ACQUISITIONS, GOODWILL, AND ACQUIRED INTANGIBLE ASSETS (Notes)

12 Months Ended

Dec. 31, 2016

Business Combinations [Abstract]

Acquisitions, Goodwill, and Acquired Intangible Assets

ACQUISITIONS, GOODWILL, AND ACQUIRED INTANGIBLE ASSETS

As part of our Medici blockchain and financial technology initiatives, during 2015, a subsidiary of tØ.com, Inc. (formerly Medici, Inc.) entered into a purchase agreement to acquire Cirrus Technologies LLC, a financial technology firm. In connection with the Cirrus Technology acquisition, a subsidiary of tØ.com also entered into an agreement to purchase SpeedRoute LLC and all of the outstanding membership interests not already owned by tØ.com 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 tØ.com. SpeedRoute and Pro Securities are 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 (which excludes $2.2 million in cash acquired, primarily during Q1 2016) and 908,364 shares of Overstock’s common stock valued at approximately $18.1 million. The proceeds for the acquisition were financed by tØ.com 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 dates, with amounts exceeding fair value recorded as goodwill. We did not 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. We estimated the fair value of the acquired assets based on Level 3 inputs, which were unobservable (see Note 2—Accounting Policies, Fair value of financial instruments). These inputs included our estimate of future revenues, operating margins, discount rates, royalty rates and assumptions about the relative competitive environment.

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

Purchase Price	Fair Value
Cash paid, net of cash acquired	$	9,353
Common stock issued	18,149
	$	27,502
Allocation
Goodwill	$	11,914
Intangibles	16,000
Accounts receivable and other assets	2,565
Other liabilities assumed	(2,977		)
	$	27,502

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

Intangible Assets	Fair Value			Weighted Average Useful Life (years)
Technology and developed software	$	13,600		4.51
Customer relationships	1,900			—
Trade names	300			7.76
Other	200
Total acquired intangible assets as of the acquisition date	16,000
Less: accumulated amortization of acquired intangible assets	(5,383		)
Total acquired intangible assets, net as of December 31, 2016	$	10,617

The expense for amortizing acquired intangible assets in connection with this acquisition was $5.4 million and $1.5 million for the years ended December 31, 2016 and 2015, respectively.

Acquired intangible assets primarily include technology, customer relationships and trade names. As described above, we determined the fair value of these assets using an income approach method to determine the present value of expected future cash flows for each identifiable intangible asset. This method was 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, and finalizing the valuation of the acquired assets, during the year ended December 31, 2016, we made a $689,000 adjustment in goodwill consisting primarily of net cash acquired of $1.2 million, accounts receivable and other assets of $1.9 million and liabilities assumed of $2.5 million.

The acquired assets, liabilities, and associated operating results were consolidated into our financial statements at the acquisition date. The revenue and operating loss of the combined entities included in our financial statements was $15.2 million and $5.2 million, respectively, for the year ended December 31, 2016.

The following unaudited pro forma financial information presents our results as if the acquisitions had occurred at the beginning of 2014 (amounts in thousands):

	Year Ended December 31,
	2016		2015		2014
Net revenues	$	1,801,139	$	1,661,540	$	1,499,944
Operating income	$	7,142	$	640	$	10,185

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.