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 ~~September~~June 30, ~~2017~~2018



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

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 ~~25,023,328~~29,009,814 shares of the Registrant's common stock, par value $0.0001, outstanding on ~~November 3, 2017.~~August 8, 2018.

Table of Contents

OVERSTOCK.COM, INC.

FORM 10-Q

For the quarterly period ended June 30, 2018

TABLE OF CONTENTS



PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)	3
	Consolidated Balance Sheets	3
	Consolidated Statements of Operations	4
	Consolidated Statements of Comprehensive Loss	5
	Consolidated Statements of Changes in Stockholder's Equity	6
	Consolidated Statements of Cash Flows	7
	Notes to Unaudited Consolidated Financial Statements	8

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	3331

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	5553

Item 4.	Controls and Procedures	5654

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	5856

Item 1A.	Risk Factors	5856

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	7960

Item 3.	Defaults Upon Senior Securities	8060

Item 4.	Mine Safety Disclosures	8061

Item 5.	Other Information	8061

Item 6.	Exhibits	8061

		Signature	8163

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)

Overstock.com, Inc.

Consolidated Balance Sheets (Unaudited)

(in thousands)


	September 30, 2017			December 31, 2016			June 30, 2018			December 31, 2017
Assets
Current assets:
Cash and cash equivalents	$	92,266		$	183,098		$	152,228		$	203,215
Restricted cash	562			430			468			455
Accounts receivable, net	24,328			28,142			28,597			30,080
Inventories, net	13,562			18,937			15,355			13,703
Prepaid inventories, net	1,766			2,112			1,071			1,625
Prepaids and other current assets	18,498			11,654			25,419			16,119
Total current assets	150,982			244,373			223,138			265,197
Fixed assets, net	131,981			134,552			131,923			129,343
Precious metals	250			9,946
Deferred tax assets, net	74,250			56,266
Intangible assets, net	8,288			10,913			26,343			7,337
Goodwill	14,698			14,698			22,058			14,698
Equity Investments							43,543			13,024
Other long-term assets, net	14,992			14,328			5,888			4,216
Total assets	$	395,441		$	485,076		$	452,893		$	433,815
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	70,543		$	106,337		$	92,712		$	85,406
Accrued liabilities	58,784			96,216			109,732			82,611
Deferred revenue	41,505			41,780			42,644			46,468
Finance obligations, current	3,326			3,256
Other current liabilities, net	1,507			1,627			468			178
Total current liabilities	175,665			249,216			245,556			214,663
Long-term debt, net	43,406			44,179			3,069			—
Finance obligations, non-current	9,325			11,831
Long-term debt, net - related party							—			39,909
Other long-term liabilities	7,159			6,890			6,160			7,120
Total liabilities	235,555			312,116			254,785			261,692
Commitments and contingencies (Note 6)
Stockholders’ equity:
Preferred stock, $0.0001 par value, authorized shares - 5,000
Series A, issued and outstanding - 127 and 127	—			—			—			—
Series B, issued and outstanding - 555 and 569	—			—
Series B, issued and outstanding - 555 and 555							—			—
Common stock, $0.0001 par value
Authorized shares - 100,000
Issued shares - 28,149 and 27,895
Outstanding shares - 25,017 and 25,432	3			3
Issued shares - 32,203 and 30,632
Outstanding shares - 29,007 and 27,497							3			3
Additional paid-in capital	387,195			383,348			553,112			494,732
Accumulated deficit	(158,893		)	(153,898		)	(365,472		)	(254,692		)
Accumulated other comprehensive loss	(1,420		)	(1,540		)	(591		)	(599		)
Treasury stock:
Shares at cost - 3,132 and 2,463	(63,691		)	(52,587		)
Shares at cost - 3,196 and 3,135							(66,662		)	(63,816		)
Equity attributable to stockholders of Overstock.com, Inc.	163,194			175,326			120,390			175,628
Equity attributable to noncontrolling interests	(3,308		)	(2,366		)	77,718			(3,505		)
Total equity	159,886			172,960			198,108			172,123
Total liabilities and stockholders’ equity	$	395,441		$	485,076		$	452,893		$	433,815

See accompanying notes to unaudited consolidated financial statements.

Overstock.com, Inc.

Consolidated Statements of Operations (Unaudited)

(in thousands, except per share data)


	Three months ended September 30,						Nine months ended September 30,						Three months ended June 30,						Six months ended June 30,
	2017			2016			2017			2016			2018			2017			2018			2017
Revenue, net
Direct	$	19,645		$	24,620		$	64,572		$	75,901		$	14,715		$	22,099		$	30,985		$	44,927
Partner and other	404,362			416,944			1,223,894			1,197,880			468,418			409,925			897,479			819,532
Total net revenue	424,007			441,564			1,288,466			1,273,781			483,133			432,024			928,464			864,459
Cost of goods sold
Direct(1)	19,577			23,955			61,687			72,459			14,672			21,147			29,444			42,110
Partner and other	320,755			337,893			972,026			967,977			376,718			326,706			713,408			651,271
Total cost of goods sold	340,332			361,848			1,033,713			1,040,436			391,390			347,853			742,852			693,381
Gross profit	83,675			79,716			254,753			233,345			91,743			84,171			185,612			171,078
Operating expenses:
Sales and marketing(1)	45,153			34,707			126,068			99,516			94,416			43,297			171,630			80,915
Technology(1)	28,746			26,739			85,982			78,249			32,423			28,244			63,717			57,236
General and administrative(1)	21,651			23,317			66,622			67,843			31,440			22,361			71,195			44,971
Litigation settlement	—			—			—			(19,520		)
Total operating expenses	95,550			84,763			278,672			226,088			158,279			93,902			306,542			183,122
Operating income (loss)	(11,875		)	(5,047		)	(23,919		)	7,257
Operating loss													(66,536		)	(9,731		)	(120,930		)	(12,044		)
Interest income	189			73			450			228			620			136			1,164			261
Interest expense	(713		)	(212		)	(2,139		)	(219		)	(395		)	(716		)	(1,269		)	(1,426		)
Other income, net	5,882			1,251			2,751			9,399
Income (loss) before income taxes	(6,517		)	(3,935		)	(22,857		)	16,665
Provision (benefit) for income taxes	(5,412		)	(543		)	(7,727		)	8,178
Consolidated net income (loss)	$	(1,105	)	$	(3,392	)	$	(15,130	)	$	8,487
Other income (expense), net													368			593			359			(3,131		)
Loss before income taxes													(65,943		)	(9,718		)	(120,676		)	(16,340		)
Benefit from income taxes													(27		)	(1,975		)	(304		)	(2,315		)
Consolidated net loss													$	(65,916	)	$	(7,743	)	$	(120,372	)	$	(14,025	)
Less: Net loss attributable to noncontrolling interests	(319		)	(294		)	(942		)	(940		)	(1,005		)	(244		)	(4,552		)	(623		)
Net income (loss) attributable to stockholders of Overstock.com, Inc.	$	(786	)	$	(3,098	)	$	(14,188	)	$	9,427
Net income (loss) per common share—basic:
Net income (loss) attributable to common shares—basic	$	(0.03	)	$	(0.12	)	$	(0.55	)	$	0.37
Net loss attributable to stockholders of Overstock.com, Inc.													$	(64,911	)	$	(7,499	)	$	(115,820	)	$	(13,402	)
Net loss per common share—basic:
Net loss attributable to common shares—basic													$	(2.20	)	$	(0.29	)	$	(3.94	)	$	(0.52	)
Weighted average common shares outstanding—basic	25,003			25,356			25,024			25,326			28,903			24,996			28,736			25,035
Net income (loss) per common share—diluted:
Net income (loss) attributable to common shares—diluted	$	(0.03	)	$	(0.12	)	$	(0.55	)	$	0.37
Net loss per common share—diluted:
Net loss attributable to common shares—diluted													$	(2.20	)	$	(0.29	)	$	(3.94	)	$	(0.52	)
Weighted average common shares outstanding—diluted	25,003			25,356			25,024			25,388			28,903			24,996			28,736			25,035


(1) Includes stock-based compensation as follows (Note 8):
Cost of goods sold — direct	$	46	$	69	$	134	$	200	$	41	$	39	$	111	$	88
Sales and marketing	109		102		318		234		315		113		1,188		209
Technology	166		210		476		615		621		150		1,142		310
General and administrative	703		1,009		2,081		3,056		1,996		743		6,967		1,378
Total	$	1,024	$	1,390	$	3,009	$	4,105	$	2,973	$	1,045	$	9,408	$	1,985

See accompanying notes to unaudited consolidated financial statements.

Overstock.com, Inc.

Consolidated Statements of Comprehensive ~~Income (Loss)~~Loss (Unaudited)

(in thousands)

Three months ended
September 30, Nine months ended
September 30,
2017 2016 2017 2016
Consolidated net income (loss) $ (1,105 ) $ (3,392 ) $ (15,130 ) $ 8,487
Other comprehensive income (loss):
Unrealized gain (loss) on cash flow hedges, net of benefit (expense) for taxes of $(31), $(346), $(71), and $718 52
(64 ) 120
(1,624 )
Other comprehensive income (loss) 52
(64 ) 120
(1,624 )
Comprehensive income (loss) $ (1,053 ) $ (3,456 ) $ (15,010 ) $ 6,863
Less: Comprehensive loss attributable to noncontrolling interests (319 ) (294 ) (942 ) (940 )
Comprehensive income (loss) attributable to stockholders of Overstock.com, Inc. $ (734 ) $ (3,162 ) $ (14,068 ) $ 7,803



	Three months ended June 30,						Six months ended June 30,
	2018			2017			2018			2017
Consolidated net loss	$	(65,916	)	$	(7,743	)	$	(120,372	)	$	(14,025	)
Other comprehensive loss:
Unrealized gain on cash flow hedges, net of expense for taxes of $0, $55, $0, and $(40)	4			(81		)	8			68
Other comprehensive income	4			(81		)	8			68
Comprehensive loss	$	(65,912	)	$	(7,824	)	$	(120,364	)	$	(13,957	)
Less: Comprehensive loss attributable to noncontrolling interests	(1,005		)	(244		)	(4,552		)	(623		)
Comprehensive loss attributable to stockholders of Overstock.com, Inc.	$	(64,907	)	$	(7,580	)	$	(115,812	)	$	(13,334	)

See accompanying notes to unaudited consolidated financial statements.

Overstock.com, Inc.

Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)

(in thousands)



	Six months ended June 30, 2018
Equity attributable to stockholders of Overstock.com, Inc.
Number of common shares issued
Balance at beginning of period	30,632
Common stock issued upon vesting of restricted stock	221
Common stock issued for asset purchase	100
Exercise of stock warrants	1,250
Balance at end of period	32,203

Number of treasury stock shares
Balance at beginning of period	3,135
Tax withholding upon vesting of restricted stock	61
Balance at end of period	3,196
Total number of outstanding shares	29,007

Common stock	$	3

Number of Series A preferred shares issued and outstanding	127

Number of Series B preferred shares issued and outstanding	555

Preferred stock	$	—

Additional paid-in capital
Balance at beginning of period	$	494,732
Stock-based compensation to employees and directors	5,368
Common stock issued for asset purchase	2,930
Exercise of stock warrants	50,562
Sale of stock warrants	25
Other	(505		)
Balance at end of period	$	553,112

Accumulated deficit
Balance at beginning of period	$	(254,692	)
Cumulative effect of change in accounting principle	5,040
Net loss attributable to stockholders of Overstock.com, Inc.	(115,820		)
Balance at end of period	$	(365,472	)

Accumulated other comprehensive loss
Balance at beginning of period	$	(599	)
Net other comprehensive income	8
Balance at end of period	$	(591	)

Treasury stock
Balance at beginning of period	$	(63,816	)
Tax withholding upon vesting of restricted stock	(2,846		)
Balance at end of period	(66,662		)
Total equity attributable to stockholders of Overstock.com, Inc.	$	120,390

Equity attributable to noncontrolling interests
Balance at beginning of period	$	(3,505	)
Proceeds from security token offering, net of offering costs (Note 2 - Noncontrolling Interest)	78,442
Stock-based compensation to employees and directors	4,040
Tax withholding upon vesting of restricted stock	(1,680		)
Net loss attributable to noncontrolling interests	(4,552		)
Fair value of noncontrolling interests at acquisition	4,468
Other	505
Total equity attributable to noncontrolling interests	$	77,718

Total equity	$	198,108

Nine months ended
September 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 202
Exercise of stock options 38
Conversion of preferred shares 14
Balance at end of period 28,149

Number of treasury stock shares
Balance at beginning of period 2,463
Purchases of treasury stock 669
Balance at end of period 3,132
Total number of outstanding shares 25,017

Common stock $ 3

Number of Series A preferred shares issued and outstanding 127

Number of Series B preferred shares issued and outstanding
Balance at beginning of period 569
Conversion of preferred shares (14 )
Balance at end of period 555

Preferred stock $ —

Additional paid-in capital
Balance at beginning of period $ 383,348
Stock-based compensation to employees and directors 3,009
Exercise of stock options 654
Conversion of preferred shares 181
Issuance of stock warrants 3
Balance at end of period $ 387,195

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. (14,188 )
Conversion of preferred shares (181 )
Balance at end of period $ (158,893 )

Accumulated other comprehensive loss
Balance at beginning of period $ (1,540 )
Net other comprehensive income 120
Balance at end of period $ (1,420 )

Treasury stock
Balance at beginning of period $ (52,587 )
Purchases of treasury stock (11,104 )
Balance at end of period (63,691 )
Total equity attributable to stockholders of Overstock.com, Inc. $ 163,194

Equity attributable to noncontrolling interests
Balance at beginning of period $ (2,366 )
Net loss attributable to noncontrolling interests (942 )
Total equity attributable to noncontrolling interests $ (3,308 )

Total equity $ 159,886

See accompanying notes to unaudited consolidated financial statements.

Overstock.com, Inc.

Consolidated Statements of Cash Flows (Unaudited)

(in thousands)


	Nine months ended September 30,						Twelve months ended September 30,						Six months ended June 30,						Twelve months ended June 30,
	2017			2016			2017			2016			2018			2017			2018			2017
Cash flows from operating activities:
Consolidated net income (loss)	$	(15,130	)	$	8,487		$	(12,369	)	$	8,350
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities:
Consolidated net loss													$	(120,372	)	$	(14,025	)	$	(218,269	)	$	(14,656	)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Depreciation of fixed assets	21,895			19,710			29,468			26,729			12,983			14,909			26,922			29,896
Amortization of intangible assets	2,839			3,193			3,614			3,444			2,051			1,891			4,159			3,637
Stock-based compensation to employees and directors	3,009			4,105			3,795			5,054			9,408			1,985			11,500			4,161
Deferred income taxes, net	(8,682		)	6,688			(7,651		)	4,701			(298		)	(2,796		)	67,697			(2,445		)
(Gain) loss on investment in precious metals	(1,907		)	—			(2,108		)	521
Gain on investment in precious metals													—			—			(1,971		)	(201		)
Impairment of cryptocurrencies													9,491			—			9,491			—
Gain on sale of cryptocurrencies	(845		)	—			(845		)	—			(8,348		)	—			(10,343		)	—
Impairment of cost method investment	4,500			2,850			4,500			2,850
Termination costs of cryptobond financing	—			—			—			850
Impairment of equity securities													—			4,500			987			7,350
Early extinguishment costs of long term debts													283			—			2,747			—
Other	420			207			569			212			(609		)	65			202			423
Changes in operating assets and liabilities, net of acquisitions:
Restricted cash	(207		)	—			(207		)	—
Accounts receivable, net	3,814			(2,909		)	(3,283		)	(2,108		)	1,882			7,391			(7,447		)	(1,446		)
Inventories, net	5,375			4,325			2,155			7,489			120			3,785			1,569			2,366
Prepaid inventories, net	346			(226		)	(229		)	(259		)	554			897			144			3
Prepaids and other current assets	(6,296		)	(3,456		)	(451		)	(1,012		)	(8,234		)	(9,213		)	(2,307		)	(3,809		)
Other long-term assets, net	(121		)	(356		)	(551		)	(670		)	(3,827		)	(147		)	(5,987		)	(729		)
Accounts payable	(35,794		)	(40,247		)	(14,370		)	17,548			6,686			(30,601		)	16,292			(3,127		)
Accrued liabilities	(35,831		)	(8,678		)	(10,217		)	4,920			26,911			(22,391		)	36,991			3,578
Deferred revenue	(275		)	(9,687		)	248			(3,896		)	1,216			(2,643		)	8,547			(4,933		)
Other long-term liabilities	235			555			280			754			(476		)	136			(467		)	194
Net cash (used in) provided by operating activities	(62,655		)	(15,439		)	(7,652		)	75,477			(70,579		)	(46,257		)	(59,543		)	20,262
Cash flows from investing activities:
Purchases of intangible assets													(9,241		)	—			(9,664		)	—
Proceeds from sale of precious metals	11,603			—			13,213			—			—			—			11,917			1,610
Investment in precious metals	—			—			(1,633		)	—			—			—			—			(1,633		)
Disbursement of note receivable	(750		)	(3,050		)	(1,368		)	(3,050		)	(200		)	(250		)	(700		)	(868		)
Cost method investments	(2,188		)	(4,000		)	(2,938		)	(4,000		)
Equity method investment	(2,000		)	—			(2,000		)	—
Investment in equity securities													(29,570		)	(3,188		)	(31,570		)	(3,938		)
Acquisitions of businesses, net of cash acquired	—			1,220			28			1,192			(12,912		)	—			(12,912		)	28
Expenditures for fixed assets, including internal-use software and website development	(20,873		)	(59,382		)	(33,772		)	(75,514		)	(12,749		)	(16,450		)	(19,885		)	(45,883		)
Other	(160		)	46			(179		)	14			22			(115		)	207			(118		)
Net cash used in investing activities	(14,368		)	(65,166		)	(28,649		)	(81,358		)	(64,650		)	(20,003		)	(62,607		)	(50,802		)
Cash flows from financing activities:
Paydown on direct financing arrangement	—			(54		)	—			(134		)
Payments on finance obligations	(2,436		)	(1,354		)	(2,988		)	(1,458		)
Payments on capital lease obligations													(248		)	—			(331		)	—
Payments on interest swap	—			(563		)	—			(620		)	—			—			(1,535		)	(224		)
Proceeds from finance obligations	—			6,075			5,324			11,773			—			—			—			5,325
Payments on short-term debt	—			—			—			(750		)
Payments on finance obligations													—			(1,622		)	(13,694		)	(2,731		)
Proceeds from long-term debt	—			31,447			4,826			40,935			—			—			40,000			12,621
Payments on long-term debt	(750		)	—			(750		)	—			(40,000		)	(469		)	(85,297		)	(469		)
Change in restricted cash	75			—			75			75
Payments of preferred dividends													—			—			(109		)	—
Proceeds from exercise of stock options	654			—			1,473			—			—			654			10			1,473
Proceeds from rights offering, net of offering costs	—			—			7,591			—			—			—			—			7,591
Proceeds from issuance of stock warrants	3			—			3			—
Proceeds from issuance and exercise of stock warrants													50,587			—			157,049			—
Proceeds from security token offering, net of offering costs													78,442			—			79,347			—
Purchase of treasury stock	(11,104		)	(737		)	(11,207		)	(737		)	—			(10,000		)	—			(10,000		)
Payments of taxes withheld upon vesting of restricted stock													(4,526		)	(1,085		)	(4,670		)	(1,323		)
Payment of debt issuance costs	(251		)	—			(251		)	—			—			(251		)	(419		)	(251		)
Net cash (used in) provided by financing activities	(13,809		)	34,814			4,096			49,084
Net (decrease) increase in cash and cash equivalents	(90,832		)	(45,791		)	(32,205		)	43,203
Cash and cash equivalents, beginning of period	183,098			170,262			124,471			81,268
Cash and cash equivalents, end of period	$	92,266		$	124,471		$	92,266		$	124,471
Net cash provided by (used in) financing activities													84,255			(12,773		)	170,351			12,012
Net increase (decrease) in cash, cash equivalents and restricted cash													(50,974		)	(79,033		)	48,201			(18,528		)
Cash, cash equivalents and restricted cash, beginning of period													203,670			183,528			104,495			123,023
Cash, cash equivalents and restricted cash, end of period													$	152,696		$	104,495		$	152,696		$	104,495

Continued on the following page

Overstock.com, Inc.

Consolidated Statements of Cash Flows (Unaudited)

(Continued)

(in thousands)


	Nine months ended September 30,					Twelve months ended September 30,					Six months ended June 30,					Twelve months ended June 30,
	2017			2016		2017			2016		2018		2017			2018			2017
Supplemental disclosures of cash flow information:
Cash paid during the period:
Interest paid (net of amounts capitalized)	$	1,980		$	675	$	2,574		$	864
Taxes paid	492			1,206		624			1,207
Interest paid, net of amounts capitalized											$	1,113	$	1,308		$	2,745		$	2,238
Income taxes paid, net of refunds											7		183			311			977
Non-cash investing and financing activities:
Fixed assets, including internal-use software and website development, costs financed through accounts payable and accrued liabilities	$	618		$	9,574	$	618		$	9,574	$	735	$	690		$	735		$	690
Equipment acquired under capital lease obligations											—		—			1,421			—
Capitalized interest cost	—			117		(12		)	157		—		—			—			27
Change in value of cash flow hedge	(180		)	1,780		(2,619		)	1,361
Note receivable converted to cost method investment	869			2,850		869			2,850
Change in fair value of cash flow hedge											—		(100		)	(1,638		)	(3,044		)
Note receivable converted to equity investment											200		869			699			3,719
Acquisition of assets through stock issuance											2,930		—			2,930			—

See accompanying notes to unaudited consolidated financial statements.

Overstock.com, Inc.

Notes to Unaudited Consolidated Financial Statements

1. BASIS OF PRESENTATION

Overstock.com, Inc. is an online retailer and advancer of blockchain technology. As used herein, "Overstock," ~~"Overstock.com," "O.co,~~"the Company," "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~~certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) have been omitted in accordance with the rules and regulations of the ~~information and footnotes required by generally accepted accounting principles for complete~~SEC.

These 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.~~2017. 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 ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 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~~have 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. The financial results of Verify Investor, LLC have been included in our consolidated financial statements from the date of acquisition on February 12, 2018. The financial results of Mac Warehouse, LLC have been included in our consolidated financial statements from the date of acquisition on June 25, 2018.

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~~our 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~~Although these estimates are based on our best knowledge of current events and actions that we may undertake in the future, actual results ~~could~~may 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 ~~$40.4~~$31.2 million and ~~$75.2~~$25.5 million at ~~September~~June 30, ~~2017~~2018 and December 31, ~~2016,~~2017, respectively.

Restricted cash

We consider cash that is legally restricted and cash that is held as a compensating ~~balance~~balances for letter of credit arrangements and self-funded health insurance as restricted cash.

Fair value of financial instruments

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,~~cash equivalents, trading securities, and deferred compensation liabilities, which fair values 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~~ Our other financial instruments, including cash, restricted cash, accounts receivable, accounts payable, accrued liabilities, and debt are carried at cost, which approximates their 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.~~value.

The following tables summarize our assets and liabilities measured at fair value on a recurring basis using the ~~following levels of inputs~~fair value hierarchy as of ~~September~~June 30, ~~2017~~2018 and December 31, ~~2016~~2017 as indicated (in thousands):


p	Fair Value Measurements at September 30, 2017:								Fair Value Measurements at June 30, 2018:
	Total		Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3
Assets:
Cash equivalents - Money market mutual funds	$	40,390	$	40,390	$	—	$	—	$	31,188	$	31,188	$	—	$	—
Investments in equity securities, at fair value									4,336		4,336		—		—
Trading securities held in a "rabbi trust" (1)	70		70		—		—		83		83		—		—
Total assets	$	40,460	$	40,460	$	—	$	—	$	35,607	$	35,607	$	—	$	—
Liabilities:
Derivatives (2)	$	1,609	$	—	$	1,609	$	—
Deferred compensation accrual "rabbi trust" ~~(3)~~(2)	76		76		—		—		$	90	$	90	$	—	$	—
Total liabilities	$	1,685	$	76	$	1,609	$	—	$	90	$	90	$	—	$	—


	Fair Value Measurements at December 31, 2016:								Fair Value Measurements at December 31, 2017:
	Total		Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3
Assets:
Cash equivalents - Money market mutual funds	$	75,177	$	75,177	$	—	$	—	$	25,455	$	25,455	$	—	$	—
Trading securities held in a "rabbi trust" (1)	58		58		—		—		74		74		—		—
Total assets	$	75,235	$	75,235	$	—	$	—	$	25,529	$	25,529	$	—	$	—
Liabilities:
Derivatives (2)	$	1,816	$	—	$	1,816	$	—
Deferred compensation accrual "rabbi trust" (3)	61		61		—		—
Deferred compensation accrual "rabbi trust" (2)									$	92	$	92	$	—	$	—
Total liabilities	$	1,877	$	61	$	1,816	$	—	$	92	$	92	$	—	$	—

___________________________________________


(1)	— Trading securities held in a rabbi trust are included in Prepaids and other current assets and Other long-term assets, net in ~~the~~our 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~~Non-qualified deferred compensation in a rabbi trust is included in Accrued liabilities and Other long-term liabilities in ~~the~~our 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, net

Accounts receivable consist primarily of trade amounts due from customers in the United States, ~~and from~~ uncleared credit card transactions at period ~~end.~~end, and carrier rebates. 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 ~~$1.2~~$1.5 million and ~~$2.0~~$1.3 million at ~~September~~June 30, ~~2017~~2018 and December 31, ~~2016~~2017, 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~~ ~~September 30, 2017~~ ~~and~~ ~~December 31, 2016~~, ~~two~~Three banks held the majority of our cash and cash ~~equivalents.~~equivalents at June 30, 2018. Two banks held the majority of our cash and cash equivalents at December 31, 2017. Our cash equivalents primarily consist of money market securities which are uninsured. 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, net

Inventories, ~~consisting of~~net include merchandise purchased for resale, which 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~~Inventory valuation requires us to make judgments, based on currently available information, about the likely method of disposition, such as through sales to individual customers, returns to product vendors, or ~~estimated obsolescence~~liquidations, and ~~to lower~~expected recoverable values 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.each disposition category.

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.~~costs, and cryptocurrency-denominated assets ("cryptocurrencies"). See Cryptocurrencies below.

Cryptocurrencies

Cryptocurrency holdings are included in Prepaids and other current assets in our consolidated balance sheets and totaled $3.0 million and $1.5 million at June 30, 2018 and December 31, 2017, respectively. Cryptocurrency holdings are recorded at cost less impairment.

We recognize impairment on these assets caused by decreases in market value based upon Level 1 inputs. See Fair value of financial instruments above. Such impairment in the value of our cryptocurrencies is recorded in General and administrative expense in our consolidated statements of operations. Impairments on cryptocurrencies were $702,000 and $9.5 million for the three and six months ended June 30, 2018. There was no impairment on cryptocurrencies during the three and six months ended June 30, 2017.

Gains and losses realized upon sale of cryptocurrencies are also recorded in General and administrative expense in our consolidated statements of operations. We occasionally use our cryptocurrencies to purchase other cryptocurrencies. Gains and losses realized with these non-cash transactions are also recorded in General and administrative expense in our consolidated statements of operations and are also presented as an adjustment to reconcile Consolidated net loss to Net cash provided by (used in) operating activities in our consolidated statements of cash flows. Realized gains on sale of cryptocurrencies were $6.8 million and $8.3 million for the three and six months ended June 30, 2018. There were no realized gains or losses on sale of cryptocurrencies during the three and six months ended June 30, 2017.

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

~~improvements,~~ are recorded at cost and stated net of depreciation and amortization. Fixed assets are 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, including internal-use software and website development	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.~~life. Costs incurred related to design or maintenance of internal-use software are expensed as incurred.

During the three months ended ~~September~~June 30, ~~2017~~2018 and ~~2016,~~2017, we capitalized ~~$2.2~~$8.3 million and $2.4 million, respectively, of costs associated with internal-use software and website development, both developed internally and acquired externally. Amortization of costs for the same periods associated with internal-use software and website development was $3.2 million and $4.1 million, respectively. During the six months ended June 30, 2018 and 2017, we capitalized $10.6 million and $5.9 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 ~~$3.9~~$6.7 million and ~~$5.0~~$8.3 million, respectively. During the nine months ended September 30, 2017 and 2016, we capitalized $8.0 million and $13.3 million, respectively, of such costs and had amortization of $12.2 million and $12.7 million for those respective periods.

Depreciation expense is classified within the corresponding operating expense categories on ~~the~~our consolidated statements of operations as follows (in thousands):


	Three months ended September 30,				Nine months ended September 30,				Three months ended June 30,				Six months ended June 30,
	2017		2016		2017		2016		2018		2017		2018		2017
Cost of goods sold - direct	$	72	$	77	$	230	$	235	$	83	$	75	$	167	$	158
Technology	5,940		6,952		18,802		18,755		5,296		6,177		10,772		12,862
Sales and marketing	—		29		—		29
General and administrative	974		357		2,863		691		1,023		959		2,044		1,889
Total depreciation, including internal-use software and website development	$	6,986	$	7,415	$	21,895	$	19,710	$	6,402	$	7,211	$	12,983	$	14,909

Total accumulated depreciation of fixed assets was ~~$201.6~~$198.4 million and ~~$180.3~~$186.4 million at ~~September~~June 30, ~~2017~~2018 and December 31, ~~2016,~~2017, 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~~our consolidated statements of operations.

Fixed assets included assets under capital leases ~~and finance obligations of $17.0~~were $1.8 million and ~~$21.5~~$1.8 million at ~~September~~June 30, ~~2017~~2018 and December 31, ~~2016, respectively.~~2017. Accumulated depreciation related to assets under capital leases was $722,000 and ~~finance obligations was $7.7 million and $8.7 million~~$458,000 at ~~September~~June 30, ~~2017~~2018 and December 31, ~~2016,~~2017, respectively.

Depreciation expense of assets recorded under capital leases was $120,000 and $1.1 million ~~and $948,000~~ for the three months ended ~~September~~June 30, ~~2017~~2018 and ~~2016,~~2017, respectively, and ~~$3.5 million~~$264,000 and $2.4 million for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 and ~~2016,~~2017, respectively.

~~Cost method~~

Equity investments under ASC 321

At ~~September~~June 30, ~~2017,~~2018, we held minority interests (less than 20%) in ~~seven~~twelve privately held entities accounted for under ASC Topic 321, Investments - Equity Securities ("ASC 321"), which ~~include PeerNova, Factom, Ripio, SettleMint, IdentityMind, Symbiont, and View. These investments~~ are ~~recognized as cost method~~

~~investments~~ included in ~~Other long-term assets, net~~Equity investments in our consolidated balance sheets. ~~Earnings from~~One of these equity investments is carried at fair value based on Level 1 inputs. See Fair value of financial instruments above. The remaining equity investments lack readily determinable fair values and therefore the investments are ~~recognized to~~measured at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the ~~extent~~identical or similar equity securities of ~~dividends~~the same issuer. Dividends received ~~and we will recognize subsequent impairments to the investment if they~~ are ~~other-than-temporary.~~reported in current earnings. We review ~~these~~our investments individually for impairment by evaluating if events or circumstances have occurred that may ~~have a significant adverse effect on their~~indicate the fair value of the investment is less than its carrying value. If such events or circumstances have occurred, we ~~will~~ estimate the fair value of the investment and ~~determine if any decline in~~recognize an impairment loss equal to the difference between the fair value of the investment ~~below~~and its carrying ~~value is other-than-temporary.~~value. In such cases, the estimated fair value of the investment is determined using unobservable inputs including assumptions by the investee's ~~management.~~management including quantitative information such as lower valuations in recently completed or proposed financings. 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.

The carrying amount of our ~~cost method~~ investments under ASC 321 was approximately ~~$6.3~~$18.6 million and ~~$11.8~~$6.5 million at ~~September~~June 30, ~~2017~~2018 and December 31, ~~2016.~~2017, respectively. We recognized ~~zero and $2.9~~unrealized gains of $1.8 million ~~impairment loss~~ on ~~these~~ investments carried at fair value during the three and six months ended ~~September~~June 30, ~~2017 and 2016, respectively, and~~2018. There was no impairment loss during the six months ended June 30, 2018. We recognized $4.5 ~~million and $2.9~~ million impairment loss during the ~~nine~~six months ended ~~September~~June 30, ~~2017 and 2016, respectively. These~~2017. The impairment ~~losses were~~loss or other adjustment to our investments are recorded in Other ~~income,~~expense, net on ~~the~~our consolidated statements of operations.

Equity method investments under ASC 323

At ~~September~~June 30, ~~2017,~~2018, we held minority interests in ~~Bitt and Spera, two~~six privately held ~~entities.~~entities accounted for as equity method investments under ASC Topic 323, Investments - Equity Method and Joint Ventures ("ASC 323"), which are included in Equity investments in our consolidated balance sheets. We can exercise significant influence, but not control, over the ~~investees.~~investees through either holding more than a 20% voting interest in the entity or through our representation on the entity's board of directors. Based on the nature of ~~one of~~ our ~~investments,~~ownership interests, we have a variable ~~interest.~~interests in these entities. 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 equity method investments included in Other long-term assets, net in our consolidated balance sheets. We initially accounted for our investment in Bitt as a cost method investment. During the nine months ended September 30, 2017, we acquired additional representation on the Board of Directors of Bitt, which gave us an ability to exercise significant influence but not control over the investee.

The carrying value of our equity method investments exceeded the amount of underlying equity in net assets of the investees and the difference was primarily related to goodwill and the fair value of ~~its~~ intangible assets. The difference related to intangible assets is amortized over their estimated useful lives. We record our proportionate share of the net income or loss of the investee and the amortization of the basis difference related to intangible assets in Other ~~income,~~expense, net ~~on the~~in our consolidated statements of operations with corresponding adjustments to the carrying value of the investment.

~~At September 30, 2017, the~~The carrying amount of our equity method investments was approximately ~~$6.0~~$25.0 million and $6.5 million at June 30, 2018 and December 31, 2017, respectively, and the difference between the carrying value ~~of this investment~~ and the amount of underlying equity in net assets of ~~the~~each investee was not significant. Our proportionate share of the net income or loss of our equity method ~~investee~~investees for the ~~nine~~six months ended ~~September~~June 30, 2018 and the six months ended June 30, 2017 was not significant.

Noncontrolling interests

Our wholly-owned subsidiary, Medici Ventures, Inc. ("Medici Ventures"), conducts its primary business through its majority-owned subsidiary, tØ.com, Inc. ("tZERO") ~~is a majority owned subsidiary of Overstock,~~, which ~~develops blockchain and fintech technology as part of our Medici blockchain and fintech technology initiatives. During 2016, tZERO completed the acquisition of~~includes a financial technology ~~firm and~~company, two related registered broker dealers, ~~each~~a registered investment advisor, and an accredited investor verification company. tZERO and its consolidated subsidiaries are 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.

On December 18, 2017, tZERO launched an offering (the "security token offering") of the right to acquire, if issued in the future, tZERO Preferred Equity Tokens (the "tZERO Security Token") through a Simple Agreement for Future Equity ("SAFE"). At June 30, 2018, the SAFEs were classified as equity by tZERO. At June 30, 2018, cumulative proceeds, net of withdrawals, from the security token offering totaling $95.9 million, have been classified as a component of noncontrolling

interest within our consolidated financial statements. As of June 30, 2018, tZERO has incurred $16.5 million of offering costs associated with the security token offering that are classified as a reduction in proceeds within noncontrolling interest of our consolidated financial statements. The security token offering closed on August 6, 2018 and we received an additional $7.5 million of proceeds, before deducting additional offering costs, prior to the close.

During the first quarter of 2018, tZERO purchased 65.8% of ES Capital Advisors, LLC ("ES Capital"), a registered investment advisor under the Investment Advisers Act of 1940, which was accounted for as an asset acquisition. tZERO operates the ES Capital business under ~~common control with~~ the ~~firm from which~~name tZERO Advisors and offers automated investment advisory services under the ~~financial technology assets were purchased. The former owners~~FinanceHub tab on our Website. tZERO also purchased 81.0% of ~~that firm hold noncontrolling interests in tZERO. These transactions are~~Verify Investor, LLC, an accredited investor verification company. This transaction is described further in Note 3—Acquisitions, Goodwill, and Acquired Intangible Assets. ~~The proceeds for the acquisitions were financed by tZERO through a note payable to Overstock that bears interest at a rate that approximates the Federal Funds Rate. tZERO is~~These entities are 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

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 $250,000 in gold at September 30, 2017 and $5.9 million in gold and $4.0 million in silver at 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. Such unrealized gains or losses resulting from changes in the value of these assets are recorded in Other income, net in our consolidated statements of operations. There were no unrealized gains or losses on precious metals during the three and nine months ended September 30, 2017 and 2016.

Gains and losses realized upon sale of precious metals are also recorded in Other income, net in our consolidated statements of operations. Realized gains on sales of precious metals were $1.9 million during the three and nine months ended September 30, 2017. There were no realized gains or losses on sale of precious metals for the three and nine months ended September 30, 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~~the fair value of a reporting unit 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.

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 ~~nine~~six months ended ~~September~~June 30, ~~2017 or the year~~2018 and 2017.

For six months ended ~~December 31, 2016.~~June 30, 2018, we recognized $7.4 million in goodwill related to a business acquisition as described in Note 3—Acquisitions, Goodwill, and Acquired Intangible Assets. The change in goodwill relates to a non-reportable segment, included in Other as described in Note 9—Business Segments.

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~~Indefinite lived intangible assets include intellectual property and investment advisor licenses purchased in connection with our tZERO Advisors and Medici Ventures' portfolio company in the blockchain property titling businesses. Certain licenses are subject to annual renewal terms with immaterial fees which are expensed as incurred. Indefinite-lived intangible assets are tested for impairment annually or

more frequently when events or circumstances indicate that the carrying value more likely than not exceeds its fair value. In addition, we routinely evaluate the remaining useful life of intangible assets not being amortized to determine whether events or circumstances continue to support an indefinite useful life, including any legal, regulatory, contractual, competitive, economic, or other ~~than goodwill~~factors that may limit their useful lives. Definite lived intangible assets 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~~Definite lived intangible 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):

September 30,
2017 December 31,
2016
Acquired intangible assets $ 16,000
$ 16,000
Intangible assets, other (1) 1,571
1,356
17,571
17,356
Less: accumulated amortization of intangible assets (9,283 ) (6,443 )
Total intangible assets, net $ 8,288
$ 10,913



	June 30, 2018			December 31, 2017
Intangible assets subject to amortization, gross (1)	$	28,004		$	17,779
Less: accumulated amortization of intangible assets subject to amortization	(12,494		)	(10,442		)
Intangible assets subject to amortization, net	15,510			7,337
Intangible assets not subject to amortization	10,833			—
Total intangible assets, net	$	26,343		$	7,337


(1)	— At ~~September~~June 30, ~~2017,~~2018, the weighted average remaining useful life for ~~Intangible~~intangible assets ~~other,~~subject to amortization, excluding fully amortized intangible assets, was ~~3.50~~5.70 years.

Amortization of intangible assets other than goodwill is classified within the corresponding operating expense categories ~~on the~~in our consolidated statements of operations as follows (in thousands):


	Three months ended September 30,				Nine months ended September 30,				Three months ended June 30,				Six months ended June 30,
	2017		2016		2017		2016		2018		2017		2018		2017
Technology	$	905	$	699	$	2,715	$	2,151	$	895	$	905	$	1,650	$	1,810
Sales and marketing	22		246		62		949		204		20		323		40
General and administrative	21		27		62		93		34		21		78		41
Total amortization	$	948	$	972	$	2,839	$	3,193	$	1,133	$	946	$	2,051	$	1,891

Estimated amortization expense for the next five years is: ~~$900,000~~$2.9 million for the remainder of ~~2017, $2.8 million in~~ 2018, ~~$2.0~~$5.1 million in 2019, ~~$1.3~~$2.7 million in 2020, ~~and $1.0~~$2.4 million in 2021, $1.1 million in 2022, and $1.3 million thereafter.

Impairment of long-lived assets

We review property and equipment and other long-lived assets, including amortizable 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 ~~nine~~six months ended ~~September~~June 30, ~~2017 or the year ended December 31, 2016.~~

~~Cryptocurrencies~~

~~We hold cryptocurrency-denominated assets ("cryptocurrencies") such as bitcoin~~2018 and we include them in Prepaids and other current assets in our consolidated balance sheets. Our cryptocurrencies were $403,000 and $307,000 at September 30, 2017 and December 31, 2016, respectively, and are recorded at 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. Such unrealized gains or losses resulting from changes in the value of our cryptocurrencies are recorded in Other income, net in our consolidated statements of operations. There were no significant unrealized gains or losses on cryptocurrencies during the three and nine months ended September 30, 2017 and 2016.

Gains and losses realized upon sale of cryptocurrencies are also recorded in Other income, net in our consolidated statements of operations. Realized gains on sale of cryptocurrencies were $3.6 million during the three and nine months ended September 30, 2017. ~~There were no realized gains or losses on sale of cryptocurrencies during the three and nine months ended September 30, 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 $45.0 million and $45.8 million at September 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 over the depreciable life of the asset. During the three and nine months ended September 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 September 30, 2017 that we will reclassify into earnings within the next 12 months is not expected to be material.

~~On November 6, 2017, we terminated the derivative instruments as a result of the repayment of the underlying loans (see Note 11—Subsequent Events).~~

~~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 September 30, 2017
Interest rate swap $ 52
Interest expense $ 4
Other income, net $ —
Three months ended September 30, 2016
Interest rate swap $ (64 ) Interest expense $ 1
Other income, net $ —
Nine months ended September 30, 2017
Interest rate swap $ 120
Interest expense $ 12
Other income, net $ —
Nine months ended September 30, 2016
Interest rate swap $ (1,624 ) Interest expense $ 1
Other income, net $ —

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

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 September 30, 2017
Interest rate swap Current and Other long-term liabilities 2023 $ 45,010
$ (1,609 ) $ (1,696 ) $ 87
$ (1,609 )
Three months ended September 30, 2016
Interest rate swap Current and Other long-term liabilities 2023 $ 45,054
$ (4,256 ) $ (4,683 ) $ 427
$ (4,256 )
Nine months ended September 30, 2017
Interest rate swap Current and Other long-term liabilities 2023 $ 45,010
$ (1,609 ) $ (1,816 ) $ 207
$ (1,609 )
Nine months ended September 30, 2016
Interest rate swap Current and Other long-term liabilities 2023 $ 45,054
$ (4,256 ) $ (2,397 ) $ (1,859 ) $ (4,256 )


~~(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~~retail merchandise ~~sales.~~sales on our Website. We also earn revenue from advertising on our Website and from other ~~pages.~~sources. We have organized our operations into two principal reporting segments based on the primary source of revenue: (i) direct revenue and (ii) partner and other revenue. Net revenue from contracts with customers is further disaggregated by Retail and Other net revenue as disclosed in Note 9—Business Segments.

On January 1, 2018, we adopted ASU 2014-09, Revenue from Contracts with Customers (Topic 606). See Recently adopted accounting standards, below. Under Topic 606, revenue is recognized when control of the product passes to the customer or the service is provided and is recognized in an amount that reflects the expected consideration to be received in exchange for such goods or services. Shipping and handling is considered a fulfillment activity and fees charged to customers are included in net revenue upon completion of our performance obligation. We present revenue net of sales taxes, discounts, and expected refunds. 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.

Generally, we require authorization from credit card or other payment vendors whose services we offer to our customers (such as PayPal), or verification of receipt of payment, before we ship products to consumers or business purchasers. From time to time we grant credit to our business purchasers with normal credit terms (typically 30 days). For sales in our partner business, we generally receive payments from our customers before our payments to our suppliers are due.

We evaluate the criteria outlined in ASC 606-10-55, Principal versus Agent Considerations, in determining whether it is appropriate to record the gross amount of merchandise sales and related costs or the net amount earned as commissions. When we are the principal in a transaction and control the specific good or service before it is transferred to the customer, revenue is recorded gross; otherwise, revenue is recorded on a net basis. Currently, the majority of both direct revenue and partner revenue ~~(see Note 9—Business Segments).~~is recorded on a gross basis.

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~~transfer of control to our customers which generally occurs upon delivery of the product to our customers. As such, customer orders are recorded as deferred revenue prior to delivery of products or services ordered. 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~~During the ~~criteria outlined~~six months ended June 30, 2018, we recognized $36.8 million of net revenue included in ~~ASC Topic 605-45,~~ ~~Principal Agent Considerations, in determining whether it is appropriate to record the gross amount of product sales~~Deferred revenue at December 31, 2017.

The allowance for returns was $15.5 million 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~~$17.4 million at June 30, 2018 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.December 31, 2017, respectively.

We evaluate the revenue recognition criteria above for our broker dealer subsidiaries ~~(see Note 10—Broker Dealers)~~ and we recognize revenue based on the gross amount of consideration that we expect to receive on securities transactions ~~(and the related commission~~(commission revenue) on a trade date ~~and gross~~ basis.

~~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~~sourced through our partners which ~~they~~are generally ~~ship~~shipped directly to our consumers and businesses. Through contractual terms with our partners, we have the

ability to control the promised goods or services and as a result record the majority of our partner revenue on a gross basis. 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~~which provides 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~~such rewards as part of a purchase on our Website. We account for these transactions as multiple element arrangements and allocate ~~revenue~~the transaction price to ~~the elements~~separated performance obligations using their relative fair values. We include the fair 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~~Reward dollars expire 90 days after the customer's Club O Gold membership expires. ~~When~~We recognize estimated reward dollar breakage, to which we expected to be entitled, over the expected redemption period in proportion to actual redemptions by customers. Upon adoption of Topic 606, Revenue Contracts with Customers, on January 1, 2018, we began classifying the breakage income related to Club O Reward dollars ~~expire, we recognize reward dollar breakage~~and gift cards as ~~Other income, net~~a component of revenue in our consolidated statements of ~~operations.~~operations rather than as a component of Other expense, net. Breakage included in revenue was $1.3 million and $3.0 million for the three and six months ended June 30, 2018. We also recognized a cumulative adjustment that reduced Accumulated deficit by approximately $5.0 million upon adoption related to the unredeemed portion of our gift cards and loyalty program rewards.

~~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~~Our total deferred revenue related 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~~outstanding Club O Reward dollars ~~not associated with any purchases, we account for~~was $6.5 million and $8.7 million at June 30, 2018 and December 31, 2017, respectively. The timing of revenue recognition of these ~~transactions as sales incentives~~reward dollars is driven by actual customer activities, such as ~~coupons~~redemptions and ~~record a reduction of revenue at the time the reward dollars are redeemed.~~expirations.

~~Co-branded credit card program~~Advertising Revenue

~~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~~Advertising revenues is derived primarily from sponsored links and ~~for customer usage of the cards. The agreement also provides for a customer loyalty program offering reward points~~display advertisements that ~~customers will accrue from card usage and can use to make purchases~~are placed on our Website, ~~(see~~ ~~Club O loyalty program~~ ~~above for more information). New account fees~~distributed via email, or sent out as direct mailers. Advertising revenue is recognized in net revenue when the advertising services 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~~rendered. Advertising 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 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%2% 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 $12.9 million and $18.2 million at~~ ~~September 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 $332,000 and ~~$431,000~~ at ~~September 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):


	Three months ended September 30,								Nine months ended September 30,								Three months ended June 30,								Six months ended June 30,
	2017				2016				2017				2016				2018				2017				2018				2017
Total revenue, net	$	424,007	100	%	$	441,564	100	%	$	1,288,466	100	%	$	1,273,781	100	%	$	483,133	100	%	$	432,024	100	%	$	928,464	100	%	$	864,459	100	%
Cost of goods sold
Product costs and other cost of goods sold	321,678		76	%	343,401		78	%	977,827		76	%	985,603		77	%	371,841		77	%	329,346		76	%	705,361		76	%	656,150		76	%
Fulfillment and related costs	18,654		4	%	18,447		4	%	55,886		4	%	54,833		4	%	19,549		4	%	18,507		4	%	37,491		4	%	37,231		4	%
Total cost of goods sold	340,332		80	%	361,848		82	%	1,033,713		80	%	1,040,436		82	%	391,390		81	%	347,853		81	%	742,852		80	%	693,381		80	%
Gross profit	$	83,675	20	%	$	79,716	18	%	$	254,753	20	%	$	233,345	18	%	$	91,743	19	%	$	84,171	19	%	$	185,612	20	%	$	171,078	20	%

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 our 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~~Sales and marketing expenses and totaled ~~$41.2~~$88.9 million and ~~$31.5~~$39.5 million during the three months ended ~~September~~June 30, ~~2017~~2018 and ~~2016,~~2017, respectively. For the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 and ~~2016,~~2017, advertising expenses totaled ~~$114.6~~$157.8 million and ~~$90.6~~$73.3 million, respectively. Prepaid advertising (included in Prepaids and other current assets in the accompanying consolidated balance sheets) was ~~$2.3 million~~$992,000 and ~~$843,000~~$987,000 at ~~September~~June 30, ~~2017~~2018 and December 31, ~~2016~~2017, 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~~the share-based awards exceeds a straight-line basis. ~~As a result of the adoption of ASU 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~~We have 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 September 30, 2017, we have recorded an~~The accrued liability ~~of approximately~~related to the self-funded health insurance plan was $1.4 ~~million. Actual claims may differ from the estimate~~million and ~~any difference could be significant. This accrual~~$1.0 million at June 30, 2018 and December 31, 2017, respectively, and is included in Accrued liabilities in the accompanying consolidated balance sheets. Actual claims may differ from the amount accrued and any difference could be significant.

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

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 ofin 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.

Each quarter we assess the recoverability of our deferred tax assets under ASC Topic 740. We assess ~~all~~the available positive and negative evidence to ~~determine~~estimate whether we will generate sufficient future taxable income to use our existing deferred tax assets. We ~~consider, among other things,~~have limited carryback ability and do not have significant taxable temporary differences to recover our ~~recent financial and operating results, along with our forecasted growth rates, projected~~existing deferred tax assets, therefore we must rely on future taxable income, ~~carryforward periods, our utilization experience with operating loss and tax credit carryforwards, and prudent and feasible~~including tax planning ~~strategies.~~strategies, to support their

realizability. 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. This assessment requires significant judgment and estimates about our ability to generate revenue, gross profit, operating income and taxable income in future periods. Except as otherwise disclosed, there are no known trends, events, transactions or other uncertainties that are expected to negatively impact the future levels of taxable income. Wehave established a valuation allowance ~~of $2.3 million~~ for ~~certain state~~our deferred tax ~~credits as of June 30, 2017, because estimates of~~assets not supported by carryback ability or taxable temporary differences, primarily due to uncertainty regarding our future ~~apportioned~~ taxable ~~income during the carryforward period were reduced. During the three months ended September 30, 2017, we sold precious metals and cryptocurrencies and generated capital gain~~ income. We have considered, among other things, the cumulative loss incurred over the three-year period ended June 30, 2018 as a significant piece of objective negative evidence. We intend to continue maintaining a valuation allowance on our net deferred tax assets ~~based on capital losses, which were offset by a valuation allowance. Since we generated capital gain income, a~~until there is sufficient evidence to support the reversal of all or some portion of these allowances. The amount of the ~~capital~~deferred tax asset considered realizable could be adjusted if objective negative evidence in the form of cumulative losses ~~can now~~is no longer present and additional weight may be ~~utilized and we released $2.2 million of valuation allowance~~given to subjective evidence such as ~~of September 30, 2017.~~long-term projections for growth. We will continue to monitor the need for a valuation allowance against our remaining deferred tax assets on a quarterly basis.

Tax laws and regulations themselves are subject to change as a result of changes in fiscal policy, changes in legislation, the evolution of regulations, and court rulings. On December 22, 2017, the President signed into law Public Law No. 115-97, commonly referred to as the Tax Cuts and Jobs Act ("TCJA"), following its passage by the United States Congress. The TCJA made significant changes to U.S. federal income tax laws, mostly effective for tax years beginning after December 31, 2017. Among many other changes, the new law lowers the corporate tax rate from 35% to 21% for tax years beginning in 2018, transitions U.S international taxation from a worldwide tax system to a territorial system, and includes a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings as of December 31, 2017. Staff Accounting Bulletin No. 118 ("SAB 118") was issued to address the application of US GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the TCJA. In accordance with SAB 118, we calculated our best estimate of the impact of the TCJA in accordance with our understanding of the law and guidance available and as a result recorded $25.3 million as additional income tax expense in the fourth quarter of 2017. The amount related to the remeasurement of certain deferred tax assets and liabilities, based on the rates at which they are expected to reverse in the future, was $25.2 million. Although the tax rate reduction was known, our analysis may also be affected by other analyses related to the TCJA, including, but not limited to, our calculation of the mandatory deemed repatriation of cumulative foreign earnings and the state tax effect of adjustments made to federal temporary differences, which are uncertain at this time. The provisional amount related to the one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings was $41,000.

As of the date of this filing, our accounting for the TCJA has not been finalized. As noted at year-end, however, we were able to reasonably estimate certain effects and, therefore, recorded adjustments associated with the remeasurement of certain deferred tax assets and liabilities and the mandatory deemed repatriation of cumulative foreign earnings. We have not ~~provided~~made any additional measurement-period adjustments related to these items during the quarter because additional time is needed to complete our analysis of the TCJA, collect and prepare necessary data, and interpret any additional guidance issued by the U.S. Treasury Department, Internal Revenue Service ("IRS"), FASB, and other standard-setting and regulatory bodies. Any subsequent adjustment to these amounts will be recorded to tax expense in the quarter when the analysis is complete. Our accounting for ~~U.S.~~the tax effects of the TCJA will be completed during the measurement period, which should not extend beyond one year from the enactment date.

The TCJA includes a provision to tax global intangible low-taxed income ("GILTI") of foreign subsidiaries beginning in 2018. Under GAAP, we can make an accounting policy election to either treat taxes due on the GILTI inclusion as a current period expense, or factor such amounts into our measurement of deferred taxes. Due to the complexity of the new GILTI tax ~~on certain~~rules, we are continuing to evaluate this provision of the TCJA and the application of GAAP and we have not yet elected an accounting policy nor have we recorded any potential deferred tax effects related to GILTI in our financial statements. We have, however, included the estimated 2018 current GILTI impact in our annual effective tax rate for 2018. We expect to complete our accounting within the prescribed measurement period.

The TCJA included a mandatory deemed repatriation of cumulative foreign earnings ~~because we intend to indefinitely reinvest these earnings outside~~for the ~~U.S. We have begun expansion of operations outside of the U.S. and have plans for additional expansion~~

year ended December 31, 2017, for which we accrued provisional tax expense. However, we would still need to accrue and pay various other taxes on this amount if repatriated. We are currently analyzing our global working capital and cash requirements and the potential tax liabilities attributable to a repatriation, but we have ~~incurred~~yet to determine whether we plan to change our prior assertion and repatriate earnings. Accordingly, we have not recorded any deferred taxes attributable to our investments in our foreign subsidiaries. We will ~~continue to incur capital requirements. We have considered ongoing capital requirements~~record the tax effects of ~~the parent company~~any change in our prior assertion in the ~~U.S.~~period that we complete our analysis and are able to make a reasonable estimate, no later than December 2018.

We are subject to taxation in the United States and several state and foreign jurisdictions. Tax years beginning in 2013 are subject to examination by taxing authorities, although net operating loss and credit carryforwards from all years are subject to examinations and adjustments for at least three years following the year in which the attributes are used. We are under audit by the Ireland Revenue Agency for the calendar year 2016. We expect the audit to continue during 2018.

Net ~~income (loss)~~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)~~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)~~loss attributable to our stockholders to both common shares and participating securities (based on the percentages outstanding) in determining net ~~income (loss)~~loss per common share.

Basic net ~~income (loss)~~loss per common share is computed by dividing net ~~income (loss)~~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)~~loss per share is computed by dividing net ~~income (loss)~~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, warrants, and restricted stock awards are included in the calculation of diluted net ~~income (loss)~~loss per common share to the extent such shares are dilutive. Net loss attributable to common shares is adjusted for options and restricted stock awards issued by our subsidiaries when the effect of our subsidiary’s diluted earnings per share is dilutive.

The following table sets forth the computation of basic and diluted net ~~income (loss)~~loss per common share for the periods indicated (in thousands, except per share data):

Three months ended
September 30, Nine months ended
September 30,
2017 2016 2017 2016
Net income (loss) attributable to stockholders of Overstock.com, Inc. $ (786 ) $ (3,098 ) $ (14,188 ) $ 9,427
Less: Preferred stock dividends - accumulated 27
—
80
—
Undistributed income (loss) (813 ) (3,098 ) (14,268 ) 9,427
Less: Undistributed loss allocated to participating securities (22 ) —
(386 ) —
Net income (loss) attributable to common shares $ (791 ) $ (3,098 ) $ (13,882 ) $ 9,427
Net income (loss) per common share—basic:

Net income (loss) attributable to common shares—basic $ (0.03 ) $ (0.12 ) $ (0.55 ) $ 0.37
Weighted average common shares outstanding—basic 25,003
25,356
25,024
25,326
Effect of dilutive securities:

Stock options and restricted stock awards —
—
—
62
Weighted average common shares outstanding—diluted 25,003
25,356
25,024
25,388
Net income (loss) attributable to common shares—diluted $ (0.03 ) $ (0.12 ) $ (0.55 ) $ 0.37



	Three months ended June 30,						Six months ended June 30,
	2018			2017			2018			2017
Net loss attributable to stockholders of Overstock.com, Inc.	$	(64,911	)	$	(7,499	)	$	(115,820	)	$	(13,402	)
Less: Preferred stock dividends - declared and accumulated	27			27			53			55
Undistributed loss	(64,938		)	(7,526		)	(115,873		)	(13,457		)
Less: Undistributed loss allocated to participating securities	(1,495		)	(204		)	(2,683		)	(364		)
Net loss attributable to common shares	$	(63,443	)	$	(7,322	)	$	(113,190	)	$	(13,093	)
Net loss per common share—basic:
Net loss attributable to common shares—basic	$	(2.20	)	$	(0.29	)	$	(3.94	)	$	(0.52	)
Weighted average common shares outstanding—basic	28,903			24,996			28,736			25,035
Effect of dilutive securities:
Stock options and restricted stock awards	—			—			—			—
Weighted average common shares outstanding—diluted	28,903			24,996			28,736			25,035
Net loss attributable to common shares—diluted	$	(2.20	)	$	(0.29	)	$	(3.94	)	$	(0.52	)

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
September 30, Nine months ended
September 30,
2017 2016 2017 2016
Stock options and restricted stock units 192
765
165
536



	Three months ended June 30,		Six months ended June 30,
	2018	2017	2018	2017
Stock options and restricted stock units	550	103	617	151
Common shares issuable under stock warrant	—	—	42	—

~~Stock repurchase program~~Warrants

On ~~May 5, 2015, our Board of Directors authorized a stock repurchase program under which~~November 8, 2017, we ~~may repurchase shares of our outstanding common stock for~~issued warrants to purchase up to ~~$25 million at any time through December 31, 2017. In January 2017, we repurchased approximately 604,000~~a combined aggregate of 3,722,188 shares of our common stock to two purchasers in privately negotiated transactions, for an aggregate purchase price of ~~$10~~$6.5 million, ~~under~~net of issuance costs. The exercise price for the warrants was $40.45 per share of common stock. On December 29, 2017, one of the warrant holders exercised its warrant in full and purchased a total of 2,472,188 shares of common stock ~~repurchase plan. All~~for $100.0 million. On January 17, 2018, the other warrant holder exercised its warrant in full and purchased 1,250,000 shares of common ~~shares repurchased were recognized as treasury stock.~~stock for $50.6 million.

Recently adopted accounting standards

~~In July 2015, the FASB issued ASU 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 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 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 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 2014-09, Revenue from Contracts with Customers (Topic 606), 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~~We adopted the new standard ~~becomes effective for us~~ on January 1, ~~2018. In March 2016, the FASB issued ASU 2016-08,~~ ~~Revenue from Contracts~~2018 with ~~Customers - Principal versus Agent Considerations. This ASU clarifies the implementation guidance for principal versus agent considerations in ASU 2014-09 and provides indicators~~a cumulative adjustment that ~~assist in the assessment of control. ASU 2016-08 is also effective for us on January 1, 2018. We are continuing~~reduced Accumulated deficit by approximately $5.0 million as opposed to evaluate the impact of these ASUs on the specific areas that apply to the Company and their potential impact to our processes, accounting, financial reporting presentation, disclosures, and controls. We have identified gross versus net revenue recognition (principal versus agent considerations) as a potentially significant issue in our analysis. Under current FASB standards, we recognize revenue from the majority of our general Website sales 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; however, our gross profit and net income (loss) would remain the same. We have further identified the timing of revenue recognition for undelivered orders (FOB shipping point versus FOB destination) as a potentially significant issue in our analysis, which is not expected to change the total amount of revenue recognized, but would accelerate the timing of when revenue and related costs are recognized. We expect the new standards to impact the timing of revenue recognition for gift card and loyalty program rewards breakage. Revenue relatedretrospectively adjusting prior periods. The adjustment primarily relates to the unredeemed portion of our gift cards and loyalty program rewards, which we will ~~be recognized~~recognize over the expected redemption period, rather than waiting until the likelihood of redemption becomes remote or the rewards expire. ~~This change is not expected to change the total amount of~~We have also updated revenue ~~recognized, but would accelerate the timing of when revenue is recognized. We plan to adopt these ASUs~~disclosures in the ~~first~~notes to our financial statements as required under the new standard.

~~quarter~~The implementation did not impact our gross and net recognition for our revenue transactions. In addition, we continue to recognize revenue related to merchandise sales upon delivery to our customers. However, we now present breakage on our Club O Rewards and gift cards in Partner and other revenue in our consolidated statement of operations rather as a component of Other expense, net. Breakage revenue included in revenue was $1.3 million and $3.0 million for the three and six months ended June 30, 2018.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, which requires equity investments previously recognized under the cost method to be measured at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or similar investment of the same issuer. We adopted the changes under the new standard on January 1, 2018 on a prospective basis. The implementation of ASU 2016-01 did not have a material impact on our consolidated financial statements and related disclosures.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, which requires amounts generally described as restricted cash be included with cash and cash equivalents when reconciling beginning-of-period and end-of-period total amounts shown in the statement of cash flows. We adopted the new standard on January 1, 2018 retrospectively to each period presented in the statement of cash flows. The implementation of ASU 2016-18 did not have a ~~cumulative adjustment to retained earnings (cumulative effect transition method) as opposed to retrospectively adjusting prior periods.~~material impact on our consolidated financial statements and related disclosures.

Recently issued accounting standards

In February 2016, the FASB issued ASU 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~~2019, with early adoption is permitted. We plan to adopt this ASU beginning on January 1, 2019. The amendments in this update should be applied under a modified retrospective approach. We are evaluating the effect that ASU 2016-02 will have on our consolidated financial statements and related disclosures.

In ~~November 2016,~~June 2018, the FASB issued ASU ~~2016-18,~~2018- 07, ~~Statement~~Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting; which aligns the measurement and classification guidance for share-based payments to nonemployees with the guidance for share-based payments to employees, with certain exceptions. Under the guidance, the measurement of ~~Cash Flows (Topic 230): Restricted Cash (a consensus of~~equity-classified nonemployee awards will be fixed at 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.~~grant date. The new standard becomes effective for us on January 1, ~~2018. The standard requires entities~~2019, with early adoption permitted. We plan to ~~apply~~adopt 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-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.ASU beginning on January 1, 2019. We do not expect ~~that ASU 2016-18 will~~the adoption to have a material impact on our consolidated financial statements and related disclosures.

~~In January 2017, the FASB issued ASU 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 2017-04 will have a material impact on our consolidated financial statements and related disclosures.

~~In May 2017, the FASB issued ASU 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 2017-09 will have a material impact on our financial statements and related disclosures.

~~In August 2017, the FASB issued ASU 2017-12,~~ ~~Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities~~, which more closely aligns an entity's risk management activities and financial reporting for hedging relationships through changes to both designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. The new standard becomes effective for us on January 1, 2019. Early adoption is permitted. We have not yet determined whether to early adopt. We do not expect ASU 2017-12 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~~Verify Investor, LLC

On February 12, 2018, tZERO entered into a purchase agreement to acquire Cirrus Technologies LLC, a financial technology firm. In connection with the Cirrus Technology acquisition, a subsidiary of tZERO also entered into an agreement to purchase SpeedRoute LLC and allacquired 81% of the ~~outstanding membership~~total equity interests ~~not already owned by tZERO in Pro Securities LLC. Both SpeedRoute and Pro Securities were under common control with Cirrus Technologies~~of Verify Investor, LLC, byan accredited investor verification company, for a ~~party that holds a noncontrolling interest in tZERO, 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~~$12.0 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 tZERO 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~~cash. With the acquisition of the ~~membership interests~~majority interest in Verify Investor, LLC, tZERO plans to integrate the software and technology of ~~SpeedRoute~~Verify Investor, LLC with the Token Trading System that tZERO plans to develop and ~~Pro Securities were negotiated and contemplated in conjunction with each other. As such, this was recognized as a single transaction.~~deploy. 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)~~instruments). These inputs included our estimate of future revenues, operating margins, discount rates, royalty rates and assumptions about the relative competitive environment.

Determination and allocation of the purchase price to net tangible and intangible assets is based upon preliminary estimates. These preliminary estimates and assumptions could change significantly during the measurement period as we finalize the valuations of the net tangible and intangible assets acquired and liabilities assumed. Any change could result in variances between our future financial results and the amounts recognized in the financial information presented below, including variances in fair values recorded, as well as expenses associated with these items.

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


Purchase Price	Fair Value			Fair Value
Cash paid, net of cash acquired	$	9,353		$	11,769
Common stock issued	18,149
	$	27,502
Allocation
Intangibles				$	7,400
Goodwill	$	11,914		7,360
Intangibles	16,000
Accounts receivable and other assets	2,565
Other assets acquired				3
Other liabilities assumed	(2,977		)	(179		)
	$	27,502
Total net assets, net of cash acquired				14,584
Less: noncontrolling interest				(2,815		)
Total net assets attributable to tZERO, net of cash acquired				$	11,769

The following table details the identifiable intangible assets acquired at their fair value and remaining useful lives as of ~~September~~June 30, ~~2017~~2018 (amounts in thousands):


Intangible Assets	Fair Value			Weighted Average Useful Life (years)	Fair Value			Estimated Useful Life (in years)
Technology and developed software	$	13,600		3.31	$	6,300		10
Trade name					700			10
Customer relationships	1,900			—	400			0.5
Trade names	300			6.39
Other	200
Total acquired intangible assets at the acquisition dates	16,000
Total acquired intangible assets at the acquisition date					7,400
Less: accumulated amortization of acquired intangible assets	(8,160		)		(313		)
Total acquired intangible assets, net	$	7,840			$	7,087

The expense for amortizing ~~acquired~~ intangible assets acquired in connection with this acquisition was ~~$948,000~~$126,000 and ~~$1.0 million~~$313,000 for the three and six months ended ~~September~~June 30, ~~2017 and 2016, respectively, and $2.8 million and $3.2 million for the nine months ended September 30, 2017 and 2016,~~2018, respectively.

Acquired intangible assets primarily include technology, trade name, and customer ~~relationships, and trade names.~~relationships. 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~~based on the ~~expectations of market participants.~~company's historical operating results.

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.

Mac Warehouse, LLC

On June 25, 2018, we acquired 100% of the total equity interests of Mac Warehouse, LLC, an electronics retailer of refurbished Apple products, for a total purchase price of $1.2 million in cash. With the acquisition of Mac Warehouse, LLC, we plan to integrate the inventory and business processes of Mac Warehouse, LLC in our direct retail business. 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 preliminary estimated fair values of the assets acquired and liabilities assumed at the acquisition date are as follows (in thousands):



Purchase Price	Fair Value
Cash paid, net of cash acquired	$	1,143
Allocation
Accounts receivable, net	$	399
Inventories, net	1,772
Prepaids and other current assets	29
Fixed assets	154
Intangibles	2,763
Accounts payable	(682		)
Accrued liabilities	(223		)
Long-term debt, net	(3,069		)
Total net assets, net of cash acquired	$	1,143

Acquired intangible assets primarily include trade name and customer relationships which have an estimated useful life of 1.5 years.

The following unaudited pro forma financial information presents our results as if the current year acquisitions of Mac Warehouse, LLC had occurred at the beginning of 2017 (amounts in thousands):



	Three months ended June 30,						Six months ended June 30,
	2018			2017			2018			2017
Total revenue	$	485,152		$	435,987		$	932,537		$	872,056
Consolidated net loss	$	(67,218	)	$	(7,514	)	$	(122,336	)	$	(13,694	)

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

4. ACCRUED LIABILITIES

Accrued liabilities consist of the following (in thousands):


	September 30, 2017		December 31, 2016		June 30, 2018		December 31, 2017
Accrued marketing expenses	$	13,467	$	26,358	$	42,311	$	25,959
Accounts payable accruals					19,847		16,614
Allowance for returns	12,857		18,176		15,539		17,391
Other accrued expenses					14,110		6,283
Accrued compensation and other related costs	12,109		8,903		12,814		10,716
Accounts payable accruals	8,956		17,229
Other accrued expenses	6,307		6,315
Accrued freight	5,038		10,062		4,470		5,040
Accrued loss contingencies	50		9,173		641		608
Total accrued liabilities	$	58,784	$	96,216	$	109,732	$	82,611

5. BORROWINGS

~~U.S. Bank term loan and revolving loan agreement~~High Bench Senior Credit Agreement

~~We are~~On June 25, 2018, we became party to a ~~loan~~senior credit agreement, ~~(as~~as amended, ~~through March 30, 2017, the "Agreement") dated October 24, 2014~~ with ~~U.S. Bank National Association and other banks (the "Banks"~~High Bench-Mac Warehouse-Senior Debt, LLC ("High Bench Loan"), in connection with our acquisition of Mac Warehouse, LLC. Under the ~~construction and long-term financing~~amended agreement, the loan carries an annual interest rate 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~~11.0% 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%. 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 18.0%. The High Bench Loan is subject to monthly interest ~~would be 2.00% above the otherwise applicable rate.~~

~~Under the Agreement, we are required to maintain compliance as of the end of each calendar quarter~~only payments with the ~~following~~remaining principal amount and any then unpaid interest due and payable on April 18, 2020. The High Bench Loan is subject to mandatory prepayment under certain circumstances, and is prepayable at our election at any time without penalty or premium. There are no 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.~~

covenants associated the High Bench Loan. At ~~September~~June 30, ~~2017, we were in compliance with the financial covenants.~~

~~At September 30, 2017,~~2018, our outstanding balance on the ~~Term~~High Bench Loan was $45.0 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.$3.1 million.

~~On November 6, 2017, we repaid the outstanding balance and terminated both the Term Loan and the Revolving Loan (see Note 11—Subsequent Events).~~

~~U.S. Bank master lease agreement~~

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 nine months ended September 30, 2017, we did not receive proceeds under the Master Lease Agreement. At September 30, 2017, our total outstanding liability under the Master Lease Agreement was $12.7 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.

~~On November 6, 2017, we repaid the outstanding balance and terminated the Master Lease Agreement (see Note 11—Subsequent Events).~~

~~U.S. Bank letters~~Letters of credit

At ~~September~~June 30, ~~2017~~2018 and December 31, ~~2016,~~2017, letters of credit totaling ~~$355,000~~$280,000 and ~~$430,000,~~$355,000, respectively, were issued on our behalf collateralized by compensating cash balances held at ~~U.S. Bank,~~a bank, which are included in Restricted cash in ~~the accompanying~~our consolidated balance sheets.

~~U.S. Bank commercial~~Commercial purchasing card agreement

We have a commercial purchasing card (the "Purchasing Card") ~~agreement with U.S. Bank.~~agreement. We use the Purchasing Card for business purpose purchasing and must pay it in full each month. At ~~September~~June 30, ~~2017, $509,000~~2018, $877,000 was outstanding and ~~$4.5~~$4.1 million was available under the Purchasing Card. At December 31, ~~2016, $811,000~~2017, $822,000 was outstanding and $4.2 million was available under the Purchasing Card.

Capital lease

During the year ended December 31, 2017, we entered into a capital lease arrangement of computer equipment for $1.4 million. The arrangement will expire in 2020. At June 30, 2018, the outstanding balance under the capital lease was $1.1 million and is included in Other current liabilities, net and Other long-term liabilities on our consolidated balance sheets. Future payment obligations, including interest, under the capital lease are $248,000, $496,000 and $413,000 for the rest of 2018, 2019 and 2020, respectively.

6. COMMITMENTS AND CONTINGENCIES

Summary of future minimum lease payments for all operating leases

Minimum future payments under all operating leases as of ~~September~~June 30, ~~2017~~2018, are as follows (in thousands):


Payments due by period
2017 (Remainder)	$	2,273
2018	6,962
2018 (Remainder)			$	3,525
2019	6,733		6,819
2020	4,292		4,379
2021	4,336		4,355
2022			4,439
Thereafter	20,775		16,356
	$	45,371	$	39,873

Rental expense for operating leases totaled ~~$2.1~~$1.7 million and ~~$3.3~~$2.4 million for the three months ended ~~September~~June 30, ~~2017~~2018 and ~~2016,~~2017, respectively, and ~~$7.0~~$3.4 million and ~~$10.1~~$4.9 million for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 and ~~2016,~~2017, respectively.

Legal proceedings and contingencies

From time to time, we are involved in litigation concerning consumer protection, employment, intellectual property, claims under the securities laws, 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. The nature of the loss contingencies relating to claims that have been asserted against us are described below.

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~~No estimate of the ~~loss contingencies relating to claims that have been asserted against us are described above. However, no estimate of the~~possible loss or range of loss can be made. We intend to vigorously defend this action and pursue our indemnification rights with our vendors.

On February 11, 2013, RPost Holdings, Inc., RPost Communications Limited, and RMail Limited, filed suit against us in the United States District Court in the 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~~No estimate of the ~~loss contingencies relating to claims that have been asserted against us are described above. However, no estimate of the~~possible 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 and penalties), and attorney's fees and costs. In the early stages of the case, we, along with others, filed motions to dismiss the case. The court dismissed one count, but allowed one count to remain. ~~Recently, we~~We filed two motions for summary judgment, along with other defendants, ~~to dismiss the case.~~one of which was denied. The court has not yet ruled on ~~these motions.~~the

second motion. The ~~case is in its discovery stages.~~court has set tentative trial date commencing September 12, 2018. 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,~~June 21, 2018, the U.S. Supreme Court issued an opinion in our South Dakota sales tax case and ruled against us. The State of South Dakota sued us along with three other defendants in the Sixth Judicial Circuit Court of South ~~Dakota. South~~ Dakota ~~alleges~~alleging that U.S. constitutional law should be revised to permit South Dakota to require out-of-state ~~ecommerce~~e-commerce websites to ~~withhold~~collect and remit sales tax in South Dakota in accordance with South Dakota's sales tax statute. Under the U.S. Supreme Court’s ruling, the longstanding Quill Corp v. North Dakota sales tax case was overruled, and states may now require remote sellers to collect sales tax under certain circumstances. We began collecting sales tax in all 45 states that have sales tax. Pursuant to ~~the~~South Dakota’s statute, we ~~would~~are not be required ~~to withhold and remit sales tax until there was a 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~~retroactively. The U.S. Supreme Court’s opinion vacated and remanded the case back to ~~lose. The state court granted summary judgment in our favor, and on September 13, 2017~~ the South Dakota Supreme Court denied South Dakota’s appeal and ruled in our favor. South Dakota has now filed a petition with the U.S. Supreme Court to hear the case. We intend to oppose the petition and continue to vigorously defend this action.

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 paid the Sonoma County District Attorney's Office

a civil penalty of $27,000 and agreed to a five-year injunction. The injunction requires us to comply with the biodegradability 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.for further proceedings.

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~~alleged that U.S. constitutional law should be revised to permit Wyoming to require out-of-state ~~ecommerce websites~~e-commerce retailers to ~~withhold~~collect and remit sales tax in Wyoming in accordance with Wyoming's sales tax statute. ~~Pursuant to~~After the ~~statute, Wyoming is prohibited by an injunction from requiring us to withhold and remit~~U.S. Supreme Court’s ruling in our South Dakota case listed above, we began collecting sales tax ~~until there is verdict~~ in ~~favor of Wyoming or the court otherwise lifts or dissolves the injunction. The~~Wyoming. Wyoming’s statute does not require us to pay sales tax ~~retroactively if we were to lose. We intend to vigorously defend this action.~~retroactively. The Wyoming court has not issued any subsequent rulings in the case.

On August 28, 2017, the State of Indiana sued us along with one other defendant in the Superior Court of Indiana, Marion County. Indiana ~~alleges~~alleged that U.S. constitutional law should be revised to permit Indiana to require out-of-state ~~ecommerce websites~~e-commerce retailers to ~~withhold~~collect and remit sales tax in Indiana in accordance with Indiana's sales tax statute. ~~Pursuant to~~After the ~~statute,~~U.S. Supreme Court’s ruling in our South Dakota case listed above, we ~~would not be required to withhold and remit~~began collecting sales tax ~~until there was a verdict~~ in ~~favor of Indiana and the verdict was no longer subject to appeal. The~~Indiana. Indiana’s statute does not require us to pay sales tax ~~retroactively if~~retroactively. The Indiana court has not issued any subsequent rulings in the case.

In February 2018, the Division of Enforcement of the SEC informed tZERO and subsequently informed us that it is conducting an investigation and requested that we ~~were~~and tZERO voluntarily provide certain information and documents related to ~~lose.~~tZERO and the tZERO security token offering in connection with its investigation. We ~~intend~~are cooperating fully with the SEC in connection with its investigation.

tZERO's broker-dealer subsidiaries are, and any broker-dealer subsidiaries that it acquires or forms in the future will be, subject to ~~vigorously defend this action.~~extensive regulatory requirements under federal and state laws and regulations and self-regulatory organization ("SRO") rules. Each of SpeedRoute and PRO Securities is registered with the SEC as a broker-dealer under the Exchange Act and in the states in which it conducts securities business and is a member of FINRA and other SROs. In addition, PRO Securities owns and operates the PRO Securities ATS, which is registered with the SEC as an alternative trading system. Each of SpeedRoute and PRO Securities is subject to regulation, examination and disciplinary action by the SEC, FINRA and state securities regulators, as well as other governmental authorities and SROs with which it is registered or licensed or of which it is a member. On February 22, 2018, the SEC's New York Regional Office notified PRO Securities that it is conducting an examination of PRO Securities, and on March 6, 2018 the SEC's Boston Regional Office notified tZERO Advisors that it is conducting an examination of tZERO Advisors.

As a result of tZERO's projects seeking to apply distributed ledger technologies to the capital markets, tZERO's subsidiaries have been, and remain involved in, ongoing discussions with regulatory authorities. While certain of the discussions have been relatively informal, tZERO's broker-dealer subsidiaries have also received and responded to several written inquiries from FINRA relating to such projects. While tZERO considers these continuing inquiries to be ordinary course in light of the non-traditional nature of tZERO's distributed ledger projects, any failure by tZERO's broker-dealer subsidiaries to satisfy their regulatory authorities that they are in compliance with all applicable rules and regulations could have a material adverse effect on tZERO and on us.

In addition, in December 2017, SpeedRoute received a letter from FINRA stating that the Department of Enforcement at FINRA has received a referral from the staff of FINRA's Department of Market Regulation relating to rules applicable to supervision and required supervisory procedures for review of certain potential trading activity, such as pre-arranged trades or wash trades. In addition, SpeedRoute continues to have discussions with FINRA about several matters, including a matter related to potential violations of FINRA rules relating to Order Audit Trail System reporting and trading practice matters, and has received document requests from FINRA in connection with certain ongoing matters. SpeedRoute has received and responded to inquiries from FINRA and the SEC. In an unrelated matter, SpeedRoute and PRO Securities have been named in a FINRA investigatory matter in which FINRA has conducted on the record interviews of certain senior officers of SpeedRoute and PRO Securities, who are also senior officers of tZERO.

On March 29, 2018, a purported securities class action lawsuit was filed against us and two of our executives in the United States District Court in the Central District of Utah, alleging violations of the Securities Exchange Act of 1934 ("Exchange Act"). On April 6, 2018, a substantially similar lawsuit was filed in the same court also naming the Company, and two of our executives as defendants, bringing the same claims under the Exchange Act, and seeking substantially similar relief. On June 20, 2018, the Court consolidated the two cases and appointed a lead plaintiff in the case. On August 7, 2018, the plaintiffs voluntarily dismissed the lawsuit without prejudice.

We ~~establish~~have recognized liabilities ~~when a particular contingency is probable and estimable. At September 30, 2017, we had accrued $50,000 in light of~~for contingencies deemed probable and estimable ~~liabilities net of related indemnities,~~totaling $641,000 and $608,000 at June 30, 2018 and December 31, 2017, which isare included in ~~accrued~~Accrued liabilities in ~~the~~our consolidated balance sheets. It is reasonably possible that the actual losses may exceed our accrued liabilities.

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 environmental indemnity we entered into in favor of the lenders under our ~~Loan Agreement with U.S. Bank~~prior loan agreements, customary indemnification arrangements in underwriting agreements and ~~other banks,~~similar agreements, 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. Stock-based compensation expense was as follows (in thousands):

Three months ended
September 30, Nine months ended
September 30,
2017 2016 2017 2016
Medici stock options $ 9
$ —
$ 9
$ —
Restricted stock awards 1,015
1,390
3,000
4,105
Total stock-based compensation expense $ 1,024
$ 1,390
$ 3,009
$ 4,105



	Three months ended June 30,				Six months ended June 30,
	2018		2017		2018		2017
Overstock restricted stock awards	$	2,700	$	1,045	$	5,084	$	1,985
Medici Ventures stock options	123		—		134		—
tZERO equity awards	150		—		4,190		—
Total stock-based compensation expense	$	2,973	$	1,045	$	9,408	$	1,985

~~Medici~~Overstock restricted stock ~~options~~awards

~~In July 2017, the Board of Directors of Medici Ventures,~~The Overstock.com, Inc. ~~("Medici Ventures"), our wholly-owned subsidiary, approved the Medici Ventures, Inc. Stock Option~~Amended and Restated 2005 Equity Incentive Plan ~~which~~ provides for the grant of ~~options to employees~~restricted stock units and ~~directors~~other types of and consultants to Medici Ventures. Pursuant to the plan, the Board of Directors approved grants of 67,950 stock options to certain Medici Ventures and Overstock employees. The stock options are valued in total at $82,000 and subject to two vesting schedules, and compensation expense is recognized on a straight-line basis over the vesting schedules.

~~Restricted stock~~equity awards

~~During the three and nine months ended September 30, 2017, the Compensation Committee~~ of the ~~Board of Directors approved grants of 11,150 and 299,171 restricted stock awards to our officers, board members and employees.~~Company. 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~~year; subject to the recipient's continuing service to us. ~~At September 30, 2017, there were 542,525 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 nine months ended September 30, 2017 was $16.55 and $16.71.

The following table summarizes restricted stock award activity during the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 (in thousands):


	Nine months ended September 30, 2017				Six months ended June 30, 2018
	Units		Weighted Average Grant Date Fair Value		Units		Weighted Average Grant Date Fair Value
Outstanding—beginning of year	560		$	17.46	540		$	17.05
Granted at fair value	299		16.71		346		70.06
Vested	(202	)	19.82		(222	)	17.30
Forfeited	(114	)	16.20		(12	)	47.76
Outstanding—end of period	543		$	16.43	652		$	44.53

Medici Ventures stock options

The Medici Ventures, Inc. 2017 Stock Option Plan provides for the grant of options to employees and directors of and consultants to Medici Ventures to acquire up to 10% of the authorized shares of Medici Ventures' common stock. During the six months ended June 30, 2018, Medici Ventures granted 19,700 stock options with a cumulative grant date fair value of $1.7 million which vest over a three year period. During the year ended December 31, 2017, Medici Ventures granted 74,750 stock options to certain Medici Ventures and Overstock employees with a cumulative grant date fair value of $91,000 which will be expensed on a straight-line basis over the vesting period of three years.

tZERO equity awards

The tZERO.com 2017 Equity Incentive Plan provides for grant of options to employees and directors of and consultants to tZERO to acquire up to 5% of the authorized shares of tZERO’s common stock. In January 2018, tZERO granted stock awards under the equity incentive plan for an aggregate of approximately 1.0% of tZERO’s common stock all of which vested on January 23, 2018. In January 2018, tZERO recognized $4.0 million in compensation expense associated with these awards, which was the entire estimated fair value at the grant date. Accordingly, there is no expense to be recognized in future periods related to these awards. As a result of these vested awards, our indirect ownership interest in tZERO was reduced from 81% to approximately 80%. During the six months ended June 30, 2018, tZERO granted awards to acquire 382 shares of its stock with a cumulative grant date fair value of $3.1 million which will be expensed on a straight-line basis over the vesting period of two to three years. No awards were issued during the year ended December 31, 2017.

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 consists of ~~Medici.~~Medici Ventures and its subsidiaries, including tZERO. 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 ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 and ~~2016.~~2017.

The following table summarizes information about reportable segments for three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 and ~~2016~~2017 (in thousands):

Three months ended
September 30,
Direct Partner Retail Total Other Total
2017

Revenue, net $ 19,645
$ 400,419
$ 420,064
$ 3,943
$ 424,007
Cost of goods sold (1) 19,577
318,121
337,698
2,634
340,332
Gross profit $ 68
$ 82,298
$ 82,366
$ 1,309
$ 83,675
Operating expenses (1) (2)

90,592
4,958
95,550
Interest and other income (expense), net (3)

5,375
(17 ) 5,358
Pre-tax loss (2,851 ) (3,666 ) (6,517 )
Benefit for income taxes

(3,993 ) (1,419 ) (5,412 )
Net income (loss) (4)

$ 1,142
$ (2,247 ) $ (1,105 )

2016

Revenue, net $ 24,620
$ 413,019
$ 437,639
$ 3,925
$ 441,564
Cost of goods sold (1) 23,955
335,306
359,261
2,587
361,848
Gross profit $ 665
$ 77,713
$ 78,378
$ 1,338
$ 79,716
Operating expenses (1) (2)

80,497
4,266
84,763
Interest and other income (expense), net (3)

1,177
(65 ) 1,112
Pre-tax loss (942 ) (2,993 ) (3,935 )
Provision (benefit) for income taxes

713
(1,256 ) (543 )
Net loss (4)

$ (1,655 ) $ (1,737 ) $ (3,392 )

Nine months ended
September 30,
Direct Partner Retail Total Other Total
2017

Revenue, net $ 64,572
$ 1,211,536
$ 1,276,108
$ 12,358
$ 1,288,466
Cost of goods sold (1) 61,687
963,310
1,024,997
8,716
1,033,713
Gross profit $ 2,885
$ 248,226
$ 251,111
$ 3,642
$ 254,753
Operating expenses (1) (2)

264,455
14,217
278,672
Interest and other income (expense), net (3)

5,490
(4,428 ) 1,062
Pre-tax loss (7,854 ) (15,003 ) (22,857 )
Benefit for income taxes

(3,280 ) (4,447 ) (7,727 )
Net loss (4)

$ (4,574 ) $ (10,556 ) $ (15,130 )

2016

Revenue, net $ 75,901
$ 1,187,364
$ 1,263,265
$ 10,516
$ 1,273,781
Cost of goods sold (1) 72,459
961,227
1,033,686
6,750
1,040,436
Gross profit $ 3,442
$ 226,137
$ 229,579
$ 3,766
$ 233,345
Operating expenses (1) (2)

213,502
12,586
226,088
Interest and other income (expense), net (3)

9,409
(1 ) 9,408
Pre-tax income (loss) 25,486
(8,821 ) 16,665
Provision (benefit) for income taxes

11,626
(3,448 ) 8,178
Net income (loss) (4)

$ 13,860
$ (5,373 ) $ 8,487



	Three months ended June 30,
	Direct		Partner		Retail Total			Other			Total
2018
Revenue, net	$	14,715	$	462,968	$	477,683		$	5,450		$	483,133
Cost of goods sold	14,672		372,580		387,252			4,138			391,390
Gross profit	$	43	$	90,388	$	90,431		$	1,312		$	91,743
Operating expenses					149,437			8,842			158,279
Interest and other income (expense), net (1)					1,624			(1,031		)	593
Pre-tax loss					(57,382		)	(8,561		)	(65,943		)
Provision for (benefit from) income taxes					(40		)	13			(27		)
Net loss (2)					$	(57,342	)	$	(8,574	)	$	(65,916	)

2017
Revenue, net	$	22,099	$	405,856	$	427,955		$	4,069		$	432,024
Cost of goods sold	21,147		323,892		345,039			2,814			347,853
Gross profit	$	952	$	81,964	$	82,916		$	1,255		$	84,171
Operating expenses					89,325			4,577			93,902
Interest and other income, net (1)					13			—			13
Pre-tax loss					(6,396		)	(3,322		)	(9,718		)
Benefit from income taxes					(176		)	(1,799		)	(1,975		)
Net loss (2)					$	(6,220	)	$	(1,523	)	$	(7,743	)



	Six months ended June 30,
	Direct		Partner		Retail Total			Other			Total
2018
Revenue, net	$	30,985	$	886,694	$	917,679		$	10,785		$	928,464
Cost of goods sold	29,444		705,388		734,832			8,020			742,852
Gross profit	$	1,541	$	181,306	$	182,847		$	2,765		$	185,612
Operating expenses					274,969			31,573			306,542
Interest and other income (expense), net (1)					1,169			(915		)	254
Pre-tax loss					(90,953		)	(29,723		)	(120,676		)
Benefit from income taxes					(128		)	(176		)	(304		)
Net loss (2)					$	(90,825	)	$	(29,547	)	$	(120,372	)

2017
Revenue, net	$	44,927	$	811,117	$	856,044		$	8,415		$	864,459
Cost of goods sold	42,110		645,189		687,299			6,082			693,381
Gross profit	$	2,817	$	165,928	$	168,745		$	2,333		$	171,078
Operating expenses					173,863			9,259			183,122
Interest and other income (expense), net (1)					115			(4,411		)	(4,296		)
Pre-tax loss					(5,003		)	(11,337		)	(16,340		)
Provision for (benefit from) income taxes					713			(3,028		)	(2,315		)
Net loss (2)					$	(5,716	)	$	(8,309	)	$	(14,025	)


(1)	— Excludes intercompany transactions eliminated in consolidation, which consist primarily of service fees and interest. The net amounts of these intercompany transactions were $504,000 and $359,000 for the three months

~~(1) — The above amounts include Retail depreciation~~

ended June 30, 2018 and ~~amortization expense of $6.7~~2017, respectively, and $2.5 million and ~~$7.3 million~~$665,000 for the ~~three~~six months ended ~~September~~June 30, 2018 and 2017, ~~and 2016, respectively, and $21.1 million and $19.5 million for the nine months ended September 30, 2017 and 2016.~~respectively.


(2)	— Net income (loss) presented for segment reporting purposes is before any adjustments attributable to noncontrolling interests.

(2) — The above amounts include Other depreciation and amortization expense of $1.2 million and $1.1 million for the three months ended September 30, 2017 and 2016, respectively, and $3.6 million and $3.4 million for the nine months ended September 30, 2017 and 2016.

(3) — The above amounts exclude intercompany transactions eliminated in consolidation, which consist primarily of interest. These amounts were $403,000 and $60,000 for the three months ended September 30, 2017 and 2016, respectively, and $1.1 million and $405,000 for the nine months ended September 30, 2017 and 2016.

~~(4) — Net income presented for segment reporting purposes is before any adjustments attributable to noncontrolling interests.~~

For additional information regarding our non-GAAP financial measures, please see Item 2 of Part I, Management's Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates.

Our Direct segment includes revenues, direct costs, and cost allocations associated with sales of inventory we own. Costs for this segment include product costs, freight, warehousing and fulfillment costs, credit card fees and customer service costs.

Our Partner segment includes revenues, direct costs and cost allocations associated with sales of inventory owned by our partners. Costs for this segment include product costs, outbound freight and fulfillment costs, credit card fees and customer service costs.

For the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 and ~~2016,~~2017, substantially all of our sales revenues were attributable to customers in the United States. At ~~September~~June 30, ~~2017~~2018 and December 31, ~~2016,~~2017, substantially all of our fixed assets were located in the United States.

10. BROKER DEALERS

As part of our Medici blockchain and fintech technology initiatives, we hold a controlling interest in each of two broker dealers, SpeedRoute LLC ("SpeedRoute") and Pro Securities LLC ("Pro Securities"), which we acquired in January ~~2016 (see Note 3—Acquisitions, Goodwill, and Acquired Intangible Assets).~~2016.

SpeedRoute is an electronic, agency-only FINRA-registered broker dealer that provides connectivity for its customers to U.S. equity exchanges as well as off-exchange sources of liquidity such as dark pools. All of SpeedRoute's customers are registered broker dealers. SpeedRoute does not hold, own or sell securities.

Pro Securities is a FINRA-registered broker dealer that owns and operates the Pro Securities alternative trading system ("ATS"), which is registered with the SEC. An ATS is a trading system that is not regulated as an exchange, but is a licensed venue for matching buy and sell orders. The Pro Securities ATS is a closed system available only to its broker dealer subscribers. Pro Securities does not accept orders from non-broker dealers, nor does it hold, own or sell securities.

SpeedRoute and Pro Securities are subject to the SEC's Uniform Net Capital Rule (SEC Rule 15c3-1), which requires the maintenance of minimum net capital and requires that the ratio of aggregate indebtedness to net capital, both as defined, shall not exceed 15 to 1 and that equity capital may not be withdrawn or cash dividends paid if the resulting net capital ratio would exceed 10 to 1. At ~~September~~June 30, ~~2017,~~2018, SpeedRoute had net capital of ~~$496,480,~~$192,365, which was ~~$391,483~~$63,764 in excess of its required net capital of ~~$104,997~~$128,601 and SpeedRoute's net capital ratio was ~~3.17~~10.03 to 1. At ~~September~~June 30, ~~2017,~~2018, Pro Securities had net capital of ~~$9,194~~$80,753 which was ~~$4,194~~$75,753 in excess of its required net capital of $5,000 and Pro Securities net capital ratio was ~~2.34~~0.21 to 1. At December 31, 2017, SpeedRoute had net capital of $334,848, which was $233,485 in excess of its required net capital of $101,363 and SpeedRoute's net capital ratio was 4.5 to 1. At December 31, 2017, PRO Securities had net capital of $24,175, which was $19,175 in excess of its required net capital of $5,000 and PRO Securities net capital ratio was 1.3 to 1.

SpeedRoute and Pro Securities did not have any securities owned or securities sold, not yet purchased at ~~September~~June 30, ~~2017.~~2018 and December 31, 2017, respectively.

11. ~~SUBSEQUENT EVENTS~~RELATED PARTY TRANSACTIONS

~~New~~PCL L.L.C. term loan ~~agreement~~repayment

On November 6, 2017, we entered into a loan agreement with PCL L.L.C., an entity directly or indirectly ~~wholly owned~~wholly-owned by the mother and brother of our Chief Executive Officer, Dr. Patrick Byrne. The agreement provides for a $40.0 million term loan (the "PCL Loan") which carries an annual interest rate of 8.0%. On May 8, 2018, our Board of Directors approved a prepayment of the PCL Loan and ~~a default rate of 18.0%. The~~we repaid the entire outstanding balance under the loan ~~is for a term of 18 months, subject~~plus accrued interest.

SiteHelix

On June 28, 2018, we entered into and concurrently closed a Stock Purchase Agreement with the stockholders of SiteHelix, Inc., a Delaware corporation ("SiteHelix") pursuant to ~~mandatory prepayment~~which we purchased all of the common stock of SiteHelix for $500,000 plus 100,000 shares of Overstock common stock with a transaction date fair value of $2.9 million for an aggregate purchase price of $3.4 million. The transaction was accounted for as an asset purchase. Saum Noursalehi, who owned approximately 62% of the SiteHelix common stock, is a member of our Board of Directors and served as President, Retail, of Overstock until May 8, 2018, when he became Chief Executive Officer of tZERO.

12. SUBSEQUENT EVENTS

Bitsy Agreement

In July 2018, Medici Ventures entered into a stock purchase agreement with Bitsy, Inc. ("Bitsy") to acquire an additional 25% equity interest in Bitsy for $3.0 million and $1.5 million worth of Overstock.com common stock. Subsequent to the purchase, Medici Ventures holds a 33% interest in Bitsy. Bitsy is a U.S.-based startup company founded and 22% owned by Medici Ventures' chief operating officer and general counsel. Bitsy plans to build a regulatory-compliant bridge between the U.S. Dollar and cryptocurrencies and offer our customers the ability to purchase cryptocurrencies on or through the Bitsy app and our Website.

JonesTrading Sales Agreement

In early August 2018 we entered into a sales agreement with JonesTrading Institutional Services LLC ("JonesTrading"), under ~~certain circumstances,~~which we plan to conduct "at the market" public offerings of our common stock from time to time. Under the sales agreement, JonesTrading, acting as our agent, may offer our common stock in the market on a daily basis or otherwise as we request from time to time. We have no obligation to sell shares under the sales agreement, but expect to do so from time to time. We will pay JonesTrading up to a 2.0% sales commission on all sales. The sales agreement contemplates sales of up to $150 million of our common stock over a period of up to three years. We will report the number of shares of common stock actually sold, the net proceeds to us and ~~is prepayable~~the compensation we pay JonesTrading on a quarterly basis.

JonesTrading Standby Equity Agreement

In early August 2018 we also entered into a standby equity underwriting agreement with JonesTrading. Under the standby underwriting agreement, we have the right, but no obligation, to sell up to $50 million of our common stock to JonesTrading, as underwriter, for sale to the public in a firm commitment public offering. Any offering under this agreement would be done in one or more tranches of up to $5 million each, at our ~~election at~~option. However, sales we make in any ~~time without penalty or premium. Interest only~~other registered offering, including any sales we make under the sales agreement with JonesTrading described above, would reduce (on a dollar-for-dollar basis) the amount we have the right to sell pursuant to the standby underwriting agreement. JonesTrading will have an option to purchase up to an additional 15% of the amount of any tranche we elect to sell under the standby underwriting agreement. The price of any shares we sell to JonesTrading pursuant to the standby underwriting agreement will be ~~due monthly. The principal amount and any then unpaid interest will be due and payable~~97% the average of the daily volume weighted average price of our common stock during normal trading hours on ~~May 1, 2019 (subject to mandatory prepayment in~~Nasdaq for the ~~event~~two trading days after we give notice of a sale ~~or encumbrance~~to JonesTrading. We paid a 1% commitment fee to JonesTrading for entering into the underwriting agreement.

GSR Agreements

In early August 2018 Overstock signed a Token Purchase Agreement and a term sheet with GSR Capital, a private equity firm organized under the laws of Hong Kong ("GSR"). Concurrently, tZERO signed a term sheet with GSR in lieu of the ~~headquarters building or a change~~the previously-announced Letter of ~~ownership~~Intent regarding GSR's purchase of ~~Overstock or the occurrence~~up to $160 million of ~~certain other events, including material changes to Overstock’s business, the loss~~security tokens from tZERO. The Letter of management control of Overstock by Dr. Patrick Byrne and other events). The loan is secured by our corporate headquarters and the related land, fixtures and certain related personal property. We incurred insignificant debt issuance costs with the new loan agreement. The $40.0 million proceeds from this loan together with our cash resources were used to repay the remaining outstanding balances and terminate the U.S. Bank Term Loan, Revolving Loan, Master Lease Agreement, and associated derivative instruments. AsIntent was cancelled as a result of the ~~termination~~new agreement.

The Token Purchase Agreement sets forth the terms on which GSR agreed to purchase, for $30 million, on May 6, 2019 or such other date as may be agreed by the parties, security tokens at a price of $6.67 per security token, that may be issued by tZERO to Overstock in satisfaction of $30 million of tZERO's indebtedness to Overstock. The agreement states that the obligations of GSR to complete the transaction described will be subject to conditions, some of which are unidentified. tZERO has not yet created the security tokens.

The term sheet signed by OSTK and GSR describes the general terms and conditions of a proposed investment by GSR in Overstock. The term sheet describes a purchase of up to 3,100,000 shares of Overstock at $33.72 per share, for an aggregate price of approximately $104.5 million, subject to the negotiation and execution of a definitive purchase and sale agreement and any other agreement that may be necessary to effect the transaction. The term sheet states that it constitutes a binding agreement to negotiate in good faith the terms of the ~~U.S. Bank agreements, we~~transaction documents, which are ~~required~~ to ~~write-off~~be substantially consistent with the terms set forth in the term sheet. However, the obligation to negotiate in good faith will terminate on the proposed closing date of December 15, 2018, if any of the closing conditions, one of which is the negotiation, execution and delivery of mutually acceptable transaction documents, have not been satisfied.

The term sheet signed by tZERO and GSR describes the general terms and conditions of a proposed investment in tZERO by GSR and other potential buyers. The term sheet describes a purchase of tZERO voting common stock for up to $270 million, based upon a $1.5 billion post-money valuation of tZERO. The proposed investment is subject to the negotiation and execution of a definitive purchase and sale agreement and any other agreement that may be necessary to effect the transaction. The term sheet states that it constitutes a binding agreement to negotiate in good faith the terms of the transaction documents, which are to be substantially consistent with the terms set forth in the term sheet. However, the obligation to negotiate in good faith will terminate on the proposed closing date of December 15, 2018, if any of the closing conditions, one of which is the negotiation, execution and delivery of mutually acceptable transaction documents, have not been satisfied. The term sheet also provides that if one or more of the other buyers does not consummate the transaction described, the obligations of the remaining ~~unamortized debt issuance costs~~buyers will remain unaltered, but that in no case will the individual ownership of ~~$816,000 associated with~~GSR Capital Ltd. exceed 18% of the ~~U.S. Bank agreements.~~voting rights and earnings payout of tZERO.

~~Declaration of cash dividends on preferred shares~~

On November 7, 2017, we announced that the Board of Directors declared a cash dividend for 2017 of $0.16 per share on its Blockchain Voting Series A Preferred Stock and a cash dividend for 2017 of $0.16 per share on its Voting Series B Preferred Stock, in each case payable on December 15, 2017 to stockholders of record on December 1, 2017. The ex-dividend date for the Series B Preferred dividend is expected to be November 29, 2017. Holders and potential investors in the Series B Preferred shares may confirm the ex-dividend date for the Series B Preferred dividend on the OTCQX website operated by OTC Markets when posted.

~~Sale of warrants~~

On November 8, 2017, we sold a warrant for $2.6 million to purchase 1,250,000 shares of our common stock at $40.45 per share until February 7, 2018. We also sold a warrant for $4.0 million to purchase 2,472,188 shares of our common stock at $40.45 per share until January 2, 2018.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Special ~~Cautionary~~ Note Regarding Forward-Looking Statements

This Report on Form 10-Q and the documents incorporated herein by reference, as well as our other public documents and statements our officers and representatives may make from time to time, contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements relate to our financial condition, liquidity, results of operations, earnings outlook and prospects. You can find many of these statements by looking for words such as “may,” “would,” “could,” “should,” “will,” “expect,” “anticipate,” “predict,” “project,” “potential,” “continue,” “contemplate,” “seek,” “assume,” “believe,” “intend,” “plan,” “forecast,” “goal,” “estimate,” or other similar expressions which identify these forward-looking statements. These forward-looking statements are ~~therefore entitled~~not historical facts, and are based on current expectations, estimates and projections about our industry and business, and on management’s beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond our control. Accordingly, you are cautioned that any such forward-looking statements are not guarantees of future performance and are subject to assumptions, risks and uncertainties that are difficult to predict, and that actual results may be materially different from the results expressed or implied by any of our forward-looking statements. We claim the protection of the safe harbor ~~provisions~~provided by the Private Securities Litigation Reform Act of ~~these laws. These~~1995, as amended, for all such forward-looking statements.

Unless otherwise required by law, we also disclaim any obligation to update our view of any such risks or uncertainties or to announce publicly any revisions to any forward-looking statements ~~involve~~made or incorporated by reference in this report. A number of important factors could cause actual results to differ materially from those indicated by the forward-looking statements, including the risks set forth in the “Risk Factors” section of this report, and ~~uncertainties,~~the risks described in our Annual Report on Form 10-K for the year ended December 31, 2017 and ~~relate to future events or~~the risks described in our ~~future financial or operating performance. The~~Quarterly Report on Form 10-Q for the quarter ended March 31, 2018. Our forward-looking statements include all statements other than statements of historical fact including, without limitation, all statements regarding:

our strategies and plans for our e-commerce business and our Medici businesses, including our tZERO initiatives;

the ~~anticipated~~possibility that we will pursue or attempt to pursue a strategic alternative that could change our business dramatically, including the possibility and potential effects of a sale of our e-commerce business, as well as the possibility that we will determine not to pursue any strategic alternative at all in the foreseeable future;

our expectation that if we sell our e-commerce business for cash and retain the after-tax proceeds of the sale, we would return a significant portion of the after-tax proceeds to our stockholders within 12 months after any such sale, by means of a stock repurchase program, dividend, one or more issuer tender offers or other means;

all statements of our expectations regarding the "Capital on Demand" Sales Agreement or the Standby Equity Underwriting Agreement we have entered into with JonesTrading Institutional Services LLC, including any statement about our ability to raise capital pursuant to either such agreement;

our expectations regarding the effects on us of the recent Tax Cuts and Jobs Act;

our expectations regarding the costs, benefits and risks of Medici Ventures’ efforts to develop blockchain applications and tZERO’s efforts to develop financial technology (“fintech”) applications, including applications using blockchain technology and how effectively that technology will be adopted, and including our expectations regarding the costs, benefits and risks of the operations of tZERO;

all statements regarding the plans of tZERO or Medici Ventures;

our expectations regarding the costs, benefits and risks of tZERO’s ownership of SpeedRoute and PRO Securities, each of which is a registered broker dealer;

our expectations regarding the costs, benefits and risks of having less than wholly-owned subsidiaries, including our indirect approximately 80% owned subsidiary tZERO and our currently wholly-owned subsidiary Medici Ventures, which has issued stock options to employees and consequently may not be wholly-owned in the future;

all statements regarding the tZERO security token offering, including the possibility that the proceeds of the security token offering might be treated as income to us for federal income tax purposes, and might be treated as a liability rather than equity for accounting purposes;

our expectations regarding the costs, benefits and risks of our ~~business~~efforts and ~~plans;~~plans to advertise or offer financial product and services offerings on our website, including discount stock brokerage trading services, automated investment advisory services, accredited investor verification services, and other financial service offerings and other businesses, innovations and projects that we or our subsidiaries may engage in, offer or advertise in the future;

our expectations regarding Medici Ventures’ efforts to create a system to help areas of the world that lack reliable widely-recognized land-titling and record-keeping processes implement blockchain-based systems for doing so;

our plans to modify our branding and marketing strategy;

our beliefs regarding our ability to attract and retain customers in a cost-efficient manner;

the anticipated effectiveness of or potential improvements in our marketing;

our future operating and financial results, including any projections of revenue, profits or losses, contribution, technology expense, general and administrative expense, cash flow, capital expenditures or other financial measures or amounts or non-GAAP financial measures or amounts or anticipated changes in any of them;

our beliefs and expectations regarding the adequacy of our facilities, including leased and any third-party operated warehouse ~~facilities;~~

~~our belief~~facilities, as well as the possibility that we ~~can maintain compliance with~~may add distribution centers or other distribution facilities to our distribution system and our expectations regarding the ~~requirements~~results of ~~our credit facility;~~any such additions;

our future capital requirements and our ability to satisfy our capital needs;

the adequacy of our ~~liquidity;~~liquidity and our ability, if any, to increase our liquidity or capital resources through traditional capital raising or otherwise;

any possibility that tZERO may repay a portion of the amounts we have advanced to tZERO, or that we may accept tZERO Security Tokens to be issued by tZERO in satisfaction of a portion of such amounts;

tZERO’s plans, including without limitation its plans to develop its Token Trading System and all statements about tZERO's plans and expectations regarding tZERO's joint venture with Box Digital;

whether the Token Trading System will be able to comply with SEC rules and regulations;

our ~~ability~~plans and expectations regarding the costs, benefits, and risks of attempting to ~~improve~~develop technology applications including applications using or relating to blockchain technology and our ~~liquidity through~~plans to commercialize any of these potential ~~strategic transactions, raising capital or initial coin offerings;~~applications;

~~our ability to retire or refinance the debt we have or incur in the future;~~

the competition we currently face and anticipate;

the effects of current and future government regulation;

our expectations for our international sales ~~efforts and the anticipated results of our international operations;~~efforts;

~~our plans and expectations regarding Supplier Oasis and~~ our efforts to provide multi-channel fulfillment services;

our plans ~~and expectations regarding our insurance product offerings and consumer finance offerings;~~

~~our plans~~ for further changes to our business;

our expectations and beliefs regarding our ability to effectively change business strategies, including by increasing or decreasing our e-commerce branding and marketing expenditures;

our beliefs regarding current or future litigation or regulatory ~~actions;~~

actions or fines, including our ~~beliefs~~expectations regarding the ~~costs~~investigation the Division of Enforcement of the Securities and ~~benefits of our "spend~~Exchange Commission is conducting and ~~defend" policy under which~~its request that we ~~generally refuse~~voluntarily provide certain information and documents related to ~~settle abusive patent suits brought against us;~~tZERO and the tZERO security token offering;

our beliefs and expectations regarding existing and future tax laws and related laws and the application of those laws to our business including the results of tax assessments we receive periodically;

our beliefs regarding the adequacy of our insurance coverage;

our beliefs regarding the adequacy and anticipated functionality of our infrastructure, including our backup facilities and beliefs regarding the adequacy of our disaster planning and our ability to recover from a disaster or other interruption of our ability to operate our Website;

our beliefs regarding our cybersecurity efforts and measures and our efforts to prevent data breaches and the costs we will incur in our ongoing efforts to avoid interruptions to our product offerings and other business processes from ~~cyber attacks~~cyber-attacks and from data breaches;

our ability to maintain or improve upon customer service levels that we and our customers consider acceptable;

our beliefs regarding the adequacy of our order processing systems and our fulfillment and distribution capabilities;

our expectations regarding the costs and benefits of our other businesses, innovations and projects including our car listing service, our Worldstock Fair Trade offerings, our Main Street Revolution offerings and our ecommerce marketplace channel offerings, as well as the credit, insurance and other services we advertise;

our expectations regarding the costs and benefits of various programs we offer, including Club O and programs pursuant to which we may offer free or discounted participation in Club O or other programs we

~~offer to members of the United States Armed Forces and/or to full-time, post-secondary students or others, and including our community site and our public service pet adoption program;~~

our expectations regarding the costs, benefits and risks of our efforts to develop blockchain and financial technology and of the costs, benefits and risks of our acquisitions of the assets and operations of a financial technology company and two registered broker dealers affiliated with the financial technology business;

~~our expectations regarding the risks and benefits of our recent rights offering of shares of our Blockchain Voting Series A Preferred Stock and our Voting Series B Preferred Stock;~~

~~our expectations regarding the costs and benefits of modifying our marketing efforts to deemphasize coupons;~~

our belief that we and our partners will be able to maintain inventory levels at appropriate levels despite the seasonal nature of our ~~business;~~business and the rapid changes we encounter in customer demand for various products;

our expectations regarding our emphasis on home and garden product ~~offerings and our attempts to brand ourselves as a home and garden shopping destination;~~

~~our belief that our sales through other ecommerce marketplace channels will be successful; and~~offerings;

our belief that we can successfully offer and sell a constantly changing mix of products and ~~services.~~services; and

our other statements about the anticipated benefits and risks of our business and plans.

~~Further, in some cases, you can identify~~Our forward-looking statements by terminology such as may, will, could, should, likely, expect, plan, seek, intend, anticipate, project, believe, estimate, predict, potential, goal, strategy, future or continue, the negative of such terms or other comparable terminology. These statements are only predictions. Actual events or results may differ materially from those contemplated by our forward-looking statements for a variety of reasons, including among others:

any changes we may make to our business as a result of our current ongoing review of potential strategic alternatives, which could involve a sale of our e-commerce business, additional equity or debt financings, or other significant changes to our business;

the possibility that we may sell our e-commerce business for cash and retain some or all of the after-tax proceeds of the sale for use in our blockchain initiatives, which would result in our stockholders owning equity interests in a publicly-held corporation seeking to develop entirely new businesses and revenue streams, without the benefits of our current e-commerce business and the approximately $1.7 billion it generates in annual net revenues but with most if not all of the expenses of operating a publicly-held corporation;

the potentially substantial corporate level income tax expense we could incur if we were to sell our e-commerce business in a taxable transaction;

the possibility that our publicly-disclosed review of potential strategic alternatives may distract our management and other employees, may cause members of our management and/or other employees to seek employment elsewhere, and may have adverse effects on our business and financial results;

the technical, operational, financial, regulatory, legal, reputational, marketing and other obstacles we face in trying to create a profitable business with significant revenues from our blockchain initiatives;

the possibility that we will be unable to raise the capital we anticipate raising pursuant to the "Capital on Demand" Sales Agreement or the Standby Equity Underwriting Agreement we have entered into with JonesTrading Institutional Services LLC;

the possibility that the recent Tax Cuts and Jobs Act will have adverse effects on us in addition to those we have already identified;

the possibility that the proceeds of the tZERO security token offering might be treated as income to us for federal income tax purposes;

the possibility that the tZERO security token offering could result in claims against tZERO and/or us;

the effects of changes we have recently made and expect to make in the near future to the amount of our sales and marketing expenditures, which could continue to have an adverse effect on our near-term financial results as they did in the first half of 2018;

the costs of, and difficulties we have encountered and may continue to encounter with, ~~changes~~the implementation of our strategies for our e-commerce business;

the possibility that ~~Google has made~~we may be unable to fund our plans for our planned sales and ~~that Google~~marketing activities, new distribution facilities, our technology platforms, our Club O rewards program, our private label strategy, and other ~~search engine companies may make~~initiatives;

the efficiency of our e-commerce marketing and its effect on our business strategy;

the cost and availability of online and traditional advertising, and the results of our various brand building and marketing campaigns;

difficulties we have encountered and continue to ~~their~~encounter with our natural search ~~engine algorithms, which have periodically resulted~~results;

increasing competition, including competition from well-established competitors including Amazon.com, competition from competitors based in ~~lower rankings~~China or in other relatively low-cost jurisdictions, competition from well-funded companies, including Wayfair, and from others including Amazon and other competitors with business

models that include delivery capabilities that we cannot currently match and do not expect to be able to match in the foreseeable future;

difficulties we may encounter in connection with our efforts to offer services to our customers outside of our e-commerce business, including the credit, insurance, discount brokerage trading services, automated investment advisory services, and accredited investor verification services we advertise or offer;

difficulties, including expense and any operational or regulatory issues we may encounter in connection with tZERO or its subsidiaries, including its two registered broker-dealers, SpeedRoute and PRO Securities;

technical, operational, regulatory or other difficulties we may encounter with our Medici or tZERO blockchain or financial technology initiatives, including difficulties we or tZERO may have marketing any products or services tZERO may offer, whether due to lack of market size or acceptance or as a result of competition from any of the numerous competitors seeking to develop competing technologies or systems or as a result of patents that may be granted to other companies or persons; and losses we may continue to ~~do so;~~incur in connection with our Medici and tZERO blockchain and financial technology initiatives;

the possibility that blockchain technology may be adopted more slowly than we anticipate;

the fact that tZERO necessarily allocates its limited resources among the projects it is pursuing, and at present has re-allocated developers from working on its DLR Software to working on other projects;

the difficulties tZERO will face in attempting to market its DLR Software, and the possibility that we and/or tZERO have overestimated the demand for, and/or the size of the intended market for the DLR Software or may face regulatory issues related to the DLR Software;

the substantial technical, operational, financial, regulatory, legal, marketing and other obstacles to tZERO’s plans to create and launch a U.S. national exchange with regulatory approval to trade security tokens, including any difficulties tZERO may have with its joint venture with Box Digital;

the difficulties tZERO will face in attempting to generate revenues from blockchain-based applications of any nature;

Medici Ventures’ current business model of providing the services of its developers at Medici Ventures’ cost to companies in which Medici Ventures owns an interest;

any difficulties we may have with the interests in other companies that we or Medici Ventures or tZERO may own or acquire in the future, including any impairment we may recognize with respect to any of them;

the substantial obstacles Medici Ventures faces in connection with its efforts to create a system to help areas of the world that lack reliable widely-recognized land-titling and record-keeping processes implement blockchain-based systems for doing so, including the substantial difficulties it may encounter with persons who benefit from existing locally-recognized systems currently in use in many places;

any liability or expense we may incur as a result of our interests in other companies, whether as a result of regulatory issues or otherwise;

the current downturn in portions of the U.S. housing market, which at least one article published in late July 2018 by a nationally-recognized online news service said “appears to be headed for the broadest slowdown in years,” and any broader or deeper downturn in the U.S. housing market or other changes in U.S. and global economic conditions ~~and~~or U.S. consumer spending;

~~any downturn in~~ the ~~U.S. housing industry;~~

~~the potential~~ effects ~~on our financial results~~ of ~~new accounting standards we will be required to adopt no later than January 1, 2018, relating to revenue recognition;~~

recent tariffs or the imposition of additional tariffs or occurrence of other ~~factors~~events or circumstances that increase the price of importing into the U.S. the types of merchandise we ~~sell;~~

~~world events;~~

~~the rate of growth of the Internet and online commerce, and the occurrence of any event that would adversely affect ecommerce~~sell in our e-commerce business or ~~discourage~~make it more difficult to import or ~~prevent consumers from shopping online or via mobile apps;~~obtain such merchandise;

our failure to maintain our existing relationships with our fulfillment partners or build new relationships with fulfillment partners on acceptable terms;

our failure to maintain optimal levels of product quality, quantity and assortment or to attract sufficient consumer interest in our product offerings;

any claims we may face regarding the quality, safety or labelling of the products we offer;

modifications we may make to our business model from time to time, including aspects relating to our product mix and the mix of direct/partner sourcing of the products we ~~offer;~~offer, and difficulties we may encounter as a result of our efforts to change various aspects of our business model frequently and rapidly;

the mix of products purchased by our customers and changes to that mix;

any claims we may face regarding cyber security issues or data breaches or difficulties we encounter regarding Internet or other infrastructure or communications impairment problems or the costs of preventing or responding to any such problems;

any problems with or affecting our payment card processors, including cyber-attacks, Internet or other infrastructure or communications impairment or other events that could interrupt the normal operation of the payment card processors or any difficulties we may have maintaining compliance with the rules of the payment card processors;

the recent substantial decrease in our liquidity, and any additional substantial decrease in our liquidity, whether as a result of ~~stock repurchases we may make~~our business operations or as a result of the expenses or results of governmental inquiries or investigations or litigation or other claims against us, and the possibility that we will be unable to obtain financing or any other source of liquidity adequate to enable us to continue our ~~business~~ operations;

problems with or affecting the facility where substantially all of our computer and communications hardware is located or other problems that result in the unavailability of our Website or reduced performance of our transaction systems;

any liabilities that may be asserted against us for not having collected sales tax in jurisdictions in which we did not do so;

any losses or issues we may encounter as a consequence of accepting or holding bitcoin or other cryptocurrencies, whether as a result of regulatory, tax or other legal issues, technological issues, value fluctuations, lack of widespread adoption of bitcoin or other cryptocurrencies as an acceptable medium of exchange or otherwise;

difficulties we may have in responding to technological changes;

losses we may incur due to fraud or our inability to prevent or limit fraud;

claims or other problems we may encounter as a result of the listing or sale on our Website of pirated, counterfeit or illegal items;

~~difficulties we may have financing our operations or our expansion with either internally generated funds or external sources of financing;~~

~~any failure by us to maintain compliance with the requirements of our credit facility;~~

any environmental liabilities we may incur relating to the real estate ~~we recently purchased for~~owned by one of our ~~new~~wholly-owned subsidiaries and on which our corporate ~~headquarters;~~headquarters is located;

any failure of any of our product or service offerings outside of our main shopping Website offerings to provide the benefits we expect from them;

any difficulties we may encounter as a result of our reliance on numerous third parties that we do not control for the performance of critical functions material to our business;

any difficulties we may encounter in connection with the rapid shift of ~~ecommerce~~e-commerce and online payments to mobile and multi-channel commerce and payments;

~~the extent~~our inability to which we may owe income or sales taxes or may be required to collect sales taxes or report sales or to modify our business model in order to avoid being required to collect sales taxes or report sales or avoid the application of other types of taxes, and any liabilities that may ultimately be imposed upon us for not having collected sales tax in jurisdictions in which we have not done so;

increasing competition, including competition from well-established competitors including Amazon.com, competition from competitors based in China or elsewhere, competition from well-funded companies willing to incur substantial losses in order to buildincrease market share ~~and from others including competitors with business models that may include delivery capabilities that we may be unable to match;~~

~~difficulties with the management of our growth and any periods in which we fail to grow~~or revenue in accordance with our plans;

additional difficulties we may have with our efforts to increase our revenues at an acceptable cost in accordance with our plans and to return to profitability;

difficulties we may encounter in connection with our efforts to emphasize our home and garden product offerings and to brand ourselves as a home and garden shopping destination, including the risk that our sales of home and garden product offerings could decrease substantially as a result of a significant downturn in some or all of the U.S. housing market;

fluctuations in our operating results;

difficulties we may encounter in connection with our efforts to expand internationally, including claims we may face and liabilities we may incur in connection with those efforts;

difficulties we may encounter in connection with our efforts to offer services to our customers outside of our retail ecommerce business, including the credit, insurance and other services we advertise;

difficulties, including expense and any operational or regulatory issues we may encounter in connection with the integration or operation of the assets and operations of the financial technology company and two registered broker dealers affiliated with the financial technology business that we acquired;

technical, operational, regulatory or other difficulties we may encounter with our Medici blockchain and financial technology initiatives, including any difficulties we may have marketing any products or services Medici may offer, whether due to lack of market acceptance or as a result of competition from any of the numerous competitors seeking to develop competing technologies or systems or as a result of patents that may be granted to other companies or persons, and losses we may incur in connection with our Medici blockchain and financial technology initiatives;

any impairment we may recognize with respect to assets or businesses that we have acquired or may acquire, including with respect to our investments in companies that are in startup or development stages;

~~any liability or expense we may incur as a result of our investments in other companies, whether as a result of regulatory issues or otherwise;~~

adverse results in legal proceedings, investigations or other ~~claims;~~claims, and costs we may incur in connection with any of them, including the costs of responding to the investigation the Division of Enforcement of the Securities and Exchange Commission is conducting;

any difficulties we may have optimizing our warehouse operations;

the risks of inventory management and seasonality, particularly with inventory subject to rapid price declines;

~~the cost and availability of traditional and online advertising, the rapid changes~~any decrease in the ~~online advertising business~~rate of growth of e-commerce, particularly in home goods, and the ~~longer-term changes~~occurrence of any event that would adversely affect e-commerce or discourage or prevent consumers from shopping online or via mobile apps;

the possibility that we will suffer adverse consequences as a result of one or more of the related party transactions we have entered into or other related party transactions that we may enter into in the ~~traditional advertising business, and the results of our various brand building and marketing campaigns;~~

~~risks that the amount of deferred tax assets we consider realizable could be reduced if estimates of future taxable income during the carryforward period are reduced;~~future; and

the other risks described in this report or in our other public filings.

In evaluating all forward-looking statements, you should specifically consider the risks outlined above ~~and~~or elsewhere in this report and the risks described in our Report on Form 10-K for the year ended December 31, 2017 filed with the SEC on March 15, 2018 and those described in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2018 filed with the SEC on May 8, 2018, especially under the headings ~~"Risk~~“Risk Factors,~~" "Legal~~” “Legal Proceedings,"” and ~~"Management's~~“Management’s Discussion and Analysis of Financial Condition and Results of Operations."” These factors may cause our actual results to differ materially from those contemplated by any forward-looking ~~statement.~~statement in this report. Although we believe that our expectations reflected in the forward-looking statements are reasonable, we cannot guarantee or offer any assurance of future results, levels of activity, performance or achievements or other future events.

Our forward-looking statements contained in this report speak only as of the date of this report and, except as required by law, we undertake no obligation to update forward-looking statements to reflect events or circumstances occurring after the date of this report or any changes in our expectations or any change in any events, conditions or circumstances on which any of our forward-looking statements are based.

Available Information

Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and other reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available free of charge through the Investor Relations section of our main website www.overstock.com as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission. Our ~~Website~~website and the information contained therein or connected thereto are not a part of or incorporated into this Quarterly Report on Form 10-Q.

Overview

We are an online retailer and advancer of blockchain technology. Through our online retail business, we offer a broad range of price-competitive ~~brand name, non-brand name and closeout~~ products, including furniture, home decor, bedding and bath, housewares, jewelry and watches, ~~apparel and designer accessories, health and beauty products, electronics and computers, and sporting goods,~~ among other products. ~~In July 2017, we launched a new Cars tab.~~ We sell ~~these~~our products and services through our Internet websites located at www.overstock.com, www.o.co and www.o.biz (referred to collectively as the "Website"). Although our three websites are located at different domain addresses, the technology and equipment and processes supporting the Website and the process of order fulfillment described herein are the same for all three websites.

In late 2014, we began working on initiatives to develop and advance blockchain technology, which we refer to collectively as Medici. As part of our Medici initiatives, we have formed a wholly-owned subsidiary Medici Ventures, Inc. ("Medici Ventures") and acquired a majority interest in a financial technology company and two related registered broker dealers which ~~we have rolled into the~~are owned by our majority-owned subsidiary tØ.com, Inc. ("tZERO"). ~~We have also made minority investments in several blockchain technology companies.~~ In 2015, we were the first public company to issue a private security using blockchain technology and in December 2016, as a ~~successful~~ demonstration of our technology, we issued publicly traded blockchain preferred shares of Overstock.com, Inc. Medici Ventures also holds minority interests in several blockchain technology companies. Medici Ventures has assembled a core blockchain development group of software engineers, developers, and other technologists that provide services to the blockchain community on a contract basis as requested, including the companies in which we hold a minority interest.In 2018, tZERO acquired majority-ownership interests in a registered investment adviser entity and an accredited investor verification entity and further purchased minority interests in multiple financial services companies, including an equity interest in a joint venture with BOX Digital Markets LLC to pursue the development of the first U.S. security token exchange.

Our company, based near Salt Lake City, Utah, was founded in 1997. We launched our initial website in March 1999 and were re-incorporated in Delaware in 2002. As used herein, "Overstock," ~~"Overstock.com,"~~"the Company", ~~"O.co,"~~ "we," "our" and similar terms include Overstock.com, Inc. and our majority-owned subsidiaries, unless the context indicates otherwise.

Our Business

Retail ~~business~~Business

In our retail business, we deal primarily in price-competitive, new and replenishable merchandise and use the Internet to aggregate both supply and demand to create an efficient marketplace for selling these products. We provide our customers an opportunity to conveniently shop for a broad range of price-competitive products. We continually add new, and sometimes limited, inventory to our Website in order to create an atmosphere that encourages customers to visit frequently and purchase products before our inventory sells out. We provide suppliers with access to a large customer base and convenient services for order fulfillment, customer service, returns handling, and other services. The merchandise offered on our Website is from a variety of sources including well-known, brand-name manufacturers. ~~We have organized our retail business (sales of product offered through the Shopping Section of our Website) into two principal segments-a "direct" business and a "partner" business.~~ Consumers and businesses are able to access and purchase our products 24 hours a day from the convenience of a computer, Internet-enabled mobile telephone or other Internet-enabled device. Our team of customer service representatives assists

customers by telephone, instant online chat and e-mail. We also derive revenue from other businesses advertising products or services on our Website. Our sales are primarily to customers located in the United States.

We have organized our retail business (sales of product offered through the Shopping Section of our Website) into two principal segments-a "direct" business and a "partner" business. Our retail direct business includes sales made to individual consumers and businesses from our owned inventory and that are fulfilled primarily from our ~~warehouse~~warehouses in Salt Lake City, ~~Utah.~~Utah and Carlisle, Pennsylvania.

For our retail partner business, we sell merchandise from manufacturers, distributors and other suppliers ("partners") primarily through our Website. We are considered to be the ~~primary obligor~~principal and control the specific good or service before it is

transferred to the customer for the majority of these sales transactions and we record revenue from the majority of these sales transactions on a gross basis. Our use of the term "partner" does not mean that we have formed any legal partnerships with any of our partners. These third-party partners generally perform the same fulfillment operations as our warehouses, such as order picking and shipping; however, we handle returns and customer service related to substantially all orders placed through our Website. Revenue generated from sales on our Shopping site from both the direct and partner businesses is recorded net of returns, coupons and other discounts.

Both direct and partner revenues are seasonal, with revenues historically being the highest in the fourth quarter, which ends December 31, reflecting higher consumer holiday spending. We anticipate this will continue for the foreseeable future. To the extent possible we maintain supplier relationships, and seek new supplier relationships, for both our direct and partner businesses, and also use our working capital, to ensure a continuous allotment of product offerings for our customers. Because a portion of our product offerings are closeout merchandise, some of our suppliers cannot supply products to us on a continuous basis.

Medici business

Our Medici business initiatives seek to leverage the security, transparency and immutability of cryptographically protected, distributed ledgers, such as blockchains, and are focused on solving important problems, including financial transaction issues, particularly in the ~~area~~areas of securities ~~settlement. Through our~~settlement, commercial blockchain applications, capital markets applications, digital currency, money and banking applications, compliance, personal identity, voting, and property and land applications. Our wholly-owned subsidiary, Medici Ventures, Inc., we hold minority investments in several technology companies which, at September 30, 2017, included PeerNova, Bitt, IdentityMind, Factom, SettleMint, Ripio, Spera and Symbiont, whose focuses include commercial blockchain applications, digital currency solutions, compliance, identity, voting, and land. Medici Ventures, Inc.'sconducts its primary business isthrough its ~~majority interest in~~majority-owned subsidiary tZERO, which includes a financial technology company, ~~and~~ two related registered broker ~~dealers.~~dealers, a registered investment advisor, and an accredited investor verification company. tZERO also holds minority interests in multiple financial services companies, including an equity interest in a joint venture with BOX Digital Markets LLC to pursue the development of the first U.S. security token exchange.

As described further in Item 1 of Part I, "Financial Statements (Unaudited)"~~-Note~~—Note 9. Business Segments, we determined our segments based on how we manage our business, which, in our view, consists primarily of our Retail and Medici businesses. As described above, 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 consists of ~~Medici.~~Medici Ventures and its subsidiaries, including tZERO.

Executive Commentary

This executive commentary is intended to provide investors with a view of our business through the eyes of our management. As an executive commentary, it necessarily focuses on selected aspects of our business. This executive commentary is intended as a supplement to, but not a substitute for, the more detailed discussion of our business included elsewhere herein. Investors are cautioned to read our entire "Management's Discussion and Analysis of Financial Condition and Results of Operations," as well as our interim and audited financial statements, and the discussion of our business and risk factors and other information included elsewhere or incorporated in this report. This executive commentary includes forward-looking statements, and investors are cautioned to read "Special Cautionary Note Regarding Forward-Looking Statements."

~~Revenues~~Revenue in ~~Q3 2017 decreased 4%~~Q2 2018 increased 12% compared to ~~Q3 2016. In~~ Q2 ~~2017 and continuing~~2017. The growth in ~~Q3 2017,~~revenue was primarily driven by increased marketing expenses as we ~~have experienced slowing of our overall~~more aggressively pursued revenue growth ~~which we believe is due~~and new customers. Our increased marketing expenses resulted in part to changes that Google, Inc. ("Google") has made in its natural search engine algorithms. We have found that the algorithm adjustments that Google has made have introduced more volatility than past years and the length of the tuning has been significantly greater than previous years. This has created tremendous headwind for our business beginning in May and continuing. We have reorganized a large number of resources around addressing this current challenge, as well as seeking to prevent it from occurring again. We have implemented a variety of innovations and technical improvements in this area and expect to continue to do so. This decrease to revenue was partially offset by efforts to increase revenue in other marketing channels such as sponsored search and email.

~~Gross profit in Q3 2017 increased 5% compared to Q3 2016 primarily as a result of increased gross margin. Gross margin increased to 19.7% in Q3 2017 compared to 18.1% in Q3 2016. The~~9% increase in ~~gross margin was~~orders in Q2 2018, and we saw a 7% increase in average order size (excluding promotional activities) primarily due to a continued ~~shift in~~ sales mix shift into ~~higher margin~~ home and garden ~~products,~~products. These increases were partially offset by increased promotional activities, including coupons and site sales (which we recognize as a reduction of revenue) due to our driving a higher proportion of our sales using such ~~promotions.~~promotions, and an increase in marketplace sales (for which we record only our commission as revenue).

Sales and marketing expenses as a percentage of revenue increased from 7.9% to 10.6% during Q3 2017 as compared to Q3 2016, primarily due to increased spending in the sponsored search and television marketing channels, due in part to our seeking to increase revenue in these channels to partially offset the effects of the Google algorithm changes described above.

~~While~~In Q2 2018, we work to adapt to Google's changes, we have increased our emphasis on other marketing channels, such as sponsored search, which has generated revenue growth but with higher associated marketing expenses than natural search. We expect this trend to continue while we work to adapt to these changes.

We are also experiencing an increasingly competitive digital marketing landscape. We have competitors who are spending significant amounts on advertising bidding up the cost of certain marketing channels, such as paid keywords. While we may not choose to match their levels of spending, this has increased our marketing ~~costs~~expenditures by $51.1 million over Q2 2017 and our revenues increased by the same amount, $51.1 million, over those respective periods. The results of our marketing efforts were hampered by the continuing challenges we face in ~~recent quarters.~~our natural search marketing, which have significantly limited our efforts to grow revenue efficiently. We ~~expect~~believed that we would begin to see improvements in our natural search marketing in early 2018; however, our customer traffic from natural search marketing decreased 11% in Q2 2018 compared to Q1 2018. To offset this trend, we

optimized our marketing channels outside of natural search while continuing our efforts to ~~continue.~~improve natural search. Although our additional marketing expenditures during Q2 2018 provided better growth than in Q1 2018, we are unable to continue marketing expenditures at these substantially elevated levels without significantly better results and/or significant additional financing. Consequently, after considering our alternatives, we began to reduce our marketing expenditures during July 2018 and expect to continue to reduce our marketing expenditures throughout the remainder of 2018.

Liquidity

In Q2 2018, our consolidated cash and cash equivalents balance declined $107.4 million, from $259.6 million to $152.2 million, primarily as the result of cash outflows from operating activities of $60.4 million for the quarter and our repayment in full of our $40 million loan from PCL, L.L.C. in early April 2018. During Q2 2018, we received an additional $16.4 million in proceeds from the tZERO security token offering, net of offering costs, which includes proceeds from the sale of cryptocurrency received during Q1 2018. We also incurred $13.7 million in cash outflows related to acquisitions of equity interests in other entities and the $8.7 million expenditures for fixed assets.

As of June 30, 2018, our cumulative proceeds, net of withdrawals, from the tZERO security token offering totaling $95.9 million and we incurred $16.5 million of offering costs related to the security token offering. The security token offering closed on August 6, 2018, and we received an additional $7.5 million of proceeds, before deducting additional offering costs, prior to the close.

In early August 2018 we entered into a ~~result~~sales agreement with JonesTrading Institutional Services LLC ("JonesTrading"), under which we plan to conduct "at the market" public offerings of ~~these factors,~~ our ~~contribution decreased 20%~~common stock from time to time. Under the sales agreement, JonesTrading, acting as our agent, may offer our common stock in ~~Q3 2017 compared~~the market on a daily basis or otherwise as we request from time to ~~Q3 2016 (see Non-GAAP Financial Measures below~~time. We have no obligation to sell shares under the sales agreement, but expect to do so from time to time. We will pay JonesTrading up to a 2.0% sales commission on all sales. The sales agreement contemplates sales of up to $150 million of our common stock over a period of up to three years.

~~Technology expenses in Q3 2017 increased $2.0 million compared~~sell pursuant to ~~Q3 2016, primarily due~~the standby underwriting agreement. JonesTrading will have an option to purchase up to an ~~increase in staff related costs~~additional 15% of ~~$1.5 million, an increase in technology licenses and maintenance costs~~the amount of ~~$1.3 million, partially offset by~~any tranche we elect to sell under the standby underwriting agreement. The price of any shares we sell to JonesTrading pursuant to the standby underwriting agreement will be 97% the average of the daily volume weighted average price of our common stock during normal trading hours on Nasdaq for the two trading days after we give notice of a ~~decrease in depreciation of $848,000.~~

~~General and administrative expenses in Q3 2017 decreased $1.7 million compared~~sale to ~~Q3 2016, primarily due~~JonesTrading. We paid a 1% commitment fee to a decrease in bad debt expense of $1.1 million, a decrease in consulting and outside services expense of $479,000, and a decrease in legal fees of $434,000. These decreases were partially offset by an increase in staff related costs of $509,000.JonesTrading for entering into the underwriting agreement.

We continue to seek opportunities for growth in our retail business, ~~and~~ through our Medici blockchain and financial technology initiatives, and through other means. As a result of these initiatives, we ~~may~~will continue to incur additional expenses and may purchase interests in, or make ~~investments in, or~~ acquisitions of, other technologies ~~and~~or businesses. We ~~also~~ anticipate that our ~~Medici~~ initiatives ~~will~~may cause us to incur losses in the ~~near term.~~foreseeable future. These losses, additional expenses, acquisitions or ~~investments~~purchases may be material, and, coupled with existing marketing expense trends, our plans to increase our marketing and ~~the seasonality of~~branding expenditures, and strategic changes in our retail business, may lead to ~~reduced~~increased consolidated ~~income or~~ losses in some periods, and to reduced liquidity. Additionally, we may recognize additional impairment charges from our ~~investments. We are considering~~ownership interest in other ~~alternatives for Medici, including raising capital.~~entities.

The balance of our Management's Discussion and Analysis of Financial Condition and Results of Operations provides further information about the matters discussed above and other important matters affecting our business.

Results of Operations

The following table sets forth our results of operations expressed as a percentage of total net revenue:


	Three months ended September 30,				Nine months ended September 30,				Three months ended June 30,				Six months ended June 30,
	2017		2016		2017		2016		2018		2017		2018		2017
	(as a percentage of total net revenue)				(as a percentage of total net revenue)				(as a percentage of total net revenue)				(as a percentage of total net revenue)
Revenue, net
Direct	4.6	%	5.6	%	5.0	%	6.0	%	3.0	%	5.1	%	3.3	%	5.2	%
Partner and other	95.4		94.4		95.0		94.0		97.0		94.9		96.7		94.8
Total net revenue	100.0		100.0		100.0		100.0		100.0		100.0		100.0		100.0
Cost of goods sold
Direct	4.6		5.4		4.8		5.7		3.0		4.9		3.2		4.9
Partner and other	75.6		76.5		75.4		76.0		78.0		75.6		76.8		75.3
Total cost of goods sold	80.3		81.9		80.2		81.7		81.0		80.5		80.0		80.2
Gross profit	19.7		18.1		19.8		18.3		19.0		19.5		20.0		19.8
Operating expenses:
Sales and marketing	10.6		7.9		9.8		7.8		19.5		10.0		18.5		9.4
Technology	6.8		6.1		6.7		6.1		6.7		6.5		6.9		6.6
General and administrative	5.1		5.3		5.2		5.3		6.5		5.2		7.7		5.2
Litigation settlement	—		—		—		(1.5	)
Total operating expenses	22.5		19.2		21.6		17.7		32.8		21.7		33.0		21.2
Operating income (loss)	(2.8	)	(1.1	)	(1.9	)	0.6
Other income, net	1.3		0.3		0.1		0.7
Income (loss) before income taxes	(1.5	)	(0.9	)	(1.8	)	1.3
Provision (benefit) for income taxes	(1.3	)	(0.1	)	(0.6	)	0.6
Consolidated net income (loss)	(0.3	)%	(0.8	)%	(1.2	)%	0.7	%
Operating loss									(13.8	)	(2.3	)	(13.0	)	(1.4	)
Other income (expense), net									0.1		—		—		(0.5	)
Loss before income taxes									(13.6	)	(2.2	)	(13.0	)	(1.9	)
Benefit from income taxes									—		(0.5	)	—		(0.3	)
Consolidated net loss									(13.6	)%	(1.8	)%	(13.0	)%	(1.6	)%

Comparisons of Three Months Ended ~~September~~June 30, ~~2017~~2018 to Three Months Ended ~~September~~June 30, ~~2016,~~2017, and ~~Nine~~Six Months Ended ~~September~~June 30, ~~2017~~2018 to ~~Nine~~Six Months Ended ~~September~~June 30, ~~2016~~2017

Revenue

The following table reflects our net revenues for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 and ~~2016~~2017 (in thousands):


	Three months ended September 30,									Nine months ended September 30,									Three months ended June 30,									Six months ended June 30,
	2017		2016		$ Change			% Change		2017		2016		$ Change			% Change		2018		2017		$ Change			% Change		2018		2017		$ Change			% Change
Revenue, net
Direct	$	19,645	$	24,620	$	(4,975	)	(20.2	)%	$	64,572	$	75,901	$	(11,329	)	(14.9	)%	$	14,715	$	22,099	$	(7,384	)	(33.4	)%	$	30,985	$	44,927	$	(13,942	)	(31.0	)%
Partner and other	404,362		416,944		(12,582		)	(3.0	)	1,223,894		1,197,880		26,014			2.2		468,418		409,925		58,493			14.3		897,479		819,532		77,947			9.5
Total revenue, net	$	424,007	$	441,564	$	(17,557	)	(4.0	)%	$	1,288,466	$	1,273,781	$	14,685		1.2	%	$	483,133	$	432,024	$	51,109		11.8	%	$	928,464	$	864,459	$	64,005		7.4	%

The ~~primary reason for decreased~~increased total net revenue for the three months ended ~~September~~June 30, ~~2017,~~2018, as compared to the same period in ~~2016,~~2017, was primarily driven by increased marketing expenses as we more aggressively pursued revenue growth and new customers. Our increased marketing expenses resulted in a 9% increase in orders, and we saw a 7% increase in average order size (excluding promotional activities) primarily due ~~in part~~ to changes that Google, Inc. ("Google") has made in its natural search engine algorithms. A large percentage of our traffic is dependent upon Google’s natural search engine algorithms. We have found that the algorithm adjustments that Google has made have introduced more volatility than past yearsa continued sales mix shift into home and the length of the tuning has been significantly greater than previous years. This has created tremendous headwind for our business beginning in May and continuing. We have reorganized a large number of resources around addressing this current challenge, as well as seeking to prevent it from occurring again. We have implemented a variety of innovations and technical improvements in this area and

~~expect to continue to do so. This decrease to revenue was partially offset by efforts to increase revenue in other marketing channels such as sponsored search and email.~~

garden products. The ~~primary reason for~~ increased total net revenue for the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2018, as compared to the same period in ~~2016,~~2017, was primarily driven by increased marketing expenses as we more aggressively pursued revenue growth and new customers. Our increased marketing expenses resulted in an 8% increase in orders in 2018, and we saw a 5% increase in average order size ~~partially offset by a 1% decrease in orders. This increase is offset by increased promotional activities, including coupons and site sales~~primarily due to ~~our driving~~ a ~~higher proportion of our~~continued sales ~~using such promotions. Also, we had an increase in product sales for which we record only our commission as revenue.~~mix shift into home and garden products. These ~~decreases to revenue~~increases were partially offset by ~~a decrease in Club O Rewards earned due to discontinuing rewards on the Club O Silver program in Q4 2016.~~

The decrease in direct revenue for the three months ended September 30, 2017, as compared to the same period in 2016, was due in part to a decrease in sales of home and garden products, and increased promotional activities, including coupons and site sales due to our driving a higher proportion of our sales using such promotions. These decreases were partially offset by deferring a lower number of orders taken but not delivered due to decreased direct revenue, and a decrease in Club O Rewards earned due to discontinuing rewards on the Club O Silver program in Q4 2016.

The decrease in direct revenue for the nine months ended September 30, 2017, as compared to the same period in 2016, was due in part to a decrease in sales of home and garden and jewelry products, and increased promotional activities, including coupons and site sales due to our driving a higher proportion of our sales using such promotions. These decreases were partially offset by deferring a lower number of orders taken but not delivered due to decreased direct revenue, and a decrease in Club O Rewards earned due to discontinuing rewards on the Club O Silver program in Q4 2016.

The decrease in partner revenue for the three months ended September 30, 2017, as compared to the same period in 2016, was due in part to an increase in product sales for which we record only our commission as revenue. Also, the percentage of revenue we defer from orders taken but not delivered was higher due to the timing of quarter ends. In addition, we increased promotional activities, including coupons and site sales (which we recognize as a reduction of revenue) due to our driving a higher

proportion of our sales using such ~~promotions. These decreases~~promotions, and an increase in marketplace sales (for which we record only our commission as revenue).

For the three months ended June 30, 2018, we increased our marketing expenditures by $51.1 million as compared to the same period in 2017 and our revenues increased by the same amount, $51.1 million, over those respective periods. For the six months ended June 30, 2018, we increased our marketing expenditures by $90.7 million as compared to the same period in 2017 and our revenues increased by $64.0 million over those respective periods. The results of our marketing efforts were hampered by the continuing challenges we face in our natural search marketing, which have significantly limited our efforts to grow revenue ~~were partially~~efficiently. We believed that we would begin to see improvements in our natural search marketing in early 2018; however, our customer traffic from natural search marketing decreased 11% in Q2 2018 compared to Q1 2018. To offset bythis trend, we optimized our marketing channels outside of natural search while continuing our efforts to improve natural search. Although our additional marketing expenditures during the second quarter of 2018 provided better growth than in first quarter of 2018, we are unable to continue marketing expenditures at these substantially elevated levels without significantly better results and/or significant additional financing. Consequently, after considering our alternatives, we began to reduce our marketing expenditures during July 2018 and expect to continue to reduce our marketing expenditures throughout the remainder of 2018.

The decreased direct revenue for the three months ended June 30, 2018, as compared to the same period in 2017, was primarily due to a decrease in ~~Club O Rewards earned~~direct sales of home and garden products.

The decreased direct revenue for the six months ended June 30, 2018, as compared to the same period in 2017, was primarily due to ~~discontinuing rewards on the Club O Silver program~~a decrease in ~~Q4 2016.~~direct sales of home and garden and clothing products.

The increase in partner revenue for the ~~nine~~three months ended ~~September~~June 30, ~~2017,~~2018, as compared to the same period in ~~2016,~~2017, was primarily ~~due to~~driven by increased marketing expenses and an increase in partner sales of home and garden products. This increase was partially offset by increased promotional activities, including coupons and site sales due to our driving a higher proportion of our sales using such ~~promotions. Also, we had~~promotions and an increase in ~~product~~marketplace sales ~~for~~(for which we record only our commission as ~~revenue. These decreases~~revenue).

The increase in partner revenue for the six months ended June 30, 2018, as compared to ~~revenue were~~the same period in 2017, was primarily driven by increased marketing expenses and an increase in partner sales of home and garden products. This increase was partially offset by ~~a decrease in Club O Rewards earned~~increased promotional activities, including coupons and site sales due to ~~discontinuing rewards on the Club O Silver program~~our driving a higher proportion of our sales using such promotions and an increase in ~~Q4 2016.~~marketplace sales (for which we record only our commission as revenue).

We continue to seek increased participation in our Club O loyalty program, including, in certain instances, by increasing Club O Rewards to our Club O members in lieu of coupons we offer to all customers. For additional information regarding our Club O loyalty program see Item 1 of Part I, "Financial Statements (Unaudited)"—Note 2. Accounting Policies, Club O loyalty program.

The shift of business from direct to partner (or vice versa) is an economic result based on the economics of each particular product offering at the time and we generally do not have particular goals for an "appropriate" mix or percentage for the size of either. Although we have experienced a trend from direct revenue to partner revenue in recent years, we believe that the mix of the business between direct and partner remains consistent with our strategic objectives for our business model and we do not currently foresee material shifts in this trend.

The products and product lines we offer, and their respective percentages of our revenue, are based on many factors including customer demand, our marketing efforts, promotional pricing, joint-marketing offered by our suppliers, the types of inventory we are able to obtain and the number of SKUs we offer. These factors change frequently and can affect the mix of the product lines we sell. We have experienced a trend toward our home and garden category in recent years and we have recently focused our marketing and branding efforts towards our home and garden product line. We are also working to increase the number of SKUs we offer. While we do not currently expect any material shifts in our product line mix, the relative amounts of the product lines we sell, and the revenue we earn from those product lines, isare generally an economic result of the factors described above, which may change from time to time.

International net revenues were less than 2%3% of total net revenues for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 and ~~2016.~~2017.

Change in estimate of average transit times (days)

Revenue related to merchandise sales is recognized upon delivery to our customers. As we ship high volumes of packages through multiple carriers, it is not practical for us to track the actual delivery date of each shipment. Therefore, we use estimates to determine which shipments are delivered and, therefore, recognized as revenue at the end of the period. Our delivery date estimates are based on average shipping transit times. We review and update our estimates on a quarterly basis based on our actual transit time experience. However, actual shipping times may differ from our estimates.

The following table shows the effect that hypothetical changes in the estimate of average shipping transit times would have had on the reported amount of revenue and pre-tax income for the three months ended ~~September~~June 30, ~~2017~~2018 (in thousands):

Three Months Ended
September 30, 2017
Change in the
Estimate of Average
Transit Times (Days)

Increase
(Decrease)
Revenue

Increase
(Decrease) Pre-Tax
Income
2 $ (15,709 ) $ (1,722 )
1 $ (6,126 ) $ (682 )
As reported As reported
As reported
-1 $ 4,669
$ 510
-2 $ 9,227
$ 1,009

~~See "Executive Commentary" above for additional discussion regarding revenue.~~



	Three Months Ended June 30, 2018
Change in the Estimate of Average Transit Times (Days)	Increase (Decrease) Revenue			Increase (Decrease) Pre-Tax Income
2	$	(18,689	)	$	(2,017	)
1	$	(7,553	)	$	(818	)
As reported	As reported			As reported
-1	$	6,193		$	676
-2	$	11,749		$	1,278

Gross profit and gross margin

Our overall gross margins fluctuate based on our sales volume mix between our direct business and partner business; changes in supplier cost and / or sales price; competitive pricing; inventory management decisions within the direct business; sales coupons and promotions; product mix of sales; and operational and fulfillment costs.

The following table reflects our net revenues, cost of goods sold and gross profit for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 and ~~2016~~2017 (in thousands):


	Three months ended September 30,									Nine months ended September 30,									Three months ended June 30,									Six months ended June 30,
	2017		2016		$ Change			% Change		2017		2016		$ Change			% Change		2018		2017		$ Change			% Change		2018		2017		$ Change			% Change
Revenue, net
Direct	$	19,645	$	24,620	$	(4,975	)	(20.2	)%	$	64,572	$	75,901	$	(11,329	)	(14.9	)%	$	14,715	$	22,099	$	(7,384	)	(33.4	)%	$	30,985	$	44,927	$	(13,942	)	(31.0	)%
Partner and other	404,362		416,944		(12,582		)	(3.0	)	1,223,894		1,197,880		26,014			2.2		468,418		409,925		58,493			14.3		897,479		819,532		77,947			9.5
Total net revenue	$	424,007	$	441,564	$	(17,557	)	(4.0	)%	$	1,288,466	$	1,273,781	$	14,685		1.2	%	$	483,133	$	432,024	$	51,109		11.8	%	$	928,464	$	864,459	$	64,005		7.4	%
Cost of goods sold
Direct	$	19,577	$	23,955	$	(4,378	)	(18.3	)%	$	61,687	$	72,459	$	(10,772	)	(14.9	)%	$	14,672	$	21,147	$	(6,475	)	(30.6	)%	$	29,444	$	42,110	$	(12,666	)	(30.1	)%
Partner and other	320,755		337,893		(17,138		)	(5.1	)	972,026		967,977		4,049			0.4		376,718		326,706		50,012			15.3		713,408		651,271		62,137			9.5
Total cost of goods sold	$	340,332	$	361,848	$	(21,516	)	(5.9	)%	$	1,033,713	$	1,040,436	$	(6,723	)	(0.6	)%	$	391,390	$	347,853	$	43,537		12.5	%	$	742,852	$	693,381	$	49,471		7.1	%
Gross Profit
Direct	$	68	$	665	$	(597	)	(89.8	)%	$	2,885	$	3,442	$	(557	)	(16.2	)%	$	43	$	952	$	(909	)	(95.5	)%	$	1,541	$	2,817	$	(1,276	)	(45.3	)%
Partner and other	83,607		79,051		4,556			5.8		251,868		229,903		21,965			9.6		91,700		83,219		8,481			10.2		184,071		168,261		15,810			9.4
Total gross profit	$	83,675	$	79,716	$	3,959		5.0	%	$	254,753	$	233,345	$	21,408		9.2	%	$	91,743	$	84,171	$	7,572		9.0	%	$	185,612	$	171,078	$	14,534		8.5	%

Gross margins for the past ~~seven~~six quarterly periods and fiscal year ending ~~2016~~2017 were:


	Q1 2016		Q2 2016		Q3 2016		Q4 2016		FY 2016		Q1 2017		Q2 2017		Q3 2017		Q1 2017		Q2 2017		Q3 2017		Q4 2017		FY 2017		Q1 2018		Q2 2018
Direct	4.7	%	6.2	%	2.7	%	7.3	%	5.2	%	8.2	%	4.3	%	0.3	%	8.2	%	4.3	%	0.3	%	(2.3	)%	3.0	%	9.2	%	0.3	%
Partner and other	19.7	%	19.0	%	19.0	%	19.2	%	19.2	%	20.8	%	20.3	%	20.7	%	20.8	%	20.3	%	20.7	%	19.7	%	20.3	%	21.5	%	19.6	%
Combined	18.7	%	18.2	%	18.1	%	18.6	%	18.4	%	20.1	%	19.5	%	19.7	%	20.1	%	19.5	%	19.7	%	18.8	%	19.5	%	21.1	%	19.0	%

Gross profit for the three months ended ~~September~~June 30, ~~2017~~2018 increased 5%9% compared to the same period in ~~2016~~2017 primarily as a result of increased ~~gross margin.~~revenue. Gross margin ~~increased~~decreased to ~~19.7%~~19.0% for the three months ended ~~September~~June 30, ~~2017~~2018 compared to ~~18.1%~~19.5% for the same period in ~~2016.~~2017. The ~~increase~~decrease in gross margin was primarily due to increased promotional activities, partially offset by a continued shift in sales mix into higher margin home and garden products ~~partially offset by increased promotional activities, including coupons~~ and ~~site~~an increase in marketplace sales ~~due to~~(for which we record only our ~~driving a higher proportion of our sales using such promotions.~~commission as revenue).

Gross profit for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 increased 9%8% compared to the same period in ~~2016 primarily~~2017 as a result of increased revenue and increased gross margin. Gross margin increased to ~~19.8%~~20.0% for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 compared to ~~18.3%~~19.8% for the same period in ~~2016.~~2017. This increase in gross margin was primarily due to a continued shift in sales mix into higher margin home and garden products and an increase in marketplace sales (for which we record only our commission as revenue), partially offset by increased promotional ~~activities, including coupons and site sales due to our driving a higher proportion of our sales using such promotions.~~activities.

The ~~235~~409 basis point decrease in direct gross margin for the three months ended ~~September~~June 30, ~~2017,~~2018, as compared to the same period in ~~2016,~~2017, was primarily due to increased promotional ~~activities, including coupons and site sales~~activities.

The 130 basis point decrease in direct gross margin for the six months ended June 30, 2018, as compared to the same period in 2017, was primarily due to ~~our driving a higher proportion of our sales using such promotions and~~ increased ~~warehousing costs,~~promotional activities, partially offset by a shift in sales mix into higher margin home and garden products. ~~Direct gross margin for the nine months ended September 30, 2017, as compared to the same period in 2016, remained relatively flat.~~

The ~~172~~72 basis point ~~increase~~decrease in partner gross margin for the three months ended ~~September~~June 30, ~~2017,~~2018, as compared to the same period in ~~2016~~2017 was primarily due toincreased promotional activities, partially offset by a continued shift in sales mix into higher margin home and garden products ~~partially offset by increased promotional activities, including coupons~~ and ~~site~~an increase in marketplace sales ~~due to our driving~~(which we recognize on a ~~higher proportion of our sales using such promotions.~~net basis).

~~The 139 basis point increase in partner~~Partner gross margin was 20.5% for the ~~nine~~six months ended ~~September~~June 30, ~~2017, as~~2018, unchanged compared to the same period in ~~2016 was~~2017, primarily due to by increased promotional activities, offset by a continued shift in sales mix into higher margin home and garden ~~products, partially offset by increased promotional activities, including coupons and site sales due to our driving a higher proportion of our sales using such promotions.~~products.

Cost of goods sold includes stock-based compensation expense of ~~$46,000~~$41,000 and ~~$69,000~~$39,000 for the three months ended ~~September~~June 30, ~~2017~~2018 and ~~2016,~~2017, respectively, and ~~$134,000~~$111,000 and ~~$200,000~~$88,000 for the ~~nine~~six months ended ~~September~~June 30, 2018 and 2017, ~~and 2016,~~ respectively.

~~See "Executive Commentary" above for additional discussion.~~

Fulfillment costs

Fulfillment costs include all warehousing costs, including fixed overhead and variable handling costs (excluding packaging costs), as well as credit card fees and customer service costs, all of which we include as costs in calculating gross margin. We believe that some companies in our industry, including some of our competitors, account for fulfillment costs within operating expenses, and therefore exclude fulfillment costs from gross margin. As a result, our gross margin may not be directly comparable to others in our industry.

The following table has been included to provide investors additional information regarding our classification of fulfillment costs, gross profit and margin, thus enabling investors to better compare our gross margin with others in our industry (in thousands):


	Three months ended September 30,						Nine months ended September 30,						Three months ended June 30,						Six months ended June 30,
	2017			2016			2017			2016			2018			2017			2018			2017
Total revenue, net	$	424,007	100%	$	441,564	100%	$	1,288,466	100%	$	1,273,781	100%	$	483,133	100%	$	432,024	100%	$	928,464	100%	$	864,459	100%
Cost of goods sold
Product costs and other cost of goods sold	321,678		76%	343,401		78%	977,827		76%	985,603		77%	371,841		77%	329,346		76%	705,361		76%	656,150		76%
Fulfillment and related costs	18,654		4%	18,447		4%	55,886		4%	54,833		4%	19,549		4%	18,507		4%	37,491		4%	37,231		4%
Total cost of goods sold	340,332		80%	361,848		82%	1,033,713		80%	1,040,436		82%	391,390		81%	347,853		81%	742,852		80%	693,381		80%
Gross profit	$	83,675	20%	$	79,716	18%	$	254,753	20%	$	233,345	18%	$	91,743	19%	$	84,171	19%	$	185,612	20%	$	171,078	20%

Fulfillment costs as a percentage of sales may vary due to several factors, such as our ability to manage costs at our warehouses, significant changes in the number of units received and fulfilled, the extent to which we use third-party fulfillment

services and warehouses, and our ability to effectively manage customer service costs and credit card fees. Fulfillment and related costs ~~increased~~decreased slightly during the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 as compared to the same periods in ~~2016.~~2017.

See "Gross profit" above for additional discussion.

Operating expenses

Sales and marketing expenses

We use a variety of methods to target our consumer audience, including online campaigns, such as advertising through keywords, product listing ads, display ads, search engines, affiliate marketing programs, social coupon websites, portals, banners, e-mail, direct mail and viral and social media campaigns. We also do brand advertising through television, radio, print ads, and event sponsorships.

The following table reflects our sales and marketing expenses for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 and ~~2016~~2017 (in thousands):


	Three months ended September 30,										Nine months ended September 30,										Three months ended June 30,										Six months ended June 30,
	2017			2016			$ Change		% Change		2017			2016			$ Change		% Change		2018			2017			$ Change		% Change		2018			2017			$ Change		% Change
Sales and marketing expenses	$	45,153		$	34,707		$	10,446	30.1	%	$	126,068		$	99,516		$	26,552	26.7	%	$	94,416		$	43,297		$	51,119	118.1	%	$	171,630		$	80,915		$	90,715	112.1	%
Sales and marketing expenses as a percent of net revenues	10.6		%	7.9		%					9.8		%	7.8		%					19.5		%	10.0		%					18.5		%	9.4		%

The ~~279~~952 basis point increase in sales and marketing expenses as a percentage of revenue for the three months ended ~~September~~June 30, ~~2017,~~2018, as compared to the same period in ~~2016,~~2017 was primarily due to our effort to aggressively pursue increased revenue and new customers through significantly increased spending in the sponsored search, television, and ~~television~~display ads on social media marketing channels, ~~due in part to our seeking to increase revenue in these channels to partially offset the effects of the Google algorithm changes described above.~~

~~While we work to adapt to Google's changes in its natural search engine algorithms~~ as ~~noted above, we have~~well as increased our emphasis on other marketing channels, such as sponsored search, which has generated revenue growth but with higher associated marketing expenses than natural search. We expect this trend to continue while we work to adapt to these changes.

~~we may not choose to match their levels of spending, this has increased our marketing costs in recent quarters. We expect this trend to continue.~~staff-related costs.

The ~~197~~912 basis point increase in sales and marketing expenses as a percentage of revenue for the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2018, as compared to the same period in ~~2016,~~2017 was primarily due to our effort to aggressively pursue increased revenue and new customers through significantly increased spending in the sponsored search, television, and display ads on social media marketing ~~channels,~~channels. We also had a $6.3 million increase in staff-related costs, including $2.9 million at tZERO for employee severance and ~~increased staff related costs.~~a special restricted stock grant which fully vested during Q1 2018.

Sales and marketing expenses include stock-based compensation expense of ~~$109,000~~$315,000 and ~~$102,000~~$113,000 for the three months ended ~~September~~June 30, ~~2017~~2018 and ~~2016,~~2017, respectively, and ~~$318,000~~$1.2 million and ~~$234,000~~$209,000 for the ~~nine~~six months ended ~~September~~June 30, 2018 and 2017, respectively. The increase during the six months ended June 30, 2018 was primarily due to $600,000 of expense related to the tZERO equity awards granted, vested, and ~~2016, respectively.~~fully expensed in January 2018. We began to reduce our marketing expenditures during July 2018 and expect to continue to reduce our marketing expenditures throughout the remainder of 2018.

Costs associated with our discounted shipping and other promotions, such as coupons, are not included in sales and marketing expense. Rather, they are accounted for as a reduction in revenue as they reduce the amount of ~~revenue~~consideration we expect to receive in exchange for goods or services and therefore affect ~~sales~~net revenues and gross margin. We consider discounted shipping and other promotions, such as our policy of free shipping on orders over $45, as an effective marketing tool, and intend to continue to offer them as we deem appropriate as part of our overall marketing plan.

Technology expenses

We seek to invest efficiently in technology, including web services, customer support solutions, website search, expansion of new and existing product categories, and in investments in technology to enhance the customer experience, improve our process efficiency and support and expand our logistics infrastructure. We expect to continue to increase our technology expenses to support these initiatives and these increases may be material.

The frequency and variety of cyberattacks on our Website, our corporate systems, and on third parties that we use to support our technology continue to increase. The impact of such attacks, their costs, and the costs we incur to protect ourselves against future attacks have not been material. However, we consider the threat from cyberattacks to be serious and will continue to incur costs related to efforts to protect ourselves against them.

The following table reflects our technology expenses for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 and ~~2016~~2017 (in thousands):


	Three months ended September 30,										Nine months ended September 30,										Three months ended June 30,										Six months ended June 30,
	2017			2016			$ Change		% Change		2017			2016			$ Change		% Change		2018			2017			$ Change		% Change		2018			2017			$ Change		% Change
Technology expenses	$	28,746		$	26,739		$	2,007	7.5	%	$	85,982		$	78,249		$	7,733	9.9	%	$	32,423		$	28,244		$	4,179	14.8	%	$	63,717		$	57,236		$	6,481	11.3	%
Technology expenses as a percent of net revenues	6.8		%	6.1		%					6.7		%	6.1		%					6.7		%	6.5		%					6.9		%	6.6		%

The ~~$2.0~~$4.2 million increase in technology costs for the three months ended ~~September~~June 30, ~~2017,~~2018, as compared to the same period in ~~2016,~~2017, was primarily due to an increase in ~~staff related~~staff-related costs of $3.8 million and an increase in technology licenses and maintenance of $1.5 million, partially offset by a decrease in depreciation and amortization of $891,000.

The $6.5 million increase in technology costs for the six months ended June 30, 2018, as compared to the same period in 2017, was primarily due to an increase in staff-related costs of $6.3 million, and an increase in technology licenses and maintenance costs of ~~$1.3~~$3.3 million, partially offset by a decrease in depreciation and amortization expense of ~~$848,000.~~

The $7.7 million increase in technology costs for the nine months ended September 30, 2017, as compared to the same period in 2016, was primarily due to an increase in staff related costs of $3.5 million, an increase in technology licenses and maintenance of $3.0 million, an increase in IT-related vendor expenses of $1.0 million, and an increase in depreciation of $505,000.$2.2 million.

Technology expenses include stock-based compensation expense of ~~$166,000~~$621,000 and ~~$210,000~~$150,000 for the three months ended ~~September~~June 30, ~~2017~~2018 and ~~2016,~~2017, respectively, and ~~$476,000~~$1.1 million and ~~$615,000~~$310,000 for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 and ~~2016,~~2017, respectively.

General and administrative expenses

The following table reflects our general and administrative expenses ("G&A") for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 and ~~2016~~2017 (in thousands):


	Three months ended September 30,											Nine months ended September 30,											Three months ended June 30,										Six months ended June 30,
	2017			2016			$ Change			% Change		2017			2016			$ Change			% Change		2018			2017			$ Change		% Change		2018			2017			$ Change		% Change
General and administrative expenses	$	21,651		$	23,317		$	(1,666	)	(7.1	)%	$	66,622		$	67,843		$	(1,221	)	(1.8	)%	$	31,440		$	22,361		$	9,079	40.6	%	$	71,195		$	44,971		$	26,224	58.3	%
General and administrative expenses as a percent of net revenues	5.1		%	5.3		%						5.2		%	5.3		%						6.5		%	5.2		%					7.7		%	5.2		%

The ~~$1.7~~$9.1 million ~~decrease~~increase in general and administrative expenses ~~("G&A")~~ for the three months ended ~~September~~June 30, ~~2017,~~2018, as compared to the same period in ~~2016,~~2017, was ~~primarily~~ due to a ~~decrease~~$5.0 million increase in ~~bad debt expense of $1.1~~legal fees primarily in tZERO related to the SEC investigation, a $4.8 million ~~a decrease~~increase in consulting and outside services, ~~expense of $479,000,~~a $3.5 million increase in staff-related costs, and a ~~decrease~~$1.2 million increase in ~~legal fees of $434,000.~~travel expenses. These ~~decreases~~increases were partially offset by ~~an increase~~a $6.8 million realized gain on the sale of cryptocurrencies on which we recognized a large impairment loss in ~~staff related costs of $509,000.~~Q1 2018.

The ~~$1.2~~$26.2 million ~~decrease~~increase in general and administrative expenses ~~("G&A")~~ for the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2018, as compared to the same period in ~~2016,~~2017, was primarily due to a ~~decrease~~$10.2 million increase in staff-related costs, a $6.1 million increase in consulting and outside services, a $6.0 million increase in legal ~~costs of $1.8~~fees primarily in tZERO related to the SEC investigation, and a $1.6 million ~~a decrease in bad debt expense of $1.1 million, a $617,000 decrease~~increase in travel ~~and a $547,000 contract termination fee in Q1 2016. These decreases were partially offset by an increase in staff related costs of $3.2 million.~~expenses.

~~G&A~~General and administrative expenses include stock-based compensation expense of approximately ~~$703,000~~$2.0 million and ~~$1.0 million~~$743,000 for the three months ended ~~September~~June 30, ~~2017~~2018 and ~~2016,~~2017, respectively, and ~~$2.1~~$7.0 million and ~~$3.1~~$1.4 million for the ~~nine~~six months ended ~~September~~June 30, 2018 and 2017, ~~and 2016.~~

~~We continue~~respectively. The increase was primarily due to seek opportunities for growth, in our retail business and through our Medici blockchain and financial technology initiatives and through other means. As a result of these initiatives, we may continue to incur additional expenses or make investments in, or acquisitions of other technologies and businesses. We also anticipate that our Medici initiatives will incur losses in the near term. These losses, additional expenses, acquisitions or investments may be material, and, coupled with existing marketing expense trends and the seasonality of our business, may lead to reduced consolidated income or losses in some periods, and to reduced liquidity. Additionally, we may recognize additional impairment charges from our investments. We are also considering other alternatives for Medici, including raising capital. During the three months ended September 30, 2017, our Medici-related subsidiaries incurred a pre-tax loss of approximately $3.7 million, which includes $1.2$3.4 million of amortization and depreciation expense. During the nine months ended September 30, 2017, Medici Ventures, Inc. and its subsidiaries incurred an operating loss of approximately $15.0 million, which includes $3.6 million of amortization and depreciation expense ~~and a $4.5 million impairment charge~~ related to ~~a cost method investment.~~the tZERO equity awards granted, vested, and fully expensed in January 2018.

~~Litigation settlement~~

In Q1 2016, we entered into a settlement agreement in our prime broker litigation which concluded the litigation in its entirety and we recognized settlement proceeds of $19.5 million. Related costs associated with the litigation and settlement of approximately $1.0 million were included in G&A expenses during Q1 2016.

Depreciation and amortization expense

Depreciation expense is classified within the corresponding operating expense categories on ~~the~~our consolidated statements of operations as follows (in thousands):


	Three months ended September 30,				Nine months ended September 30,				Three months ended June 30,				Six months ended June 30,
	2017		2016		2017		2016		2018		2017		2018		2017
Cost of goods sold - direct	$	72	$	77	$	230	$	235	$	83	$	75	$	167	$	158
Technology	5,940		6,952		18,802		18,755		5,296		6,177		10,772		12,862
Sales and marketing	—		29		—		29
General and administrative	974		357		2,863		691		1,023		959		2,044		1,889
Total depreciation, including internal-use software and website development	$	6,986	$	7,415	$	21,895	$	19,710	$	6,402	$	7,211	$	12,983	$	14,909

Amortization of intangible assets other than goodwill is classified within the corresponding operating expense categories on ~~the~~our consolidated statements of operations as follows (in thousands):

Three months ended
September 30, Nine months ended
September 30,
2017 2016 2017 2016
Technology $ 905
$ 699
$ 2,715
$ 2,151
Sales and marketing 22
246
62
949
General and administrative 21
27
62
93
Total amortization of intangible assets other than goodwill $ 948
$ 972
$ 2,839
$ 3,193

~~Interest expense~~

Total interest expense increased $500,000, from $212,000 for the three months ended September 30, 2016 to $713,000 for the three months ended September 30, 2017. The increase in interest expense is primarily due to no longer capitalizing interest on our headquarters loan due to construction completion in late 2016.

Total interest expense increased $1.9 million, from $219,000 for the nine months ended September 30, 2016 to $2.1 million for the nine months ended September 30, 2017. The increase in interest expense is primarily due to no longer capitalizing interest on our headquarters loan due to construction completion.



	Three months ended June 30,				Six months ended June 30,
	2018		2017		2017		2016
Technology	$	895	$	905	$	1,650	$	1,810
Sales and marketing	204		20		323		40
General and administrative	34		21		78		41
Total amortization of intangible assets other than goodwill	$	1,133	$	946	$	2,051	$	1,891

Other income (expense), net

Other income, net for the three months ended ~~September~~June 30, ~~2017~~2018 was ~~$5.9 million~~$368,000 as compared to ~~$1.3 million~~$593,000 in 2016. The increase is primarily due to an increase in realized gains on sales of cryptocurrencies and precious metals of $5.5 million, and a decrease in impairment charges of $2.8 million, partially offset by a decrease in Club O Rewards breakage of $3.5 million due to discontinuing our Club O Silver rewards program in Q4 2016.

~~Other income, net for the nine months ended September 30, 2017 was $2.8 million as compared to $9.4 million in 2016.~~2017. The decrease is primarily due to a $1.0 million equity method loss, a $560,000 decrease in Club O ~~Rewards~~and gift card breakage which we began recognizing as a component of ~~$10.4~~revenue in 2018 following the adoption of ASC 606, and $283,000 in debt retirement costs related to our building loan repayment. These decreases to other income, net were largely offset by $1.8 million in unrealized gains on investments in equity securities.

Other income (expense), net for the six months ended June 30, 2018 was $359,000 as compared to ($3.1 million) in 2017. The decrease is primarily due to ~~discontinuing our Club O Silver rewards program~~a $4.5 million decrease in ~~Q4 2016, and an increase in~~asset impairment charges ~~of $1.7~~and $1.8 million ~~related to cost method investments. These decreases were~~in unrealized gains on investments in equity securities, partially offset by ~~an increase~~a $1.4 million equity method loss and a $1.2 million decrease in ~~realized gains on sales~~Club O and gift card breakage which we began recognizing as a component of ~~cryptocurrencies and precious metals~~revenue in 2018 following the adoption of ~~$5.5 million.~~ASC 606.

Income taxes

Our ~~provision (benefit) for~~benefit from income taxes for the ~~three~~six months ended ~~September~~June 30, 2018 and 2017 was $304,000 and 2016 was $(5.4) million and $(543,000). The decrease in the provision is due to the release of a valuation allowance against capital losses and a decrease in pre-tax income during the three months ended September 30, 2017, as compared to the same period in 2016. Our provision (benefit) for income taxes for the nine months ended September 30, 2017 and 2016 was $(7.7) million and $8.2 million, respectively. The decrease in the provision is primarily due to a decrease in pre-tax income during the nine months ended September 30, 2017 as compared to the same period in 2016.

$2,315,000. The effective tax rate for the ~~nine~~six months ended ~~September~~June 30, 2018 and 2017 was 0.3% and ~~2016 was 33.8% and 49.1%~~14.2%, respectively. The decrease in the effective tax rate is primarily attributable to athe valuation allowance ~~recorded~~we are maintaining on our net deferred tax assets and a decrease in pre-tax income during the ~~three~~six months ended

June 30, ~~2017 against certain state tax credits and an impairment loss on a cost method investment that we recognized during~~2018 as compared to the ~~three months ended March 31, 2017, for which no tax benefit can be recorded, partially offset by the release of a valuation allowance against capital losses during the three months ended September 30,~~same period in 2017.

We adopted ASU 2016-09 on January 1, 2017, which requires stock based compensation excess tax benefits or deficiencies to be reflected in the Consolidated Statements of Operations as a component of the provision for income taxes whereas they previously were recognized in equity.

We have indefinitely reinvested foreign earnings of ~~$1.1~~$1.7 million at ~~September~~June 30, ~~2017. We~~2018. The TCJA included a mandatory deemed repatriation of cumulative foreign earnings for the year ended December 31, 2017, for which we accrued provisional tax expense. However, we would still need to accrue and pay ~~U.S. income tax~~various other taxes on this amount if repatriated. We doare currently analyzing our global working capital and cash requirements and the potential tax liabilities attributable to a repatriation, but we have yet to determine whether we plan to change our prior assertion and repatriate earnings. Accordingly, we have not ~~intend~~recorded any deferred taxes attributable to ~~repatriate these earnings.~~our investments in our foreign subsidiaries. We will record the tax effects of any change in our prior assertion in the period that we complete our analysis and are able to make a reasonable estimate, in the period that we are first able to make a reasonable estimate, no later than December 2018.

We are subject to taxation in the United States and several state and foreign jurisdictions. Tax years beginning in ~~2012~~2013 are subject to examination by taxing authorities, although net operating loss and credit carryforwards from all years are subject to examinations and adjustments for at least three years following the year in which the attributes are used. We are under audit by the ~~Internal~~Ireland Revenue ~~Service ("IRS")~~Agency for the calendar year ~~2015. The IRS has not indicated or communicated any deficiencies.~~2016. We expect the audit to ~~complete~~continue during ~~2017.~~2018.

Each quarter we assess the recoverability of our deferred tax assets under ASC 740. We assess ~~all~~the available positive and negative evidence to ~~determine~~estimate whether we will generate sufficient future taxable income to use ~~the~~our existing deferred tax assets. We ~~consider, among other things,~~have limited carryback ability and do not have significant taxable temporary differences to recover our ~~recent financial and operating results, along with our forecasted growth rates, projected~~existing deferred tax assets, therefore we must rely on future taxable income, ~~carryforward periods, our utilization experience with operating loss and tax credit carryforwards, and prudent and feasible~~including tax planning ~~strategies.~~strategies, to support their realizability. 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 these deduction differences, net of recorded valuation allowances. This assessment requires significant judgment and estimates about our ability to generate revenue, gross profit, operating income and taxable income in future periods. Except as otherwise disclosed, there are no known trends, events, transactions or other uncertainties that are expected to negatively impact the future levels of taxable income. Wehave established a valuation allowance ~~of $2.3 million~~ for ~~certain state~~our deferred tax ~~credits as of June 30, 2017, because estimates of~~assets not supported by carryback ability or taxable temporary differences, primarily due to uncertainty regarding our future ~~apportioned~~ taxable ~~income during the carryforward period were reduced. During the three months ended September 30, 2017, we sold precious metals and cryptocurrencies and generated capital gain~~ income. We have considered, among other things, the cumulative loss incurred over the three-year period ended June 30, 2018 as a significant piece of objective negative evidence. We intend to continue maintaining a valuation allowance on our net deferred tax assets ~~based on capital losses, which were offset by a valuation allowance. Since we generated capital gain income, a~~until there is sufficient evidence to support the reversal of all or some portion of these allowances. The amount of the ~~capital~~deferred tax asset considered realizable could be adjusted if objective negative evidence in the form of cumulative losses ~~can now~~is no longer present and additional weight may be ~~utilized and we released $2.2 million of valuation allowance~~given to subjective evidence such as ~~of September 30, 2017.~~long-term projections for growth. We will continue to monitor the need for a valuation allowance against our remaining deferred tax assets on a quarterly basis.

Seasonality

Based upon our historical experience, revenue typically increases during the fourth quarter because of the holiday retail season and gross margin decreases due to increased sales of certain lower margin products, such as electronics. Revenue typically decreases in the following quarter(s), as shown in the table below. The actual quarterly results for each quarter could differ materially depending upon consumer preferences, availability of product and competition, among other risks and uncertainties. Accordingly, there can be no assurances that seasonal variations will not materially affect our results of operations in the future.

The following table reflects our total net revenues for each of the quarters in 2018, 2017 ~~2016~~ and ~~2015~~2016 (in thousands):


	First Quarter		Second Quarter		Third Quarter		Fourth Quarter		First Quarter		Second Quarter		Third Quarter		Fourth Quarter
2018									$	445,331	$	483,134	$	N/A	$	N/A
2017	$	432,435	$	432,024	$	424,007	$	N/A		432,435		432,024		424,007		456,290
2016		413,677		418,540		441,564		526,182		413,677		418,540		441,564		526,182
2015		398,344		388,013		391,211		480,270

Liquidity and Capital Resources

Overview

Although we believe that our cash and cash equivalents currently on hand, expected cash flows from future operations, and proceeds available under the standby equity underwriting agreement with JonesTrading will be sufficient to continue operations for at least the next twelve months, we also believe that we may need to raise additional capital and/or obtain significant additional debt financing to be able to fully pursue some or all of our plans discussed below, including plans for our retail business while also funding our Medici initiatives, beyond the next twelve months.

During the first half of 2018, we have increased our branding and marketing expenditures in an effort to increase our market share in the e-commerce home goods market and educate consumers about our current position as an online retailer offering a wide assortment of quality home goods and other products at low prices and with a high level of customer service.

We continue to develop and implement marketing and branding initiatives in an effort to adjust to the competitive marketing landscape. The results of our marketing efforts have been hampered by the continuing challenges we face in our natural search marketing, which have significantly limited our efforts to grow revenue efficiently. We are unable to continue marketing expenditures at these substantially elevated levels without significantly better results and/or significant additional financing. Consequently, after considering our alternatives, we began to reduce our marketing expenditures during July 2018 and expect to continue to reduce our marketing expenditures throughout the remainder of 2018.

We continue to seek opportunities for growth in our retail business, through our Medici blockchain and financial technology initiatives, and through other means. We also want to invest in additional distribution facilities to speed shipping and improve our customer service; in additional automation, technology and engineering resources because we believe they can improve our customers' shopping experience and increase our sales; in our Club O rewards program, primarily to increase member benefits and to develop additional personalization programs; and in expansion of our private label initiative because we believe that private label brands can generate significant brand equity and customer loyalty.

Our Medici initiatives also require substantial funding. Medici Ventures and its majority-owned subsidiary, tZERO, continue to identify, evaluate and pursue various opportunities for strategic acquisitions or purchases of interests to expand the services and expertise they offer their customers. As a result of these initiatives, we will continue to incur additional expenses and expect to purchase interests in, or make acquisitions of, other technologies and businesses.

We anticipate that our initiatives will cause us to incur losses in the foreseeable future. These losses, additional expenses, acquisitions or purchases may be material, and, coupled with existing marketing expense trends, and strategic changes in our retail business, may lead to increased consolidated losses in some periods, and to reduced liquidity.

Current sources of liquidity

We believe that our cash and cash equivalents currently on hand, ~~and~~ expected cash flows from future operations, and proceeds available under the standby equity underwriting agreement with JonesTrading will be sufficient to continue operations for at least the next twelve months. Our failure to generate sufficient revenues or profits or to obtain additional financing or raise additional capital could have a material adverse effect on our operations and on our ability to achieve our business objectives. Any projections of future cash needs and cash flows are subject to substantial uncertainty.

~~In December 2016, as a successful demonstration of the platform and technology developed by our majority-owned subsidiary tZERO,~~On November 8, 2017, we issued ~~preferred shares~~warrants to purchase up to a combined aggregate of ~~Overstock.com, Inc. for proceeds of $7.6 million, net of offering costs.~~

Subsequent to September 30, 2017, we entered into a $40.0 million loan agreement dated November 6, 2017 with PCL L.L.C., an entity directly or indirectly wholly owned by the mother and brother of our Chief Executive Officer, Dr. Patrick Byrne. For additional information, see ~~Borrowings -~~ ~~below.~~

~~We do not have any credit facilities available to us other than our purchasing card with U.S. Bank, all as described under~~ ~~Borrowings~~ ~~below.~~

~~In January 2017, we repurchased approximately 604,000~~3,722,188 shares of our common stock to two purchasers in privately negotiated transactions, for an aggregate purchase price of ~~$10~~$6.5 million, ~~under our~~net of issuance costs. The exercise price for the warrants was $40.45 per share of common stock. On December 29, 2017, one of the warrant holders exercised its warrant in full and purchased a total of 2,472,188 shares of common stock ~~repurchase plan, utilizing cash on hand. All~~for $100.0 million. On January 17, 2018, the other warrant holder exercised its warrant in full and purchased 1,250,000 shares of common ~~shares repurchased were recognized as treasury stock. We may repurchase additional shares~~stock for $50.6 million.

In December 2017, tZERO launched an offering (the "security token offering") of the right to acquire, if issued by tZERO in the ~~future.~~future, tZERO Preferred Equity Tokens (the "tZERO Security Token") through a Simple Agreement for Future Equity ("SAFE"). The security token offering is expected to run through August 6, 2018 but may be extended or shortened and is subject to withdrawal rights under certain circumstances. As of June 30, 2018, tZERO has received $95.9 million in cumulative proceeds, net of withdrawals, and incurred $16.5 million of offering costs. The security token offering closed on August 6, 2018 and we received an additional $7.5 million of proceeds, before deducting additional offering costs, prior to the close.

~~Our~~At June 30, 2018, our principal sources of liquidity are cash flows generated from operations, ~~and~~ our existing cash and cash ~~equivalents.~~equivalents, and proceeds from the warrants and tZERO's security token offering. At ~~September~~June 30, ~~2017,~~2018, we had cash and cash equivalents of ~~$92.3~~$152.2 million. The intramonthly balance of our cash and cash equivalents on hand fluctuates significantly, generally reaching the highest balance at the end of month and the lowest balances after the first and fifteenth of the month when we make our regular partner and supplier payments.

In early August 2018 we entered into a sales agreement with JonesTrading Institutional Services LLC ("JonesTrading"), under which we plan to conduct "at the market" public offerings of our common stock from time to time. Under the sales agreement, JonesTrading, acting as our agent, may offer our common stock in the market on a daily basis or otherwise as we request from time to time. We have no obligation to sell shares under the sales agreement, but expect to do so from time to time. We will pay JonesTrading up to a 2.0% sales commission on all sales. The sales agreement contemplates

sales of up to $150 million of our common stock over a period of up to three years. We will report the number of shares of common stock actually sold, the net proceeds to us and the compensation we pay JonesTrading on a quarterly basis.

In early August 2018 we also entered into a standby equity underwriting agreement with JonesTrading. Under the standby underwriting agreement, we have the right, but no obligation, to sell up to $50 million of our common stock to JonesTrading, as underwriter, for sale to the public in a firm commitment public offering. Any offering under this agreement would be done in one or more tranches of up to $5 million each, at our option. However, sales we make in any other registered offering, including any sales we make under the sales agreement with JonesTrading described above, would reduce (on a dollar-for-dollar basis) the amount we have the right to sell pursuant to the standby underwriting agreement. JonesTrading will have an option to purchase up to an additional 15% of the amount of any tranche we elect to sell under the standby underwriting agreement. The price of any shares we sell to JonesTrading pursuant to the standby underwriting agreement will be 97% the average of the daily volume weighted average price of our common stock during normal trading hours on Nasdaq for the two trading days after we give notice of a sale to JonesTrading. We paid a 1% commitment fee to JonesTrading for entering into the underwriting agreement.

Contemplated Financing Transactions

In early August 2018 Overstock signed a Token Purchase Agreement and a term sheet with GSR Capital, a private equity firm organized under the laws of Hong Kong ("GSR"). Concurrently, tZERO signed a term sheet with GSR in lieu of the previously-announced Letter of Intent regarding GSR's purchase of up to $160 million of security tokens from tZERO. The Letter of Intent was cancelled as a result of the new agreement.

The term sheet signed by OSTK and GSR describes the general terms and conditions of a proposed investment by GSR in Overstock. The term sheet describes a purchase of up to 3,100,000 shares of Overstock at $33.72 per share, for an aggregate price of approximately $104.5 million, subject to the negotiation and execution of a definitive purchase and sale agreement and any other agreement that may be necessary to effect the transaction. The term sheet states that it constitutes a binding agreement to negotiate in good faith the terms of the transaction documents, which are to be substantially consistent with the terms set forth in the term sheet. However, the obligation to negotiate in good faith will terminate on the proposed closing date of December 15, 2018, if any of the closing conditions, one of which is the negotiation, execution and delivery of mutually acceptable transaction documents, have not been satisfied.

The term sheet signed by tZERO and GSR describes the general terms and conditions of a proposed investment in tZERO by GSR and other potential buyers. The term sheet describes a purchase of tZERO voting common stock for up to $270 million, based upon a $1.5 billion post-money valuation of tZERO. The proposed investment is subject to the negotiation and execution of a definitive purchase and sale agreement and any other agreement that may be necessary to effect the transaction. The term sheet states that it constitutes a binding agreement to negotiate in good faith the terms of the transaction documents, which are to be substantially consistent with the terms set forth in the term sheet. However, the obligation to negotiate in good faith will terminate on the proposed closing date of December 15, 2018, if any of the closing conditions, one of which is the negotiation, execution and delivery of mutually acceptable transaction documents, have not been satisfied. The term sheet also provides that if one or more of the other buyers does not consummate the transaction described, the obligations of the remaining buyers will remain unaltered, but that in no case will the individual ownership of GSR Capital Ltd. exceed 18% of the voting rights and earnings payout of tZERO.

Cash flow information is as follows (in thousands):

Nine months ended
September 30, Twelve months ended
September 30,
2017 2016 2017 2016
Cash provided by (used in):

Operating activities $ (62,655 ) $ (15,439 ) $ (7,652 ) $ 75,477
Investing activities (14,368 ) (65,166 ) (28,649 ) (81,358 )
Financing activities (13,809 ) 34,814
4,096
49,084

~~Free cash flow~~

"Free Cash Flow" (a non-GAAP measure) for the nine months ended September 30, 2017 and 2016, was $(83.5) million and $(74.8) million, respectively, and $(41.4) million and $(37,000) for the twelve months ended September 30, 2017 and 2016, respectively. See ~~Non-GAAP Financial Measures~~ ~~below for a reconciliation of Free Cash Flow to net cash provided by (used in) operating activities.~~



	Six months ended June 30,						Twelve months ended June 30,
	2018			2017			2018			2017
Cash provided by (used in):
Operating activities	$	(70,579	)	$	(46,257	)	$	(59,543	)	$	20,262
Investing activities	(64,650		)	(20,003		)	(62,607		)	(50,802		)
Financing activities	84,255			(12,773		)	170,351			12,012

Cash flows from operating activities

~~For~~Our operating cash flows result primarily from cash received from our customers, offset by cash payments we make for employee compensation (less amounts capitalized related to internal-use software that are reflected as cash used in investing activities), and changes in working capital and other related activities. Working capital at any specific point in time is subject to many variables, including seasonality, inventory management, expansion efforts, the ~~nine months ended September 30, 2017~~timing of cash receipts and ~~2016, our operating activities resulted in net cash outflows of $62.7 million~~payments, and ~~$15.4 million, respectively.~~

vendor payment terms. Cash received from customers generally corresponds to our net revenues as our customers primarily use credit cards to buy from us causing our receivables from these sales transactions to settle quickly. We have payment terms with our partners that generally extend beyond the amount of time necessary to collect proceeds from our customers. As a result, following our typically seasonally strong fourth quarter sales, at December 31 of each year, our cash, cash equivalents, accounts payable and accrued liability balances normally reach their highest level (other than as a result of cash flows provided by or used in investing and financing activities). ~~However, our accounts payable and accrued liability balances normally decline during the~~

~~first three months following year-end, which normally results in a decline in our cash and cash equivalents balances from the year-end balance.~~ The ~~seasonality of our business causes payables and accruals to grow significantly in the fourth quarter, and then decrease in the first quarter when they are typically paid.~~

~~The $62.7~~$70.6 million of net cash used in operating activities during the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 was primarily due to ~~decreases in accounts payable of $35.8 million and accrued liabilities of $35.8 million, and~~ consolidated net loss of $15.1 million. Accounts payable and accrued liabilities decreased due to seasonality which caused high balances at year-end 2016 and a significant decline during 2017, and due to decreased revenue growth in 2017. The net cash used in operating activities during the nine months ended September 30, 2017 was$120.4 million, partially offset by cash provided by operating assets and liabilities of $24.8 million, and certain non-cash items including depreciation and amortization expense of ~~$21.9~~$15.0 million, stock-based compensation of $9.4 million, and impairment losses, net of realized gains, recognized on cryptocurrency holdings of $1.1 million. The increase in net cash used in operating activities for the nine months ended September 30, 2017, as compared to the same period of 2016, is due in part to the results for 2016 including litigation settlement proceeds of $19.5 million, as described above under ~~Litigation settlement.~~

The ~~$15.4~~$46.3 million of net cash used in operating activities during the ~~nine~~six months ended ~~September~~June 30, ~~2016~~2017 was primarily due to ~~decreases in accounts payable~~consolidated net loss of ~~$40.2~~$14.0 million, deferred revenue of $9.7 million, and accrued liabilities of $8.7 million. Accounts payable, accrued liabilities and deferred revenue decreased due to seasonality which caused high balances at year-end 2015 and a significant decline during 2016. The net cash used in operating ~~activities during the nine months ended September 30, 2016 was~~assets and liabilities of $52.8 million, and other non-cash items of $2.7 million, partially offset by certain non-cash items including depreciation and amortization expense of ~~$19.7~~$16.8 million, ~~consolidated net income~~stock-based compensation of ~~$8.5~~$2.0 million, and ~~deferred income taxes~~impairments recognized on cost method investments of ~~$6.7~~$4.5 million.

Notwithstanding our current negative cash flows from operating activities, we believe that our cash and cash equivalents currently on hand, expected cash flows from future operations, and proceeds available under the standby equity underwriting agreement with JonesTrading will be sufficient to continue operations for at least the next twelve months. We also believe that we may need to raise additional capital and/or obtain significant additional debt financing to be able to fully pursue some or all of our plans, including plans for our retail business while also funding our Medici initiatives, beyond the next twelve months.

Cash flows from investing activities

For the ~~nine~~six months ended ~~September~~June 30, 2018, investing activities resulted in net cash outflows of $64.7 million primarily due to $29.6 million investment in equity securities, $12.9 million acquisition of business, net of cash acquired, $12.7 million of expenditures for fixed assets, and $9.2 million purchase of intangible assets.

For the six months ended June 30, 2017, investing activities resulted in net cash outflows of ~~$14.4~~$20.0 million primarily due to ~~$20.9 million of expenditures for fixed assets.~~

~~For the nine months ended September 30, 2016, investing activities resulted in net cash outflows of $65.2 million primarily due to $59.4~~$16.5 million of expenditures for fixed assets.

Cash flows from financing activities

For the ~~nine~~six months ended ~~September~~June 30, 2018, financing activities resulted in net cash inflows of $84.3 million primarily due to $78.4 million net proceeds from security token offering, $50.6 million proceeds from exercise of stock warrants, partially offset by a $40.0 million repayment of long-term debt and $4.5 million of taxes withheld upon vesting of restricted stock.

For the six months ended June 30, 2017, financing activities resulted in net cash outflows of ~~$13.8~~$12.8 million primarily due to the purchase of treasury stock for ~~$11.1 million.~~$10.0 million and $1.1 million of taxes withheld upon vesting of restricted stock.

~~For~~Free cash flow

"Free Cash Flow" (a non-GAAP measure) for the ~~nine~~six months ended ~~September~~June 30, ~~2016, financing activities resulted in~~2018 and 2017, was $(83.3) million and $(62.7) million, respectively, and $(79.4) million and $(25.6) million for the twelve months ended June 30, 2018 and 2017, respectively. See Non-GAAP Financial Measures below for a reconciliation of Free Cash Flow to net cash ~~inflows of $34.8 million primarily due to $31.4 million of proceeds from our U.S. Bank term loan and $6.1 million of proceeds from lease finance obligations with U.S. Bank.~~provided by (used in) operating activities.

Contractual Obligations and Commitments

The following table summarizes our contractual obligations as of ~~September~~June 30, ~~2017~~2018 and the effect such obligations and commitments are expected to have on our liquidity and cash flow in future periods (in thousands):

Payments Due by Period
Contractual Obligations Remainder of 2017 2018 2019 2020 2021 Thereafter Total
U.S. Bank term loan payments (1) $ 45,010
$ —
$ —
$ —
$ —
$ —
$ 45,010
U.S. Bank master lease agreement (2) 12,651
—
—
—
—
—
12,651
Operating leases (3) 2,273
6,962
6,733
4,292
4,336
20,775
45,371
Purchase obligations (4) 3,497
1,528
—
—
—
—
5,025
Total contractual cash obligations $ 63,431
$ 8,490
$ 6,733
$ 4,292
$ 4,336
$ 20,775
$ 108,057



	Payments Due by Period
Contractual Obligations	Remainder of 2018		2019		2020		2021		2022		Thereafter		Total
Operating leases	3,525		6,819		4,379		4,355		4,439		16,356		39,873
Purchase obligations	4,772		—		—		—		—		—		4,772
Technology services	1,016		2,031		1,693		—		—		—		4,740
High Bench Senior Credit Agreement	—		—		3,069		—		—		—		3,069
Total contractual cash obligations	$	9,313	$	8,850	$	9,141	$	4,355	$	4,439	$	16,356	$	52,454

~~___________________________________________~~

~~(1) — Subsequent to September 30, 2017, we terminated the U.S. Bank term loan agreement (see~~ ~~Borrowings~~ ~~below).~~Operating leases

~~(2) — Subsequent to September 30, 2017, we terminated the U.S. Bank master lease agreement (see~~ ~~Borrowings~~ ~~below).~~

~~(3) —~~ From time to time we enter into operating leases for facilities and equipment for use in our operations.

~~(4) —~~ Purchase obligations

The amount of purchase obligations shown above is based on assumptions regarding the legal enforceability against us of inventory purchase orders we had outstanding at ~~September~~June 30, ~~2017.~~2018. Under different assumptions regarding our rights to cancel our purchase orders or different assumptions regarding the enforceability of the purchase orders under applicable law, the amount of purchase obligations shown in the table above would be less.

~~During Q1 2017,~~Technology services

From time to time we ~~established a partially self-funded health insurance plan~~enter into long-term contractual agreements for ~~our employees,~~technology services and have established accrued liabilities based upon claims history and estimates of claims that have been incurred but not reported. In addition to the contractual obligations summarized above, we are responsiblecapital leases for estimating our liability for unpaid costs of insured events under the health insurance plan that have occurred, which includes known cases on a case-basis, and also for events that have occurred, but have not yet been reported. As of September 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 isequipment included in ~~accrued liabilities in the accompanying consolidated balance sheets.~~such service agreements.

High Bench Senior Credit Agreement

Subsequent to September 30, 2017, we entered into a new loan agreement related to our corporate headquarters. The loan agreement provides for $40.0 million term loan which carries an interest rate of 8.0%. We are ~~required~~party to ~~make monthly interest-only payments during the term~~a financing agreement acquired in connection with our acquisition of ~~the loan and a balloon payment of all unpaid principal and interest on May 1, 2019~~Mac Warehouse, LLC (see Borrowings below). The amounts presented reflect our related principal payments.

Tax contingencies

We are involved in various tax matters, the outcomes of which are uncertain. As of ~~September~~June 30, ~~2017,~~2018, accrued tax contingencies were ~~$1.7~~$1.5 million. ~~We expect the total amount of tax contingencies to increase in the future. In addition, changes~~Changes in state, federal, and foreign tax laws may increase our tax contingencies. The timing of the resolution of income tax contingencies is highly uncertain, and the amounts ultimately paid, if any, upon resolution of ~~the~~ issues raised by the taxing authorities may differ from the amounts accrued. ~~While it~~It is reasonably possible that within the next 12 months we will receive additional assessments by various tax ~~authorities or reach resolution of tax contingencies in one or more jurisdictions, we do not anticipate that we will make any payments to such authorities during that period.~~authorities. These assessments ~~or settlements~~ may or may not result in changes to our contingencies related to positions on prior years' tax filings.

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 (the "Banks") in connection with the construction and long-term financing of our corporate headquarters (the "Project"). TheHigh Bench Senior Credit 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.

At September 30, 2017, our outstanding balance on the Term Loan was $45.0 million. We have 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.

~~Subsequent to September 30, 2017, we repaid the remaining outstanding balance and terminated the Term Loan and Revolving Loan (see~~ ~~PCL L.L.C. term loan agreement~~ ~~below).~~

~~U.S. Bank master lease agreement~~

Agreement twelve months following the initial term. We 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 nine months ended September 30, 2017, we did not receive proceeds under the Master Lease Agreement. 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. Our liability under the Master Lease Agreement approximates fair value.

~~Subsequent to September 30, 2017, we repaid the remaining outstanding balance and terminated the Master Lease Agreement (see~~ ~~PCL L.L.C. term loan agreement~~ ~~below).~~

~~PCL L.L.C. term loan agreement~~

On ~~November 6, 2017,~~June 25, 2018, we ~~entered into~~became party to a ~~loan~~senior credit agreement, as amended, with ~~PCL L.L.C.~~High Bench-Mac Warehouse-Senior Debt, LLC ("High Bench Loan"), ~~an entity directly or indirectly wholly owned by~~in connection with our acquisition of Mac Warehouse, LLC. Under the ~~mother and brother of our Chief Executive Officer, Dr. Patrick Byrne. The~~amended agreement, ~~provides for a $40.0 million term~~the loan ~~which~~ carries an annual interest rate of ~~8.0%~~11.0% and a default rate of 18.0%. The ~~loan~~High Bench Loan is ~~for a term of~~subject to monthly interest only payments with the remaining principal amount and any then unpaid interest due and payable on April 18, ~~months,~~2020. The High Bench Loan is subject to mandatory prepayment under certain circumstances, and is prepayable at our election at any time without penalty or premium. ~~Interest only will be due monthly. The principal amount~~There are no financial covenants associated the High Bench Loan. At June 30, 2018, our outstanding balance on the High Bench Loan was $3.1 million.

Letters of credit

At June 30, 2018 and ~~any then unpaid interest will be due~~December 31, 2017, letters of credit totaling $280,000 and ~~payable~~$355,000, were issued on ~~May 1, 2019 (subject to mandatory prepayment~~our behalf collateralized by compensating cash balances held at a bank, which are included in Restricted cash in the event of a sale or encumbrance of the headquarters building or a change of ownership of Overstock or the occurrence of certain other events, including material changes to Overstock’s business, the loss of management control of Overstock by Dr. Patrick Byrne and other events). The loan is secured by our corporate headquarters and the related land, fixtures and certain related personal property. We incurred insignificant debt issuance costs with the new loan agreement. The $40.0 million proceeds from this loan together with our cash resources were used to repay the remaining outstanding balances and terminate the U.S. Bank Term Loan, Revolving Loan, Master Lease Agreement, and associated derivative instruments.accompanying consolidated balance sheets.

~~U.S. Bank commercial~~Commercial purchasing card agreement

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that would be material to investors.

Critical Accounting Policies and Estimates

The preparation of our financial statements requires that we make estimates and judgments. We base these on historical experience and on other assumptions that we believe to be reasonable. Our critical accounting policies are discussed in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" section of our Annual Report on Form 10-K for the year ended December 31, ~~2016~~2017, and our accounting policies and use of estimates are further discussed in Item 1 of Part I, "Financial Statements (Unaudited)"—Note 22. Accounting Policies, contained in the "Notes to ~~the financial statements included in~~Unaudited Consolidated Financial Statements" of this Quarterly Report on Form ~~10-Q~~10-Q. and elsewhere in this Management's Discussion and Analysis of Financial Condition and Results of Operations.

As discussed in Note 2 to the financial statements, during Q1 2017, we established a partially self-funded health insurance plan for our employees, and have recorded an accrued liability based upon claims history and estimates of claims that have been incurred but not reported. During Q1 ~~2017,~~2018, we implemented ASU No. ~~2015-17,~~2014-09, ~~Income Taxes~~Revenue from Contracts with Customers (Topic ~~740): Balance Sheet Classification of Deferred Taxes~~ on a retrospective basis and, for the year ended December 31, 2016, reclassified approximately $16.3 million from current Deferred tax assets, net to long-term Deferred tax assets, net in our consolidated balance sheet. In addition, during Q1 2017, we implemented ASU No. 2016-09, ~~Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting~~606) on a modified retrospective basis and recognized ~~$9.4~~$5.0 million of additional ~~deferred tax assets~~breakage income related to ~~excess tax benefits~~the unredeemed portion of our gift cards and loyalty program rewards through a cumulative effect adjustment in retained

earnings as of January 1, ~~2017.~~2018. In addition, we now recognize estimated breakage on our gift cards and loyalty program rewards in Partner and other revenue in our consolidated statement of operations rather as a component of Other expense, net. The adoption of these new accounting standards is discussed further in Item 1 of Part I, "Financial Statements (Unaudited)"—Note 22. Accounting Policies, contained in the "Notes to ~~the financial statements included in~~Unaudited Consolidated Financial Statements" of this Quarterly Report on Form 10-Q. There have been no other material changes to the critical accounting policies previously disclosed in our Annual Report on Form 10-K for the year ended December 31, ~~2016.~~2017.

For information about recently issued accounting standards not yet adopted, see ~~Note 2,~~ Recently issued accounting standards not yet adopted, included in Item 1 of Part I, "Financial Statements (Unaudited)"—Note 22. Accounting Policies, contained in the "Notes to ~~the financial statements included in~~Unaudited Consolidated Financial Statements" of this Quarterly Report on Form 10-Q.

Non-GAAP Financial Measures

Regulation G, Conditions for Use of Non-GAAP Financial Measures, and other SEC regulations regulate the disclosure of certain non-GAAP financial information.

~~Contribution and contribution margin~~

Contribution (a non-GAAP financial measure which we reconcile below to "Gross Profit," the nearest GAAP financial measure appearing in our consolidated statement of operations) consists of gross profit less sales and marketing expense plus Club O Rewards and gift card breakage and reflects an additional way of viewing our results. Contribution margin is contribution as a percentage of total net revenue. We believe contribution and contribution margin provide management and users of the financial statements information about our ability to cover our operating costs, such as technology and general and administrative expenses, while reflecting the selling costs we incurred to generate our revenues. Including these amounts in our contribution improves this measure by adding back the reductions in revenue that we recognized for Club O Rewards that have subsequently expired and for gift cards whose redemption is remote. Contribution and contribution margin are used in addition to and in conjunction with results presented in accordance with GAAP and should not be relied upon to the exclusion of GAAP financial measures. The material limitation associated with the use of contribution is that it is an incomplete measure of profitability as it does not include all operating expenses or all non-operating income and expenses. Management compensates for these limitations when using this measure by looking at other GAAP measures, such as operating income and net income. You should review our financial statements and publicly-filed reports in their entirety and not rely on any single financial measure.

~~For further details on contribution and contribution margin, see the reconciliation of these non-GAAP financial measures below (in thousands):~~

Three months ended
September 30, Nine months ended
September 30,
2017 2016 2017 2016
Total net revenue $ 424,007
100 % $ 441,564
100% $ 1,288,466
100 % $ 1,273,781
100 %
Cost of goods sold 340,332
80.3 % 361,848
81.9 1,033,713
80.2 % 1,040,436
81.7 %
Gross profit 83,675
19.7 % 79,716
18.1 254,753
19.8 % 233,345
18.3 %
Less: Sales and marketing expense 45,153
10.6 % 34,707
7.9 126,068
9.8 % 99,516
7.8 %
Plus: Club O Rewards and gift card breakage (included in Other income, net) 692
0.2 % 4,162
0.9% 1,924
0.1 % 12,247
1.0 %
Contribution and contribution margin $ 39,214
9.2 % $ 49,171
11.1% $ 130,609
10.1 % $ 146,076
11.5 %

~~Our calculation of our contribution and contribution margin by Retail Total (which consists of Direct and Partner) and Other (which consists of Medici) is set forth below (in thousands):~~

Three months ended
September 30,
Direct Partner Retail Total Other Total
2017
Total net revenue $ 19,645
$ 400,419
$ 420,064
$ 3,943
$ 424,007
Cost of goods sold 19,577
318,121
337,698
2,634
340,332
Gross profit $ 68
$ 82,298
$ 82,366
$ 1,309
$ 83,675
Less: Sales and marketing expense 44,910
243
45,153
Plus: Club O Rewards and gift card breakage (included in Other income, net) 692
—
692
Contribution $ 38,148
$ 1,066
$ 39,214
Contribution margin 9.1 % 27.0 % 9.2 %

2016
Total net revenue $ 24,620
$ 413,019
$ 437,639
$ 3,925
$ 441,564
Cost of goods sold 23,955
335,306
359,261
2,587
361,848
Gross profit $ 665
$ 77,713
$ 78,378
$ 1,338
$ 79,716
Less: Sales and marketing expense 34,594
113
34,707
Plus: Club O Rewards and gift card breakage (included in Other income, net) 4,162
—
4,162
Contribution $ 47,946
$ 1,225
$ 49,171
Contribution margin 11.0 % 31.2 % 11.1 %

Nine months ended
September 30,
Direct Partner Retail Total Other Total
2017
Total net revenue $ 64,572
$ 1,211,536
$ 1,276,108
$ 12,358
$ 1,288,466
Cost of goods sold 61,687
963,310
1,024,997
8,716
1,033,713
Gross profit $ 2,885
$ 248,226
$ 251,111
$ 3,642
$ 254,753
Less: Sales and marketing expense 125,312
756
126,068
Plus: Club O Rewards and gift card breakage (included in Other income, net) 1,924
—
1,924
Contribution $ 127,723
$ 2,886
$ 130,609
Contribution margin 10.0 % 23.4 % 10.1 %

2016
Total net revenue $ 75,901
$ 1,187,364
$ 1,263,265
$ 10,516
$ 1,273,781
Cost of goods sold 72,459
961,227
1,033,686
6,750
1,040,436
Gross profit $ 3,442
$ 226,137
$ 229,579
$ 3,766
$ 233,345
Less: Sales and marketing expense 99,097
419
99,516
Plus: Club O Rewards and gift card breakage (included in Other income, net) 12,247
—
12,247
Contribution $ 142,729
$ 3,347
$ 146,076
Contribution margin 11.3 % 31.8 % 11.5 %

~~OSTK~~ Retail and Medici pre-tax income or loss

~~OSTK~~ Retail and Medici pre-tax income or loss (non-GAAP financial measures - which we reconcile to Consolidated pre-tax income or loss) consists of income or loss before taxes of our Retail (which consists of Direct and Partner) and Medici (which is included in Other) businesses, excluding intercompany transactions eliminated in consolidation. We believe these measures provide management and users of the financial statements useful information because they provide financial results for our separate businesses which are distinct in nature. The material limitation associated with these measures is that they are an incomplete measure of our consolidated operations. These measures should be used in addition to and in conjunction with results presented in accordance with GAAP and should not be relied upon to the exclusion of GAAP financial measures. You should review our financial statements and publicly-filed reports in their entirety and not rely on any single financial measure. For additional information regarding our segment reporting, and a reconciliation of ~~OSTK~~ Retail and Medici pre-tax income or loss, please see Item 1 of Part I, "Financial Statements (Unaudited)"—Note 9. Business Segments, contained in the "Notes to Unaudited Consolidated Financial Statements" of this Quarterly Report on Form 10-Q.

Free cash flow

Free cash flow (a non-GAAP financial measure) reflects an additional way of viewing our cash flows and liquidity that, when viewed with our GAAP results, provides a more complete understanding of factors and trends affecting our cash flows and liquidity. Free cash flow, which we reconcile below to "Net cash provided by (used in) operating activities," the nearest GAAP financial measure, is net cash provided by ~~(used in)~~ operating activities reduced by "Expenditures for fixed assets, including internal-use software and website development." We believe that net cash provided by ~~(used in)~~ operating activities is an important measure, since it includes both the cash impact of the continuing operations of the business and changes in the balance sheet that impact cash. ~~However, we~~We believe free cash flow is a useful measure to evaluate our business since purchases of fixed assets are a necessary component of ongoing operations and free cash flow measures the amount of cash we have available for mandatory debt service and financing obligations, changes in our capital structure, and future investments after purchases of fixed assets. Free cash flow measures have limitations as they omit certain components of the overall consolidated statement of cash flows and do not represent the residual cash flow available for discretionary expenditures. Free cash flow should not be considered a substitute for net income (loss) or cash flow data prepared in accordance with GAAP and may not be comparable to similarly titled measures used by other companies. Therefore, we believe it is important to view free cash flow as a complement to our entire consolidated statements of cash flows as reconciled below (in thousands):


	Nine months ended September 30,						Twelve months ended September 30,						Six months ended June 30,						Twelve months ended June 30,
	2017			2016			2017			2016			2018			2017			2018			2017
Net cash (used in) provided by operating activities	$	(62,655	)	$	(15,439	)	$	(7,652	)	$	75,477		$	(70,579	)	$	(46,257	)	$	(59,543	)	$	20,262
Expenditures for fixed assets, including internal-use software and website development	(20,873		)	(59,382		)	(33,772		)	(75,514		)	(12,749		)	(16,450		)	(19,885		)	(45,883		)
Free cash flow	$	(83,528	)	$	(74,821	)	$	(41,424	)	$	(37	)	$	(83,328	)	$	(62,707	)	$	(79,428	)	$	(25,621	)

Government Regulation

Our ~~main~~e-commerce business is subject to general business regulations and laws, as well as regulations and laws specifically governing the Internet, e-commerce and other services. Existing and future laws and regulations may result in increasing expense and may impede our growth. These regulations and laws ~~may~~ cover taxation, privacy, data protection, pricing, content, copyrights, distribution, mobile communications, electronic device certification, electronic waste, energy consumption, environmental regulation, electronic contracts and other communications, competition, consumer protection, information reporting requirements, the design and operation of websites, and the characteristics and quality of products and services. ~~New~~On June 21, 2018, the U.S. Supreme Court issued an opinion in our South Dakota sales tax case and overruled the 1992 Quill Corp v. North Dakota case, and states may now require remote sellers to withhold sales tax under certain circumstances. In June 2018, we began withholding sales tax in all 45 states that have sales tax. If any state were to assert that we have any liability for sales tax regulations in states where we do not now collect state and local taxes may subject us to the obligation to collect and remit state and local taxes, or subject us to additional state and local sales and income taxes, or to requirements intended to assist states with their tax collection efforts.for prior periods, it could have an adverse effect on us. New legislation or regulations, the application of laws and regulations from jurisdictions whose laws do not currently apply to our business or the application of existing laws and

regulations to the Internet and commercial online services could result in significant additional taxes on our business. These taxes or tax collection obligations could have an adverse effect on us. Further, there is a possibility that we may be subject to significant fines or other payments for any past failures to comply with these requirements. In addition, it is not clear how existing laws governing issues such as property ownership, libel, and personal privacy apply to the Internet, e-commerce and digital content. Laws and regulations may diminish the demand for our products and services and increase our cost of doing business. Certain of our services are subject to federal and state consumer protection laws, including laws protecting the privacy of consumer information and regulations prohibiting unfair and deceptive trade practices. In particular, under federal and state financial privacy laws and regulations, we must provide notice to consumers of our policies on sharing non-public information with third parties, advance notice of any changes to our policies and, with limited exceptions, we must give consumers the right to prevent

sharing of their non-public personal information with unaffiliated third parties. Further, the growth and demand for online commerce could result in more stringent consumer protection laws that could impose additional compliance burdens on us. These consumer protection laws could result in substantial compliance costs.

In addition, our broker dealers are subject to additional extensive regulatory requirements under federal and state laws and regulations and self-regulatory organization ("SRO") rules. Broker dealers are subject to regulation, examination and disciplinary action by the SEC, FINRA and state securities regulators, as well as other governmental authorities and SROs with which they are registered or licensed or of which they are members. See our Annual Report on Form 10-K for the year ended December 31, 2017, Part III - Item 1A - "Risk Factors - ~~The~~PRO Securities and SpeedRoute, two subsidiaries of tZERO that currently generate substantially all of tZERO's revenues, are registered ~~broker dealers we acquired~~broker-dealers and are subject to extensive regulation."

Our efforts to expand our sales outside of the U.S. expose us to additional U.S. and foreign laws and regulations, including but not limited to, laws and regulations relating to taxation, business licensing or certification requirements, advertising practices, online services, the use of cryptocurrency, the importation of specified or proscribed items, importation quotas, consumer protection, intellectual property rights, consumer and data protection, privacy, encryption, restrictions on pricing or discounts, and the U.S. Foreign Corrupt Practices Act and other applicable U.S. and foreign laws prohibiting corrupt payments to government officials and other third parties. Our ~~investment~~ownership interest in Bitt Inc. and Bitsy, Inc. also may expose us to additional laws and regulations relating to money transmitters and money services businesses. See our Annual Report on Form 10-K for the year ended December 31, 2017, Part III - Item 1A - "Risk Factors - Our ~~investment~~ownership interest in Bitt Inc. may expose us to additional risks."

Other Factors that May Affect Future Results

We periodically evaluate opportunities to repurchase our equity securities, obtain credit facilities, or issue additional debt or equity securities. In addition, we may, from time to time, consider ~~the investment~~purchases of equity interests in, or acquisition of, complementary businesses, products, services, or technologies, whether related to our retail business, our Medici initiatives or otherwise, any of which might affect our liquidity requirements or cause us to issue additional debt or equity securities. There can be no assurance that financing arrangements will be available in amounts or on terms acceptable to us, ifor at all.

On January 27, 2017, we repurchased approximately $10 million of our common stock under the $25 million stock repurchase plan authorized by our Board of Directors on May 5, 2015. We are considering additional repurchases of our common stock, which we may finance through additional debt.

Any investment in our securities involves a high degree of risk. Investors should consider carefully the risks and uncertainties described in this Form 10-Q, including the risks described in Item 1A of Part II, ~~("Risk~~"Risk Factors") of this report and in our Annual Report on Form ~~10-Q,~~10-K for the year ended December 31, 2017, Part I - Item 1A - "Risk Factors," and all other information in this Form 10-Q and in our other filings with the SEC including those we file after we file this Form 10-Q, before deciding whether to purchase or hold our securities.

Additional risks and uncertainties not currently known to us or that we currently deem immaterial may also become important factors that may harm our business. The occurrence of any of the risks described under "Risk Factors" in this report or in our Annual Report on Form 10-K for the year ended December 31, 2017 could harm our business. The trading price of our securities could decline due to any of these risks and uncertainties, and investors may lose part or all of their investment.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Other than the interest rate swaps described below and elsewhere in this Quarterly Report on Form 10-Q, we do not use derivative financial instruments in our investment portfolio, and we have no foreign exchange contracts.

Our financial instruments consist of cash and cash equivalents, trade accounts and contracts receivable, accounts ~~payable, current notes~~ payable and long-term obligations. We consider ~~investments in~~ highly-liquid instruments with a remaining maturity of 90 days or less at the date of purchase to be cash equivalents.

In connection with the syndicated senior secured credit facility with U.S. Bank described above, we entered into interest rate swap transactions. The swaps have an effective date of September 1, 2015 and a maturity date of October 1, 2023.

The combined notional amount changes monthly beginning at approximately $3.6 million on September 1, 2015, increasing to a maximum of approximately $45.8 million as of December 31, 2016, and will decrease to approximately $38.2 million on October 1, 2023. The swaps effectively fix our effective interest rate on the approximate amounts expected to be outstanding from time to time on the Real Estate Loan at an annual rate of approximately 4.6%. At September 30, 2017, we had $45.0 million outstanding under the Real Estate Loan, and the notional amount of the swaps was $45.0 million.

We carry our interest rate swaps at fair value on our consolidated balance sheets. At September 30, 2017, we recognized swap liabilities in the amount of $1.6 million. The change in fair value of our swaps for the nine months ended September 30, 2017 was a gain of $207,000. The fair value of the swaps can be impacted by several factors including forward rates, interest rates and discount rates (see Item 1 of Part I, "Financial Statements"—Note 2. Accounting Policies, ~~Fair value of~~currently do not hold any derivative financial instruments). Because we have designated our swaps as cash flow hedges for accounting purposes, to the extent the swaps qualify for this designation and are effective, changes in the fair value of the instruments are recognized through Other comprehensive income (loss) in our statements of comprehensive income (loss) (see Item 1 of Part I, "Financial Statements"—Note 2. Accounting Policies, ~~Derivative financial instruments). On November 6, 2017, we terminated the interest rate swaps as a result of the termination of the underlying loan instruments (see Note 11—Subsequent Events).~~ or foreign exchange contracts.

Our exposure to market risk for changes in interest rates relates primarily to our short-term investments and short-term obligations; thus, fluctuations in interest rates would not have a material impact on the fair value of these securities. However, the fair values of our investments may be subject to fluctuations due to volatility of the stock market in general, investment-specific circumstances, and changes in general economic conditions.

At ~~September~~June 30, ~~2017~~,2018, we had ~~$92.3~~$152.2 million in cash and cash equivalents. Hypothetically, an increase or decrease in interest rates of one hundred basis points would have an estimated impact of ~~$923,000~~$1.5 million on our earnings or loss, or the cash flows of these instruments.

At June 30, 2018, letters of credit totaling $280,000 were outstanding under our credit facilities. Hypothetically, an increase or decrease in interest rates of one hundred basis points would have an estimated impact of $2,800 on our earnings or loss if the letters of credit were fully drawn.

At June 30, 2018, we had cryptocurrency-denominated assets totaling $3.0 million. Hypothetically, a decrease in the market value of one hundred basis points would have an estimated impact of $30,000 on our earnings or loss, and the recorded value of these instruments. Reported earnings resulting from increases in the market value of cryptocurrency would be limited to realized gains.

ITEM 4. CONTROLS AND PROCEDURES

We maintain disclosure controls and procedures, as such term is defined in Rule 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The term disclosure controls and procedures means controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission's rules and forms.

Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer's management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

Evaluation of Disclosure Controls and Procedures

We carried out an evaluation required by the Exchange Act under the supervision and with the participation of our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rule 13a-15(e) of the Exchange Act, as of the end of the period covered by this report. Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and to provide reasonable assurance that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

~~During~~Beginning January 1, 2018, we implemented ASU 2014-09, Revenue from Contracts with Customers (Topic 606). In connection with its adoption, we implemented changes to our processes and internal control activities over financial reporting to ensure compliance with the ~~most recent fiscal quarter,~~new accounting and disclosure rules.

Except for the preceding changes, there has not occurred any change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives as specified above. Management does not expect, however, that our disclosure controls and procedures will prevent or detect all

error and fraud. Any control system, no matter how well designed and operated, is based upon certain assumptions and can provide only reasonable, not absolute, assurance that its objectives will be met. Further, no evaluation of controls can provide

absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The information set forth under Item 1 of Part I, "Financial Statements "—Note 6—"Commitments and Contingencies," subheading "Legal Proceedings and Contingencies," contained in the "Notes to Unaudited Consolidated Financial Statements" of this Quarterly Report on Form 10-Q is incorporated by reference in answer to this Item.

ITEM 1A. RISK FACTORS

Any investment in our securities involves a high degree of risk. Please consider the following risk factors carefully. If any one or more of the following risks were to occur, it could have a material adverse effect on our business, prospects, financial condition and results of operations, and the market price of our securities could decrease significantly. Statements below to the effect that an event could or would harm our business (or have an adverse effect on our business or similar statements) mean that the event could or would have a material adverse effect on our business, prospects, financial condition and results of operations, which in turn could or would have a material adverse effect on the market price of our securities. Many of the risks we face involve more than one type of risk. Consequently, you should read all of the risk factors below carefully, ~~including~~as well as the risk factors ~~under the caption "Risks Related Primarily to our Common Stock and Other Securities" before making any decision to acquire or hold our common stock. Holders of, and potential investors~~described in our Series A Preferred Stock should also read "Additional Risks Related Primarily to our Series A Preferred Stock," and "Additional Risks Related to our Series A Preferred Stock and our Series B Preferred Stock," below. Holders of, and potential investorsForm 10-K for the year ended December 31, 2017, the risk factors described in our ~~Series B Preferred Stock should also read "Additional Risks Related to our Series A Preferred Stock and our Series B Preferred Stock," below.~~

~~Any investment in our securities involves a high degree of risk. Investors should consider carefully~~Form 10-Q for the ~~risks and uncertainties described below, and all other information in this Form 10-Q~~quarter ended March 31, 2018, and in any reports we file with the SEC after we file this Form 10-Q, before deciding whether to purchase or hold our securities. ~~Additional risks and uncertainties not currently known to us or that we currently deem immaterial may also become important factors that may harm our business.~~ The occurrence of any of ~~the~~these risks ~~described in this Form 10-Q~~ could harm our ~~business. The~~business, the trading price of our securities could decline, ~~due to any of these risks and uncertainties,~~ and investors ~~may~~could lose part or all of their investment.

Other than the risk factors set forth below, there are no material changes from the risk factors previously disclosed in Part I - Item 1A - "Risk Factors," of our Annual Report on Form 10-K for the year ended December 31, 2017.

We have a history of significant losses, and we expect to incur additional operating and net losses. If recent changes we ~~do not maintain profitability,~~have made in our ~~financial results and~~retail business ~~could be harmed,~~are inadequate to decrease our recent losses substantially, we will have to make additional changes to our business and our stock price could ~~suffer.~~decline.

We have a history of losses, including significant losses in 2017 and for the quarters ended March 31, 2018 and June 30, 2018, and we ~~may~~expect to incur additional operating and net losses in the ~~foreseeable~~near future. At ~~September~~June 30, ~~2017,~~2018 our accumulated deficit was ~~$158.9~~$365.5 million. We need to generate significant revenues and improve the efficiency of our operations, including our retail business marketing, in order to ~~be profitable,~~decrease our losses substantially and achieve profitability, and we may not be able to do so. ~~Although~~If the recent changes we have ~~generated positive net income~~made, including the reduction in ~~recent years,~~our marketing expenditures we ~~incurred~~began in July 2018, are inadequate to decrease our losses substantially, we will have to make deeper cuts and additional changes to our business, which may adversely affect our business prospects and have a ~~net loss~~further material adverse effects on our financial results and business.

We do not have access to any credit facility or other arrangement for ~~2011, and interim net losses during 2015, 2016 and 2017.~~borrowing funds.

We currently do not have access to a credit facility or to the proceeds of any mortgage indebtedness or other secured or unsecured indebtedness for borrowed money. We may be unable to ~~maintain profitability~~obtain financing on favorable terms, or at all. Our lack of any credit facility or other ready access to borrowed funds could have a material adverse effect on our ability to fund additional losses in the ~~future. If our revenues grow more slowly than~~near future, or to respond to unexpected cash requirements or other liquidity issues that we ~~anticipate~~may face from time to time. Our inability to generate sufficient cash flow from operations or ~~decline, or if our expenses exceed our expectations,~~obtain financing on acceptable terms would have a material adverse effect on our financial results, business and prospects.

We expect that we will need to raise capital, and the "at the market" offering that we intend to begin in the near future is not expected to raise a substantial amount in a short period of time.

We expect that we will need to raise capital, and we have entered into a sales agreement for the purpose of doing so by means of an "at the market" offering. Although we believe that the terms of the sales agreement are favorable, "at the market" offerings generally do not raise substantial amounts of capital quickly, and we do not expect that ours will do so. Our inability to raise sufficient capital reasonably quickly, if coupled with difficulties generating cash from operations and difficulties obtaining debt financing, would have a material adverse effect on our financial results, business and prospects.

The transactions contemplated by the Token Purchase Agreement and term sheets we and tZERO have signed with GSR Capital may not close.

As described in this Form 10-Q, in early August 2018 Overstock signed a Token Purchase Agreement and a term sheet with GSR Capital, a private equity firm organized under the laws of Hong Kong (“GSR”). Concurrently, tZERO signed a term sheet with GSR in lieu of the Letter of Intent regarding GSR’s purchase of up to $160 million of security tokens from tZERO. The Letter of Intent was cancelled as a result of the new agreement. Although each of the term sheets and the agreement states that it is binding, we might be ~~harmed~~unable to enforce one or more of them. Further, even if the transactions contemplated by the term sheets and the agreement are consummated as described, the closings of the proposed investments in Overstock and tZERO may not occur before December 2018, and the closing of the purchase of tZERO security tokens from Overstock may not occur before May 2019. As previously disclosed, the failure of the security token offering to result in substantial proceeds could require tZERO to reduce its planned expenditures and/or obtain additional funding from us or other sources in order to carry out its business plan, and could have a material adverse effect on tZERO's ability to carry out its business plan.

We have decreased our ~~business, prospects, financial condition~~marketing expenditures from their recent elevated levels, which may have an adverse effect on our revenues and business.

As described in our recent filings and earnings calls and elsewhere in this report, in Q1 2018 and Q2 2018 we increased our marketing expenditures substantially from their historical levels. We recently determined that the results of ~~operations~~the increased expenditures did not warrant the continuation of the increased marketing expenditures, and in July 2018 we began to decrease our marketing expenditures. The decrease could ~~fall below~~have a material adverse effect on our revenues and could adversely affect our relationships with partners and other companies with which we do business. In addition, our rapid increase to our marketing expenditures in the ~~expectations~~first half of 2018, followed by our reversal of that increase beginning in July 2018, created operational challenges for us and for our employees, partners and other companies with which we do business ~~as well as public market analysts~~ and ~~investors. The occurrence of any of the foregoing~~ could have a material adverse effect on our financial results, business and ~~business.~~prospects.

~~Our business depends on~~tZERO has recently entered into a joint venture with BOX Digital Markets LLC intended to develop a national securities exchange with regulatory authority to trade security tokens; however, regulatory authorities may never permit the ~~Internet, our infrastructure and transaction-processing systems.~~regulated exchange to become operational.

~~We are completely dependent on our infrastructure~~In June 2018, tZERO and onBOX Digital Markets LLC ("BOX Digital") announced that they had entered into a joint venture intended to develop a U.S. national securities exchange (the "Exchange") with regulatory approvals that would enable the ~~availability, reliability~~Exchange to trade security tokens. The Exchange will require approval from the U.S. Securities and ~~security~~Exchange Commission prior to beginning operations. tZERO intends to create the necessary technology, and to manage the ongoing technology implementation, administration, maintenance and support. BOX Digital intends to provide executive leadership and regulatory expertise. Subject to obtaining SEC approval, tZERO and Box Digital intend for the Exchange to operate as a facility of BOX Options Exchange, an existing registered U.S. securities exchange. There can be no assurance that the joint venture will be able to develop the Exchange, that the Exchange will achieve tZERO's goals, or that the Exchange will be able to satisfy the complex regulatory requirements applicable to SEC-registered exchanges. If tZERO is not successful in its efforts to develop the Exchange in compliance with all regulatory and legal requirements, to demonstrate to users the utility and value of the Internet and related systems. Substantially all of our computer and communications hardware is located at a single Overstock owned and operated facility. Our systems and operations are vulnerable to damage or interruption from fire, flood, power loss, telecommunications failure, terrorist attacks, cyber-attacks, acts of war, break-ins, earthquake and similar events. Our back-up facility is not adequate to support sales at a high level. Our servers and applications are vulnerable to malware, physical or electronic break-ins and other disruptions, the occurrence of any of which could lead to interruptions, delays, loss of critical data or the inability to accept and fulfill customer orders. Any system interruption that results in the unavailability of our Website or our mobile app or reduced performance of our transaction systems could interrupt or substantially reduce our ability to conduct our business. We have experienced periodic systems interruptions due to server failure, application failure, power failure and intentional cyber-attacks in the past, and may experience additional interruptions or failures in the future. Any failure or impairment of our infrastructure or of the availability of the Internet or related systems could have a material adverse effect on our financial results and business.

~~We are subject to cyber~~Exchange for trading security ~~risks and risks of data loss or other security breaches.~~

~~Our business involves the storage and transmission of users' proprietary information, and security breaches could expose us to a risk of loss or misuse of this information,~~tokens, and to resulting claims, fines, and litigation. We have been subjected to a variety of cyber-attacks, which we expect will continue to occur from time to time. Cyber-attacks may target us, our customers, our suppliers, banks, credit card processors, delivery services, e-commerce in general or the communication infrastructure on which we depend. Any compromise of our security could result in a violation of applicable privacy and other laws, significant legal and financial exposure, damage to our reputation, and a loss of confidence in our security measures, any ofbe commercially viable, tZERO's business would be materially adversely affected, which could have a material adverse effect on our financial results, business and ~~business.~~

~~Our dependence on payment card payments increases our risks.~~

Most of our customers use credit or other payment cards to pay for their purchases. Under payment card rules and our contracts with our card processors, if we experience a breach of payment card information or fail to follow payment card industry security standards, we could incur significant fines, higher transaction costs or lose our ability to give customers the option of using payment cards. If we were unable to accept payment cards, it would have a material adverse effect on our financial results and business.

~~Tariffs or other measures that increase the effective price of products we or our suppliers or fulfillment partners import into the United States could have a material adverse effect on our business.~~

We and many of our suppliers and fulfillment partners source a large percentage of the products we offer on our Website from China and other countries. If the United States imposes tariffs or other measures that directly or indirectly increase the price of products we or they import and that we offer on our Website, the increased prices could have a material adverse effect on our financial results and business.prospects.

We face intense competition and may not be able to compete successfully against existing or future competitors.

The online retail market is evolving rapidly and intensely competitive. Barriers to entry are minimal, and current and new competitors can launch new websites at a relatively low cost. We currently compete with numerous competitors, including:



•	~~online retailers with or without discount departments, including Amazon.com, AliExpress (part of the Alibaba Group), eBay, and Rakuten.com (formerly Buy.com);~~
•	~~online specialty retailers such as Blue Nile, Bluefly, Houzz, Jet.com, Wayfair, Zappos.com, and Zulily;~~
•	~~private sale sites such as Groupon, Living Social and Rue La La;~~
•	~~furniture specialists including Ashley Furniture, Bob's Discount Furniture, Havertys, Raymour & Flanigan and Rooms To Go;~~
•	traditional general merchandise and specialty retailers and liquidators including Barnes and Noble, Bed, Bath & Beyond, Best Buy, Costco, Crate and Barrel, Ethan Allen, Gilt, Home Depot, HomeGoods, Hudson's Bay Company, IKEA, J.C. Penny Company, Kirkland's, Kohl's, Lands' End, Lowe's, Macy's, Nordstrom, Pier 1 Imports, Pottery Barn, Restoration Hardware, Ross Stores, Saks Fifth Avenue, Sears, T.J. Maxx, Target, Wal-Mart and Williams-Sonoma, all of which also have an online presence; and
•	~~liquidation e-tailers such as SmartBargains.~~

online retailers with or without discount departments, including Amazon.com, AliExpress (part of the Alibaba Group), eBay, and Rakuten.com (formerly Buy.com);

online shopping services, including Google Express;

online specialty retailers such as Blue Nile, Bluefly, Houzz, Jet.com, Wayfair, Zappos.com, and Zulily;

furniture specialists including Ashley Furniture, Bob's Discount Furniture, Havertys, Raymour & Flanigan and Rooms To Go;

traditional general merchandise and specialty retailers and liquidators including Barnes and Noble, Bed, Bath & Beyond, Best Buy, Costco, Crate and Barrel, Ethan Allen, Gilt, Home Depot, HomeGoods, Hudson's Bay Company, IKEA, J.C. Penney Company, Kirkland's, Kohl's, Lands' End, Lowe's, Macy's, Nordstrom, Pier 1 Imports, Pottery Barn, Restoration Hardware, Ross Stores, Saks Fifth Avenue, Sears, T.J. Maxx, Target, Wal-Mart, and Williams-Sonoma, all of which also have an online presence; and

liquidation e-tailers such as SmartBargains.

We expect that existing and future traditional manufacturers and retailers will continue to add or improve their e-commerce offerings, and that our existing and future ~~ecommerce~~e-commerce competitors, including Amazon, will continue to increase their offerings, their delivery capabilities, and ~~delivery capabilities.~~the ways in which they enable shoppers to purchase goods, including the voice-activated shopping services offered by Amazon. Many of our competitors specialize in one or more of the areas in which we offer products. For example, our furniture offerings compete with more than 100 online retail furniture websites, in addition to many more traditional furniture retail specialists. Some of our competitors run at net losses to gain market share in the online retail market. We also face competition from shopping services such as Google Express, which offers products from Walmart, Costco, Target and other retailers on a voice-activated shopping platform. Competition from Amazon and from other competitors, many of whom have longer operating histories, larger customer bases, greater brand recognition, greater access to capital and significantly greater financial, marketing and other resources than we do, affect us and ~~could~~ have ~~a material adverse effect on our financial results~~had and ~~business.~~

~~Our competitors may directly increase our marketing costs and also may cause us to decrease certain types of marketing.~~

In addition to competing with us for customers, suppliers, and employees, our competitors may directly increase our operating costs, by driving up the cost of various forms of online advertising, as has happened recently, or otherwise. We may elect to decrease our use of sponsored search or other forms of marketing from time to time in order to decrease our costs,

which may have a material adverse effect on our financial results and business. We may also elect to spend additional amounts on sponsored search or other forms of marketing from time to time in order to increase traffic to our Website, or to take other actions to increase traffic and/or conversion, and the additional expenditures may have a material adverse effect on our financial results and business.

~~Our business depends on effective marketing, including marketing via email and social networking messaging.~~

We depend on effective marketing and high customer traffic. We depend on email to promote our site and offerings and to generate a substantial portion of our revenue. If a significant portion of our target customers no longer utilize email, or if we are unable to effectively and economically deliver email to our potential customers, whether for legal, regulatory or other reasons, it would have a material adverse effect on our business. We also rely on social networking messaging services for marketing purposes, and anything that limits our ability or our customers' ability or desire to utilize social networking services could have a material adverse effect on our business. If we are unable to develop, implement and maintain effective and efficient cost-effective advertising and marketing programs, it would have a material adverse effect on our financial results and business.

We rely upon paid and unpaid natural search engines including Google, Bing, and Yahoo! to rank our product offerings. Our financial results may suffer if search engines change their ranking algorithms and our product offerings are ranked lower in paid and/or unpaid searches, and we may at times be subject to ranking penalties if the operators of search engines believe we are not in compliance with their guidelines.

We rely on paid and unpaid natural search engines to attract consumer interest in our product offerings. Potential and existing customers use search engines provided by search engine companies, including, but not limited to, Google, Bing, and Yahoo!, which use algorithms and other devices to provide users a natural ranked listing of relevant Internet sites matching a user's search criteria and specifications. Search engine companies change their natural search engine algorithms periodically, and our ranking in natural searches may be adversely affected by those changes, as has occurred from time to time, and which occurred again during the second and third quarters of this year, reducing our revenue growth and leading us to pursue revenue growth in other more expensive marketing channels. In addition, large marketplace websites and sites which aggregate marketplace sellers with a large product selection are becoming increasingly popular, and we may not be able to place our products on these sites to take advantage of their internal search platforms. Further, some shoppers may begin their searches at a competitor's website, and may not utilize traditional search engines at all. Our inability to place products on or access these sites may have a material adverse effect on our business.

We continue to ~~experiment with various ways to reduce the number of coupons we offer to our customers, which may have adversely affected our revenue growth and may continue to do so.~~

Although our business has historically relied heavily on coupons to generate sales, we are experimenting with modifications to our coupon marketing. We believe that changes we have made to our coupon marketing in the past adversely affected our revenue growth, and that these and other changes we may make may continue to adversely affect our revenue growth. We have not yet achieved the results we are seeking, and there can be no assurance that we will be able to do so. If we are unable to generate sales using other marketing approaches at rates equal to or better than the rates we were generating through our coupon marketing, our revenue growth could be adversely affected or reversed, and it could have a material adverse effect on our financial results and business.

If one or more states successfully asserts that we should collect sales or other taxes on the sale of our merchandise or the merchandise of third parties that we offer for sale on our Website, or that we should pay commercial activity taxes, our business could be harmed.

We generally do not currently collect sales or other similar taxes on sales of goods into states where we have no duty to do so under federal court decisions construing applicable constitutional law. If any jurisdiction where we do not or did not collect sales or other taxes successfully asserts that we should do so or should have done so, or should otherwise have collected or paid other types of taxes, it could have a material adverse effect on our business. Several states have enacted laws requiring remote vendors to notify resident purchasers in those states of their obligation to pay a use tax on their purchases and, in some instances, to report untaxed purchases to the state tax authorities. Other states have enacted legislation to require retailers without a physical presence in the state to collect and remit state sales taxes if they engage in any activity in connection with the selling, leasing or delivery of tangible personal property or taxable services within the state. In the past we have terminated affiliate marketing websites as a result of efforts by certain states to require us to collect sales taxes based on the presence of our third-party Internet advertising affiliates in those states, and we may do so again, which may have material adverse effect on our financial results and business. Additionally, states may seek to apply economic pressure by enacting similar or new laws,

or revising their existing tax positions, to force or encourage remote retailers to collect and remit sales tax. Such laws could harm our business by imposing notice burdens upon us, by requiring transaction notices that would adversely affect sales, or by discouraging customer purchases by requiring detailed purchase reporting. The occurrence of any of the foregoing could have a material adverse effect on our financial results and business.

~~Economic factors, including our increasing exposure to the U.S. housing industry, may adversely affect us.~~

Economic conditions, particularly any weakness in the United States housing market, may adversely affect our financial performance. Over the last few years the percentage of our sales from home and garden products has increased substantially. We believe that our sales of home and garden products are affected by the strength of the U.S. housing industry, and that downturns in the U.S. housing industry could have a material adverse effect on our financial results and business.

~~Decreases in discretionary consumer spending may have an adverse effect on us.~~

A substantial portion of the products and services we offer are products or services that consumers may view as discretionary items rather than necessities. As a result, our results of operations are sensitive to changes in macro-economic conditions that impact consumer spending, including discretionary spending. Difficult macro-economic conditions, particularly high levels of unemployment or underemployment, also impact our customers' ability to obtain consumer credit. Other factors, including consumer confidence, employment levels, interest rates, tax rates, consumer debt levels, and fuel and energy costs could reduce consumer spending or change consumer purchasing habits. Slowdowns in the U.S. or global economy, or an uncertain economic outlook, could materially adversely affect consumer spending habits and could have a material adverse effect on our financial results and business.

~~We are attempting to expand our international business, which could adversely affect us.~~

We sell products in international markets, and are attempting to expand into some of these markets. International sales and transactions, and our efforts to expand them, are subject to inherent risks and challenges that could adversely affect us, including:



•	~~the need to develop new supplier and manufacturer relationships;~~
•	~~the need to comply with additional U.S. and foreign laws and regulations;~~
•	~~changes in international laws, regulatory requirements, taxes and tariffs;~~
•	~~our limited experience with different local cultures and standards;~~
•	~~geopolitical events, such as war and terrorist attacks;~~
•	~~the risk that the products we offer may not appeal to customers in international markets; and~~
•	~~the additional resources and management attention required for such expansion.~~

Penalties for non-compliance with laws applicable to international business and trade, including the U.S. Foreign Corrupt Practices Act, could have a material adverse effect on our business. Foreign data protection, privacy and other laws and regulations are different and often more restrictive than those in the United States. Compliance with such laws and regulations will result in additional costs and may necessitate changes to our business practices, which may adversely affect our business. To the extent that we make purchases or sales denominated in foreign currencies, we would have foreign currency risks, which could have a material adverse effect on our financial results and business.

A subsidiary of ours owns the land on which we built our new headquarters, and consequently has environmental and other risks, and we may incur environmental expense and liabilities under the environmental indemnity agreements we entered into in connection with our former credit facility or with the new loan we obtained in order to refinance our former credit facility.

In 2014 our wholly-owned subsidiary O.com Land, LLC purchased land near Salt Lake City, Utah on which we have built our new headquarters. The land is part of the Midvale SLAG Superfund Site ("Site"), a former Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") superfund site. O.com Land, LLC is required to follow certain requirements of CERCLA and the consent decree governing remediation of the Site, and its failure to do so could expose us to material environmental liabilities. Further, in connection with the credit facility we entered into with U.S. Bank and other banks, we entered into a broad environmental indemnity agreement pursuant to which we agreed to indemnify U.S. Bank and other banks and other persons against a broad array of potential environmental claims, liabilities and exposures relating to the property. We have entered into a similar indemnity agreement for the benefit of our new lender, PCL L.L.C. Any

~~such environmental liabilities, and any liabilities under any environmental indemnity agreement, could be material and could have a material adverse effect on our financial results and business.~~

~~Our secured credit facility requires us to maintain compliance with a variety of covenants.~~

We are party to a $40.0 million term loan agreement with PCL L.L.C. We will need to maintain compliance with the requirements governing the facility, including compliance with a variety of covenants, certain of which may be subject to events outside of our control. We have pledged substantially all of our assets to secure our obligations under the credit facility. If we fail to comply with the terms of the credit facility, the failure could have a material adverse effect on our liquidity and financial results and business.

~~We have incurred substantial indebtedness and may incur additional indebtedness.~~

We are party to a $40.0 million term loan agreement with PCL L.L.C. and may incur additional indebtedness. This existing indebtedness increases, and any additional future indebtedness will further increase, our business risks substantially, including our vulnerability to industry downturns and competitive pressures. The degree to which we are ultimately leveraged could materially and adversely affect our ability to obtain additional financing for working capital, acquisitions or other purposes. Our ability to satisfy our debt service obligations will be dependent upon our future performance, which will be subject to financial, business and other factors affecting our operations, many of which are beyond our control. Any difficulties we have satisfying our debt service obligations could have a material adverse effect on our financial results and business.

~~We may be unable to generate sufficient cash flow to satisfy our debt service obligations.~~

Our ability to generate cash flow from operations to make interest and principal payments on our debt obligations will depend on our future performance, which will be affected by a range of economic, competitive and business factors. We cannot control many of these factors, including general economic conditions, the health of the Internet retail industry and certain costs of marketing. If our operations do not generate sufficient cash flow from operations to satisfy our debt service obligations and all of our other obligations, we may need to borrow additional funds to make these payments or undertake alternative financing plans, such as refinancing or restructuring our debt, or reducing or delaying capital investments and other expenses. Additional funds or alternative financing may not be available to us on favorable terms, or at all. Our inability to generate sufficient cash flow from operations or obtain additional funds or alternative financing on acceptable terms could have a material adverse effect on our financial results and business.

~~Our Board has authorized a stock repurchase program and repurchases under the program reduce our liquidity and increase our risks.~~

In May 2015, our Board authorized a stock repurchase program. In January 2017, we repurchased approximately 604,000 shares of our common stock for $10 million under the program. We may repurchase additional shares for up to $15 million at any time through December 31, 2017 under our existing repurchase program. Further, our Board could authorize additional repurchases. Any such repurchases would reduce our liquidity and could increase our vulnerability to industry downturns and competitive pressures. A material decrease in our liquidity could have a material adverse effect on our financial results and business.

~~We face risks related to automating our process for onboarding new products.~~

We are in the process of automating portions of our new product onboarding process that we previously performed manually. As we do so, there is a risk that inappropriate content or products we prohibit may not be properly identified by our new systems and may appear on our Website until we identify and remove them. The appearance of any such products or content on our Website could violate applicable laws or regulations, result in damage to our brand and/or result in claims, fines or penalties, and could have a material adverse effect on our business.

~~We face risks relating to our inventory and returns.~~

In our direct business, we sell merchandise that we have purchased and hold in inventory. In addition, subject to our returns policies, we accept returns of products sold through our partners as well as products we sell in our direct business, and we have the risk of reselling the returned products. We assume the risks of inventory damage, theft and obsolescence, as well as risks of price erosion for these products, and we sometimes sell merchandise at a loss. Our risk of losses in our direct business is especially significant because much of the merchandise we sell is subject to seasonal trends, fashion trends, rapid technological change, obsolescence and price erosion, and because we sometimes make large purchases of particular types of

~~inventory. Difficulties we may experience with our inventory or returns could have a material adverse effect on our financial results and business.~~

~~If we do not successfully optimize and operate our warehouse and customer service operations, our business could be harmed.~~

We have expanded, contracted and otherwise modified our warehouse and customer service operations from time to time in the past, and expect that we will continue to do so. We also contract with third parties to operate warehouses, receive returns and process orders. If we or our third-party providers do not successfully optimize and operate our warehouse and customer service operations, it could significantly limit our ability to meet customer demand, customer shipping or return time expectations, or result in excessive costs and expenses for the size of our business. Because it is difficult to predict demand, we may not be able to manage our facilities in an optimal way, which may result in excess or insufficient inventory or warehousing capacity. We may also fail to staff our fulfillment and customer service centers at optimal levels. Our failure to manage our warehouse operations or our fulfillment and customer service centers optimally could adversely affect our financial results and customer experience, and could have a material adverse effect on our financial results and business.

~~We depend on a large number of other companies to perform functions critical to our ability to deliver products and services to our customers.~~

We depend on a large number of other companies, including a large number of independent fulfillment partners whose products we offer for sale on our Website, to perform functions critical to our ability to deliver products and services to our customers. We depend on our fulfillment partners to perform a number of traditional retail operations such as maintaining inventory, preparing merchandise for shipment to our customers and delivering purchased merchandise on a timely basis. We also depend on the delivery services that we and they utilize. Difficulties with any of our significant fulfillment partners or with any of the delivery services, regardless of the reason, could have a material adverse effect on our financial results and business.

Risks associated with the suppliers from whom we or our fulfillment partners source products and risks regarding the safety, labelling, content or quality of those products could adversely affect our financial performance.

We depend on our and our fulfillment partners' ability to access products from qualified suppliers in a timely and efficient manner. We rely on suppliers' representations of product safety, content and quality. We also rely on our suppliers and partners to ensure proper labelling of products. Issues or concerns regarding product safety, labelling, content or quality could result in consumer or governmental claims and could adversely affect our financial results and business. Any indemnity agreement we may have with a supplier or partner of a product may be inadequate or inapplicable, and any insurance coverage we may carry may be inadequate. Even unsuccessful claims could result in the expenditure of funds and management time and could have a negative impact on our business. The occurrence of any of the foregoing could have a material adverse effect on our financial results and business.

~~If we fail to accurately forecast our expenses and revenues, our business may be harmed.~~

The rapidly evolving nature of our industry and the constantly evolving nature of our business make forecasting operating results difficult. We periodically implement large, complex and expensive infrastructure upgrades in order to increase our ability to handle larger volumes of sales and to develop or increase our ability to perform a variety of analytical procedures relating to our business. We are continuing to upgrade and further expand these and other components of our infrastructure. As a result of expenditures on our infrastructure and headquarters, our ability to reduce our expenditures is and will be limited, and any significant shortfall in the revenues for which we have built and are continuing to build our business could have a material adverse effect on our financial results and business.

~~Changes in assumptions, estimates and judgments by management related to complex accounting matters could affect our financial results significantly.~~

The rules governing our financial reporting require our management to make many subjective assumptions, estimates and judgments about revenue recognition, valuation allowances and accrued liabilities (including allowances for returns, credit card chargebacks, doubtful accounts, obsolete and damaged inventory, and self-funded health insurance liabilities), internal-use software and website development (acquired and developed internally), income taxes, valuation of intangible assets and goodwill, stock-based compensation, loss contingencies and other matters. Changes in any of these assumptions, estimates or judgments could change our reported or expected financial performance significantly, and could have a material adverse effect on our financial results and business.

~~Changes in accounting policies governing our financial reporting could affect our future financial results significantly.~~

The Financial Accounting Standards Board (FASB), which sets accounting standards for U.S. public companies, has issued new standards relating to revenue recognition. Subject to transition provisions, the new standards will become effective for us on January 1, 2018. We are in the process of analyzing the new standards and their application to our financial reporting. We have not reached conclusions about the effects of the new standards on our future financial reporting, but have identified gross versus net revenue recognition, 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. 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, which could have a material adverse effect on our financial results and business.

Our income tax provisions and the amounts we reserve for tax contingencies are estimates and are subject to variations and adjustments. The amounts we ultimately pay may exceed the amounts estimated or accrued.

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 accurately predicting our pre-tax and taxable income and loss and the mix of jurisdictions to which they relate, relative changes of expenses or losses for which tax benefits are not recognized, changes in how we do business, fluctuations in our stock price, and changes in law, regulations, and administrative practices. Additionally, our effective tax rate can be more or less volatile based on the amount of pre-tax income. For example, the impact of discrete items and non-deductible expenses on our effective tax rate is greater when our pre-tax income is relatively low. We are subject to audits by a number of tax authorities. The timing of the resolution of income, sales and other tax examinations is highly uncertain, and the amounts ultimately paid, if any, upon resolution of the issues raised by the taxing authorities may differ from the amounts we have accrued. It is possible that within the next 12 months we will receive additional assessments by various tax authorities or reach resolution of tax examinations in one or more jurisdictions. These assessments or settlements may result in changes to our contingencies related to positions on prior years' tax filings and may result in increases to amounts we have accrued. The volatility of our quarterly tax provision, the resolution of matters related to our tax contingencies, and establishment of or increases to any such accruals could have a material adverse effect on our financial results and business.

We have significant deferred tax assets, and we may not be able to realize these assets in the future. Our deferred tax assets may also be subject to additional valuation allowances, which could adversely affect our operating results.

From our inception to December 31, 2013, we established a valuation allowance for our deferred tax assets, primarily due to realized losses and uncertainty regarding our future taxable income. Determining whether a valuation allowance for deferred tax assets is appropriate requires significant judgment and an evaluation of all positive and negative evidence. At each reporting period, we assess the need for, or the sufficiency of, a valuation allowance against deferred tax assets. We have historically recorded valuation allowances against deferred tax assets related to net operating losses and credits generated in domestic and foreign separate filing jurisdictions and capital losses. At June 30, 2017, based on the weight of all the positive and negative evidence (primarily our estimate of future taxable income and prudent and feasible tax planning strategies), 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 for these tax credits. Our estimates of future taxable income are based primarily on historical performance, but also include estimates and assumptions and external data, some of which are subject to significant judgment. If our actual taxable income differs significantly from our estimates, we may need to establish a valuation allowance for more or all of our deferred tax assets, which could have a material adverse effect on our financial results and business.

~~The businesses that we are pursuing through our Medici initiatives are novel and subject to technical, operational, financial, regulatory, legal, reputational and marketing risks.~~

In August 2015, we acquired the assets and business of a financial technology ("fintech") company and in January 2016, we acquired two registered broker dealers (our "broker dealer subsidiaries") that were affiliated with the fintech company. We have limited experience with the operation of fintech companies or of broker dealers. In December 2016 we issued publicly-traded securities traded exclusively on a registered alternative trading system operated by one of our majority-owned broker dealer subsidiaries, the ownership of which is tracked on a distributed ledger. We are also working on other potential financial applications of blockchain technology, including a solution for initial coin offerings and post-offering trading of cryptosecurities. All of these are areas in which we do not have substantial experience, and all of them are subject to the risks of new and novel businesses, including technical, operational, financial, regulatory, legal and reputational risks, as well as the risk

~~that we may be unable to market, license or sell our technology successfully or profitably. The occurrence of any such risks could have a material adverse effect on our financial results and business.~~

~~We may be required to write off amounts relating to our investments in startup businesses.~~

At September 30, 2017, we held investments of approximately $12.3 million in several companies that are in the startup or development stages. These investments are inherently risky because the markets for the technologies or products these companies are developing are typically in the early stages and may never materialize. Additionally, since several of our investments are in the early startup or development stages, even if their technology or products are viable, they may not be able to obtain the capital or resources necessary to successfully bring their technology or products to market. Furthermore, we have no assurance that the technology or products of our investees would be successful, even if they were brought to market. We may write off additional amounts related to these investments, and any such write-offs could be material. Any of the foregoing could have a material adverse effect on our financial results and business.

~~The registered broker dealers we acquired are subject to extensive regulation.~~

The broker dealers we acquired in January 2016 are subject to regulation, examination and disciplinary action by the SEC, the Financial Industry Regulatory Authority ("FINRA") and state securities regulators, as well as other governmental authorities and self-regulatory organizations ("SROs") with which they are registered or licensed or of which they are members. The broker dealers are also subject to rules and regulations relating to the prevention and detection of money laundering, privacy and data protection laws and regulations, and substantial other regulatory requirements. Any failure to comply with all applicable regulations, and any regulatory proceeding or civil or criminal action against any of the broker dealers that we have acquired, or any of their associated persons, could have a material adverse effect on our financial results and business. Further, any failure to identify and successfully manage conflicts of interest or to implement appropriate policies or procedures could subject the broker dealers or us to disciplinary sanctions or litigation or could harm our reputation. Any of the foregoing could have a material adverse effect on our financial results and business.

~~Our investment in Bitt Inc. may expose us to additional risks.~~

In 2016, we acquired an equity interest in Bitt, Inc., a startup company based in Barbados, that is pursuing a variety of digital currency transfer and payment businesses in the Caribbean. Virtually every state in the U.S. regulates money transmitters and money services businesses. In some states the licensing requirements and regulations expressly cover companies engaged in digital currency activities; in other states it is not clear whether or how the existing laws and regulations apply to digital currency activities. Further, U.S. federal law requires registration of most such businesses with the Financial Crimes Enforcement Network ("FinCEN"). These licenses and registrations subject companies to various anti-money laundering, know-your-customer, record-keeping, reporting and capital and bonding requirements, limitations on the investment of customer funds, and inspection by state and federal regulatory agencies. Under U.S. federal law, it is a crime for a person, entity or business that is required to be registered with FinCEN or licensed in any state to fail to do so, even if the person, entity or business was unaware of the licensing requirement. Further, under U.S. federal law, anyone who owns all or part of an unlicensed money transmitting business may be subject to civil and criminal penalties. The business in which we have invested has represented to us that it has not taken any action that could subject it to registration with FinCEN or to the licensing requirements in any state and has agreed that it will not do so until it has become properly licensed in all required states and registered with FinCEN. However, if the business makes an error, even inadvertently, we could be subject to potential civil and criminal penalties as a result. Any such penalties, or even the allegation of criminal or other illegal activities, could have a material adverse effect on us and on our financial results and business. Further, all of our foreign business activities expose us to a variety of risks, including risks under the Foreign Corrupt Practices Act.

~~Each of our offerings faces specialized competition and involves regulatory risks.~~

We offer a variety of services and product offerings, including specialized services and product offerings, such as advertising for various types of loans, credit cards and insurance offerings, automobiles, and our Farmers Market offerings. Each of these is subject to substantial regulation and competition. For example, many states and other jurisdictions, including Utah, where we are located, have regulations governing the conduct of automobile sellers and public advertising for automobile sales. We have no ability to know whether the information the automobile advertisers or other advertisers provide is correct. Similarly, we have no ability to ensure that the sellers in our Farmers Market offerings comply with all regulations governing the sale of food products. More generally, we have no ability to ensure that our partners or others with whom we do business will comply with all laws and regulations applicable to them and their transactions. Any negative publicity we receive regarding any allegations of unlawful or deceptive conduct may damage our reputation, our ability to attract new customers to our main

~~shopping site, and our brand name generally. The occurrence of any of the foregoing could have a material adverse effect on our financial results and business.~~

~~We have an evolving business model, which increases the complexity of our business.~~

Our business model has evolved in the past and continues to do so. In prior years we have added additional types of services and product offerings and in some cases we have modified or discontinued those offerings. We intend to continue to try to offer additional types of products or services, and we do not know whether any of them will be successful. From time to time we have also modified aspects of our business model relating to our product mix and the mix of direct/partner sourcing of the products we offer. The additions and modifications to our business have increased the complexity of our business and impacted our management, personnel, operations, systems, technical performance, financial resources, and internal financial control and reporting functions. Future additions to or modifications of our business are likely to have similar effects. Further, any new business or website we launch that is not favorably received by consumers could damage our reputation or our brand. The occurrence of any of the foregoing could have a material adverse effect on our financial results and business.

~~The seasonality of our business places increased strain on our operations.~~

A disproportionate amount of our sales normally occur during our fourth quarter. If we, or our partners, do not stock or are otherwise unable to source products sufficient to meet customer demand, our business would be adversely affected. We may experience an increase in our net shipping cost due to complimentary upgrades and the expense of shipments necessary to ensure timely delivery for the holiday season. In addition, we may be unable to adequately staff our fulfillment and customer service centers during peak periods, and delivery services and other fulfillment companies and customer service providers may be unable to meet the seasonal demand. The occurrence of any of the foregoing, or the occurrence of a disappointing fourth quarter for any reason, could have a material adverse effect on our financial results and business.

~~Acquisitions we have made and may make will increase costs and regulatory and integration risks.~~

From time to time we have acquired, and may in the future acquire, other businesses or the assets of other businesses. Integrating an acquired business or its assets involves a number of risks and financial, managerial and operational challenges. We have incurred significant expenses in connection with acquisitions we have made in the past, and expect to incur additional expenses in connection with those acquisitions or in connection with other acquisitions we may make in the future. Our profitability has been and may continue to be adversely affected by such acquisitions. Further, acquisitions may also create a need for additional accounting, tax, compliance, documentation, risk management and internal control procedures, and may require us to hire additional personnel to implement, perform and/or monitor such procedures. To the extent our procedures are not adequate to appropriately implement, perform and/or monitor all necessary procedures relating to any new or expanded business, we could be exposed to a material loss or regulatory sanction. The occurrence of any of the foregoing could have a material adverse effect on our financial results and business.

~~We are routinely involved in substantial litigation.~~

From time to time we receive claims and become subject to lawsuits involving consumer protection, employment, intellectual property and other matters related to the conduct and operation of our business and the sale of products on our Website, including claims by regulators and by customers. In addition, we have in the past been and in the future may be, involved in substantial litigation. We are presently involved in litigation regarding the constitutionality of certain state tax laws. Litigation can be costly and time consuming and could divert management and key personnel from our regular business operations. An unfavorable resolution of any substantial litigation matter could have a material adverse effect on our financial results and business.

~~We may be accused of infringing intellectual property rights of third parties.~~

We have been and expect we will continue to be subject to claims that we have infringed the intellectual property rights of others, by offering allegedly infringing products or otherwise. We have contested and expect to continue to contest claims we consider unfounded rather than settling such claims, even when we expect the costs of contesting the claims to exceed the cost of settlement. Any claims may result in significant expenditure of our financial and managerial resources, and may result in us making significant damages or settlement payments or changes to our business. We could be prohibited from using software or business processes, or required to obtain licenses from third parties, which could be expensive or unavailable. Any such difficulties could have a material adverse effect on our financial results and business.

~~We may be unable to protect our proprietary technology and to obtain trademark protection for our marks.~~

Our success depends to a significant degree upon the protection of our software and other proprietary intellectual property rights. We may be unable to protect it, in the United States or elsewhere, which could have a material adverse effect on our business. Further, we may not be able to secure protection for our service marks or trademarks in the United States or elsewhere as we expand internationally. Our competitors might adopt product or service marks similar to our marks, or might try to prevent us from using our marks. Any claim by another party against us or customer confusion related to our trademarks, or our failure to obtain trademark registration, could have a material adverse effect on our financial results and business.

~~Our decision to accept and hold cryptocurrency, such as bitcoin, may subject us to exchange risk and additional tax and regulatory requirements.~~

In January 2014, we began accepting bitcoin as a form of payment for purchases on our Website. Bitcoin is not considered legal tender or backed by any government, and it has experienced price volatility, technological glitches and various law enforcement and regulatory interventions. In September 2014, we began accepting bitcoin internationally. The use of cryptocurrency such as bitcoin has been prohibited or effectively prohibited in some countries. We also accept other cryptocurrencies for sales to customers in the United States and internationally. If we fail to comply with regulations or prohibitions applicable to us, we could face regulatory or other enforcement actions and potential fines and other consequences. From time to time we also hold bitcoin and other cryptocurrencies directly, and we have exchange rate risk on the amounts we hold as well as the risks that regulatory or other developments may adversely affect the value of the cryptocurrencies we hold. The uncertainties regarding legal and regulatory requirements relating to cryptocurrencies or transactions utilizing cryptocurrencies, as well as potential accounting and tax issues, or other requirements relating to cryptocurrencies could have a material adverse effect on our financial results and business.

~~Our cash, cash equivalents and short-term investments are subject to a risk of loss based upon the solvency of the financial institutions in which they are maintained.~~

We maintain the majority of our cash, cash equivalents and short-term investments in accounts with a small number of major financial institutions within the United States, in the form of demand deposits, money market accounts, time deposits, U.S. Treasury Bills and other short-term investments. Our deposits in these institutions are generally substantially in excess of the amounts of insurance provided by the FDIC, and some deposits may not be covered by insurance at all. If any of these institutions were to become insolvent or subject to regulatory action, we could lose some, or all, of such deposits, which would have a material adverse effect on our financial results and business.

~~Existing or future government regulation could harm our business.~~

We are subject to regulation at the federal, state, local and international levels, including regulation relating to privacy, security, retention, transfer and use of personal user information and telemarketing laws. Increasing regulation may increase the cost of our business and may further restrict our marketing efforts. Our expanding business model may trigger additional regulatory scrutiny. Existing laws, including those governing advertising, product labeling, product content requirements and product safety, may cause us to incur expenses. We may be subject to claims related to personal injury, death, environmental or property damage. We are periodically required to participate in product recalls. We may incur expense in connection with any of the foregoing or other matters or actions which may not be covered by any liability insurance we may carry. These current and future laws and regulations could have a material adverse effect on our financial results and business.

Changes in management roles and responsibilities, the loss of key personnel, particularly technical personnel, or any inability to attract and retain additional personnel could affect our ability to successfully grow our business.

Our performance is substantially dependent on the continued services and on the performance of our senior management and other key personnel. Our performance also depends on our ability to retain and motivate our officers and key employees. Changes in the roles and responsibilities of members of management and other key personnel, including changes resulting from members of our e-commerce management team and other key personnel who have transitioned or will transition in the future to our majority-owned subsidiary tZERO, or the loss of the services of any of our executive officers or other key employees for any reason could harm our business. Members of senior management or key employees may need to take a leave of absence for medical or other reasons. ~~In 2013 our~~Our Chief Executive Officer ~~and then Chairman of the Board,~~ Dr. Patrick Byrne took ~~a two-month leave~~medical leaves of absence ~~for medical reasons,~~in 2013 and ~~in 2016 he took a three-month leave of absence for medical reasons.~~2016. We do not have employment agreements with any of our key personnel and we do not maintain "key person" life insurance policies. Our future success, in both our e-commerce business and in our Medici business, also depends on our ability to identify, attract, hire, train, retain and motivate other highly-skilled technical, managerial, editorial, merchandising, marketing and customer service personnel. Competition for such personnel, particularly technical personnel including high-end data engineers, experts in rapidly developing fields including artificial intelligence and machine learning, and other technical experts, including personnel with expertise in blockchain technology and applications, is intense. Our failure to attract and retain the necessary personnel could have a

material adverse effect on our financial results, business and ~~business. In addition, events affecting Dr. Patrick Byrne could result in a default and/or early mandatory pre-payment obligation under our new $40 million loan.~~prospects.

~~Mobile commerce is becoming increasingly significant~~tZERO's business has recently undergone a change in management and changes to ~~us.~~

~~Mobile commerce within our iOS and Android apps is becoming increasingly significant~~its business operations are expected to ~~us. Customers who shop on mobile devices may behave differently from our other customers.~~follow. If ~~we fail to~~tZERO does not successfully ~~develop app-specific features or if we fail to keep up with mobile technology~~implement and adapt to ~~the changing mobile landscape,~~these changes, it could have a material adverse effect on ~~our business.~~tZERO's business and on us.

~~Changes we are making~~In May 2018, Joe Cammarata resigned his position as President of tZERO. Mr. Cammarata had also previously served as the chief executive officer of SpeedRoute. In connection with Mr. Cammarata's resignation, Saum Noursalehi, formerly president of Overstock, assumed the role of Chief Executive Officer (CEO) of tZERO. Concurrent with Mr. Noursalehi's assumption of the CEO position, Dr. Patrick Byrne resigned as CEO of tZERO and assumed the role of tZERO Executive Chairman. Although Mr. Cammarata and Dr. Byrne intend to ~~Club O or our~~remain active as members of tZERO's board of directors, the loss of ~~Club O Gold members~~their day-to-day services could create a gap in management and could adversely affect ~~us.~~

~~We recently have made~~its business. In connection with the recent changes ~~and are planning additional~~in management, tZERO anticipates that there will be significant changes to our Club O offerings. For example, in Q4 2016 we discontinued rewards on the Club O Silver program. Such changes could cause confusion among our customers. Because our Club O Gold members tend to be particularly valuable customers, a loss of a significant number of them would have an adverse effect on us. Further, if we fail to successfully implement the changes we are planning or otherwise fail to develop and market our Club O offerings, it could have a material adverse effect on our business.

~~Our insurance coverage and indemnity rights may not adequately protect us against loss.~~

The types, coverage, or the amounts of any insurance coverage we may carry from time to time may not be adequate to compensate us for any losses we may actually incur in the operation of our business. Further, any insurance we may desire to purchase may not be available to us on terms we find acceptable or at all. We are not indemnified by all of our suppliers, and any indemnification rights we may have may not be enforceable or adequate to cover actual losses we may incurits operations as a result of our sales of their products. Actual losses for which we are not insured or indemnified, or which exceed our insurance coverage or the capacity of our indemnitors or our ability to enforce our indemnity agreements, could have a material adverse effect on our business.

~~We are partially self-insured~~well as with respect to ~~our employees' health insurance.~~its key strategies and tactical initiatives. If ~~the actual costs of~~tZERO does not successfully implement and adapt to these ~~claims exceed the amounts we have reserved for them, we would incur additional expense.~~

~~Beginning January 1, 2017, we are partially self-insured with respect to our employees' health insurance, except~~changes they may not lead to the ~~extent~~desired improvement in tZERO's business and results of stop-loss coverage that limits our losses both on a per employee basis and an aggregate basis. The actual costs of our employees' health insurance claims could exceed our estimates of those costs for a number of reasons, including more claims or larger claims than we expect, and increases in the costs of healthcare generally. If the actual cost of our employees' health insurance claims and related expenses exceeds the amounts we have accrued, we may be required to record additional charges for these claims and/or to establish additional reserves,operation, which could have a material adverse effect on our financial results, business and ~~business.~~prospects.

~~Risks Related Primarily~~If one or more states successfully asserts that we are liable for the collection of sales or other taxes for periods prior to the Supreme Court's recent decision in South Dakota v. Wayfair, our ~~Common Stock and Other Securities~~business could be harmed.

(Holders of, and potential investors in, our Series A Preferred Stock should also read "Additional Risks Related Primarily to our Series A Preferred Stock," and "Additional Risks Related to our Series A Preferred Stock and our Series B Preferred Stock," below.)

~~(Holders of, and potential investors in, our Series B Preferred Stock should also read "Additional Risks Related to our Series A Preferred Stock and our Series B Preferred Stock," below.)~~

~~The issuance of our Series A Preferred Stock and our Series B Preferred Stock could adversely affect the holders of our common stock in some circumstances.~~

In December 2016, we issued shares of our Blockchain Voting Series A Preferred Stock (the "Series A Preferred") and our Voting Series B Preferred Stock (the "Series B Preferred," and together with the Series A Preferred, collectively sometimes called the "Preferred Stock") in a registered rights offering (the "rights offering"). The Preferred Stock could adversely affect the holders of our common stock in some circumstances. Except as required by law, the Preferred Stock votes with the common stock on all matters submitted to a vote of the common stock, with holders of the Preferred Stock having one vote for each share of Preferred Stock held. As of September 30, 2017, the 681,259 issued shares of Preferred Stock constituted approximately 2.7% of the total number of shares of the Preferred Stock and the common stock, taken together. The Preferred Stock ranks seniorPrior to the ~~common stock with respect to dividends. Holders of the Preferred Stock will be entitled to an annual cash dividend equal to $0.16 per share of Preferred Stock,~~Supreme Court's recent decision in ~~preference to any dividend payment to the holders of the common~~

~~stock. Holders of the Preferred Stock are also entitled to participate~~South Dakota v. Wayfair, in ~~any cash dividends~~which we ~~pay to the holders of the common stock and are also entitled to participate in any non-cash dividends we pay to holders of the common stock, subject to different treatment if we effect~~were a stock dividend, stock split or combination of the common stock. The Preferred Stock will rank on a parity with the common stock with respect to rights upon our liquidation, winding up or dissolution. If we are anamed party, to ~~any merger or consolidation~~overturn its 1992 decision in ~~which the common stock is changed into or exchanged for stock~~Quill v. North Dakota, we generally did not collect sales or other ~~securities~~similar taxes on sales of goods into states where we had no duty to do so under Quill. If any jurisdiction where we did not collect sales or other ~~person (or the Company) or cash or any other property (or a right to receive the foregoing),~~taxes successfully asserts that we will be required to use all commercially reasonable efforts to cause each outstanding share of the Preferred Stock to be treated as if such share were an additional outstanding share of common stock in connection with any such transaction. Any of the foregoingshould have done so, it could have a material adverse effect on ~~the holders~~our business, regardless of the ~~common stock.~~ultimate outcome.

~~Our quarterly operating results are volatile~~Strategic relationships, joint ventures, purchases of strategic interests in other companies and ~~may adversely affect the market price~~acquisitions of ~~our securities, and you may lose all or a part of your investment.~~other companies involve numerous risks.

We have ~~experienced~~developed strategic relationships, entered into joint ventures, purchased strategic interests in other companies, and acquired other companies, and we expect to ~~continue to experience significant fluctuations~~pursue and engage in ~~our operating results because~~similar types of ~~seasonal fluctuations in traditional retail patterns. Our gross revenues have historically been significantly lower~~activities in the ~~first and second calendar quarters than~~future. Each of these types of business transactions involve numerous risks, including difficulties in the ~~fourth quarter~~evaluation of business opportunities and risks, as well as difficulties in the assimilation of acquired operations and products. These types of transactions can also result in the diversion of management's attention from other business matters, employee retention issues, and the risk of liability for liabilities of acquired companies. We may not be able to successfully integrate businesses, operations, personnel, services, products or other assets that we have acquired or may acquire in the future. In addition, we may be unable to sell or otherwise monetize any of the ~~prior year due primarily to increased shopping activity during the fourth quarter holiday season. Further,~~interests or companies or other assets or rights we generally increase our inventories substantially in anticipation of holiday season shopping activity, which has a negative effect on our cash flow. As a result of the fourth quarter holiday season shopping, we also typically have ~~unusually large payments due to our fulfillment partners~~acquired or may acquire in the ~~first calendar quarter. Our revenues and operating results have varied in the past and~~future. We also may ~~continue~~be unable to ~~vary significantly from quarter to quarter due to a number~~maintain our strategic relationships, including those with joint venture partners, or develop new strategic relationships. The occurrence of other factors, many of which are outside our control. In addition to seasonal effects and the other risk factors described in this report, factors that have caused and/or could cause our quarterly operating results to fluctuate and in turn affect the market price of our securities include:



•	~~increases in the cost of advertising and changes in our sales and marketing expenditures;~~
•	~~expenses we incur in our Medici development efforts~~
•	~~our inability to retain existing customers or encourage repeat purchases;~~
•	~~the extent to which our existing and future marketing campaigns are successful;~~
•	~~price competition, in the costs of marketing as well as in producing pricing, that results in losses or lower profit margins;~~
•	~~the amount and timing of operating costs and capital expenditures relating to the expansion of our business operations and infrastructure;~~
•	~~the amount and timing of our purchases of inventory;~~
•	~~our inability to manage distribution operations or provide adequate levels of customer service;~~
•	~~increases in the cost of fuel, transportation or distribution;~~
•	~~our ability to successfully implement technology changes or to integrate operations and technologies from acquisitions or other business combinations;~~
•	~~our efforts to offer new lines of products and services; and~~
•	~~our ability to attract users to our shopping and other sites.~~

~~Any~~any of the foregoing which could have a material adverse effect on our financial results, ~~and~~ business and ~~particularly on our ability to raise capital, and could have a material adverse effect on the holders of our securities.~~prospects.

~~Sales by our significant stockholders~~We are exploring strategic initiatives, and decisions we may make could have anmaterial adverse ~~effect~~effects on ~~the market price of~~ our ~~stock.~~

~~A small number of our stockholders own significant percentages of our common stock~~business and ~~preferred stock. If one or more of them were to offer or sell all or a portion of their holdings,~~ the market price of our common stock, preferred stock or both could be materially adversely affected. In addition, the transfer of ownership of a significant portion of our outstanding shares within a three-year period could adversely affect our ability to use our net operating losses to offset future taxable net income. Any of the foregoing could have a material adverse effect on the holders of our securities.stock.

We ~~do not intend to pay dividends on~~have been and are currently exploring certain strategic initiatives, and decisions we make could change our ~~common stock~~business fundamentally and ~~you may lose~~increase the ~~entire amount of your investment in our common stock.~~

~~We have never declared or paid any cash dividends on our common stock~~risks and ~~do not intend to pay dividends on our common stock for the foreseeable future. We intend to invest our future earnings, if any, to fund our growth. Therefore, holders~~

uncertainties of our ~~common stock will not receive any funds without selling their shares. You may not receive~~business substantially. We are considering a ~~positive return on your investment, and you may lose your entire investment.~~

~~Provisions in our amended and restated certificate~~range of ~~incorporation and bylaws and Delaware law might discourage, delay or prevent a change of control of our company or changes in our management.~~

Our amended and restated certificate of incorporation and bylaws contain provisions that could discourage, delay or prevent a change in control of our company or changes in our management that the stockholders of our company may deem advantageous. These provisions among other things:



•	~~permit the board of directors to establish the number of directors;~~
•	provide that only one-third of our board of directors is elected at each of our annual meetings of stockholders (and our amended and restated certificate of incorporation prohibits cumulative voting in the election of directors);
•	~~mean that directors may be removed by the affirmative vote of the holders of the outstanding shares of common stock only "for cause;"~~
•	~~authorize the issuance of "blank check" preferred stock that our board could use to implement a stockholder rights plan (also known as a "poison pill");~~
•	~~eliminate the ability of our stockholders to call special meetings of stockholders;~~
•	~~prohibit stockholder action by written consent, which requires all stockholder actions to be taken at a meeting of our stockholders;~~
•	~~provide that the board of directors is expressly authorized to make, alter or repeal our bylaws;~~
•	~~establish advance notice requirements,~~potential transactions, including specific requirements as to the timing, form and content of a stockholder's notice, for nominations for election to our board or for proposing matters that can be acted upon by stockholders at annual stockholder meetings;
•	~~provide that special meetings of our stockholders may be called only by the board of directors, the chairman of the board, the chief executive officer or the president; and~~
•	provide that stockholders are permitted to amend the bylaws only with the approval of the holders of sixty-six and two-thirds percent (66-2/3%) of the voting power of outstanding capital stock entitled to vote at an election of directors.

In addition, Section 203 of the Delaware General Corporation Law may discourage, delay or prevent a change in control of our company. In general, Section 203 prohibits a publicly held Delaware corporation from engaging in a "business combination" with an "interested stockholder" for a period of three years following the date the person became an interested stockholder, subject to certain exceptions.

Further, certain provisions of the loan agreement we entered into on or about November 6, 2017 with a lender directly or indirectly wholly owned by members of Dr. Patrick Byrne’s family could discourage, delay or prevent a change in control of our company or changes in our management.

Our board of directors or the compensation committee could accelerate the vesting of outstanding restricted stock units upon a sale of the Company or otherwise, which could result in an increase in the number of shares outstanding.

The compensation committee of our board has granted and expects to grant additional restricted stock units ("RSUs") to certain of our employees and directors. Under the terms of the outstanding grants, upon vesting, one share of our common stock is issued for every RSU held. Under the terms of these grants, the board or the compensation committee could determine to accelerate the vesting of RSUs in the event of a sale of our ~~company~~e-commerce business and additional equity or ~~otherwise, which would~~debt financings. There can be no assurance that we will pursue or consummate any strategic transaction or, if consummated, that any such transaction will ultimately be favorable to the Company and its stockholders. Any such transaction could materially adversely affect our business and financial results. In addition, our exploration of strategic and financing options has required and will continue to require significant time and attention by our management, and the incurrence of significant expenses. Further, our efforts to keep investors informed about our consideration of strategic alternatives may result in ~~an increase in the number of shares outstanding,~~distraction and ~~would dilute stockholders' ownership of~~unrest among our company. Although the number of RSUs outstanding changes frequently, the aggregate amount outstanding as of September 30, 2017 was approximately 2.2% of the number of shares of common stock outstanding.

We have issued and in the future may again issue preferred stock as authorized by our amended and restated certificate of incorporation without further stockholder approval for purposes of a stockholder rights plan or for other purposes, and any such preferred stock could entitle the holders to rights superior to those of the holders of our common stock.

Our amended and restated certificate of incorporation authorizes our Board to designate and issue preferred stock on such terms as may be approved by the Board without further stockholder approval. In addition to the possibility that the Board could do so in connection with the adoption of a stockholder rights plan as described above, the Board has done so and could do so again for a variety of other purposes.

~~We generally have not received significant coverage by securities analysts, and the lack of coverage~~employees, which may adversely affect ~~our share price~~employee engagement, morale and ~~trading volume.~~

~~We generally have not received significant coverage by securities analysts,~~retention and the lack of coverage may adversely affect our share price and trading volume. The lack of coverage may cause our share price or trading volume to be lower than they might be if more analysts covered us.

~~Additional Risks Related Primarily to our Series A Preferred Stock~~

The Series A Preferred and the tZERO Platform are novel, and the use of the PRO Securities ATS utilizing the tZERO Platform for trading public digital securities was untested prior to the December 2016 closing of the offering of the Series A Preferred.

Trades in publicly traded securities currently generally take place through the continuous net settlement system operated by The Depositary Trust Company ("DTC"). Our Series A Preferred does not trade or settle through the system operated by the DTC. Instead, shares of Series A Preferred trade exclusively on a registered alternative trading system (the "PRO Securities ATS") operated by our indirect majority-owned subsidiary PRO Securities LLC ("PRO Securities") utilizing technology known as the tZERO Issuance and Trading Platform (the "tZERO Platform"). Shares of Series A Preferred can be held only in an online brokerage account with Keystone Capital Corporation ("Keystone"). Unlike trades through the system operated by the DTC, trades of the Series A Preferred settle on the trade date. The tZERO Platform is a recent development, licensed by PRO Securities from our majority-owned subsidiary tØ.com, Inc. ("tZERO"), and the tZERO Platform had not been tested with public trading of digital securities prior to the closing of the offering of the Series A Preferred in December 2016. Consequently, investors in the Series A Preferred bear the risks of investing in a novel type of security that trades exclusively on a novel type of trading platform and that is subject to a number of unusual restrictions, as well as the risks of investing in our business. Any failure of the PRO Securities ATS or of the tZERO Platform to perform as expected could have a material adverse effect on holders' ability to sell the Series A Preferred.

Our Series A Preferred is not and will not be listed on any securities exchange; prior to December 2016 there was no trading market for the Series A Preferred, and an active trading market has not yet developed and may not develop.

Our Series A Preferred is a new issue of securities that may be traded only on an unprecedented trading platform. Prior to December 2016 there was no established trading market for the Series A Preferred, and no digital security had ever been publicly traded on the PRO Securities ATS or utilizing the tZERO Platform. As of September 30, 2017 only 141 persons had open online brokerage accounts with Keystone for the purpose of acquiring and holding shares of Series A Preferred, including persons who opened accounts in order to participate in the rights offering, and only ten trades in the Series A Preferred had taken place since the closing of the rights offering in December 2016. The Series A Preferred is not and will not be listed on any securities exchange or any other market of any kind, other than the PRO Securities ATS utilizing the tZERO Platform. Even if a trading market for the Series A Preferred does develop on the PRO Securities ATS utilizing the tZERO Platform, the depth and liquidity of that market and the ability of the holders to sell the Series A Preferred may nevertheless be very limited, which may have a material adverse effect on holders of the Series A Preferred.

The technology on which the tZERO Platform depends has been developed by our majority-owned subsidiary, tZERO, and is licensed by its subsidiary, PRO Securities, and the Series A Preferred depends on both tZERO and on PRO Securities, neither of which has substantial resources.

tZERO is a majority-owned subsidiary of ours and owns 100% of the equity interest in PRO Securities. tZERO licenses the tZERO Platform to PRO Securities, and PRO Securities operates the PRO Securities ATS. tZERO also licenses the tZERO Platform to the Company for the Company's use in connection with the Series A Preferred. Neither tZERO nor PRO Securities has substantial resources. PRO Securities had net capital of approximately $9,194 at September 30, 2017. Neither tZERO nor PRO Securities has any legally binding commitment from any person, including the Company, to contribute additional capital or to make any loan to either of them. If any one or more of the Company, tZERO or PRO Securities were unable to fund its operations in the future, or if any one or more of them were to become the subject of a bankruptcy or other insolvency proceeding, PRO Securities might be unable to continue to operate the tZERO Platform, and the Series A Preferred could be materially adversely affected. In any such event, holders of our capital stock, including the Series A Preferred, could lose their entire investment in our capital stock, including all amounts invested in the Series A Preferred.

~~The requirement that each prospective purchaser of Series A Preferred open and maintain an online brokerage account with Keystone limits the number of potential purchasers.~~

In order to trade in the Series A Preferred, a prospective purchaser is required to open an online brokerage account with Keystone Capital Corporation ("Keystone"), and it is possible that very few prospective purchasers will ever do so. Consequently, we expect liquidity in the Series A Preferred to be very limited, which could have a material adverse effect on ~~holders' ability to trade the Series A Preferred.~~our financial results, business and prospects.

~~Accounts for the Series A Preferred are held directly~~We engage in related-party transactions, which could result in conflicts of interest involving our management.

We have engaged in the ~~customer's name, rather than~~past, and continue to engage, in ~~"street name."~~

~~Each investor~~related-party transactions with members of our management, including with Patrick Byrne and Saum Noursalehi and their affiliates. In November 2017, our subsidiary O.com Land, borrowed $40 million from PCL, an entity owned by the brother and mother of Dr. Byrne, and in May 2018 we repaid the ~~Series A Preferred is required to open an online brokerage account~~loan. In June 2018, we bought all of the common stock of a company 62% owned by Saum Noursalehi for $3.4 million in ~~his, her~~cash and Overstock common stock. We also own interests in businesses, including tZERO and Bitsy, Inc., in which one or ~~its name with Keystone. Investors cannot hold their Series A Preferred in "street name." The Series A Preferred shares are directly recorded on~~more of our stockholder books and records maintained by Computershare Trust Company, N.A. ("Computershare"). We expect that many potential investors will not hold securities in their own names and therefore will not invest in the Series A Preferred. In addition, as a result of this requirement, individual retirement accountsdirectors, officers and other ~~fiduciary or nominee accounts including 401(k) accounts are unable to acquire shares~~employees own interests. In July 2018, Medici Ventures purchased an additional 25% equity interest in Bitsy, a startup company founded and owned in part by Medici Ventures' chief operating officer and general counsel, for $4.5 million in cash and Overstock common stock. Related party transactions present conflicts of ~~Series A Preferred (although certain custodial accounts for minors are permitted). We expect that these limitations will further limit liquidity in the Series A Preferred,~~interest and ~~the limitations may have a material adverse effect on the development of any trading market in the Series A Preferred.~~

~~The complete trading history of each digital wallet is available to the general public and it may be possible for members of the public to determine the identity of the holders of wallets.~~

The tZERO Platform makes trade data publicly available shortly after each trade. Although the trade data that the tZERO Platform makes publicly available is anonymous, the publicly available information includes the digital wallet address (the location where records of transactions and balances involving the series A Preferred are stored) of each holder transacting in Series A Preferred, and the entire trading history of each digital wallet (including the number of securities traded by each digital wallet, the price of each trade and the balance of the securities held in each digital wallet). As a result, the trading history of each digital wallet is available to the general public. It may be possible for members of the public to determine the identity of the holders of certain wallets based on the information that the tZERO Platform makes publicly available and other publicly available information, including any ownership reports required to be filed with the SEC regarding the Series A Preferred. In addition, under Delaware law stockholders have certain rights to inspect and copy a corporation's stock ledger and a list of its stockholders. Delaware law also requires the Company to make lists of its stockholders, including the number of shares held, available for inspection by stockholders of the Company in connection with stockholder meetings. These lists disclose the identity of stockholders of record. Because all holders of the Series A Preferred are holders of record, all of them are subject to the risk of loss of their anonymity. Potential investors who desire to execute their trades in relative anonymity may find these aspects of the tZERO Platform unattractive, which may further limit liquidity in the Series A Preferred, and may have a material adverse effect on the development of any trading market in the Series A Preferred.

~~Only certain persons and entities are able to acquire Series A Preferred.~~

Only certain persons and entities may purchase Series A Preferred. We expect that these limitations will limit liquidity in the Series A Preferred, and the limitations may have a material adverse effect on the development of any trading market in the Series A Preferred.

~~The Series A Preferred and any development of a trading market for the Series A Preferred depends on both Keystone and its clearing broker, ETC.~~

The Series A Preferred depends on the continuing business operations of both Keystone and Electronic Transaction Clearing, Inc. ("ETC"). Keystone is the only broker dealer authorized to provide the accounts required to acquire, hold and trade shares of Series A Preferred, and ETC is the clearing broker for Keystone with respect to the Series A Preferred. Any failure of either Keystone or ETC to continue operating its business in the ordinary course or to satisfactorily perform their respective obligations could require PRO Securities to engage a substitute broker dealer to perform the functions we expect Keystone to perform, and Keystone or such substitute broker dealer might need to engage a substitute clearing broker. PRO Securities or Keystone may not be able to do so on a timely basis or at all. A transition from Keystone to a replacement broker dealer or from ETC to a replacement clearing broker would be a lengthy process, during which time it would be impossible to trade Series A Preferred.

~~A violation of privacy or data protection laws could have a material adverse effect on PRO Securities, tZERO or other entities, the tZERO Platform and the Series A Preferred.~~

PRO Securities, tZERO and other entities relevant to the operation of the PRO Securities ATS utilizing the tZERO Platform, including Keystone, ETC and Computershare, are subject to applicable privacy and data protection laws and regulations. Any violations of laws and regulations relating to the safeguarding of private information could subject us or any of them to fines, penalties or other regulatory actions, as well as to civil actions by affected parties. Any such violations could adversely affect the ability of PRO Securities to operate the PRO Securities ATS or to use the tZERO Platform, either of which could have a material adverse effect on ~~holders' ability to trade Series A Preferred.~~

~~PRO Securities, tZERO, the PRO Securities ATS, the tZERO Platform~~our financial results, business and ~~the other entities relevant to the operation of the PRO Securities ATS are subject to cyberattacks, security risks and risks of security breaches.~~

PRO Securities, tZERO, the PRO Securities ATS, the tZERO Platform and the other entities relevant to the operation of the PRO Securities ATS utilizing the tZERO Platform, including Keystone, ETC and Computershare, are all subject to cyberattacks, security risks and risks of security breaches. An attack on any of them or a breach of security of any of them could result in a loss of private data, unauthorized trades, and an interruption of trading for an extended period of time. Any such attack or breach could adversely affect the ability of PRO Securities to operate the PRO Securities ATS or to utilize the tZERO Platform, or both, any of which could have a material adverse effect on holders' ability to trade the Series A Preferred. Any breach of data security that compromises the security of any of the private digital keys used to authorize or validate transaction orders, or that enables any unauthorized person to generate any of the private digital keys, could result in unauthorized trades and would have a material adverse effect on the Series A Preferred. Because trades on the PRO Securities ATS utilizing the tZERO Platform settle on the trade date, it could be impossible to correct unauthorized trades.

In the event of the insolvency of Keystone or ETC, the Securities Investor Protection Corporation would be unable to cause the return of shares of Series A Preferred until a substitute for Keystone or ETC, as applicable, was in place.

The Securities Investor Protection Corporation ("SIPC") oversees the liquidation of member broker dealers that close when the broker dealer is bankrupt or in financial trouble, and customer assets are missing. In a liquidation under the Securities Investor Protection Act, SIPC and a court-appointed trustee typically work to return customers' securities and cash. Within limits, SIPC expedites the return of missing customer property by protecting each customer up to $500,000 for securities and cash (including a $250,000 limit for cash only). If Keystone or ETC were to become insolvent, the structure of the trading system for the Series A Preferred could cause delays in the return of Series A Preferred until a substitute for Keystone or ETC, as applicable, was in place, which could have a material adverse effect on holders of Series A Preferred.

~~Certain transactions involving the Series A Preferred will require manual intervention, which could result in errors.~~

All ordinary course Series A Preferred purchase and sale transactions initiated by purchasers and sellers through their Keystone accounts are executed on the PRO Securities ATS utilizing the automated processes of the tZERO Platform, without separate manual intervention by any of the relevant parties. Extraordinary transactions, however, may require manual intervention, which would be initiated by employees of ETC through the tZERO Platform. For example, a unilateral transfer to a specific transferee, such as gift to a family member or charity, or an involuntary transfer pursuant to a court order, will require such manual intervention. In any situation involving manual intervention, there is a risk of human error. The same-day settlement of trades on the PRO Securities ATS utilizing the tZERO Platform also means that any error not detected promptly on the trade date may be impossible to correct, which could have a material adverse effect on holders of Series A Preferred.prospects.

The ~~same-day settlement~~price of ~~trades on the PRO Securities ATS utilizing the tZERO Platform may make it impossible to correct trading errors in the Series A Preferred.~~

Trades on the PRO Securities ATS utilizing the tZERO Platform settle on the trade date rather than on the current three-day (T+3) basis or the two-day (T+2) basis expected to begin in September 2017. This may make it impossible to correct trading errors that might have been corrected prior to settlement under a T+3 or T+2 system. Consequently, persons acquiring shares of Series A Preferred must accept the risk that correction of any trading errorsour common stock has experienced volatility which may be ~~impossible.~~due in part to short-selling activity and our disclosures about exploration of strategic alternatives. If we determine not to sell our Company or our e-commerce business or make other fundamental changes to our business, the trading prices of our securities may decrease significantly. The ~~occurrence~~trading prices of our securities may also decrease significantly if we determine to take any such trading error could have a material adverse effect on any affected holder of Series A Preferred. Further, in the future ETC's custody and settlement systems may be able to move funds between customer accounts in near real-time after order executions are recorded by the PRO Securities ATS on the electronic data store in which the ownership and transfer of the Series A Preferred are recorded (the "Proprietary Ledger"), which could result in near-real time settlement. Near-real time settlement would further increase the risk that correction of trading errors may be impossible, and could have a material adverse effect on any affected holder of Series A Preferred.actions.

The ~~technology on which~~trading price of our common stock is volatile. In the ~~tZERO Platform depends is~~first quarter of 2018, our common stock traded at a high of $89.80; in ~~an area~~the second quarter of 2018 it traded at a high of $41.50. Our stock price fluctuations may be due in ~~which tZERO~~part to short-selling activity related to our common stock and ~~PRO Securities have limited experience.~~

~~Neither tZERO nor PRO Securities has significant experience with~~our disclosures about our exploration of strategic alternatives, including decisions or announcements to pursue or not to pursue such strategic alternatives. The practice of short-selling activity may adversely affect our common stock price and business in the ~~technology on which~~future. In addition, to the ~~tZERO Platform depends~~extent our stock price fluctuations resulted from our disclosures about our exploration of strategic initiatives, any decision or ~~the operation~~announcement of the tZERO Platform. Portions of the technology utilized by the tZERO Platform have been developed by tZERO recently. Any problems tZERO or PRO Securities encounters with the operation of the tZERO Platform, including technical, legal and regulatory problems, could have a ~~material adverse effect on holders of the Series A Preferred.~~

~~tZERO~~decision we may ~~continue~~make not to ~~modify the tZERO Platform, and~~pursue any such ~~modifications could require periods of downtime during which trading on the PRO Securities ATS might be suspended.~~

tZERO developed the tZERO Platform recently and intends to continue to work on enhancements to the tZERO Platform. The continued development of enhancements to the tZERO Platform or other modifications of the tZERO Platformstrategic initiatives could cause ~~service interruptions and interruptions in~~the trading ~~on the PRO Securities ATS, which~~prices of our securities to decrease significantly. The trading prices of our securities could also decrease significantly if we make ~~it impossible~~or announce any decision to ~~trade the Series A Preferred from time to time. Any~~go forward with or pursue any such ~~interruptions could occur with little or no notice, which could have a material adverse effect on holders of the Series A Preferred.~~

Our use of the Bitcoin blockchain to enable members of the public to confirm that the public copies of the Proprietary Ledger have not been altered depends on the continued availability and functioning of the Bitcoin blockchain.

The Series A Preferred trade exclusively on the PRO Securities ATS utilizing the tZERO Platform. The tZERO Platform embeds a digital fingerprint in the Bitcoin blockchain that may be used to confirm that the public copies of the Proprietary Ledger have not been altered. No person, business, governmental authority or other entity or authority of any kind has any obligation to provide any financial, technical or other support to the continued operation or development of blockchain technology. If the Bitcoin blockchain were to become unavailable to us in its current form and functionality for any reason, we would need to use a different form of public announcement, which could make it more difficult for members of the public to confirm that the public copies of the Proprietary Ledger have not been altered, which could have a material adverse effect on the holders of the Series A Preferred.

~~Trading in the Series A Preferred depends on the operation and functionality of the PRO Securities ATS, on tZERO's proprietary tZERO Platform and on the Proprietary Ledger.~~strategic initiatives.

The ~~Series A Preferred trades exclusively~~recent fluctuations of trading prices of our common stock may be due in part to the volatility of the cryptocurrency market, including Bitcoin, together with an apparent misperception that the value of our business is related to the value of Bitcoin. Consequently, the market price of our shares may rise and fall as a result of increases and decreases in Bitcoin or other cryptocurrencies despite our disclosures that we generally hold very little Bitcoin.

The recent fluctuations of trading prices of our common stock may be due in part to the volatility of the cryptocurrency market, including Bitcoin, together with an apparent misperception that the value of our business is related to the value of Bitcoin. Consequently, the market price of our shares may rise and fall as a result of increases and decreases in Bitcoin or other cryptocurrencies despite our disclosures that we generally hold very little Bitcoin. The market price of our shares may also be affected by perceptions regarding the business prospects of our Medici business and blockchain technology generally. To the extent that our blockchain initiatives do not succeed, or the development or acceptance of blockchain networks, blockchain assets or blockchain applications slows or stops, the trading prices of our shares could decrease significantly.

We must make choices on ~~the PRO Securities ATS utilizing the tZERO Platform. The ATS is operated and maintained by PRO Securities,~~how to allocate our limited capital and the decisions we may make could have material adverse effects on our business.

We have limited capital, which we must allocate among our retail and Medici Ventures/tZERO ~~Platform is maintained by tZERO. Each of PRO Securities~~business opportunities. Capital allocation decisions are difficult, and ~~tZERO is a direct or indirect majority-owned subsidiary of the Company, and neither of them has substantial resources. If the PRO Securities ATS or the tZERO Platform were~~we may not allocate our capital efficiently. Our failure to fail to operate as intended for any reason, trading in the Series A Preferred could be impossible until the failure were corrected and full functionality of the affected system or systems were restored and tested. Further, if the Proprietary Ledger were to fail to operate as intended, or were to become unavailable to us in its current form and functionality for any reason, the tZERO Platform might be unable to publish trade data or to provide trade data to ETC and to the transfer agent. Any of the foregoingallocate our capital efficiently could have a material adverse effect on our ~~ability to execute or settle trades of Series A Preferred, to maintain accurate records of the ownership of the Series A Preferred~~financial results, business and ~~to comply with our obligations relating to records of the ownership of the Series A Preferred and a material adverse effect on the holders of the Series A Preferred.~~

~~The Series A Preferred depends on Computershare as the transfer agent for the Series A Preferred.~~

Computershare serves as the transfer agent for both the Series A Preferred and the Series B Preferred. If Computershare were unable or unwilling for any reason to serve as the transfer agent for the Series A Preferred, trading in the Series A Preferred would be impossible unless we were able to locate another transfer agent able and willing to serve as a replacement transfer agent for the Series A Preferred. We estimate that a transition from Computershare to a replacement transfer agent would take approximately three months; however, any such transition could take longer, during which time it would be impossible to trade in the Series A Preferred, which would have a material adverse effect on the holders of the Series A Preferred.

~~The tZERO Platform relies on technology and intellectual property rights licensed from tZERO to PRO Securities.~~

The ability of PRO Securities to operate the PRO Securities ATS utilizing the tZERO Platform depends on technology and intellectual property rights that PRO Securities licenses from our majority-owned subsidiary tZERO. Keystone, ETC and

Computershare, in the performance of their respective obligations, also depend on the technology and intellectual property rights that they license (or have licensed on their behalf) from tZERO. tZERO has filed both provisional and non-provisional patent applications covering numerous aspects of the technology relating to the tZERO Platform, none of which have been granted. We believe that a number of organizations are or may be working to develop trading systems utilizing distributed ledger or blockchain technologies that may be competitive with the tZERO Platform. Some or all of such organizations and/or their respective investors have substantially greater resources than tZERO or we have, and many or all of them may be attempting to patent technologies that may be competitive with or similar to the technology tZERO has developed. If third parties obtain patents covering any or all of the technology relating to the tZERO Platform, or if the rights of tZERO to the technology or intellectual property necessary for the operation of the tZERO Platform were otherwise invalidated or limited, or if tZERO were to fail to comply with its obligations under the applicable license agreement, or for any other reason were unable to provide the technology and intellectual property that PRO Securities requires, PRO Securities would be unable to operate the PRO Securities ATS utilizing the tZERO Platform, which would have a material adverse effect on the holders of the Series A Preferred.

~~The potential application of U.S. laws regarding traditional investment securities to the Series A Preferred is unclear.~~

The commercial law regarding traditional investment securities in the United States is well-developed. Article 8 of the Uniform Commercial Code as adopted in most states, including Delaware, provides a set of rules that governs common aspects of securities transfers and related matters. Because of the differences between the Series A Preferred and traditional investment securities, there is a risk that issues that might easily be resolved by existing law if traditional securities were involved may not be easily resolved for the Series A Preferred. The occurrence of any such issue or dispute could have a material adverse effect on the holders of Series A Preferred.

~~The potential application of U.S. laws regarding virtual currencies and money transmission to PRO Securities' use of the Bitcoin blockchain is unclear.~~

Existing state and federal laws applicable to various activities of persons exchanging or otherwise using virtual currencies, in some cases expressly including Bitcoin, impose prohibitions and require licensing or registration requirements and impose substantive regulations on such persons. Many more states impose licensing and substantive regulation on persons engaging in various activities relating to money transmission, some of which do or may apply to the transmission of virtual currencies such as Bitcoin. The failure to be properly licensed and registered if required under any of these state or federal laws can be a criminal offense. The tZERO Platform uses the Bitcoin blockchain for the purpose of enabling members of the public to confirm that the public copies of the Proprietary Ledger have not been altered. The tZERO Platform does not use the Bitcoin blockchain for any purpose of transmitting value and does not transmit Bitcoin to any third-party; rather, the tZERO Platform simply transmits nominal amounts of Bitcoin to itself in order to embed data relating to Series A Preferred transactions into the Bitcoin blockchain. None of the parties involved in the operation of the tZERO Platform is licensed under the virtual currency or money transmission regulations of any state in the United States or registered with the Financial Crimes Enforcement Network ("FinCEN") of the U.S. Department of the Treasury. Although we do not believe that the operation of the tZERO Platform requires such licensing or registration, if any regulatory authority were to assert otherwise, it could have a material adverse effect on the ability of the parties involved in the operation of the tZERO Platform to publish Series A Preferred trade data to the Bitcoin blockchain, which could have a material adverse effect on the holders of the Series A Preferred.

~~The potential application of foreign laws to the tZERO Platform is unclear.~~

Any person opening an account with Keystone will be required to represent that doing so and acquiring shares of Series A Preferred will not cause a violation of any law, rule or regulation of any jurisdiction outside of the United States and will not subject us or PRO Securities or the tZERO Platform to regulation by any authority in any jurisdiction outside of the United States. We also limit purchasers of Series A Preferred to certain U.S. residents, entities and trusts. If we became subject to any law, rule or regulation of any jurisdiction outside of the United States, it could have a material adverse effect on the ability of PRO Securities to operate the tZERO Platform and on the Series A Preferred, which would have a material adverse effect on the holders of the Series A Preferred.

~~Regulatory or factual developments may adversely affect the tZERO Platform.~~

Neither PRO Securities nor tZERO is registered as a transfer agent under the Exchange Act. If PRO Securities or tZERO were required to register as a transfer agent, the process would be expensive and one or both entities might be unable to do so. Further, future regulatory developments could otherwise affect the tZERO Platform or the ability of PRO Securities to operate the tZERO Platform. To the extent that any current or future regulatory requirements adversely affect the ability of PRO

~~Securities to operate the tZERO Platform or its ability to utilize the Bitcoin blockchain, such regulatory requirements would have a material adverse effect on the holders of the Series A Preferred.~~

~~PRO Securities is involved in an ongoing dialog with regulatory authorities.~~

PRO Securities has been and remains involved in ongoing discussions with regulatory authorities about the operation of the PRO Securities ATS utilizing the tZERO Platform and various matters relating to the regulated entities involved. While many of the discussions have been relatively informal, PRO Securities has also received and responded to written inquiries, and most recently received and responded to additional written inquiries from FINRA. While we consider these continuing inquiries to be ordinary course in light of the non-traditional nature of the registered alternative trading system operated by PRO Securities utilizing the tZERO Platform, any failure of PRO Securities to satisfy FINRA or any other regulatory authority that PRO Securities is in compliance with all applicable rules and regulations could have a material adverse effect on the holders of the Series A Preferred.

~~Holders of Series A Preferred are at risk of fee and commission increases by Keystone.~~

At present the tZERO Platform does not allow more than a single broker dealer to provide access to the system. The lack of an alternative broker dealer to provide access to the tZERO Platform may subject customers to the risk of fee and commission increases by Keystone. Keystone has agreed to limits on the fees and commissions it will charge to customers who trade shares of the Series A Preferred; however, if PRO Securities and tZERO agree to amend the relevant agreements to permit increases to those limits, or if such agreements or the provisions regarding such matters were ineffective for any reason, it could have a material adverse effect on holders of the Series A Preferred.

We have the right to convert the outstanding shares of Series A Preferred into shares of Series B Preferred at any time, even if the Series B Preferred is trading for substantially less than the Series A Preferred.

We have the right to cause the conversion of all outstanding shares of Series A Preferred into shares of Series B Preferred at any time. If we were to do so at a time when the Series B Preferred were trading at a price lower than the trading price of the Series A Preferred, holders of Series A Preferred would likely experience an immediate and potentially material decrease in the market value of the Series A Preferred they hold and of the Series B Preferred they would receive upon the conversion. Investors should not purchase shares of Series A Preferred unless they are willing to hold shares of Series B Preferred in lieu of shares of Series A Preferred.

~~The terms of the Series B Preferred could be amended after the issuance of the Series B Preferred without the consent of the holders of the Series A Preferred.~~

The terms of the Series B Preferred may be amended at any time without the consent of the holders of the Series A Preferred. Nevertheless, we will have the right to cause the conversion of all outstanding shares of Series A Preferred into shares of Series B Preferred at any time. Consequently, holders of Series A Preferred are subject to the risk that their shares could be converted into shares of Series B Preferred having terms different from those of the Series B Preferred at the date of its issuance or at the date of a holder's acquisition of Series A Preferred. Any such amendment of the Series B Preferred could have a material adverse effect on holders of Series A Preferred.

The restrictions on the tax reporting of holder's cost basis in shares of Series A Preferred will not allow normal tax planning in the sale of shares of Series A Preferred, and may result in disadvantageous tax consequences to a seller of Series A Preferred.

Taxpayers must report gains and losses on sales of securities, and related cost basis information when they file their income tax returns. Brokers, including Keystone, also have a requirement to report sales information to the IRS. Holders of most securities typically can elect one of several methods permitted by the IRS for their reporting of their cost basis in securities. However, only one method of cost basis reporting (the first-in, first-out, or FIFO, method) is available for the Series A Preferred. Sellers of Series A Preferred will not be able to elect any method other than FIFO to report their sales information to the IRS. As a result, sellers of Series A Preferred may be required to pay more tax on their sales or to pay taxes earlier than might have been required if other methods of cost basis reporting had been available, which could have a material adverse effect on the holders of Series A Preferred.

~~Additional Risks Related to our Series A Preferred Stock and our Series B Preferred Stock~~

~~We do not intend to issue any additional shares of either Series A Preferred or Series B Preferred, which is expected to result in very limited trading in each series.~~

Although we have the right to convert the outstanding shares of Series A Preferred into Series B Preferred, we do not intend to issue any additional shares of Series A Preferred or any additional shares of Series B Preferred. Consequently, we expect trading of the Series A Preferred and the Series B Preferred to be limited to the shares we issued in the rights offering. As a result, trading in the Series A Preferred and the Series B Preferred may be very limited.

~~We do not expect there to be any market makers to develop a trading market in the Series A Preferred, and there is only one market maker in the Series B Preferred.~~

Most securities that are publicly traded in the United States have one or more broker dealers acting as "market makers" for the security. A market maker is a firm that stands ready to buy and sell the security on a regular and continuous basis at publicly quoted prices. Currently, to our knowledge, there is only one market maker in the Series B Preferred. Further, we do not believe that the Series A Preferred will ever have any market makers. We expect the lack of market makers to contribute to a lack of liquidity in the Series A Preferred and in the Series B Preferred, which could have a material adverse effect on holders' ability to trade either of them.

~~Rule 144 will not be available for resales of "restricted shares" of Series A Preferred, and Rule 144 volume limitations on resales of Series B Preferred would be very low.~~

Persons, including non-affiliates of a public company such as the Company, who acquire shares directly or indirectly from the public company, or from an affiliate of the public company, in a transaction or chain of transactions not involving any public offering, acquire "restricted shares" for purposes of Rule 144. Although Rule 144 permits public sales of "restricted shares" subject to certain conditions, we do not expect Rule 144 ever to be available for any sales of Series A Preferred. Because all of the shares of Series A Preferred and Series B Preferred were issued in a registered public offering, and because we expect to register the resale of shares of Series A Preferred and Series B Preferred by our affiliates, we do not anticipate that any outstanding shares of Series A Preferred or Series B Preferred will be "restricted" for purposes of Rule 144. However, any person who acquires any shares of Series A Preferred or Series B Preferred in any manner described in the definition of "restricted securities" in Rule 144, will acquire "restricted" shares. We do not expect Rule 144 ever to be available for public resales of any shares of Series A Preferred, and the sale of any such shares may be difficult or impossible. Further, because of the limited number of shares of Series B Preferred outstanding, sales of Series B Preferred under Rule 144 may also be severely limited.

We will have an economic incentive to repurchase Series A Preferred and Series B Preferred at prices below the redemption price, and our doing so could cause the trading prices of Series A Preferred and Series B Preferred, as applicable, to decrease further.

Subject to applicable laws and regulations regarding issuer repurchases of their capital stock, we could repurchase shares of the Series A Preferred or Series B Preferred. If we repurchase any shares, we would do so only at or below the prices at which we could redeem shares. Because our right to redeem the Series A Preferred and the Series B Preferred will be at prices that will vary with the price of our common stock as well as the prices of the Series A Preferred and the Series B Preferred, respectively, and in any case would be no less than the Subscription Price, we will have an economic incentive to repurchase the shares at their trading prices from time to time if those prices are lower than the prices at which we would be entitled to redeem the shares. If we repurchase (or redeem) shares of either Series A Preferred or Series B Preferred, the trading market for the shares would become less liquid, which could cause the trading prices to decrease further, giving us an economic incentive to repurchase additional shares. The occurrence of the foregoing could have a material adverse effect on holders of Series A Preferred, the holders of Series B Preferred, or both.

~~A share of Series A Preferred and/or Series B Preferred may have a substantially lower market value than a share of our common stock.~~

The trading prices of the Series A Preferred and the Series B Preferred may be substantially lower than the trading price of our common stock at any time. The market for the Series B Preferred is expected to have substantially less liquidity than the market for our common stock, which is traded on the Nasdaq Global Market, and the market for the Series A Preferred has been and is expected to remain even more limited. The Series B Preferred trades in the over-the-counter market rather than on any securities exchange, and the Series A Preferred trades exclusively on the PRO Securities ATS utilizing the tZERO

Platform, which is a closed trading platform. Consequently, the trading prices of the Series A Preferred and the Series B Preferred may both be substantially lower than the trading price of our common stock, which could have a material adverse effect on holders of Series A Preferred and holders of Series B Preferred. On June 23, 2017, OTC Markets Group, Inc. announced that the Series B Preferred quotations had been moved from the OTCQB® Venture Market to the OTCQX® Best Market; however, the change may not result in improved liquidity in the Series B Preferred. Further, the Series B Preferred may fail to qualify for the OTCQX in the future.

Holders of Series A Preferred and/or Series B Preferred have no rights with respect to our common stock, but they may be adversely affected by certain events or changes made with respect to our common stock.

Holders of our Series A Preferred and our Series B Preferred have no rights with respect to our common stock, and no right to convert their Series A Preferred or Series B Preferred into shares of common stock or to exchange their Series A Preferred or Series B Preferred for shares of common stock, except that such holders have the right to vote with the common stock (together with the holders of the other series of Preferred Stock) on any matter submitted to a vote of the holders of the common stock, the right to receive payments upon liquidation with the holders of the common stock (together with the holders of the other series of Preferred Stock) and the right to receive dividends (together with the holders of the other series of Preferred Stock) in preference to the holders of the common stock and to participate in cash dividends, if any, paid on the common stock. Holders of Preferred Stock do not have other rights of the holders of the common stock, including the right to respond to common stock tender offers, if any, and their investment in the Series A Preferred and/or the Series B Preferred may be materially negatively affected by any such event. Holders' lack of any such rights, or the occurrence of any such event, could have a material adverse effect on holders of Series A Preferred and holders of Series B Preferred.

Voting rights of holders of Preferred Stock generally will be limited to voting together with the holders of the common stock as a single class, and the holders of the Series A Preferred and the holders of the Series B Preferred collectively will have only a small percentage of the voting power on any matter submitted to the holders of the common stock and the Series A Preferred and Series B Preferred, voting together as a single class.

Voting rights of holders of Preferred Stock generally will be limited to voting together with the holders of the common stock as a single class. Neither the holders of the Series A Preferred nor the holders of the Series B Preferred have any right by themselves, either together or as separate classes, to elect any members of our board of directors. As of September 30, 2017, the 681,259 shares of Preferred Stock outstanding represented approximately 2.7% of the combined voting power of the Series A Preferred, the Series B Preferred and the common stock, voting together as a single class. If an amendment requiring stockholder approval is proposed to our Amended and Restated Certificate of Incorporation or our Amended and Restated Bylaws, the holders of the Series A Preferred and the holders of the Series B Preferred will vote together with the holders of the common stock as a single class, but neither the holders of the Series A Preferred nor the holders of the Series B Preferred will be entitled to a class vote on the amendment, unless the proposed amendment would adversely affect the special rights, preferences, privileges and voting powers of the Series A Preferred or Series B Preferred, respectively. Holders' limited voting rights and any of the foregoing events could have a material adverse effect on holders of Series A Preferred and holders of Series B.

The Series A Preferred and the Series B Preferred rank junior to all of our and our subsidiaries' liabilities, as well as the capital stock of our subsidiaries held by third parties, in the event of a bankruptcy, liquidation or winding up of our or our subsidiaries' business.

In the event of our bankruptcy, liquidation or winding up, our assets will be available to make payments to holders of Series A Preferred and to holders of Series B Preferred only after all of our liabilities have been paid, and neither the Series A Preferred nor the Series B Preferred will have any preference over the common stock in the event of our bankruptcy, liquidation or winding up. In addition, the Series A Preferred and Series B Preferred will rank structurally junior to all existing and future liabilities of our subsidiaries, as well as the capital stock of our subsidiaries held by third parties, including employees holding shares of our majority-owned subsidiary tZERO and employees holding shares of any other direct or indirect subsidiary of ours, whether now existing or created in the future. Any bankruptcy, liquidation or winding up of the Company or any of its wholly or partially owned subsidiaries would have a material adverse effect on holders of Series A Preferred and holders of Series B Preferred.

Our obligation to pay dividends on the Series A Preferred or on the Series B Preferred is limited, and our ability to pay dividends on the Series A Preferred and on the Series B Preferred may be limited.

Our obligation to pay preferential dividends on the Series A Preferred and the Series B Preferred is subject to our board of directors declaring such dividend payments. Further, although we will be contractually restricted from paying a

dividend on the common stock unless we have paid preferential cumulative 1.0% annual dividends on the Series A Preferred and the Series B Preferred, we have never paid a dividend on the common stock and we have no current intent to do so. Consequently, our failure to pay preferential dividends on the Series A Preferred and on the Series B Preferred might have no legal effect on us at all, although it could adversely affect the trading prices of the Series A Preferred and of the Series B Preferred. Further, our payment of any dividends will be subject to contractual and legal restrictions and other factors the board deems relevant. Moreover, agreements governing any future indebtedness of ours may further limit our ability to pay dividends on our capital stock, including the Series A Preferred and the Series B Preferred. In addition, our ability to pay dividends is limited by applicable law. Any of the foregoing could have a material adverse effect on the holders of the Series A Preferred and the holders of the Series B Preferred.

~~Purchasers of the Series A Preferred and of the Series B Preferred may be adversely affected by our issuance of any subsequent series of preferred stock.~~

Neither the terms of the Series A Preferred nor the terms of the Series B Preferred restrict our ability to issue one or more additional new series of preferred stock, any or all of which may rank equally with or have preferences over the Series A Preferred and the Series B Preferred as to dividend payments, voting rights, rights upon liquidation or other types of rights. We will have no obligation to consider the specific interests of the holders of Series A Preferred or the specific interests of the holders of Series B Preferred in creating any such new series of preferred stock or engaging in any such offering or transaction. Our creation of any such new series of preferred stock or our engaging in any such offering or transaction could have a material adverse effect on the holders of Series A Preferred and the holders of Series B Preferred.

~~It is uncertain whether the IRS will treat the Series A Preferred and Series B Preferred as common stock or preferred stock for U.S. federal income tax purposes.~~

We intend to treat the Series A Preferred and Series B Preferred as common stock for U.S. federal income tax purposes. Nevertheless, it is unclear whether the IRS will treat the Series A Preferred and Series B Preferred as common stock for U.S. federal income tax purposes. If the IRS were not to treat either the Series A Preferred or the Series B Preferred as common stock for U.S. federal income tax purposes, it could have a material adverse effect on the holders of Series A Preferred and the holders of Series B Preferred.prospects.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

~~Issuance~~Unregistered issuance of equity securities

On ~~September 22, 2017,~~June 28, 2018, we issued ~~14,639~~100,000 shares of our common stock in ~~exchange~~a private placement to the stockholders of SiteHelix, Inc., including Saum Noursalehi, who owned approximately 62% of the SiteHelix common stock, as part of the acquisition price for ~~14,639 shares~~our acquisition of all of the common stock of SiteHelix. Mr. Noursalehi is a member of our ~~Voting Series B Preferred Stock in an exchange~~Board of Directors and served as President, Retail, of Overstock until May 8, 2018, when he became Chief Executive Officer of tZERO. The issuance was exempt from the registration ~~under~~requirements of the Securities Act of 1933, as amended, ~~pursuant to Section 3(a)(9) thereof. The class~~as a private placement under Rule 506(b) of persons to which we issued the common stock was holders of our Voting Series B Preferred Stock. No underwriters were involved. The transaction was an exchange in which we did not pay any consideration other than the issuance of the shares of common stock and did not receive any consideration other than the delivery of the shares of Voting Series B Preferred Stock. The exchange was between the issuer with existing security holders exclusively where no commission or other remuneration was paid or given directly or indirectly for soliciting the exchange. The shares of Voting Series B Preferred Stock we received in the exchange were not restricted in the hands of the stockholders that exchanged them.Regulation D.

Issuer purchases of equity securities

None.

Limitations upon the payment of dividends

We have never declared or paid any cash dividends on our common stock. We currently intend to retain any earnings for future growth and do not anticipate paying any cash dividends on our common stock in the foreseeable future. Any future determination to pay dividends on our common stock will be at the discretion of our board of directors and will depend on our results of operations, financial conditions, contractual and legal restrictions and other factors the board of directors deems relevant.

In December 2016, we issued a total of 695,898 shares of our preferred stock (the "Preferred Stock"), of which 681,259 shares remained outstanding at ~~September~~June 30, ~~2017.~~2018. The Preferred Stock ranks senior to our common stock with respect to dividends. Holders of the Preferred Stock are entitled to an annual cash dividend of $0.16 per share, in preference to

any dividend payment to the holders of the common stock, out of funds legally available for payment of dividends and subject to declaration by our ~~board~~Board of ~~directors.~~Directors. Holders of the Preferred Stock are also entitled to participate in any cash dividends we pay to the holders of the common stock and are also entitled to participate in non-cash dividends we pay to holders of the common stock, subject to potentially different treatment if we effect a stock dividend, stock split or combination of the common stock. There are no arrearages in cumulative preferred dividends. We declared and paid a cash dividend of $0.16 per share on our preferred stock during 2017.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS



(a)	Exhibits
	10.1^(a)	~~Medici Ventures,~~t0.com, Inc. 2017 ~~Stock Option~~Equity Incentive Plan as amended and restated on May 21, 2018 (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on ~~August 1, 2017~~May 25, 2018 (File No. 000-49799)).
	*10.2^(a)	Option Agreement dated May 21, 2018 between t0.com, Inc. and Saum Noursalehi.
	10.3^(a)(b)(c)	Stock Purchase Agreement dated June 28, 2018 between Saum Noursalehi and the other stockholders of SiteHelix, Inc., and Overstock.com, Inc. (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on June 29, 2018 (File No. 000-49799)).
	*10.4^(a)	Description of unwritten compensation arrangement with Saum Noursalehi
	*10.5^(a)	Offer letter dated April 1, 2018 from Overstock.com, Inc. to Gregory J. Iverson
	*31.1	Exhibit 31.1 Certification of Chief Executive Officer
	*31.2	Exhibit 31.2 Certification of Chief Financial Officer
	*32.1	Exhibit 32.1 Section 1350 Certification of Chief Executive Officer
	*32.2	Exhibit 32.2 Section 1350 Certification of Chief Financial Officer
	101	Attached as Exhibit 101 to this report are the following documents formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Comprehensive Income (Loss), (iv) Consolidated Statements of Cash Flows, (v) Consolidated Statements of Stockholders' Equity, and (vi) Notes to Consolidated Financial Statements.

* Filed herewith.

(a) Management or compensatory arrangement or agreement.

(b) Schedules have been omitted pursuant to Item 601(b)(2) of Regulation S-K. A copy of any omitted schedule will be furnished supplementally to the Securities and Exchange Commission upon request.

(c) The representations and warranties of each of the parties contained in the Stock Purchase Agreement and the assertions embodied in those representations and warranties may not be accurate or complete because they are subject to a contractual standard of materiality different from those generally applicable to stockholders or were used for the purpose of allocating risk between the parties rather than establishing matters as facts. Accordingly, investors should not rely on the representations and warranties contained in the Stock Purchase Agreement as characterizations of the actual state of facts, or for any other purpose, at the time they were made or otherwise.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



Date:	~~November 8, 2017~~August 9, 2018	OVERSTOCK.COM, INC.

		/s/ ~~ROBERT P. HUGHES~~GREGORY J. IVERSON
		~~Robert P. Hughes~~Gregory J. Iverson
		~~Senior Vice President, Finance and Risk Management~~Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)

8163



	September 30, 2017			December 31, 2016
Acquired intangible assets	$	16,000		$	16,000
Intangible assets, other (1)	1,571			1,356
	17,571			17,356
Less: accumulated amortization of intangible assets	(9,283		)	(6,443		)
Total intangible assets, net	$	8,288		$	10,913



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 September 30, 2017
Interest rate swap	$	52		Interest expense	$	4	Other income, net	$	—
Three months ended September 30, 2016
Interest rate swap	$	(64	)	Interest expense	$	1	Other income, net	$	—
Nine months ended September 30, 2017
Interest rate swap	$	120		Interest expense	$	12	Other income, net	$	—
Nine months ended September 30, 2016
Interest rate swap	$	(1,624	)	Interest expense	$	1	Other income, net	$	—



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 September 30, 2017
Interest rate swap	Current and Other long-term liabilities	2023	$	45,010	$	(1,609	)	$	(1,696	)	$	87		$	(1,609	)
Three months ended September 30, 2016
Interest rate swap	Current and Other long-term liabilities	2023	$	45,054	$	(4,256	)	$	(4,683	)	$	427		$	(4,256	)
Nine months ended September 30, 2017
Interest rate swap	Current and Other long-term liabilities	2023	$	45,010	$	(1,609	)	$	(1,816	)	$	207		$	(1,609	)
Nine months ended September 30, 2016
Interest rate swap	Current and Other long-term liabilities	2023	$	45,054	$	(4,256	)	$	(2,397	)	$	(1,859	)	$	(4,256	)



	Three Months Ended September 30, 2017
Change in the Estimate of Average Transit Times (Days)	Increase (Decrease) Revenue			Increase (Decrease) Pre-Tax Income
2	$	(15,709	)	$	(1,722	)
1	$	(6,126	)	$	(682	)
As reported	As reported			As reported
-1	$	4,669		$	510
-2	$	9,227		$	1,009



	Payments Due by Period
Contractual Obligations	Remainder of 2017		2018		2019		2020		2021		Thereafter		Total
U.S. Bank term loan payments (1)	$	45,010	$	—	$	—	$	—	$	—	$	—	$	45,010
U.S. Bank master lease agreement (2)	12,651		—		—		—		—		—		12,651
Operating leases (3)	2,273		6,962		6,733		4,292		4,336		20,775		45,371
Purchase obligations (4)	3,497		1,528		—		—		—		—		5,025
Total contractual cash obligations	$	63,431	$	8,490	$	6,733	$	4,292	$	4,336	$	20,775	$	108,057