ACQUISITIONS, GOODWILL, AND ACQUIRED INTANGIBLE ASSETS (Notes)

3 Months Ended

Mar. 31, 2016

Business Combinations [Abstract]

Acquisitions, Goodwill, and Acquired Intangible Assets

ACQUISITIONS, GOODWILL, AND ACQUIRED INTANGIBLE ASSETS

As part of our crypto-initiatives, during 2015, a subsidiary of Medici, Inc., entered into a purchase agreement to acquire all or substantially all of the assets of Cirrus Technologies LLC, a financial technology firm. These assets constituted a business. In connection with the Cirrus Technology acquisition, Medici also entered into an agreement to purchase all of the outstanding membership interests in SpeedRoute LLC and all of the outstanding membership interests not already owned by Medici in Pro Securities, LLC. Both SpeedRoute and Pro Securities were under common control with Cirrus Technologies by a party that holds a noncontrolling interest in Medici. SpeedRoute and Pro Securities are privately-held FINRA-registered broker dealers.

This acquisition closed in two parts. The Cirrus Technologies acquisition closed in Q3 2015 and the membership interests in SpeedRoute and Pro Securities closed in Q1 2016 after receiving approval from FINRA. The total gross purchase price of this acquisition was $29.7 million, consisting of approximately $11.6 million in cash and 908,364 shares of Overstock’s common stock valued at approximately $18.1 million. The proceeds for the acquisition were financed by Medici through a note payable to Overstock that bears interest that approximates the Federal Funds Rate. The total purchase price has been allocated to the assets acquired and the liabilities assumed based on their respective fair values at the acquisition date, with amounts exceeding fair value recorded as goodwill. We do not expect to record significant deferred taxes related to the acquisition. The goodwill of the acquired business is deductible for tax purposes.

The acquisition of Cirrus Technologies and the acquisition of the membership interests of SpeedRoute and Pro Securities were negotiated and contemplated in conjunction with each other. As such, this was recognized as a single transaction. Determination and allocation of the purchase price is based upon preliminary estimates and assumptions. These preliminary estimates and assumptions could change significantly during the measurement period as we finalize the valuations of the net tangible and intangible assets acquired and liabilities assumed. Any change could result in variances between our future financial results and the amounts recognized in the accompanying consolidated financial statements, including variances in fair values recorded, as well as expenses associated with these items.

The preliminary fair values of the assets acquired and liabilities assumed at the acquisition date are as follows (in thousands): 

Purchase Price	Fair Value
Cash paid, net of cash acquired	$	9,424
Common stock issued	18,149
	$	27,573
Allocation
Goodwill	$	11,551
Intangibles	16,000
Accounts receivable and other assets	2,248
Other liabilities assumed	(2,226		)
	$	27,573

Because this acquisition just recently occurred, and we need to complete our analysis on the information necessary to determine the fair values of the intangible assets we acquired, our estimates of fair value for our purchase price allocation are preliminary and may change during the allowable measurement period. Any changes in the fair values of these assets during the measurement period may result in material adjustments to goodwill.

The following table details the identifiable intangible assets acquired at their preliminary fair value and useful lives (amounts in thousands): 

Intangible Assets	Fair Value			Weighted Average Useful Life (years)
Technology and developed software	$	13,600		5.47
Customer relationships	1,900			0.35
Trade names	300			9.11
Other	200
Total acquired intangible assets as of the acquisition date	16,000
Less: accumulated amortization of acquired intangible assets	(2,547		)
Total acquired intangible assets, net as of March 31, 2016	$	13,453

The expense for amortizing acquired intangible assets in connection with this acquisition was $1.1 million for the three months ended March 31, 2016.

Acquired intangible assets primarily include technology, customer relationships and trade names. We determined the fair value of the identifiable intangible assets using various income approach methods including excess earnings to determine the present value of expected future cash flows for each identifiable intangible asset based on discount rates which incorporate a risk premium to take into account the risks inherent in those expected cash flows. The expected cash flows were estimated using the expectations of market participants.

As a result of the closing of the membership interests in SpeedRoute and Pro Securities during the three months ended March 31, 2016, we made a $1.1 million adjustment in goodwill consisting primarily of net cash acquired of $1.2 million, accounts receivable and other assets of $1.6 million and liabilities assumed of $1.7 million.

The acquired assets, liabilities, and associated operating results were consolidated into our financial statements at the acquisition dates, or the dates on which we obtained control of the acquired assets or interests. The revenue and operating loss of the combined acquired entities included in our financial statements were $2.8 million and $1.5 million, respectively, for the three months ended March 31, 2016.

The following unaudited pro forma financial information presents our results as if the current year acquisitions had occurred at the beginning of 2015 (amounts in thousands):

	Three months ended March 31,
	2016		2015
Net revenues	$	414,853	$	405,957
Operating income	$	18,040	$	3,612

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