit (in thousands): Three months ended Six months ended June 30, June 30, 2022 2021 2022 2021 Net revenue$ 528,122 $ 794,536 $ 1,064,159 $ 1,454,397 Cost of goods sold Product costs and other cost of goods sold 386,007 591,280 774,977 1,070,462 Merchant fees, customer service, and other 21,010 28,430 42,865 55,585 Total cost of goods sold 407,017 619,710 817,842 1,126,047 Gross profit$ 121,105 $ 174,826 $ 246,317 $ 328,350 Year-over-year percentage changes Net revenue (33.5) % (26.8) % Gross profit (30.7) % (25.0) % Percent of total net revenue Cost of goods sold Product costs and other cost of goods sold 73.1 % 74.4 % 72.8 % 73.6 % Merchant fees, customer service, and other 4.0 % 3.6 % 4.0 % 3.8 % Total cost of goods sold 77.1 % 78.0 % 76.9 % 77.4 % Gross margin 22.9 % 22.0 % 23.1 % 22.6 % The 33.5% decrease in net revenue for the three months endedJune 30, 2022 , as compared to the same period in 2021, was primarily due to a 43% decrease in the number of customer orders delivered, partially offset by a 16% increase in average order value driven by a continued product mix shift into furniture and home furnishings categories. This decreased order activity was largely driven by normalization of shopping behavior following the acceleration in customer growth during the COVID-19 pandemic, impact on consumer sentiment from macroeconomic and geopolitical factors, a heightened inflationary environment, our non-home exit strategy, and government stimulus activity in 2021. The 26.8% decrease in net revenue for the six months endedJune 30, 2022 , as compared to the same period in 2021, was primarily due to a 38% decrease in the number of customer orders, partially offset by a 18% increase in average order value driven by a continued product mix shift into furniture and home furnishings categories. This decreased order activity was largely driven by normalization of shopping behavior following the acceleration in customer growth during the COVID-19 pandemic, impact on consumer sentiment from macroeconomic and geopolitical factors, a heightened inflationary environment, our non-home exit strategy, and government stimulus activity in 2021. We cannot estimate the impact that macroeconomic conditions, such as the COVID-19 pandemic, supply chain challenges, inflation, rising interest rates, or the current conflict betweenRussia andUkraine will have on our business in the future due to the unpredictable nature of the ultimate development and duration of these conditions.
International net revenues were less than 1% of total net revenues for each of
the three and six months ended
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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. Merchant fees, customer service, and other (previously labeled "Fulfillment and related costs") include merchant processing fees associated with customer payments made by credit cards and other payment methods and other variable fees, customer service costs, costs incurred to operate and staff our warehouses, including rent and depreciation expense associated with these facilities, costs to receive, inspect, pick, and prepare customer order for delivery, and direct and indirect labor costs including payroll, payroll-related benefits, and stock-based compensation, all of which we include as costs in calculating gross margin. Merchant fees, customer service, and other as a percentage of sales may vary due to several factors, such as our ability to effectively manage merchant fees, customer service costs, and warehouse costs. We believe that some companies in our industry, including some of our competitors, account for merchant fees, customer service, and other costs within operating expenses, and therefore exclude merchant fees, customer service, and other costs from gross margin. As a result, our gross margin may not be directly comparable to others in our industry. Gross margins for the past six quarterly periods and fiscal year ending 2021 were: Q1 2021 Q2 2021 Q3 2021 Q4 2021 FY 2021 Q1 2022 Q2 2022 Gross margin 23.3 % 22.0 % 22.7 % 22.7 % 22.6 % 23.4 % 22.9 % Gross profit for the three months endedJune 30, 2022 decreased 30.7% compared to the same period in 2021, due to lower sales and partially offset by an increase in gross margin. Gross margin increased to 22.9% for the three months endedJune 30, 2022 , compared to 22.0% for the same period in 2021, primarily due to operational efficiencies in merchandising, customer service, and advertising revenue. The increase was partially offset by higher promotional discounting. Gross profit for the six months endedJune 30, 2022 decreased 25.0% compared to the same period in 2021, primarily due to decreased sales volume and partially offset by an increase in gross margin. Gross margin increased to 23.1% for the six months endedJune 30, 2022 , compared to 22.6% for the same period in 2021, primarily due to operational efficiencies in merchandising, customer service, and advertising revenue. The increase was partially offset by higher promotional discounting. Operating expenses Sales and marketing expenses We use a variety of online advertising channels to attract new and repeat customers, including paid search, product listings, search engine optimization, personalized emails, mobile app, loyalty program, affiliate marketing, display banners, and social media. We also build our brand awareness through linear and streaming TV.
Costs associated with our discounted shipping and other promotions, such as coupons, are not included in sales and marketing expense. Rather, they are accounted for as a reduction in revenue as they reduce the amount of consideration we expect to receive in exchange for goods or services and therefore affect net revenues and gross margin. We consider discounted shipping and other promotions, such as our policy for free shipping on orders, as an effective marketing tool.
The following table summarizes our sales and marketing expenses (in thousands): Three months ended Six months ended June 30, June 30, 2022 2021 2022 2021 Sales and marketing expenses$ 57,940 $ 85,272 $ 116,453 $ 158,810
Advertising expense included in sales and marketing expenses
55,334 81,855 111,046 151,868 Year-over-year percentage changes Sales and marketing expenses (32.1) % (26.7) % Advertising expense included in sales and marketing expenses (32.4) % (26.9) % Percentage of net revenues Sales and marketing expenses 11.0 % 10.7 % 10.9 % 10.9 % Advertising expense included in sales and marketing expenses 10.5 % 10.3 % 10.4 % 10.4 % 28
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The 30 basis point increase in sales and marketing expenses as a percent of net
revenues for the three months ended
Sales and marketing expenses as a percent of net revenues for the six months
ended
Technology expenses
We seek to deploy our capital resources efficiently in technology to support operations including private and public cloud, web services, customer support solutions, and product search, and in technology to enhance the customer experience including machine learning algorithms, improving our process efficiency, modernizing and expanding our systems, and supporting and expanding our logistics infrastructure. We expect to continue to incur technology expenses to support these efforts and these expenditures may continue to be material. The frequency and variety of cyberattacks on our Website, enterprise systems, services, 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 summarizes our technology expenses (in thousands):
Three months ended Six months ended June 30, June 30, 2022 2021 2022 2021 Technology expenses$ 30,542 $ 30,383 $ 63,531 $ 60,906 Year-over-year percentage change Technology expenses 0.5 % 4.3 % Technology expenses as a percent of net revenues 5.8 % 3.8 % 6.0 % 4.2 %
Technology expenses totaled
The$2.6 million increase in technology expenses for the six months endedJune 30, 2022 , as compared to the same period in 2021, was primarily due to staff-related costs, including share-based compensation, to support strategic initiatives and increased cloud adoption. The increase is partially offset by third party vendor spend.
General and administrative expenses
The following table summarizes our general and administrative expenses (in thousands): Three months ended Six months ended June 30, June 30, 2022 2021 2022 2021 General and administrative expenses$ 21,081 $ 22,660 $ 42,337 $ 45,531 Year-over-year percentage change General and administrative expenses (7.0) % (7.0) % General and administrative expenses as a percent of net revenues 4.0 % 2.9 % 4.0 % 3.1 %
The
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The$3.2 million decrease in general and administrative expenses for the six months endedJune 30, 2022 , as compared to the same period in 2021, was primarily driven by reduced legal, third party vendor, and facilities-related expenses, partially offset by increased staff-related costs including share-based compensation.
Income taxes
Our income tax provision for interim periods is determined using an estimate of our annual effective tax rate adjusted for discrete items, if any, for relevant interim periods. We update our estimate of the annual effective tax rate each quarter and make cumulative adjustments if our estimated annual effective tax rate changes. Our quarterly tax provision and our quarterly estimate of our annual effective tax rate are subject to significant variations due to several factors including: variability in predicting our pre-tax and taxable income, the mix of jurisdictions to which those items relate, relative changes in expenses or losses for which tax benefits are limited or not recognized, how we do business, fluctuations in our stock price, economic outlook, political climate, and other conditions such as the COVID-19 pandemic, supply chain challenges, inflation, rising interest rates, and the current conflict betweenRussia andUkraine . In addition, changes in laws, regulations, and administrative practices will impact our rate. Our effective tax rate can be volatile based on the amount of pre-tax income. For example, the impact of discrete items on our effective tax rate is greater when pre-tax income is lower. Our provision (benefit) for income tax for the three months endedJune 30, 2022 and 2021 was$2.5 million and$(45.7) million , respectively. The effective tax rate for the three months endedJune 30, 2022 and 2021 was 26.1% and (124.7)%, respectively. Our provision (benefit) for income tax for the six months endedJune 30, 2022 and 2021 was$4.6 million and$(45.5) million , respectively. The effective tax rate for the six months endedJune 30, 2022 and 2021 was 21.1% and (72.4)%, respectively. Our tax rate and expense increased during the three and six months endedJune 30, 2022 , as compared to the same period in 2021, primarily due to the fact we no longer maintain a valuation allowance on most of our federal and state deferred tax assets. Our low effective tax rate for the six months endedJune 30, 2022 is primarily attributable to a discrete valuation allowance release on capital loss deferred tax assets due to year to date investment results and stock-based compensation deductions. Each quarter we assess the recoverability of our deferred tax assets under ASC Topic 740. We assess available positive and negative evidence to estimate whether we will generate sufficient future taxable income to use our existing deferred tax assets. We have no carryback ability, and therefore we must rely on future taxable income, including tax planning strategies and future reversals of taxable temporary differences, to support their realizability. We maintain a valuation allowance against our deferred tax assets for capital losses and the state ofUtah where not supported by future reversals of taxable temporary differences, because of the uncertainty regarding the realizability of these deferred tax assets. Any activities that impact the valuation allowance will be recognized discretely in the period in which they occur. We will continue to monitor the need for a valuation allowance against our other deferred tax assets on a quarterly basis. We are subject to taxation inthe United States and multiple state and foreign jurisdictions. Tax years beginning in 2017 are subject to examination by taxing authorities, although net operating loss and credit carryforwards from all years are subject to examinations and adjustments for at least three years following the year in which the attributes are used.
Liquidity and Capital Resources
Overview
We believe that our cash and cash equivalents currently on hand and expected cash flows from future operations will be sufficient to continue operations for at least the next twelve months. We continue to monitor, evaluate, and manage our operating plans, forecasts, and liquidity considering the most recent developments driven by macroeconomic conditions, such as the COVID-19 pandemic, supply chain challenges, inflation, rising interest rates, and the current conflict betweenRussia andUkraine . 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. 30 --------------------------------------------------------------------------------
Table of Contents Current sources of liquidity Our principal sources of liquidity are existing cash and cash equivalents and accounts receivables, net. AtJune 30, 2022 , we had cash and cash equivalents of$442.6 million and accounts receivables, net of$23.1 million .
At
Cash flow information is as follows (in thousands):
Six months ended June 30, 2022 2021 Cash provided by (used in): Operating activities$ 21,822 $ 120,047 Investing activities (17,169) (47,650) Financing activities (65,232) (9,179) 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. The$21.8 million of net cash provided by continuing operating activities during the six months endedJune 30, 2022 was primarily due to income from continuing operations adjusted for non-cash items of$42.8 million offset by cash used by changes in operating assets and liabilities of$21.0 million .
The
Investing activities
For the six months endedJune 30, 2022 , investing activities resulted in a net cash outflow of$17.2 million , primarily due to$11.4 million for purchases of equity securities and$6.4 million of expenditures for property and equipment. For the six months endedJune 30, 2021 , investing activities resulted in a net cash outflow of$47.7 million , primarily due to$41.1 million of contributions for capital calls and$5.6 million of expenditures for property and equipment.
Financing activities
For the six months endedJune 30, 2022 , financing activities resulted in a net cash outflow of$65.2 million primarily due to$60.1 million for repurchases of our common stock and Series A-1 preferred stock under the Repurchase Program and$3.5 million for payment of taxes withheld upon vesting of restricted stock. For the six months endedJune 30, 2021 , financing activities resulted in a net cash outflow of$9.2 million primarily due to$7.8 million for payment of taxes withheld upon vesting of restricted stock. 31 --------------------------------------------------------------------------------
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Contractual Obligations and Commitments
The following table summarizes our contractual obligations as of
Less than 1-3 3-5 More than 5 Contractual Obligations Total 1 year years years years Operating leases (1)$ 11,921 $ 8,072 $ 3,516 $ 333 $ - Loan agreements (2) 51,963 5,264 5,149 2,968 38,582 Total contractual cash obligations$ 63,884
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(1) - Represents the future minimum lease payments under non-cancellable operating leases. For information regarding our operating lease obligations, see Note 8-Leases, in the Notes to Unaudited Consolidated Financial Statements included in Item 1, Part I, Financial Statements (Unaudited) of this Quarterly Report on Form 10-Q. (2) - Represents future interest and principal payments on the financing agreements withLoan Core Capital Funding Corporation LLC . For information regarding our financing agreements, see Note 7-Borrowings, in the Notes to Unaudited Consolidated Financial Statements included in Item 1, Part I, Financial Statements (Unaudited) of this Quarterly Report on Form 10-Q.
Tax contingencies
We are involved in various tax matters, the outcomes of which are uncertain. As ofJune 30, 2022 , accrued tax contingencies were$3.5 million . Changes in state, federal, and foreign tax laws may increase our tax contingencies. The timing of the resolution of income tax contingencies is highly uncertain, and the amounts ultimately paid, if any, upon resolution of issues raised by the taxing authorities may differ from the amounts accrued. It is reasonably possible that within the next 12 months we will receive additional assessments by various tax authorities. These assessments may or may not result in changes to our contingencies related to positions on prior years' tax filings.
Critical Accounting Policies and Estimates
The preparation of our financial statements requires that we make estimates and judgments. We base these on historical experience and on other assumptions that we believe to be reasonable. There have been no material changes to our critical accounting policies and estimates as compared to the critical accounting policies and estimates described in Note 2-Accounting Policies and Supplemental Disclosures, included in Part II, Item 8, Financial Statements and Supplementary Data, of our Annual Report on Form 10-K for the year endedDecember 31, 2021 , except as disclosed in Note 2-Summary of Significant Accounting Policies, included in Item 1, Part I, Financial Statements (Unaudited), contained in the Notes to Unaudited Consolidated Financial Statements of this Quarterly Report on Form 10-Q.
Change in estimate of average transit times (days)
Our revenue related to merchandise sales is recognized upon delivery to our customers. As we ship high volumes of packages through multiple carriers, it is not practical for us to track the actual delivery date of each shipment. Therefore, we use estimates to determine which shipments are delivered and, therefore, recognized as revenue at the end of the period. Our delivery date estimates are based on average shipping transit times. We review and update our estimates on a quarterly basis based on our actual transit time experience. However, actual shipping times may differ from our estimates, which can be further impacted by uncertainty, volatility, and any disruption to our carriers caused by certain macroeconomic conditions, such as the COVID-19 pandemic, supply chain challenges, inflation, rising interest rates, or the current conflict betweenRussia andUkraine . 32 --------------------------------------------------------------------------------
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The following table shows the effect that hypothetical changes in the estimate of average shipping transit times would have had on the reported amount of revenue and income before income taxes (in thousands):
Three months ended June 30, 2022 Increase (Decrease) Increase (Decrease) Income Before Income Change in the Estimate of Average Transit Times (Days) Revenue Taxes 2 $ (15,688) $ (3,247) 1 $ (8,980) $ (1,860) As reported As reported As reported -1 $ 5,909 $ 1,216 -2 $ 10,556 $ 2,174 Government Regulation We are subject to a wide variety of laws, rules, mandates, and regulations, some of which apply or may apply to us as a result of our retail business, and others of which apply to us for other reasons, such as our status as a publicly held company or the places in which we sell certain types or amounts of products. Our retail business is subject to general business regulations and laws, regulations and laws specifically governing the internet, e-commerce, and other services we offer. Existing and future laws and regulations may result in increasing expense and may impede our growth. Applicable and potentially applicable regulations and laws include regulations and laws regarding taxation, privacy, data protection, pricing, content, copyrights, distribution, mobile communications, electronic device certification, electronic waste, energy consumption, environmental regulation, electronic contracts and other communications, competition, consumer protection, employment, import and export matters, information reporting requirements, access to our services and facilities, the design and operation of websites, health, safety, and sanitation standards, the characteristics and quality of products and services, product labeling and unfair and deceptive trade practices. Our efforts to expand our retail business outside of theU.S. expose us to foreign and additionalU.S. laws and regulations, including but not limited to, laws and regulations relating to taxation, business licensing or certification requirements, advertising practices, online services, the use of cryptocurrency, the importation of specified or proscribed items, importation quotas, consumer protection, intellectual property rights, consumer and data protection, privacy, encryption, restrictions on pricing or discounts, and theU.S. Foreign Corrupt Practices Act and other applicableU.S. and foreign laws prohibiting corrupt payments to government officials and other third parties. 33 --------------------------------------------------------------------------------
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