BEYOND, INC. The following discussion provides information that we believe to be relevant to an understanding of our consolidated financial condition and results of operations. The statements in this section regarding industry outlook, our expectations regarding the performance of our business and any other non-historical statements are forward-looking statements. Our actual results may differ materially from those contained in or implied by any forward-looking statements contained herein. These forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, the risks and uncertainties described in "Special Cautionary Note Regarding Forward Looking Statements" and in Part II, Item 1A, "Risk Factors" included in this Quarterly Report on Form 10-Q. You should read the following discussion together with our consolidated financial statements and related notes included in this Quarterly Report on Form 10-Q and with the sections entitled "Special Cautionary Note Regarding Forward-Looking Statements," Part I, Item 1A, "Risk Factors," and our consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year endedDecember 31, 2020 . We are an online retailer and technology company. As used herein, "Overstock", "Overstock.com", "O.co", "the Company", "we," "our" and similar terms includeOverstock.com, Inc. and our majority-owned subsidiaries, unless the context indicates otherwise.
Our Retail Business
Our online retail business seeks to provide goods to furnish and accessorize "Dream Homes for 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, particularly as Millennial consumers (which we define as those born between 1981 - 1996), who are generally comfortable shopping online, start families and move into new homes. As a result of the COVID-19 pandemic and resulting state and local government mandates of home confinement and closure of many brick-and-mortar stores, we have seen strong trends to online sales as consumers migrate to online shopping. We regularly 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"). Nearly all our retail sales through our Website were from transactions in which we fulfilled orders through our network of manufacturers, distributors and other suppliers ("partners") selling on our Website. Our use of the term "partner" does not mean that we have formed any legal partnerships with any of our retail partners. We provide our partners with access to a large customer base and a proprietary technology platform and 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.
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." Current initiatives for the business include: •Improve Product Findability - Directly supporting our "Product Findability" pillar, by improving customer search and navigation by refining our taxonomy and 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.
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•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 public cloud in order to promote greater resilience for the business in the event of unforeseen circumstances.
Financial Reporting Presentation in Accordance with the Pelion Transaction
OnApril 23, 2021 , we entered into a Limited Partnership Agreement (the "Limited Partnership Agreement") withMedici Ventures, Inc. ("Medici Ventures "),Pelion MV GP, L.L.C. ("Pelion"), andPelion, Inc. , in connection with the closing of the Transaction Agreement datedJanuary 25, 2021 between the Company,Medici Ventures , Pelion, andPelion, Inc. In connection with the execution of the Limited Partnership Agreement, Pelion acquired control overMedici 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 upon closing of the transaction, we held a variable interest in bothMedici Ventures and tZEROGroup, Inc. ("tZERO") (collectively, the "Disposal Group ") which meet the definition of variable interest entities; however, we are not the primary beneficiary of either entity for purposes of consolidation.The Disposal Group met the criteria to be reported as held for sale and discontinued operations as ofMarch 31, 2021 . Therefore, theDisposal Group's assets and liabilities are reported as held for sale and the related operating results of theDisposal Group are reported as discontinued operations for all periods presented herein. The entities that make up theDisposal Group are focused on developing and advancing blockchain businesses, products and services, and related technology, including financial applications. Many of the entities owned by theDisposal Group are in the early stage of development, do not yet have a stable customer base or backlog orders, and have not yet generated any meaningful revenue. The businesses, products, and services that are being pursued or contemplated by theDisposal Group will require substantial additional funding, initially for technology development and regulatory compliance, as well as for working capital, marketing and sales, and other substantial costs of developing new products and businesses in emerging areas of technology. We expect the entities owned by theDisposal Group will continue to incur significant losses as these businesses develop. 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," as well as our interim and audited financial statements, and the discussion of our business and risk factors and other information included elsewhere or incorporated in this report. This executive commentary includes forward-looking statements, and investors are cautioned to read "Special Cautionary Note Regarding Forward-Looking Statements." Revenue increased 94.3% in Q1 2021 compared to the same period in 2020. This increase was primarily due to increased retail product sales resulting from a 66% increase in customer orders and a 17% increase in average order size driven by a continued product mix shift into core home furnishings categories. This increased order activity was largely driven by new customer growth and strong repeat customer behavior, both influenced by our marketing efforts and a consumer migration toward online shopping. As noted below, this customer migration was significantly accelerated due to the COVID-19 pandemic, which caused our retail product sales to accelerate beginning in the second half ofMarch 2020 and continuing throughMarch 2021 . While we have observed this recent acceleration of new customer acquisition and demand for our products and resulting sales, we cannot estimate the impact that the COVID-19 pandemic or its subsiding will have on our business in the future due to the unpredictable nature of the ultimate scope and duration of the pandemic. 27 --------------------------------------------------------------------------------
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Gross profit increased 106.9% in Q1 2021 compared to the same period in 2020 primarily due to an increase in retail product sales and an increase in gross margin. Gross margin increased to 23.3% for the three months endedMarch 31, 2021 , compared to 21.9% for the same period in 2020, primarily due to continued mix into our core home furnishing categories and reduced promotional discounting as we balanced spend to support new customer acquisition efforts, partially offset by elevated carrier costs due to COVID-19 surcharges. Sales and marketing expenses as a percentage of revenue increased from 10.7% in Q1 2020 to 11.1% in Q1 2021, primarily due to increased spending on paid listing advertisements and keywords to support our customer acquisition strategy, partially offset by gained leverage in staff-related costs. Technology expenses totaled$30.5 million for the three months endedMarch 31, 2021 , a$3.2 million increase compared to the three months endedMarch 31, 2020 , primarily due to staff-related costs to support strategic initiatives and increased cloud adoption.
General and administrative expenses decreased
Our consolidated cash and cash equivalents balance increased from
Additional commentary related to COVID-19
Overstock has continued to respond to the challenges and opportunities created
by the COVID-19 pandemic. We have seen a substantial year-over-year increase in
our website traffic, number of new customers, and customer demand, particularly
in our key home furnishings categories. 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. We have hired in key areas throughout the Company to
support our current and expected growth. There are continued challenges created
by the increased volume 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
phased re-entry plan for our offices; most of our corporate employees continue
to work from home without incident. We cannot predict how the COVID-19 pandemic
or the ongoing development and rollout of vaccinations will unfold in the coming
months. 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.
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Comparisons of Three Months Ended
Net revenue, cost of goods sold, gross profit and gross margin
The following table reflects our net revenue, cost of goods sold, and gross
profit for the three months ended
Three months ended
March 31,
2021 2020
Net revenue $ 659,861 $ 339,598 Cost of goods sold Product costs and other cost of goods sold 479,182 249,605 Fulfillment and related costs
27,155 15,787
Total cost of goods sold 506,337 265,392
Gross profit $ 153,524 $ 74,206
Year-over-year percentage growth
Revenue, net 94.3 %
Gross profit 106.9 %
Percent of total revenue, net
Cost of goods sold
Product costs and other cost of goods sold 72.6 % 73.5 %
Fulfillment and related costs 4.1 % 4.6 %
Total cost of goods sold 76.7 % 78.1 %
Gross margin 23.3 % 21.9 %
The 94.3% increase in net revenue for the three months ended March 31, 2021 , as
compared to the same period in 2020, was primarily due to increased retail
product sales resulting from a 66% increase in customer orders and a 17%
increase in average order size driven by a continued product mix shift into core
home furnishings categories. This increased order activity was largely driven by
new customer growth and strong repeat customer behavior, both influenced by our
marketing efforts and a consumer migration toward online shopping. While we have
observed this recent acceleration of new customer acquisition and demand for our
products and resulting sales, we cannot estimate the impact that the COVID-19
pandemic or its subsiding will have on our business in the future due to the
unpredictable nature of the ultimate scope and duration of the pandemic.
International net revenues were less than 2% of total net revenues for each of
the three months ended
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 the COVID-19 pandemic.
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The following table shows the effect that hypothetical changes in the estimate of average shipping transit times would have had on the reported amount of revenue and income before income taxes for the three months endedMarch 31, 2021 (in thousands): Three months ended March 31, 2021 Increase (Decrease) Increase (Decrease) Income Before Income Change in the Estimate of Average Transit Times (Days) Revenue Taxes 2 $ (19,118) $ (3,692) 1 $ (9,278) $ (1,780) As reported As reported As reported -1 $ 20,034 $ 3,951 -2 $ 32,380 $ 6,373 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 decreased slightly as a percentage of revenue during the three months endedMarch 31, 2021 as compared to the same period in 2020. Gross margins for the past five quarterly periods and fiscal year ending 2020 were: Q1 2020 Q2 2020 Q3 2020 Q4 2020 FY 2020 Q1 2021 Gross margin 21.9 % 23.2 % 23.5 % 22.5 % 22.9 % 23.3 % Gross profit for the three months endedMarch 31, 2021 increased 106.9% compared to the same period in 2020, primarily due to an increase in retail product sales and an increase in gross margin. Retail gross margin increased to 23.3% for the three months endedMarch 31, 2021 , compared to 21.9% for the same period in 2020, primarily due to continued mix into our core home furnishing categories and reduced promotional discounting as we balanced spend to support new customer acquisition efforts, partially offset by elevated carrier costs due to COVID-19 surcharges. Operating expenses Sales and marketing expenses We use a variety of methods to target our consumer audience, including online campaigns, such as advertising through text ads, product listing ads, display ads, native ads, affiliate marketing programs, e-mail, direct mail, video ads, and social media campaigns. We also do brand advertising through television, radio, print ads, and event sponsorships.
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.
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The following table reflects our sales and marketing expenses for the three
months ended
Three months ended
March 31,
2021 2020
Sales and marketing expenses $ 73,538 $ 36,345 Advertising expense included in sales and marketing expenses
$ 32,536 Year-over-year percentage growth Sales and marketing expenses 102.3 %
Advertising expense included in sales and marketing expenses 115.2 % Percentage of net revenues Sales and marketing expenses
11.1 % 10.7 %
Advertising expense included in sales and marketing expenses 10.6 % 9.6 %
The 40 basis point increase in sales and marketing expenses as a percent of net
revenues for the three months ended
Technology expenses
We seek to deploy our capital resources efficiently in technology, including web services, customer support solutions, website search, expansion of new and existing product categories, and in technology to enhance the customer experience, including using machine learning, improve our process efficiency, modernize and expand our systems, and support and expand our logistics infrastructure. We expect to continue to incur technology expenses to support these initiatives and these expenditures may continue to be material. The frequency and variety of cyberattacks on our Website, our corporate systems, and on third parties we use to support our technology continues to increase. The impact of such attacks, their costs, and the costs we incur to protect ourselves against future attacks have not been material 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 three months ended
Three months ended
March 31,
2021 2020
Technology expenses $ 30,523 $ 27,281
Year-over-year percentage growth
Technology expenses 11.9 %
Technology expenses as a percent of net revenues 4.6 % 8.0 %
The
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General and administrative expenses
The following table reflects our general and administrative expenses for the
three months ended
Three months ended
March 31,
2021 2020
General and administrative expenses $ 22,871 $ 23,885
Year-over-year percentage growth
General and administrative expenses (4.2) %
General and administrative expenses as a percent of net revenues 3.5 % 7.0 %
The
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 as well as 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. 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 for income taxes for the three months endedMarch 31, 2021 and 2020 was$193,000 and$163,000 , respectively. The effective tax rate for the three months endedMarch 31, 2021 and 2020 was 0.7% and (1.4)%, respectively. Our low effective tax rate is primarily attributable to the valuation allowance we maintain on our net deferred tax assets related to ourU.S. operations. Each quarter we assess the recoverability of our deferred tax assets under ASC Topic 740. We assess the available positive and negative evidence to estimate whether we will generate sufficient future taxable income to use our existing deferred tax assets. We have no carryback ability and do not have significant taxable temporary differences to recover our existing deferred tax assets, therefore we must rely on future taxable income, including tax planning strategies, to support their realizability. We have established a valuation allowance for our deferred tax assets not supported by taxable temporary differences, primarily due to uncertainty regarding our future taxable income. We have considered, among other things, the cumulative loss incurred over the three-year period endedMarch 31, 2021 , as a significant piece of objective negative evidence. However, we have seen a reduction in our cumulative loss year over year as we generated income in the last four quarters. We utilized significant deferred tax assets in the form of federal net operating losses in the last four quarters, resulting in an overall reduction in the amount of valuation allowance recorded against our net deferred tax assets. We have also considered the magnitude and duration of past losses and the magnitude and duration of current profitability as well as changes in the factors that drove losses in the past and those currently driving profitability. As a result of the COVID-19 pandemic and resulting state and local government mandates of home confinement and closure of many brick-and-mortar stores, we have seen strong trends to online sales as consumers migrate to online shopping. We saw our Retail product sales accelerate beginning in the second half ofMarch 2020 and continuing throughMarch 2021 , returning the Retail segment to profitability after generating substantial operating losses for the years endedDecember 31, 2019 , 2018 and 2017. 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. We continue to monitor, evaluate, and manage our operating plans and forecasts in light of the most recent developments driven by the COVID-19 pandemic. 32 --------------------------------------------------------------------------------
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We intend to continue maintaining a valuation allowance on our net deferred tax assets until there is sufficient evidence to support the reversal of all or some portion of these allowances. The amount of the deferred tax asset considered realizable could be adjusted if objective negative evidence in the form of cumulative losses is no longer present and additional weight may be given to our more recent operating results, utilization of net operating losses, and subjective evidence such as long-term projections for growth. To the extent that we remain profitable for the foreseeable future, the full or partial release of the valuation allowance could occur in the near term. Release of the valuation allowance would result in the recognition of certain deferred tax assets and a decrease to income tax expense for the period the release is recorded. However, the exact timing and amount of the valuation allowance release are subject to change on the basis of the level of profitability that we are able to actually achieve. We will continue to monitor the need for a valuation allowance against our remaining deferred tax assets on a quarterly basis. We are subject to taxation inthe United States and several state and foreign jurisdictions. Tax years beginning in 2016 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 in light of 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. Current sources of liquidity Our principal sources of liquidity are existing cash and cash equivalents and accounts receivables, net. AtMarch 31, 2021 , we had cash and cash equivalents of$534.8 million and accounts receivables, net of$38.5 million . AtMarch 31, 2021 , we had$150.0 million available under our "at the market" sales program which permits us to conduct "at the market" sales of our common stock under a Sales Agreement, datedJune 26, 2020 , with JonesTrading andD.A. Davidson & Co.
Cash flow information is as follows (in thousands):
Three months ended
March 31,
2021 2020
Cash provided by (used in) - continuing:
Operating activities $ 74,084 $ (1,647)
Investing activities (2,762) (2,737)
Financing activities (7,844) 46,337
Operating activities - continuing operations
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 retail product sales accelerate beginning in the second half ofMarch 2020 and continuing throughMarch 2021 , as customers turned to online shopping, which caused our cash, cash equivalents and accounts receivable balances to increase compared to prior quarter-end and also resulted in an increase in our accounts payable and unearned revenue balance as ofMarch 31, 2021 . Due to uncertainty surrounding the COVID-19 pandemic, we are unable to predict the duration such favorable conditions and its sustained impact on cash flows. We continue 33 --------------------------------------------------------------------------------
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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
The$1.6 million of net cash provided by continuing operating activities during the three months endedMarch 31, 2020 was primarily due to loss from continuing operations adjusted for non-cash items of$3.7 million and cash provided by changes in operating assets and liabilities of$2.0 million .
Investing activities - continuing operations
For the three months endedMarch 31, 2021 , investing activities resulted in a net cash outflow of$2.8 million , primarily due to$2.4 million of expenditures for property and equipment. For the three months endedMarch 31, 2020 , investing activities resulted in a net cash outflow of$2.7 million , primarily due to$2.6 million of expenditures for property and equipment.
Financing activities - continuing operations
For the three months endedMarch 31, 2021 , financing activities resulted in a net cash outflow of$7.8 million primarily due to$7.3 million for payment of taxes withheld upon vesting of restricted stock. For the three months endedMarch 31, 2020 , financing activities resulted in a net cash inflow of$46.3 million primarily due to$47.5 million in proceeds from long-term debt,$2.8 million of net proceeds from the sale of common stock under our at the market offering for sales of common stock executed in lateDecember 2019 , partially offset by$1.7 million for payment of taxes withheld upon vesting of restricted stock.
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) $ 18,503 $ 5,818 $ 9,594 $ 2,818 $ 273
Loan agreements (2) 58,542 5,264 9,871 2,968 40,439
Total contractual cash obligations $ 77,045 $
11,082
__________________________________________
(1) - Represents the future minimum lease payments under non-cancellable operating leases. For information regarding our operating lease obligations, see Note 6-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 5-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 ofMarch 31, 2021 , accrued tax contingencies were$909,000 . 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. 34 --------------------------------------------------------------------------------
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Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources that would be material to investors.
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, included in Part II, Item 8, Financial Statements and Supplementary Data, of our Annual Report on Form 10-K for the year endedDecember 31, 2020 , except as disclosed in Note 2-Summary of Significant Accounting Policies and Supplemental Disclosures, including information about recently adopted accounting standards, see Recently adopted accounting standards, 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.
Government Regulation
We are subject to a wide variety of laws, rules and regulations, some of which apply or may apply to us as a result of our retail business, and others of which apply to us for other reasons, such as our status as a publicly held company or the places in which we sell certain types or amounts of products. Our retail business is subject to general business regulations and laws, as well as regulations and laws specifically governing the Internet, e-commerce, and other services we offer. Existing and future laws and regulations may result in increasing expense and may impede our growth. Applicable and potentially applicable regulations and laws include regulations and laws regarding taxation, privacy, data protection, pricing, content, copyrights, distribution, mobile communications, electronic device certification, electronic waste, energy consumption, environmental regulation, electronic contracts and other communications, competition, consumer protection, employment, import and export matters, information reporting requirements, access to our services and facilities, the design and operation of websites, health and sanitation standards, the characteristics and quality of products and services, product labeling and unfair and deceptive trade practices. Our efforts to expand our retail business outside of 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.
Government regulation - discontinued operations
The Medici Ventures and tZERO businesses are subject to general business regulations and laws, including some of those described above, but are also affected by a number of other laws and regulations, including but not limited to, laws and regulations relating to money transmitters and money services businesses, including the requirements of theFinancial Crimes Enforcement Network of theU.S. Department of Treasury ("FinCEN") and state requirements applicable to money transmission, cryptocurrencies, provisions of various securities laws and other laws and regulations governing broker-dealers, alternative trading systems and national securities exchanges, anti-money laundering requirements, know-your-customer requirements, record-keeping, reporting and capital and bonding requirements, and a variety of other matters. Blockchain and distributed ledger platforms are recent technological innovations, and the regulation of peer-to-peer digital assets and conventional securities, insofar as blockchain technologies are applied to conventional securities, is developing. In theU.S. , theMedici Ventures and tZERO businesses are or may be subject to a wide variety of complex statutes and rules, most of which were implemented prior to the development of these technologies, and it is sometimes unclear whether or how various statutes or regulations apply. In addition, tZERO Markets is anSEC -registered broker-dealer under the Exchange Act and a member ofFINRA and theSecurities Investor Protection Corporation and is subject to regulation, examination, investigation and disciplinary action by theSEC ,FINRA and state securities regulators, as well as other governmental authorities and self-regulatory organizations with 35 --------------------------------------------------------------------------------
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which it is registered or licensed or of which it becomes a member. As a result of the services which tZERO Markets provides, including servicing retail investors, a number of these legal and regulatory requirements are new to tZERO's broker-dealer subsidiaries and we expect federal and state securities regulators will require enhanced supervision, compliance and control procedures for tZERO Markets. Furthermore, tZEROATS, LLC operates the tZERO ATS and is, therefore, subject to Regulation ATS as well as other regulations, and partners with broker-dealers that are also subject to regulation by theSEC andFINRA and whose regulatory compliance may impact tZEROATS, LLC . Regulation ATS establishes the regulatory framework for alternative trading systems that match buy and sell orders but are exempt from registering as a national exchange under the Securities Exchange Act of 1934. Regulation ATS subjects tZEROATS, LLC to various rules and regulations, including, but not limited to, quarterly reporting obligations on Form ATS. The tZERO ATS facilitates the current trading of our outstanding Series A-1 preferred stock as well as TZROP. Secondary resales of our Series A-1 preferred stock and TZROP must be conducted in compliance with federal and state securities laws which may additionally impact tZEROATS, LLC . The joint venture that tZERO and BOX Digital announced inJune 2018 is seeking regulatory approvals that would enable the parties to operate theBoston Security Token Exchange ("BSTX"), a national securities exchange facility to support trading in a type of security for which order and transaction data would be captured on a proprietary blockchain and to also support settlement of transactions in such securities on BSTX faster than T+2. BSTX will require approval from theSEC prior to beginning operations. TheSEC originally published proposed rule changes relating to BSTX onOctober 11, 2019 which, following subsequent amendments and resubmissions, was disapproved by theSEC onDecember 18, 2020 . BSTX resubmitted a revised set of proposed rule changes which incorporate feedback from theSEC and expand the role of blockchain technology in BSTX's operations onApril 15, 2021 , which is expected to be published in the federal register in early May, 2021. Were it to be approved for operation by theSEC in the future, as a national securities exchange facility, BSTX would be subject to provisions of the Exchange Act and other rules and regulations applicable to national securities exchanges that are different than those applicable to tZERO's current operations, including, but not limited to, periodic and special examinations by theSEC . 36 --------------------------------------------------------------------------------
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