10-Q 1 ostk-20170630x10q.htm 10-Q Document

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 2017
 
Or 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from                        to                        
 
Commission file number: 000-49799
overstockcoma09.jpg
OVERSTOCK.COM, INC.
(Exact name of registrant as specified in its charter) 
Delaware
 
87-0634302
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification Number)
 
 
 
799 West Coliseum Way, Midvale, Utah
 
84047
(Address of principal executive offices)
 
(Zip Code)
 
 
 
(801) 947-3100
(Registrant's telephone number, including area code)
 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), (2) has been subject to such filing requirements for the past 90 days. Yes ý   No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý   No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer o
 
Accelerated filer x
 
 
 
Non-accelerated filer o (Do not check if a smaller reporting company)
 
Smaller reporting company o
 
 
 
Emerging growth company o
 
 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o  No ý

There were 25,000,327 shares of the Registrant's common stock, par value $0.0001, outstanding on July 31, 2017.





TABLE OF CONTENTS
 
 
 
 
Item 1.
 
 
 
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
Defaults Upon Senior Securities
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 
 

2


PART I. FINANCIAL INFORMATION
 
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)

Overstock.com, Inc.
Consolidated Balance Sheets (Unaudited)
(in thousands)
 
June 30,
2017
 
December 31,
2016
Assets
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
103,952

 
$
183,098

Restricted cash
543

 
430

Accounts receivable, net
20,751

 
28,142

Inventories, net
15,152

 
18,937

Prepaid inventories, net
1,215

 
2,112

Prepaids and other current assets
20,089

 
11,654

Total current assets
161,702

 
244,373

Fixed assets, net
134,563

 
134,552

Precious metals
9,946

 
9,946

Deferred tax assets, net
68,396

 
56,266

Intangible assets, net
9,171

 
10,913

Goodwill
14,698

 
14,698

Other long-term assets, net
14,399

 
14,328

Total assets
$
412,875

 
$
485,076

Liabilities and Stockholders’ Equity
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
75,736

 
$
106,337

Accrued liabilities
72,296

 
96,216

Deferred revenue
39,137

 
41,780

Finance obligations, current
3,297

 
3,256

Other current liabilities, net
1,548

 
1,627

Total current liabilities
192,014

 
249,216

Long-term debt, net
43,663

 
44,179

Finance obligations, non-current
10,168

 
11,831

Other long-term liabilities
7,099

 
6,890

Total liabilities
252,944

 
312,116

Commitments and contingencies (Note 6)


 


Stockholders’ equity:
 

 
 

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

 
 

Series A, issued and outstanding - 127

 

Series B, issued and outstanding - 569

 

Common stock, $0.0001 par value
 

 
 

Authorized shares - 100,000
 

 
 

Issued shares - 28,131 and 27,895
 

 
 

Outstanding shares - 25,000 and 25,432
3

 
3

Additional paid-in capital
385,987

 
383,348

Accumulated deficit
(157,926
)
 
(153,898
)
Accumulated other comprehensive loss
(1,472
)
 
(1,540
)
Treasury stock:
 

 
 

Shares at cost - 3,131 and 2,463
(63,672
)
 
(52,587
)
Equity attributable to stockholders of Overstock.com, Inc.
162,920

 
175,326

Equity attributable to noncontrolling interests
(2,989
)
 
(2,366
)
Total equity
159,931

 
172,960

Total liabilities and stockholders’ equity
$
412,875

 
$
485,076

See accompanying notes to unaudited consolidated financial statements.

3


Overstock.com, Inc.
Consolidated Statements of Operations (Unaudited)
(in thousands, except per share data)
 
 
Three months ended
 June 30,
 
Six months ended
 June 30,
 
2017
 
2016
 
2017
 
2016
Revenue, net
 

 
 

 
 

 
 

Direct
$
22,099

 
$
24,630

 
$
44,927

 
$
51,281

Partner and other
409,925

 
393,910

 
819,532

 
780,936

Total net revenue
432,024

 
418,540

 
864,459

 
832,217

Cost of goods sold
 

 
 

 
 

 
 

Direct(1)
21,147

 
23,098

 
42,110

 
48,504

Partner and other
326,706

 
319,120

 
651,271

 
630,084

Total cost of goods sold
347,853

 
342,218

 
693,381

 
678,588

Gross profit
84,171

 
76,322

 
171,078

 
153,629

Operating expenses:
 

 
 

 
 

 
 

Sales and marketing(1)
43,297

 
33,353

 
80,915

 
64,809

Technology(1)
28,244

 
25,800

 
57,236

 
51,510

General and administrative(1)
22,361

 
22,678

 
44,971

 
44,526

Litigation settlement

 

 

 
(19,520
)
Total operating expenses
93,902

 
81,831

 
183,122

 
141,325

Operating income (loss)
(9,731
)
 
(5,509
)
 
(12,044
)
 
12,304

Interest income
136

 
64

 
261

 
155

Interest expense
(716
)
 
(5
)
 
(1,426
)
 
(7
)
Other income (expense), net
593

 
3,992

 
(3,131
)
 
8,148

Income (loss) before income taxes
(9,718
)
 
(1,458
)
 
(16,340
)
 
20,600

Provision (benefit) for income taxes
(1,975
)
 
(243
)
 
(2,315
)
 
8,721

Consolidated net income (loss)
$
(7,743
)
 
$
(1,215
)
 
$
(14,025
)
 
$
11,879

Less: Net loss attributable to noncontrolling interests
(244
)
 
(311
)
 
(623
)
 
(646
)
Net income (loss) attributable to stockholders of Overstock.com, Inc.
$
(7,499
)
 
$
(904
)
 
$
(13,402
)
 
$
12,525

Net income (loss) per common share—basic:
 

 
 

 
 

 
 

Net income (loss) attributable to common shares—basic
$
(0.29
)
 
$
(0.04
)
 
$
(0.52
)
 
$
0.49

Weighted average common shares outstanding—basic
24,996

 
25,341

 
25,035

 
25,311

Net income (loss) per common share—diluted:
 

 
 

 
 

 
 

Net income (loss) attributable to common shares—diluted
$
(0.29
)
 
$
(0.04
)
 
$
(0.52
)
 
$
0.49

Weighted average common shares outstanding—diluted
24,996

 
25,341

 
25,035

 
25,350

________________________________________
(1) Includes stock-based compensation as follows (Note 8):
 

 
 

 
 

 
 

 Cost of goods sold — direct
$
39

 
$
80

 
$
88

 
$
131

 Sales and marketing
113

 
83

 
209

 
132

 Technology
150

 
238

 
310

 
405

 General and administrative
743

 
1,346

 
1,378

 
2,047

 Total
$
1,045

 
$
1,747

 
$
1,985

 
$
2,715

See accompanying notes to unaudited consolidated financial statements.

4


Overstock.com, Inc.
Consolidated Statements of Comprehensive Income (Loss) (Unaudited)
(in thousands)
 
 
Three months ended
 June 30,
 
Six months ended
 June 30,
 
2017
 
2016
 
2017
 
2016
Consolidated net income (loss)
$
(7,743
)
 
$
(1,215
)
 
$
(14,025
)
 
$
11,879

Other comprehensive income (loss):
 
 
 
 
 
 
 
Unrealized gain (loss) on cash flow hedges, net of benefit (expense) for taxes of $55, $349, $(40), and $1,064
(81
)
 
(540
)
 
68

 
(1,560
)
Other comprehensive income (loss)
(81
)
 
(540
)
 
68

 
(1,560
)
Comprehensive income (loss)
$
(7,824
)
 
$
(1,755
)
 
$
(13,957
)
 
$
10,319

Less: Comprehensive loss attributable to noncontrolling interests
(244
)
 
(311
)
 
(623
)
 
(646
)
Comprehensive income (loss) attributable to stockholders of Overstock.com, Inc.
$
(7,580
)
 
$
(1,444
)
 
$
(13,334
)
 
$
10,965

See accompanying notes to unaudited consolidated financial statements.


5


Overstock.com, Inc.
Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)
(in thousands)
 
Six months ended
 June 30, 2017
Equity attributable to stockholders of Overstock.com, Inc.
 

Number of common shares issued
 
Balance at beginning of period
27,895

Common stock issued upon vesting of restricted stock
198

Exercise of stock options
38

Balance at end of period
28,131

 
 
Number of treasury stock shares
 
Balance at beginning of period
2,463

Purchases of treasury stock
668

Balance at end of period
3,131

Total number of outstanding shares
25,000

 
 
Common stock
$
3

 
 
Number of Series A preferred shares issued and outstanding
 
Balance at beginning of period
127

Series A preferred shares issued

Balance at end of period
127

 
 
Number of Series B preferred shares issued and outstanding
 
Balance at beginning of period
569

Series B preferred shares issued

Balance at end of period
569

 
 
Preferred stock
$

 
 
Additional paid-in capital
 
Balance at beginning of period
$
383,348

Stock-based compensation to employees and directors
1,985

Exercise of stock options
654

Balance at end of period
$
385,987

 
 
Accumulated deficit
 
Balance at beginning of period
$
(153,898
)
Cumulative effect of change in accounting principle
9,374

Net loss attributable to stockholders of Overstock.com, Inc.
(13,402
)
Balance at end of period
$
(157,926
)
 
 
Accumulated other comprehensive loss
 
Balance at beginning of period
$
(1,540
)
Net other comprehensive income
68

Balance at end of period
$
(1,472
)
 
 
Treasury stock
 
Balance at beginning of period
$
(52,587
)
Purchases of treasury stock
(11,085
)
Balance at end of period
(63,672
)
Total equity attributable to stockholders of Overstock.com, Inc.
$
162,920

 
 
Equity attributable to noncontrolling interests
 
Balance at beginning of period
$
(2,366
)
Net loss attributable to noncontrolling interests
(623
)
Total equity attributable to noncontrolling interests
$
(2,989
)
 
 
Total equity
$
159,931

See accompanying notes to unaudited consolidated financial statements.

6


Overstock.com, Inc.
Consolidated Statements of Cash Flows (Unaudited)
(in thousands)
 
Six months ended
 June 30,
 
Twelve months ended
 June 30,
 
2017
 
2016
 
2017
 
2016
Cash flows from operating activities:
 

 
 

 
 

 
 

Consolidated net income (loss)
$
(14,025
)
 
$
11,879

 
$
(14,656
)
 
$
9,125

Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities:
 

 
 

 
 

 
 

Depreciation of fixed assets
14,909

 
12,296

 
29,896

 
24,660

Amortization of intangible assets
1,891

 
2,222

 
3,637

 
3,741

Stock-based compensation to employees and directors
1,985

 
2,715

 
4,161

 
4,503

Deferred income taxes, net
(2,796
)
 
7,368

 
(2,445
)
 
5,548

Loss on investment in precious metals

 

 
(201
)
 
1,131

Loss on investment in cryptocurrency

 

 

 
46

Impairment of cost method investment
4,500

 

 
7,350

 

Ineffective portion of loss on cash flow hedge

 

 

 
124

Termination costs of cryptobond financing

 

 

 
850

Other
65

 
(2
)
 
423

 
25

Changes in operating assets and liabilities, net of acquisitions:
 

 
 

 
 

 
 

Restricted cash
(188
)
 
(27
)
 
(161
)
 
(27
)
Accounts receivable, net
7,391

 
(1,169
)
 
(1,446
)
 
(826
)
Inventories, net
3,785

 
2,524

 
2,366

 
10,010

Prepaid inventories, net
897

 
93

 
3

 
1,230

Prepaids and other current assets
(9,213
)
 
(3,015
)
 
(3,809
)
 
994

Other long-term assets, net
(147
)
 
(204
)
 
(729
)
 
(563
)
Accounts payable
(30,601
)
 
(46,297
)
 
(3,127
)
 
8,189

Accrued liabilities
(22,391
)
 
(9,033
)
 
3,578

 
7,413

Deferred revenue
(2,643
)
 
(6,874
)
 
(4,933
)
 
(1,770
)
Other long-term liabilities
136

 
542

 
194

 
998

Net cash (used in) provided by operating activities
(46,445
)
 
(26,982
)
 
20,101

 
75,401

Cash flows from investing activities:
 

 
 

 
 

 
 

Proceeds from sale of precious metals

 

 
1,610

 

Investment in precious metals

 

 
(1,633
)
 

Disbursement of note receivable
(250
)
 
(3,050
)
 
(868
)
 
(8,050
)
Cost method investments
(1,188
)
 
(4,000
)
 
(1,938
)
 
(4,000
)
Equity method investment
(2,000
)
 

 
(2,000
)
 
38

Acquisitions of businesses, net of cash acquired

 
1,220

 
28

 
(9,381
)
Expenditures for fixed assets, including internal-use software and website development
(16,450
)
 
(42,848
)
 
(45,883
)
 
(83,322
)
Other
(115
)
 
30

 
(118
)
 
(91
)
Net cash used in investing activities
(20,003
)
 
(48,648
)
 
(50,802
)
 
(104,806
)
Cash flows from financing activities:
 

 
 

 
 

 
 

Paydown on direct financing arrangement

 
(54
)
 

 
(212
)
Payments on finance obligations
(1,622
)
 
(797
)
 
(2,731
)
 
(901
)
Payments on interest swap

 
(339
)
 
(224
)
 
(396
)
Proceeds from finance obligations

 
6,074

 
5,325

 
11,772

Proceeds from short-term debt

 

 

 
5,000

Payments on short-term debt

 

 

 
(750
)
Proceeds from long-term debt

 
23,652

 
12,621

 
33,140

Payments on long-term debt
(469
)
 

 
(469
)
 

Change in restricted cash
75

 

 
75

 
75

Proceeds from exercise of stock options
654

 

 
1,473

 

Proceeds from rights offering, net of offering costs

 

 
7,591

 

Purchase of treasury stock
(11,085
)
 
(602
)
 
(11,323
)
 
(607
)
Payment of debt issuance costs
(251
)
 

 
(251
)
 
(621
)
Net cash (used in) provided by financing activities
(12,698
)
 
27,934

 
12,087

 
46,500

Net (decrease) increase in cash and cash equivalents
(79,146
)
 
(47,696
)
 
(18,614
)
 
17,095

Cash and cash equivalents, beginning of period
183,098

 
170,262

 
122,566

 
105,471

Cash and cash equivalents, end of period
$
103,952

 
$
122,566

 
$
103,952

 
$
122,566


Continued on the following page
Overstock.com, Inc.
Consolidated Statements of Cash Flows (Unaudited)
(Continued)
(in thousands)
 
Six months ended
 June 30,
 
Twelve months ended
 June 30,
 
2017
 
2016
 
2017
 
2016
Supplemental disclosures of cash flow information:
 

 
 

 
 

 
 

Cash paid during the period:
 

 
 

 
 

 
 

Interest paid (net of amounts capitalized)
$
1,308

 
$
339

 
$
2,238

 
$
538

Taxes paid
183

 
544

 
977

 
617

Non-cash investing and financing activities:
 

 
 

 
 

 
 

Fixed assets, including internal-use software and website development, costs financed through accounts payable and accrued liabilities
$
690

 
$
8,283

 
$
690

 
$
8,283

Capitalized interest cost

 
78

 
27

 
157

Acquisition of businesses through stock issuance

 

 

 
18,149

Change in value of cash flow hedge
(100
)
 
2,286

 
(3,044
)
 
3,348

Note receivable converted to cost method investment
869

 

 
3,719

 


See accompanying notes to unaudited consolidated financial statements.


7


Overstock.com, Inc.
Notes to Unaudited Consolidated Financial Statements
 
1. BASIS OF PRESENTATION
 
As used herein, "Overstock," "Overstock.com," "O.co," "we," "our" and similar terms include Overstock.com, Inc. and its majority-owned subsidiaries, unless the context indicates otherwise.

We have prepared the accompanying unaudited consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC") regarding interim financial reporting. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements and should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations and our audited annual consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2016. The accompanying unaudited consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, which are, in our opinion, necessary for a fair presentation of results for the interim periods presented. 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, actual results may be different from the estimates. The results of operations for the three and six months ended June 30, 2017 are not necessarily indicative of the results to be expected for any future period or the full fiscal year.

For purposes of comparability, the presentation of certain immaterial amounts in the prior periods has been conformed with the current period presentation. We also retrospectively applied certain accounting standard updates as discussed in Note 2—Accounting Policies, Recently adopted accounting standards.

2. ACCOUNTING POLICIES
 
Principles of consolidation
 
The accompanying consolidated financial statements include our accounts and the accounts of our wholly-owned and majority-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 the consolidated financial statements and accompanying notes. Estimates are used for, but not limited to, investment valuation, receivables valuation, valuation of derivative financial instruments, revenue recognition, sales returns, incentive discount offers, inventory valuation, depreciable lives of fixed assets and internally-developed software, goodwill valuation, intangible asset valuation, cost method and equity method investment valuation, income taxes, stock-based compensation, performance-based compensation, self-funded health insurance liabilities and contingencies. Actual results could differ materially from these estimates.

Cash equivalents

We classify all highly liquid instruments, including instruments with a remaining maturity of three months or less at the time of purchase, as cash equivalents. Cash equivalents were $40.3 million and $75.2 million at June 30, 2017 and December 31, 2016, respectively.
 
Restricted cash
 
We consider cash that is legally restricted and cash that is held as a compensating balance for letter of credit arrangements as restricted cash.
 
Fair value of financial instruments


8


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.

Under GAAP, certain assets and liabilities are required to be recorded at fair value on a recurring basis. Our assets and liabilities that are adjusted to fair value on a recurring basis are investments in money market mutual funds, trading securities, derivative instruments, and deferred compensation liabilities.

The fair values of our investments in money market mutual funds, trading securities, and deferred compensation liabilities 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.

The fair values of our derivative instruments are determined using standard valuation models. The significant inputs used in these models are readily available in public markets, or can be derived from observable market transactions, and therefore have been classified as Level 2. Inputs used in these standard valuation models for derivative instruments include the applicable forward rates, interest rates and discount rates. Included in the fair value of derivative instruments is an adjustment for nonperformance risk. The adjustment for nonperformance risk did not have a significant impact on the estimated fair value of our derivative instruments. For additional disclosures related to our derivative instruments, see Derivative financial instruments below.

The following tables summarize our assets and liabilities measured at fair value on a recurring basis using the following levels of inputs as of June 30, 2017 and December 31, 2016 as indicated (in thousands):
p
Fair Value Measurements at June 30, 2017:
 
Total
 
Level 1
 
Level 2
 
Level 3
Assets:
 

 
 

 
 

 
 

Cash equivalents - Money market mutual funds
$
40,322

 
$
40,322

 
$

 
$

Trading securities held in a "rabbi trust" (1)
66

 
66

 

 

Total assets
$
40,388

 
$
40,388

 
$

 
$

Liabilities:
 

 
 

 
 

 
 

Derivatives (2)
$
1,696

 
$

 
$
1,696

 
$

Deferred compensation accrual "rabbi trust" (3)
68

 
68

 

 

Total liabilities
$
1,764

 
$
68

 
$
1,696

 
$

 
 
Fair Value Measurements at December 31, 2016:
 
Total
 
Level 1
 
Level 2
 
Level 3
Assets:
 

 
 

 
 

 
 

Cash equivalents - Money market mutual funds
$
75,177

 
$
75,177

 
$

 
$

Trading securities held in a "rabbi trust" (1)
58

 
58

 

 

Total assets
$
75,235

 
$
75,235

 
$

 
$

Liabilities:
 

 
 

 
 

 
 

Derivatives (2)
$
1,816

 
$

 
$
1,816

 
$

Deferred compensation accrual "rabbi trust" (3)
61

 
61

 

 

Total liabilities
$
1,877

 
$
61

 
$
1,816

 
$


9


 ___________________________________________
(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)
— Derivative financial instruments are included in Other current liabilities, net and Other long-term liabilities in the consolidated balance sheets.
(3)
— Non qualified deferred compensation in a rabbi trust is included in Accrued liabilities and Other long-term liabilities in the consolidated balance sheets.

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.

Accounts receivable
 
Accounts receivable consist primarily of trade amounts due from customers in the United States and from uncleared credit card transactions at period end. Accounts receivable are recorded at invoiced amounts and do not bear interest.

Allowance for doubtful accounts
 
From time to time, we grant credit to some of our business customers on normal credit terms (typically 30 days). We maintain an allowance for doubtful accounts receivable based upon our business customers' financial condition and payment history, and our historical collection experience and expected collectability of accounts receivable. The allowance for doubtful accounts receivable was $2.1 million and $2.0 million at June 30, 2017 and December 31, 2016, respectively.

Concentration of credit risk
 
Cash equivalents include short-term, highly liquid instruments with maturities at date of purchase of three months or less. At June 30, 2017 and December 31, 2016, two banks held the majority of our cash and cash equivalents. We do not believe that, as a result of this concentration, we are subject to any unusual financial risk beyond the normal risk associated with commercial banking relationships.
 
Financial instruments that potentially subject us to significant concentrations of credit risk consist primarily of cash equivalents and receivables. We invest our cash primarily in money market securities which are uninsured.
  
Valuation of inventories
 
Inventories, consisting of merchandise purchased for resale, 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. We write down our inventory for damage or estimated obsolescence and to lower of cost and net realizable value based upon assumptions about future demand market conditions and fulfillment costs. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required. Once established, the original cost of the inventory less the related inventory allowance represents the new cost basis of such products. Reversal of the allowance is recognized only when the related inventory has been sold or scrapped.
 
Prepaid inventories, net
 
Prepaid inventories, net represent inventories paid for in advance of receipt.

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, and other miscellaneous costs.
 
Fixed assets, net
 
Fixed assets, which include assets such as our corporate headquarters, land improvements, building machinery and equipment, furniture and equipment, technology infrastructure, internal-use software, website development and leasehold

10


improvements, are recorded at cost and depreciated using the straight-line method over the estimated useful lives of the related assets or the term of the related capital 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
2-4
 
Leasehold improvements are amortized over the shorter of the term of the related leases or estimated useful lives.

Included in fixed assets 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 of two to three years. Costs incurred related to design or maintenance of internal-use software are expensed as incurred.

During the three months ended June 30, 2017 and 2016, we capitalized $2.4 million and $5.4 million, respectively, of costs associated with internal-use software and website development, both developed internally and acquired externally. Amortization of costs associated with internal-use software and website development was $4.1 million and $3.8 million, respectively. During the six months ended June 30, 2017 and 2016, we capitalized $5.9 million and $10.1 million, respectively, of such costs and had amortization of $8.3 million and $7.6 million for those respective periods.

Depreciation expense is classified within the corresponding operating expense categories on the consolidated statements of operations as follows (in thousands): 
 
Three months ended
 June 30,
 
Six months ended
 June 30,
 
2017
 
2016
 
2017
 
2016
Cost of goods sold - direct
$
75

 
$
82

 
$
158

 
$
159

Technology
6,177

 
5,882

 
12,862

 
11,802

General and administrative
959

 
143

 
1,889

 
335

Total depreciation, including internal-use software and website development
$
7,211

 
$
6,107

 
$
14,909

 
$
12,296


Total accumulated depreciation of fixed assets was $194.7 million and $180.3 million at June 30, 2017 and December 31, 2016, respectively.

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 the consolidated statements of operations.

Fixed assets included assets under capital leases and finance obligations of $21.5 million and $21.5 million, at June 30, 2017 and December 31, 2016, respectively. Accumulated depreciation related to assets under capital leases and finance obligations was $11.1 million and $8.7 million, at June 30, 2017 and December 31, 2016, respectively.

Depreciation expense of assets recorded under capital leases was $1.1 million and $727,000 for the three months ended June 30, 2017 and 2016, respectively, and $2.4 million and $1.4 million, for the six months ended June 30, 2017 and 2016, respectively.

Cost method investments

At June 30, 2017, we held minority interests (less than 20%) in eight privately held entities, which include PeerNova, Bitt, Factom, Ripio, SettleMint, IdentityMind, MarkaVIP, and View Inc. The total aggregate amount of these investments (excluding any adjustments for impairment) was approximately $16.7 million. Based on the nature of one of our investments,

11


we have a variable interest. However, because we do not have power to direct the investee's activities and we are not the investee's primary beneficiary, we therefore do not consolidate the investee in our financial statements.

These investments are recognized as cost method investments included in Other long-term assets, net in our consolidated balance sheets. Earnings from the investments are recognized to the extent of dividends received, and we will recognize subsequent impairments to the investment if they are other than temporary. We review these investments individually for impairment by evaluating if events or circumstances have occurred that may have a significant adverse effect on their fair value. If such events or circumstances have occurred, we will estimate the fair value of the investment and determine if any decline in the fair value of the investment below its carrying value is other-than-temporary. In such cases, the estimated fair value of the investment is determined using unobservable inputs including assumptions by the investee's management. These inputs are classified as Level 3. See Fair value of financial instruments above. Because several of our investees are in the early startup or development stages, these entities are subject to potential changes in cash flows, valuation, and inability to attract new investors which may be necessary for the liquidity needed to support their operations.

At June 30, 2017, the carrying amount of our cost method investments was approximately $9.3 million. We recognized a $2.9 million impairment loss on one of these investments during 2016, which consisted of the entire carrying amount of the investment. We recognized a $4.5 million impairment loss on another one of these investments during the six months ended June 30, 2017. These impairment losses were recorded in Other income (expense), net on the consolidated statements of operations.

Equity method investments

In June 2017, we acquired a minority interest in Spera, Inc, a private held entity, which gives us the ability to exercise significant influence, but not control, over the investee. The purchase price for the investment was $2.0 million and is accounted for as an equity method investment included in Other long-term assets, net in our consolidated balance sheets. When we record our proportionate share of net income, it increases income (or decreases loss) in our consolidated statements of operations and our carrying value in that investment. Conversely, when we record our proportionate share of a net loss, it decreases income (or increases loss) in our consolidated statements of operations and our carrying value in that investment.

At June 30, 2017, the difference between the carrying value of this investment and the amount of underlying equity in net assets of the investee is not significant. Our proportionate share of the net income or loss of our equity method investee for the three months ended June 30, 2017 is not significant.

Noncontrolling interests

During 2014, we formed tØ.com, Inc. (formerly Medici, Inc.) to develop blockchain and fintech technology as part of our Medici initiatives. tØ.com is a majority owned subsidiary of Overstock. During 2016, tØ.com completed the acquisition of a financial technology firm and two registered broker dealers, each of which was under common control with the firm from which the financial technology assets were purchased. The former owners of that firm hold noncontrolling interests in tØ.com. These transactions are described further in Note 3—Acquisitions, Goodwill, and Acquired Intangible Assets. The proceeds for the acquisitions were financed by tØ.com through a note payable to Overstock that bears interest at a rate that approximates the Federal Funds Rate. tØ.com is included in our consolidated financial statements. Intercompany transactions have been eliminated and the amounts of contributions and gains or losses that are attributable to the noncontrolling interests are disclosed in our consolidated financial statements.

Leases
 
We account for lease agreements as either operating or capital leases depending on certain defined criteria. In certain of our lease agreements, we receive rent holidays and other incentives. We recognize lease costs on a straight-line basis without regard to deferred payment terms, such as rent holidays, that defer the commencement date of required payments. Additionally, tenant improvement allowances are amortized as a reduction in rent expense over the term of the lease. 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.

Treasury stock
 

12


We account for treasury stock under the cost method and include treasury stock as a component of stockholders' equity.
 
Precious metals
 
Our precious metals consisted of $5.9 million in gold and $4.0 million in silver at June 30, 2017 and December 31, 2016. We store our precious metals at an off-site secure facility. Because these assets consist of actual precious metals, rather than financial instruments, we account for them as an investment initially recorded at cost (including transaction fees) and then adjusted to the lower of cost or market based on an average unit cost. On an interim basis, we recognize decreases in the value of these assets caused by market declines. Subsequent increases in the value of these assets through market price recoveries during the same fiscal year are recognized in the later interim period, but may not exceed the total previously recognized decreases in value during the same year. Gains or losses resulting from changes in the value of our precious metal assets are recorded in Other income (expense), net in our consolidated statements of operations. There were no recorded gains or losses on investments in precious metals for the six months ended June 30, 2017 and 2016.

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. When evaluating whether goodwill is impaired, we make a qualitative assessment to determine if it is more likely than not that its fair value 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, then the amount of the impairment loss must be measured. The impairment loss, if any, is calculated by comparing the implied fair value of the goodwill to its carrying amount. In calculating the implied fair value of goodwill, the fair value of the reporting unit is allocated to the other assets and liabilities within the reporting unit based on estimated fair value. The excess of the fair value of a reporting unit over the amount allocated to its other assets and liabilities is the implied fair value of goodwill. An impairment loss is recognized when the carrying amount of goodwill exceeds its implied fair value.
 
In accordance with this guidance, we test for impairment of goodwill annually or when we deem that a triggering event has occurred. There were no impairments to goodwill recorded during the six months ended June 30, 2017 or the year ended December 31, 2016.

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. Intangible assets other than goodwill 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 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.

Intangible assets, net consist of the following (in thousands):
 
June 30,
2017
 
December 31,
2016
Acquired intangible assets
$
16,000

 
$
16,000

Intangible assets, other (1)
1,506

 
1,356

 
17,506

 
17,356

Less: accumulated amortization of intangible assets
(8,335
)
 
(6,443
)
Total intangible assets, net
$
9,171

 
$
10,913

___________________________________________
(1)
 — At June 30, 2017, the weighted average remaining useful life for intangible assets, other, excluding fully amortized intangible assets, was 3.38 years.


13


Amortization of intangible assets other than goodwill is classified within the corresponding operating expense categories on the consolidated statements of operations as follows (in thousands):
 
Three months ended
 June 30,
 
Six months ended
 June 30,
 
2017
 
2016
 
2017
 
2016
Technology
$
905

 
$
726

 
$
1,810

 
$
1,452

Sales and marketing
20

 
354

 
40

 
704

General and administrative
21

 
44

 
41

 
66

Total amortization
$
946

 
$
1,124

 
$
1,891

 
$
2,222


Estimated amortization expense for the next five years is: $1.9 million for the remainder of 2017, $2.8 million in 2018, $2.0 million in 2019, $1.3 million in 2020, and $900,000 in 2021 thereafter.

Impairment of long-lived assets
 
We review property and equipment 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 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 six months ended June 30, 2017 or the year ended December 31, 2016.

Other long-term assets, net
 
Other long-term assets, net consist primarily of cost and equity method investments (see Cost method investments and Equity method investments above) and related convertible notes and long-term prepaid expenses.

Derivative financial instruments
 
In 2014, we entered into a loan agreement in connection with the construction of our new corporate headquarters. We began borrowing under the facility in October 2015. Because amounts borrowed on the loan carry a variable LIBOR-based interest rate, we are affected by changes in certain market conditions. These changes in market conditions may adversely impact our financial performance, and as such, we use derivatives as a risk management tool to mitigate the potential impact of these changes. We do not enter into derivatives for speculative or trading purposes. The primary market risk we manage through the use of derivative instruments is interest rate risk on the amounts we have borrowed under the loan agreement relating to our new headquarters. To manage that risk, we use interest rate swap agreements. An interest rate swap agreement is a contract between two parties to exchange cash flows based on underlying notional amounts and indices. Our interest rate swaps entitle us to pay amounts based on a fixed rate in exchange for receipt of amounts based on variable rates over the term of the related loan agreement. The notional amounts under our hedges were $45.3 million and $45.8 million at June 30, 2017 and December 31, 2016, respectively.

Our derivatives are carried at fair value in our consolidated balance sheets in Other current liabilities, net and Other long-term liabilities on a gross basis. The accounting for gains and losses that result from changes in the fair values of derivative instruments depends on whether the derivatives have been designated and qualify as hedging instruments under GAAP. Our derivatives have been designated and qualify as cash flow hedges. We formally designated and documented, at inception, the financial instruments as hedges of specific underlying exposures, the risk management objectives, and the strategy for undertaking the hedging transactions. In addition, we formally assess, both at the inception and at least quarterly thereafter, whether the financial instruments used in hedging transactions are effective at offsetting changes in the cash flows of the related underlying exposures. To the extent that the hedges are effective, the changes in fair values of our cash flow hedges are recorded in Accumulated other comprehensive income (loss) in the consolidated statements of changes in stockholders' equity. Any ineffective portion is immediately recognized into earnings. The variable-rate interest on the borrowing for our new corporate headquarters was capitalized during the construction period. The amounts in Accumulated other comprehensive income (loss) related to the cash flow hedge of the variability of the interest that was capitalized is reclassified into earnings

14


over the depreciable life of the asset. During the six months ended June 30, 2017, the amount of gains or losses in accumulated other comprehensive income (loss) that has been reclassified into earnings was not material and the amounts at June 30, 2017 that we will reclassify into earnings within the next 12 months is not expected to be material.

We determine the fair values of our derivatives based on quoted market prices or using standard valuation models (see Fair value of financial instruments above). The notional amounts of the derivative financial instruments do not necessarily represent amounts exchanged by the parties and, therefore, are not a direct measure of our exposure to the financial risks described above. The amounts exchanged are calculated by reference to the notional amounts and by other terms of the derivatives, such as interest rates.

The following table shows the effect of derivative financial instruments that were designated as accounting hedges for the period indicated (in thousands): 
Cash flow hedges
 
Amount of gain (loss) recognized in OCI on derivative (effective portion) net of tax
 
Location of gain (loss) reclassified from Accumulated OCI into operations (effective portion)
 
Amount of gain (loss) reclassified from Accumulated OCI into operations (effective portion)
 
Location of gain (loss) recognized in operations on derivative (ineffective portion)
 
Amount of gain (loss) recognized in operations on derivative (ineffective portion)
Three months ended June 30, 2017
 
 
 
 
 
 
 
 
 
 
Interest rate swap
 
$
(81
)
 
Interest expense
 
$
4

 
Other income (expense)
 
$

Three months ended June 30, 2016
 
 
 
 
 
 
 
 
 
 
Interest rate swap
 
$
(540
)
 
Interest expense
 
$

 
Other income (expense)
 
$

Six months ended June 30, 2017
 
 
 
 
 
 
 
 
 
 
Interest rate swap
 
$
68

 
Interest expense
 
$
8

 
Other income (expense)
 
$

Six months ended June 30, 2016
 
 
 
 
 
 
 
 
 
 
Interest rate swap
 
$
(1,560
)
 
Interest expense
 
$

 
Other income (expense)
 
$

    
The following table provides the outstanding notional balances and fair values of derivative financial instruments that were designated as accounting hedges outstanding positions for the dates indicated, and recorded gains (losses) during the periods indicated (in thousands):

15


Cash flow hedges
 
Location in balance sheet
 
Expiration date
 
Outstanding notional
 
Fair value
 
Beginning gains (losses)
 
Gains (losses) recorded during period (1)
 
Ending gains (losses)
Three months ended June 30, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swap
 
Current and Other long-term liabilities
 
2023
 
$
45,292

 
$
(1,696
)
 
$
(1,570
)
 
$
(126
)
 
$
(1,696
)
Three months ended June 30, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swap
 
Current and Other long-term liabilities
 
2023
 
$
39,433

 
$
(4,683
)
 
$
(3,991
)
 
$
(692
)
 
$
(4,683
)
Six months ended June 30, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swap
 
Current and Other long-term liabilities
 
2023
 
$
45,292

 
$
(1,696
)
 
$
(1,816
)
 
$
120

 
$
(1,696
)
Six months ended June 30, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swap
 
Current and Other long-term liabilities
 
2023
 
$
39,433

 
$
(4,683
)
 
$
(2,397
)
 
$
(2,286
)
 
$
(4,683
)
___________________________________________
(1)
 — Gains (losses) recorded during the period are presented gross of the related tax impact.

Revenue recognition
 
We derive our revenue primarily from direct revenue and partner revenue from merchandise sales. We also earn revenue from advertising on our Website and from other pages. We have organized our operations into two principal reporting segments based on the primary source of revenue: direct revenue and partner revenue (see Note 9—Business Segments).
 
Revenue is recognized when the following revenue recognition criteria are met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or the service has been provided; (3) the selling price or fee revenue earned is fixed or determinable; and (4) collection of the resulting receivable is reasonably assured. 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, 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.
 
We evaluate the criteria outlined in ASC Topic 605-45, Principal Agent Considerations, in determining whether it is appropriate to record the gross amount of product sales and related costs or the net amount earned as commissions. When we are the primary obligor in a transaction, are subject to inventory risk, have latitude in establishing prices and selecting suppliers, or have several but not all of these indicators, revenue is recorded gross. If we are not the primary obligor in the transaction and amounts earned are determined using a fixed percentage, revenue is recorded on a net basis. Currently, the majority of both direct revenue and partner revenue is recorded on a gross basis, as we are the primary obligor. We present revenue net of sales taxes. We periodically provide incentive offers to our customers to encourage purchases. Such offers include current discount offers, such as percentage discounts off current purchases and other similar offers, which, when used by customers, are treated as a reduction of revenue.

We evaluate the revenue recognition criteria above for our broker dealer subsidiaries (see Note 10—Broker Dealers) and we recognize securities transactions (and the related commission revenue) on a trade date and gross basis.

16



Based upon our historical experience, direct and partner revenues typically increase during the fourth quarter because of the holiday retail season and decrease in the following quarter(s).
 
Direct revenue
 
Direct revenue is derived from merchandise sales of our owned inventory to individual consumers and businesses. Direct revenue comes from merchandise sales that occur primarily through our Website, but may also occur through offline and other channels.
 
Partner and other revenue
 
Partner and other revenue is derived primarily from merchandise sales of inventory owned by our partners which they generally ship directly to our consumers and businesses. Partner and other revenue comes from merchandise sales that occur primarily through our Website, but may also occur through offline and other channels, including through our broker dealer subsidiaries in our Other segment.

Club O loyalty program
 
We have a customer loyalty program called Club O Gold for which we sell annual memberships. For Club O Gold memberships, we record membership fees as deferred revenue and we recognize revenue ratably over the membership period. The Club O Gold loyalty program allows members to earn Club O Reward dollars for qualifying purchases made on our Website. We also have a co-branded credit card program (see Co-branded credit card program below for more information). Co-branded cardholders are also Club O Gold members and earn additional reward dollars for purchases made on our Website, and from other merchants.

Earned Club O Reward dollars may be redeemed on future purchases made through our Website. We recognize revenue for Club O Reward dollars when customers redeem their reward dollars as part of a purchase on our Website. We account for these transactions as multiple element arrangements and allocate revenue to the elements using their relative fair values. We include the value of reward dollars earned in deferred revenue and we record it as a reduction of revenue at the time the reward dollars are earned. Club O Gold membership reward dollars expire 90 days after the customer's Club O Gold membership expires. When Club O Reward dollars expire, we recognize reward dollar breakage as Other income (expense), net in our consolidated statements of operations.

Beginning in 2015, we enrolled a significant number of members in Club O Silver, a newly introduced Club O membership tier for customers who agree to receive promotional emails. Club O Silver members earned Club O Rewards on qualifying purchases that expired after 90 days from a qualifying purchase. We discontinued Club O Silver in October 2016, and as a result we do not expect further Club O Silver rewards breakage in the future.

In instances where customers receive free Club O Reward dollars not associated with any purchases, we account for these transactions as sales incentives such as coupons and record a reduction of revenue at the time the reward dollars are redeemed.

Co-branded credit card program
 
We have a co-branded credit card agreement with a commercial bank for the issuance of credit cards bearing the Overstock.com brand, under which the bank pays us fees for new accounts and for customer usage of the cards. The agreement also provides for a customer loyalty program offering reward points that customers will accrue from card usage and can use to make purchases on our Website (see Club O loyalty program above for more information). New account fees are recognized as revenue on a straight-line basis over the estimated expected life of co-branded credit card customers. Credit card usage fees are recognized as revenues as actual credit card usage occurs.

We also have a private label credit card agreement with another commercial bank for the issuance of credit cards bearing our brand, but that is only available for use on our Website. In connection with the agreement, we received upfront fees that we recognize as revenue on a straight line basis over the term of the agreement, which runs through February 2022. When customers make regular revolving purchases using the card, we receive fees, which are recognized as revenue. When we offer promotional financing for purchases made with the card (for example, 12 months same as cash), we pay a discount fee to the

17


commercial bank, which we recognize as a reduction of revenue. The commercial bank owns all of the accounts under the program and performs all account administration, underwriting and servicing. Fees and royalties from new accounts, credit card usage fees, and fees from both of these cards were less than 1% of total net revenues for all periods presented.

Deferred revenue
 
Customer orders are recorded as deferred revenue prior to delivery of products or services ordered. We record amounts received for Club O Gold membership fees as deferred revenue and we recognize it ratably over the membership period. We record Club O Reward dollars earned from purchases as deferred revenue at the time they are earned and we recognize it as revenue upon redemption. If reward dollars are not redeemed, we recognize other income upon expiration. In addition, we sell gift cards and record related deferred 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. If a gift card is not redeemed, we recognize other income when the likelihood of its redemption becomes remote based on our historical redemption experience. We consider the likelihood of redemption to be remote after 36 months.

 We periodically enter into agreements with other parties to market ancillary products or services on our Website. As a result of those agreements, we sometimes receive payments in advance of performing our obligations under those agreements. Such payments received before we perform our obligations are initially recorded as deferred revenue and then recognized over our service period.

Sales returns allowance
 
We inspect returned items when they arrive at our processing facility. 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.
 
The allowance for returns was $13.6 million and $18.2 million at June 30, 2017 and December 31, 2016, respectively.
 
Credit card chargeback allowance
 
Revenue is recorded net of credit card chargebacks. We maintain an allowance for credit card chargebacks based on current period revenues and historical chargeback experience. The allowance for chargebacks was $328,000 and $431,000 at June 30, 2017 and December 31, 2016, respectively.
 
Cost of goods sold
 
Cost of goods sold includes product costs, warehousing costs, outbound shipping costs, handling and fulfillment costs, customer service costs and credit card fees, and is recorded in the same period in which related revenues have been recorded. Cost of goods sold, including product cost and other costs and fulfillment and related costs are as follows (in thousands):

18


 
Three months ended
 June 30,
 
Six months ended
 June 30,
 
2017
 
2016
 
2017
 
2016
Total revenue, net
$
432,024

 
100
%
 
$
418,540

 
100
%
 
$
864,459

 
100
%
 
$
832,217

 
100
%
Cost of goods sold
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Product costs and other cost of goods sold
329,346

 
76
%
 
324,128

 
77
%
 
656,150

 
76
%
 
642,203

 
77
%
Fulfillment and related costs
18,507

 
4
%
 
18,090

 
4
%
 
37,231

 
4
%
 
36,385

 
4
%
Total cost of goods sold
347,853

 
81
%
 
342,218

 
82
%
 
693,381

 
80
%
 
678,588

 
82
%
Gross profit
$
84,171

 
19
%
 
$
76,322

 
18
%
 
$
171,078

 
20
%
 
$
153,629

 
18
%
 
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 the 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 and totaled $39.5 million and $30.3 million during the three months ended June 30, 2017 and 2016, respectively. For the six months ended June 30, 2017 and 2016, advertising expenses totaled $73.3 million and $59.1 million, respectively. Prepaid advertising (included in Prepaids and other current assets in the accompanying consolidated balance sheets) was $1.1 million and $843,000 at June 30, 2017 and December 31, 2016, respectively.
 
Stock-based compensation
 
We measure compensation expense for all outstanding unvested share-based 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 restricted stock awards exceeds a straight line basis. As a result of the adoption of ASU No. 2016-09, we made an accounting policy election to record forfeitures when they occur. 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 8—Stock-Based Awards.

Self-funded health insurance
 
As of January 1, 2017, we established a partially self-funded health insurance plan for our employees. We maintain a stop-loss insurance policy through an insurance company that limits our losses both on a per employee basis and an aggregate basis. Although we intend to maintain this plan indefinitely, we may terminate, modify, suspend, or discontinue this plan at any time and for any reason.
 
We are responsible for estimating our liability for unpaid costs of insured events that have occurred, which includes known cases on a case-by-case basis, and also for events that have occurred, but have not yet been reported. As of June 30, 2017, we have recorded an accrued liability of approximately $1.4 million. Actual claims may differ from the estimate and any difference could be significant. This accrual is included in accrued liabilities in the accompanying consolidated balance sheets.
 
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 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 6—Commitments and Contingencies).

Income taxes


19


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 and the mix of jurisdictions to which those items relate, relative changes of expenses or losses for which tax benefits are not recognized, how we do business, fluctuations in our stock price, and changes in law, regulations, and administrative practices. 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.

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 consider, among other things, our recent financial and operating results, along with our forecasted growth rates, projected future taxable income, and prudent and feasible tax planning strategies. We perform sensitivity analyses to address how potential changes in significant assumptions would impact our ability to generate the minimum amount of taxable income required. We give the most weight to objective evidence related to our more recent financial results. Based upon the level of historical taxable income and projections for future taxable income, and planned tax strategies over the periods in which the deferred tax assets are deductible, we believe it is more likely than not that we will realize the benefits of the deduction differences, net of recorded valuation allowances. During the three months ended June 30, 2017, our estimates of future apportioned taxable income during the carryforward period were reduced, primarily due to slowing of our overall revenue growth coupled with an increase of sales and marketing expenses as a percentage of revenue. Based on the weight of all positive and negative evidence, we concluded that it was not more likely than not that we would realize the benefits of certain state tax credits, and we established a valuation allowance of $2.3 million for these state tax credits as of June 30, 2017. We will continue to monitor the need for a valuation allowance against our remaining federal and state deferred tax assets on a quarterly basis.

We have not provided for U.S. income tax on certain foreign earnings because we intend to indefinitely reinvest these earnings outside the U.S. We have begun expansion of operations outside of the U.S. and have plans for additional expansion for which we have incurred and will continue to incur capital requirements. We have considered ongoing capital requirements of the parent company in the U.S.

Net income (loss) per share
 
In 2016, we issued shares of our Blockchain Voting Series A Preferred Stock and our Voting Series B Preferred Stock (collectively the "preferred shares"). These 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 upon the exercise of stock options and restricted stock awards are included in the calculation of diluted net income (loss) per common share to the extent such shares are dilutive.


20


The following table sets forth the computation of basic and diluted net income (loss) per common share for the periods indicated (in thousands, except per share data):
 
Three months ended
 June 30,
 
Six months ended
 June 30,
 
2017
 
2016
 
2017
 
2016
Net income (loss) attributable to stockholders of Overstock.com, Inc.
$
(7,499
)
 
$
(904
)
 
$
(13,402
)
 
$
12,525

Less: Preferred stock dividends - accumulated
27

 

 
55

 

Undistributed income (loss)
(7,526
)
 
(904
)
 
$
(13,457
)
 
12,525

Less: Undistributed loss allocated to participating securities
(204
)
 

 
(364
)
 

Net income (loss) attributable to common shares
$
(7,322
)
 
$
(904
)
 
$
(13,093
)
 
$
12,525

Net income (loss) per common share—basic:
 

 
 

 
 

 
 

Net income (loss) attributable to common shares—basic
$
(0.29
)
 
$
(0.04
)
 
$
(0.52
)
 
$
0.49

Weighted average common shares outstanding—basic
24,996

 
25,341

 
25,035

 
25,311

Effect of dilutive securities:
 

 
 

 
 

 
 

Stock options and restricted stock awards

 

 

 
39

Weighted average common shares outstanding—diluted
24,996

 
25,341

 
25,035

 
25,350

Net income (loss) attributable to common shares—diluted
$
(0.29
)
 
$
(0.04
)
 
$
(0.52
)
 
$
0.49

 
The following shares were excluded from the calculation of diluted shares outstanding as their effect would have been anti-dilutive (in thousands):
 
Three months ended
 June 30,
 
Six months ended
 June 30,
 
2017
 
2016
 
2017
 
2016
Stock options and restricted stock units
103

 
890

 
151

 
645


Stock repurchase program

On May 5, 2015, our Board of Directors authorized a stock repurchase program under which we may repurchase shares of our outstanding common stock for up to $25 million at any time through December 31, 2017. In January 2017, we repurchased approximately 604,000 shares of our common stock for an aggregate purchase price of $10 million under the stock repurchase plan. All common shares repurchased were recognized as treasury stock.

Recently adopted accounting standards

In July 2015, the FASB issued ASU No. 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory, which requires inventory to be measured at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. We implemented the provisions of ASU 2015-11 on January 1, 2017 on a prospective basis. The implementation of ASU 2015-11 did not impact our results of operations or cash flows.

In November 2015, the FASB issued ASU No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes, which requires that deferred tax assets and liabilities be classified as noncurrent in a classified balance sheet. We implemented the provisions of ASU 2015-17 on January 1, 2017 on a retrospective basis. Amounts related to the implementation for the year ended December 31, 2016 totaled approximately $16.3 million and have been reclassified to long-term deferred tax assets, net in our consolidated balance sheet. The implementation of ASU 2015-17 did not impact our results of operations or cash flows.

In March 2016, the FASB issued ASU No. 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, which simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on

21


the statement of cash flows. We implemented the provisions of ASU 2016-09 on January 1, 2017 on a modified retrospective basis. We recognized $9.4 million of additional deferred tax assets related to excess tax benefits through a cumulative effect adjustment in retained earnings as of January 1, 2017. We will recognize future excess tax benefits or tax deficiencies related to the vesting of stock-based compensation awards as income tax benefit or income tax expense. This is likely to cause volatility in our effective tax rate and income tax expense. As part of our implementation of this standard, we also made a policy election to recognize forfeitures as they occur under a modified retrospective approach which did not have a significant impact on our results of operations or cash flows. Our adoption of the other provisions of this standard, which will be applied prospectively, did not have a significant impact on our results of operations or cash flows.

Recently issued accounting standards not yet adopted

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard becomes effective for us on January 1, 2018. Early adoption is permitted. In March 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customers - Principal versus Agent Considerations. This ASU clarifies the implementation guidance for principal versus agent considerations in ASU No. 2014-09 and provides indicators that assist in the assessment of control. ASU No. 2016-08 is also effective for us on January 1, 2018. In 2016, the FASB issued additional implementation guidance for the new revenue recognition standards. These standards permit the use of either the retrospective or cumulative effect transition method. We are continuing to evaluate the impact of this ASU on the specific areas that apply to the Company and their potential impact to our processes, accounting, financial reporting, disclosures, and controls. We have not yet selected a transition method nor have we completed our assessment of the effect that ASU No. 2014-09 will have on our consolidated financial statements and related disclosures. At this stage in our assessment, the expected financial statement impact of new accounting standards cannot be reasonably estimated. We expect expanding revenue disclosures in our periodic filings as a result of adopting ASU No. 2014-09. We have identified gross versus net revenue recognition (principal versus agent considerations) as a potentially significant issue in our analysis. We generate substantially all of our net revenues in our retail partner business, in which we sell merchandise from manufacturers, distributors and other suppliers primarily through our Website. Under current FASB standards, we recognize revenue from the majority of these sales transactions on a gross basis. If our adoption of the new standards requires us to recognize net, rather than gross, revenue from the same types of sales for which we currently recognize gross revenue, our future revenue would be substantially lower than it would be under the current standards. We have further identified the timing of revenue recognition (FOB shipping point versus FOB destination) and the allocation of performance obligation related to the loyalty program (standalone selling price consideration) as potentially significant issues in our analysis, which are not expected to change the total amount of revenue recognized, but would accelerate the timing of when revenue is recognized.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which, among other things, requires lessees to recognize most leases on their balance sheets related to the rights and obligations created by those leases. The new standard also requires new disclosures to help financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. The new standard becomes effective for us on January 1, 2019. Early adoption is permitted. The amendments in this update should be applied under a modified retrospective approach. We are evaluating the effect that ASU No. 2016-02 will have on our consolidated financial statements and related disclosures.

In March 2016, the FASB issued ASU No. 2016-04, Liabilities - Extinguishment of Liabilities (Subtopic 405-20): Recognition of Breakage for Certain Prepaid Stored-Value Products, which specifies how prepaid stored-value product liabilities, such as gift cards, should be derecognized. The standard, among other things, requires derecognition of such liabilities through expected breakage in proportion to the pattern of rights expected to be exercised by the holder, but only to the extent that it is probable that a significant reversal of the recognized breakage amount will not subsequently occur. The new standard becomes effective for us on January 1, 2018. Early adoption is permitted. The amendments in this update should be applied under a modified retrospective approach or a retrospective approach to each period presented. We are evaluating the effect that ASU No. 2016-04 will have on our consolidated financial statements and related disclosures.

In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force), which provides guidance on the presentation of restricted cash or restricted cash equivalents in the statement of cash flows, thereby reducing the diversity in practice. The new standard becomes effective for us on January 1, 2018. The standard requires entities to apply this standard using the retrospective transition method to each period presented. The adoption of this standard will require that amounts generally described as restricted cash and restricted cash equivalents be included with cash and cash equivalents when reconciling beginning-of-period and end-of-

22


period total amounts shown in the statement of cash flows, rather than as currently presented within the operating activities and financing activities in the statement of cash flows. We do not expect that ASU No. 2016-18 will have a material impact on our consolidated financial statements and related disclosures.

In January 2017, the FASB issued ASU No. 2017-03, Accounting Changes and Error Corrections (Topic 250) and Investments-Equity Method and Joint Ventures (Topic 323): Amendments to SEC Paragraphs Pursuant to Staff Announcements at the September 22, 2016 and November 17, 2016 EITF Meetings (SEC Update), which provides the SEC staff view that a registrant should evaluate ASUs that have not yet been adopted to determine the appropriate financial statement disclosures about the potential material effects of those ASUs on the financial statements when adopted. We do not expect that ASU No. 2017-03 will have a material impact on our consolidated financial statements and related disclosures.

In January 2017, the FASB issued ASU No. 2017-04, Intangibles, Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which simplifies the manner in which an entity should perform its annual, or interim, goodwill impairment test. The new standard becomes effective for us on January 1, 2020. Early adoption is permitted. We have not yet determined whether to early adopt. The amendments in this update should be applied on a prospective basis. We do not expect that ASU No. 2017-04 will have a material impact on our consolidated financial statements and related disclosures.

In May 2017, the FASB issued ASU No. 2017-09, Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting, which provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. Essentially, an entity will not have to account for the effects of a modification if: (1) The fair value of the modified award is the same immediately before and after the modification; (2) the vesting conditions of the modified award are the same immediately before and after the modification; and (3) the classification of the modified award as either an equity instrument or liability instrument is the same immediately before and after the modification. The new standard becomes effective for us on January 1, 2018. We do not expect that ASU No. 2017-09 will have a material impact on our financial statements and related disclosures.

3. ACQUISITIONS, GOODWILL, AND ACQUIRED INTANGIBLE ASSETS
 
As part of our Medici blockchain and fintech 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 LLC 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):

23


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 useful lives as of June 30, 2017 (amounts in thousands):
Intangible Assets
Fair Value
 
Weighted Average Useful Life (years)
Technology and developed software
$
13,600

 
3.71
Customer relationships
1,900

 
Trade names
300

 
6.85
Other
200

 
 
Total acquired intangible assets at the acquisition dates
16,000

 
 
Less: accumulated amortization of acquired intangible assets
(7,234
)
 
 
Total acquired intangible assets, net
$
8,766

 
 

The expense for amortizing acquired intangible assets in connection with this acquisition was $924,000 and $1.1 million for the three months ended June 30, 2017 and 2016, respectively, and $1.8 million and $2.2 million for the six months ended June 30, 2017 and 2016, 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.

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.
    
4. ACCRUED LIABILITIES

Accrued liabilities consist of the following (in thousands):
 
June 30,
2017
 
December 31,
2016
Accrued marketing expenses
$
19,234

 
$
26,358

Allowance for returns
13,557

 
18,176

Accrued compensation and other related costs
9,934

 
8,903

Accounts payable accruals
9,720

 
17,229

Accrued loss contingencies
9,497

 
9,173

Accrued freight
5,374

 
10,062

Other accrued expenses
4,980

 
6,315

Total accrued liabilities
$
72,296

 
$
96,216


24



5. BORROWINGS
 
U.S. Bank term loan and revolving loan agreement

We are party to a loan agreement (as amended through March 30, 2017, the "Agreement") dated October 24, 2014 with U.S. Bank National Association and other banks in connection with the construction and long-term financing of our corporate headquarters (the "Project"). The Agreement provides for a senior secured real estate loan of $45.8 million (the "Term Loan") that we used to finance a portion of the Project and a $25.0 million senior secured revolving credit facility (the "Revolving Loan") to be used for working capital and other permitted purposes, including stock repurchases. The Term Loan and the Revolving Loan are both secured by the Project, our inventory and accounts receivable, substantially all of our deposit accounts and related assets. On January 1, 2017, the Term Loan was converted from a real estate loan used in the construction of our headquarters into an approximately 6.75-year loan due October 1, 2023. The aggregate principal amount converted was $45.8 million. The Revolving Loan terminates June 30, 2020.
    
Amounts outstanding under the Term Loan carry an interest rate based on one-month LIBOR plus 2.00% or an Alternate Base Rate plus 1.00%. However, we have entered into interest rate swap agreements designed to fix our interest rate on the Term Loan at approximately 4.6% annually (see Derivative financial instruments in Note 2. Accounting Policies). We are required to make monthly payments of principal plus interest, with a balloon payment of all unpaid principal and interest on October 1, 2023. Amounts outstanding under the Revolving Loan will carry an interest rate based on LIBOR plus 2.00% or an Alternate Base Rate plus 1.00%.

Under the Agreement, we are required to maintain compliance as of the end of each calendar quarter with the following financial covenants:

a fixed charge coverage ratio on a trailing 12-month basis of no less than 1.15 to 1.00;
a cash flow leverage ratio on a trailing 12-month basis not greater than 2.75 to 1.00; and
minimum liquidity of at least $50.0 million.

At June 30, 2017, we were in compliance with the financial covenants. The Term Loan includes customary events of default. The Term Loan and the Revolving Loan are cross-defaulted and cross-collateralized. In the event of a default, the default rate of interest would be 2.00% above the otherwise applicable rate.

At June 30, 2017, our outstanding balance on the Term Loan was $45.3 million and we had no amounts outstanding under the Revolving Loan. Our liability under the Term Loan approximates fair value. Amounts outstanding under the Term Loan are presented net of discount and issuance costs in our consolidated balance sheets.

Future principal payments on the Term Loan as of June 30, 2017, are as follows (in thousands):
Payments due by period:
 
 
2017 (Remainder)
 
$
562

2018
 
1,124

2019
 
1,124

2020
 
1,124

2021
 
1,124

Thereafter
 
40,234

 
 
$
45,292


On March 30, 2017, we amended the Agreement to increase our borrowing capacity under the Revolving Loan from $10 million to $25 million, to modify the Cash Flow Leverage Ratio limitation to not to exceed 2.75 to 1.00 (previously 2.50 to 1.00) and to make other changes, including a modification of the definition of "Restricted Payment" to exclude stock repurchases of up to $60 million from January 1, 2017 to June 30, 2018. The modification also extended the term of the Revolving Loan to June 30, 2020.

U.S. Bank master lease agreement

25



In November 2015, we entered into a Master Lease Agreement and a Financial Covenants Rider (collectively, the "Master Lease Agreement") with U.S. Bank Equipment Finance, a division of U.S. Bank National Association. ("Lessor"). Under the Master Lease Agreement we are able to sell certain assets (the "Leased Assets") to the Lessor and simultaneously lease them back for a period of 60 months. We are also able to finance certain software licenses (inclusive in the "Leased Assets") for a period of 60 months. We have the right to repurchase the Leased Assets and terminate the Master Lease Agreement twelve months following the initial term. We also have the right to repurchase the Leased Assets at the end of the term for $1.00. Payments on the Master Lease Agreement are due monthly. During the six months ended June 30, 2017, we did not receive proceeds under the Master Lease Agreement. At June 30, 2017, our total outstanding liability under the Master Lease Agreement was $13.5 million. The average interest rate for amounts outstanding under the Master Lease agreement was approximately 3.50%.

We have accounted for the Master Lease Agreement as a financing transaction and amounts owed are included in Finance obligations, current and non-current in the consolidated balance sheets. We recorded no gain or loss as a result of this transaction. The Master Lease Agreement allows for lease financing of up to $20 million. Our liability under the Master Lease Agreement approximates fair value.

In connection with the Master Lease Agreement, and as long as any obligations remain outstanding under the Master Lease Agreement, we are required to maintain compliance with the same financial covenants as the Agreement with U.S. Bank described above, and the two agreements have cross-default and cross-collateralization provisions. At June 30, 2017, we were in compliance with these financial covenants.

Future principal payments of the Master Lease Agreement as of June 30, 2017, are as follows (in thousands):
Payments due by period:
 
 
2017 (Remainder)
 
$
1,634

2018
 
3,356

2019
 
3,479

2020
 
3,502

2021
 
1,494

Thereafter
 

 
 
$
13,465


U.S. Bank letters of credit

At June 30, 2017 and December 31, 2016, letters of credit totaling $355,000 and $430,000, respectively, were issued on our behalf collateralized by compensating cash balances held at U.S. Bank, which are included in Restricted cash in the accompanying consolidated balance sheets.
 
U.S. Bank commercial purchasing card agreement
 
We have a commercial purchasing card (the "Purchasing Card") agreement with U.S. Bank. We use the Purchasing Card for business purpose purchasing and must pay it in full each month. At June 30, 2017, $619,000 was outstanding and $4.4 million was available under the Purchasing Card. At December 31, 2016, $811,000 was outstanding and $4.2 million was available under the Purchasing Card.


26


6. COMMITMENTS AND CONTINGENCIES
 
Summary of future minimum lease payments for all operating leases

Minimum future payments under all operating leases as of June 30, 2017, are as follows (in thousands):
Payments due by period
 
 
2017 (Remainder)
 
$
4,442

2018
 
7,221

2019
 
6,588

2020
 
4,293

2021
 
4,337

Thereafter
 
20,755

 
 
$
47,636

 

Rental expense for operating leases totaled $2.4 million and $3.4 million for the three months ended June 30, 2017 and 2016, respectively, and $4.9 million and $6.8 million for the six months ended June 30, 2017 and 2016, respectively.

Legal Proceedings and Contingencies
 
From time to time, we are involved in litigation concerning consumer protection, employment, intellectual property and other commercial matters related to the conduct and operation of our business and the sale of products on our Website. In connection with such litigation, we may be subject to significant damages. In some instances other parties may have contractual indemnification obligations to us. However, such contractual obligations may prove unenforceable or non-collectible, and if we cannot enforce or collect on indemnification obligations, we may bear the full responsibility for damages, fees and costs resulting from such litigation. We may also be subject to penalties and equitable remedies that could force us to alter important business practices. Such litigation could be costly and time consuming and could divert or distract our management and key personnel from our business operations. Due to the uncertainty of litigation and depending on the amount and the timing, an unfavorable resolution of some or all of these matters could materially affect our business, results of operations, financial position, or cash flows.

On September 23, 2009, SpeedTrack, Inc. sued us along with 27 other defendants in the United States District Court in the Northern District of California. We are alleged to have infringed a patent covering search and categorization software. We believe that certain third party vendors of products and services sold to us are contractually obligated to indemnify us, and we have tendered defense of the case to an indemnitor who accepted the defense. On April 21, 2016, the court entered an order partially dismissing the claims against us. On May 4, 2016, the plaintiff filed an amended complaint, and we have filed our answer. The nature of the loss contingencies relating to claims that have been asserted against us are described above. However, no estimate of the loss or range of loss can be made. We intend to vigorously defend this action and pursue our indemnification rights with our vendors.

On November 17, 2010, we were sued in the Superior Court of California, County of Alameda, by District Attorneys for the California Counties of Alameda, Marin, Monterey, Napa, Santa Clara, Shasta and Sonoma County, and the County of Santa Cruz later joined the suit. The district attorneys sought damages and an injunction under claims for violations of California consumer protection laws, alleging we made untrue or misleading statements concerning our pricing, price reductions, sources of products and shipping charges. The complaint asked for damages in the amount of not less than $15.0 million. We tried the case in September 2013 before the judge of the court and made final arguments in December 2013. On January 3, 2014, the court issued a tentative ruling in favor of the District Attorneys, which became a final Statement of Decision on February 5, 2014. The decision provided for an injunction that prescribes disclosures necessary for certain types of price advertising and price reductions and imposed a civil penalty, totaling $6.8 million. The court issued a Final Judgment February 19, 2014 reflecting the Court's Statement of Decision. We stipulated to Plaintiff's reimbursement of costs in the amount of $111,500. We appealed the decision to the California Court of Appeals, First Appellate District and secured a bond as required in the ruling in the amount of 150% of the penalty imposed in the matter until the ruling on the appeal. On June 2, 2017, the Court of Appeals ruled against us and affirmed the trial court's decision. We paid the amount of the judgment and related accumulated interest, totaling $9.3 million and obtained a Satisfaction of Judgment in July 2017 concluding the matter. The injunction described above will remain in place. The amount of the judgment and related accumulated interest were accrued as of June 30, 2017.

27



On February 11, 2013, RPost Holdings, Inc., RPost Communications Limited, and RMail Limited, filed suit against us in the United States District Court in Eastern District of Texas for infringement of patents covering products and services that verify the delivery and integrity of email messages. We tendered defense of the case to an indemnitor who accepted the defense. The nature of the loss contingencies relating to claims that have been asserted against us are described above. However, no estimate of the loss or range of loss can be made. We intend to vigorously defend this action and pursue our indemnification rights with our vendors.

In June 2013, William French filed suit against us and 46 other defendants under seal in the Superior Court of the State of Delaware. The filing was unsealed on March 24, 2014. French brought the action on Delaware's behalf for violations of Delaware's unclaimed property laws and for recovery of the unredeemed gift card value allegedly attributable to Delaware residents. French's complaint alleges that we, and other defendants, knowingly refused to fulfill obligations under Delaware's Abandoned Property Law by failing to report and deliver unclaimed gift card funds to the State of Delaware, and knowingly made, used or caused to be made or used, false statements and records to conceal, avoid or decrease an obligation to pay or transmit money to Delaware in violation of the Delaware False Claims and Reporting Act. The complaint seeks an injunction, monetary damages (including treble damages) penalties, and attorney's fees and costs. We, along with others, have filed motions to dismiss the case. The court dismissed one count, but allowed one count to remain. The case is in its discovery stages. We intend to vigorously defend this action. The nature of the loss contingencies relating to claims that have been asserted against us are described above.

On April 28, 2016, the State of South Dakota sued us along with three other defendants in the Sixth Judicial Circuit Court of South Dakota. South Dakota alleges that U.S. constitutional law should be revised to permit South Dakota to require out-of-state ecommerce websites to withhold and remit sales tax in South Dakota in accordance with South Dakota's sales tax statute. We removed the case to the United States District Court which recently remanded the case back to the South Dakota state court. Pursuant to the statute, we would not be required to withhold and remit sales tax until there was verdict in favor of South Dakota which was then upheld by the highest applicable appellate court. The statute does not require us to pay sales tax retroactively if we were to lose. The state court recently granted summary judgment in our favor, and South Dakota has filed to appeal the decision.

In September 2016, we received a letter from the District Attorney of Sonoma County, California who is acting as part of the Consumer Protection Divisions of the following counties in California: Sonoma, Alameda, Monterey, Napa, Solano, Fresno, Sacramento, Shasta, Santa Cruz, Butte, and Merced. The District Attorney alleges that certain plastic products on our site which are labeled as biodegradable, degradable, or decomposable constitute false advertising under California law. On July 24, 2017, we agreed to the terms of a Final Judgment pursuant to which we will pay the Sonoma County District Attorney's Office a civil penalty of $27,000 and agree to an injunction. The injunction will require us to comply with the biodegradable law, to search our Website and re-label or remove any non-compliant products, and to certify our compliance to Sonoma each year during the five-year term of the injunction. The nature of the loss contingencies relating to claims that have been asserted against us are described above. We intend to vigorously defend this matter and pursue our indemnification rights with our vendors.

On July 7, 2017, the State of Wyoming sued us along with five other defendants in the Second Judicial District Court of Wyoming. Wyoming alleges that U.S. constitutional law should be revised to permit Wyoming to require out-of-state ecommerce websites to withhold and remit sales tax in Wyoming in accordance with Wyoming's sales tax statute. Pursuant to the statute, Wyoming is prohibited by an injunction from requiring to withhold and remit sales tax until there is verdict in favor of Wyoming or the court otherwise lifts or dissolves the injunction. The statute does not require us to pay sales tax retroactively if we were to lose. We intend to vigorously defend this action.

We establish liabilities when a particular contingency is probable and estimable. At June 30, 2017, we have accrued $9.5 million in light of probable and estimable liabilities, which is included in accrued liabilities in the consolidated balance sheets. It is reasonably possible that the actual losses may exceed our accrued liabilities. We have other contingencies which are reasonably possible; however, the reasonably possible exposure to losses cannot currently be estimated.
 
7. INDEMNIFICATIONS AND GUARANTEES
 
During our normal course of business, we have made certain indemnities, commitments, and guarantees under which we may be required to make payments in relation to certain transactions. These indemnities include, but are not limited to, indemnities to various lessors in connection with facility leases for certain claims arising from such facility or lease, the

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environmental indemnity we entered into in favor of the lenders under our Loan Agreement with U.S. Bank and other banks, and indemnities to our directors and officers to the maximum extent permitted under the laws of the State of Delaware. The duration of these indemnities, commitments, and guarantees varies, and in certain cases, is indefinite. In addition, the majority of these indemnities, commitments, and guarantees do not provide for any limitation of the maximum potential future payments we could be obligated to make. As such, we are unable to estimate with any reasonableness our potential exposure under these items. We have not recorded any liability for these indemnities, commitments, and guarantees in the accompanying consolidated balance sheets. We do, however, accrue for losses for any known contingent liability, including those that may arise from indemnification provisions, when future payment is both probable and reasonably estimable.
 
8. STOCK-BASED AWARDS
 
We have equity incentive plans that provide for the grant to employees and board members of stock-based awards, including stock options and restricted stock. During the three and six months ended June 30, 2017, the Compensation Committee of the Board of Directors approved grants of 34,521 and 288,021 restricted stock awards to our officers, board members and employees. The restricted stock awards generally vest over three years at 33.3% at the end of the first year, 33.3% at the end of the second year and 33.3% at the end of the third year and are subject to the recipient's continuing service to us. At June 30, 2017, there were 552,192 unvested restricted stock awards that remained outstanding.

The cost of restricted stock awards is determined using the fair value of our common stock on the date of the grant, and compensation expense is either recognized on a straight-line basis over the three-year vesting schedule or on an accelerated schedule when vesting of restricted stock awards exceeds a straight-line basis. The cumulative amount of compensation expense recognized at any point in time is at least equal to the portion of the grant date fair value of the award that is vested at that date. The weighted average grant date fair value of restricted stock awards granted during the three and six months ended June 30, 2017 was $15.20 and $16.71.

Stock-based compensation expense related to restricted stock awards was $1.0 million and $1.7 million during the three months ended June 30, 2017 and 2016, respectively, and $2.0 million and $2.7 million during the six months ended June 30, 2017 and 2016, respectively.

The following table summarizes restricted stock award activity during the six months ended June 30, 2017 (in thousands):
 
Six months ended
 June 30, 2017
 
Units
 
Weighted
Average
Grant Date
Fair Value
Outstanding—beginning of year
560

 
$
17.44

Granted at fair value
288

 
16.71

Vested
(198
)
 
19.87

Forfeited
(98
)
 
16.15

Outstanding—end of period
552

 
$
16.43

 
9. BUSINESS SEGMENTS

Segment information has been prepared in accordance with ASC Topic 280 Segment Reporting. We determined our segments based on how we manage our business, which, in our view, consists primarily of our Retail and Medici businesses. Our Retail business consists of our Direct and Partner reportable segments. We use gross profit as the measure to determine our reportable segments because there is not discrete financial information available below gross profit for our Direct and Partner segments. As a result, our Medici business is not significant as compared to our Direct and Partner segments and is included in Other. Our Other segment includes Medici and equity method investments. Although our Direct and Partner segments both relate to our Retail business, we do not combine these segments because they have dissimilar economic characteristics, such as gross profit margins. We do not allocate assets between our segments for our internal management purposes, and as such, they are not presented here. There were no significant inter-segment sales or transfers during the three and six months ended June 30, 2017 and 2016.


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The following table summarizes information about reportable segments for the three and six months ended June 30, 2017 and 2016 (in thousands):
 
Three months ended
 June 30,
 
Direct
 
Partner
 
Retail Total
 
Other
 
Total
2017
 

 
 

 
 
 
 
 
 

Revenue, net
$
22,099

 
$
405,856

 
$
427,955

 
$
4,069

 
$
432,024

Cost of goods sold (1)
21,147

 
323,892

 
345,039

 
2,814

 
347,853

Gross profit
$
952

 
$
81,964

 
$
82,916

 
$
1,255

 
$
84,171

Operating expenses (1) (2)
 

 
 

 
89,325

 
4,577

 
93,902

Interest and other income (expense), net (3)
 

 
 

 
13

 

 
13

Pre-tax loss
 
 
 
 
(6,396
)
 
(3,322
)
 
(9,718
)
Benefit for income taxes
 

 
 

 
(176
)
 
(1,799
)
 
(1,975
)
Net loss (4)
 

 
 

 
$
(6,220
)
 
$
(1,523
)
 
$
(7,743
)
 
 
 
 
 
 
 
 
 
 
2016
 

 
 

 
 
 
 
 
 

Revenue, net
$
24,630

 
$
390,143

 
$
414,773

 
$
3,767

 
$
418,540

Cost of goods sold (1)
23,098

 
316,623

 
339,721

 
2,497

 
342,218

Gross profit
$
1,532

 
$
73,520

 
$
75,052

 
$
1,270

 
$
76,322

Operating expenses (1) (2)
 

 
 

 
77,625

 
4,206

 
81,831

Interest and other income (expense), net (3)
 

 
 

 
3,987

 
64

 
4,051

Pre-tax income (loss)
 
 
 
 
1,414

 
(2,872
)
 
(1,458
)
Provision (benefit) for income taxes
 

 
 

 
868

 
(1,111
)
 
(243
)
Net income (loss) (4)
 

 
 

 
$