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 30, 2017~~March 31, 2019



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), and (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, a 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~~Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.0001 par value	OSTK	NASDAQ Global Market

35,275,785 shares of the Registrant's common stock, par value $0.0001, outstanding on ~~November~~May 3, ~~2017.~~2019

OVERSTOCK.COM, INC.

FORM 10-Q

~~Table of Contents~~

For the Quarterly Period Ended March 31, 2019

TABLE OF CONTENTS



		Page
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	8
	Notes to Unaudited Consolidated Financial Statements	9

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	33

Item 3.	Quantitative and Qualitative Disclosures ~~about~~About Market Risk	5551

Item 4.	Controls and Procedures	5652

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	5854

Item 1A.	Risk Factors	5854

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	7954

Item 3.	Defaults Upon Senior Securities	8054

Item 4.	Mine Safety Disclosures	8055

Item 5.	Other Information	8055

Item 6.	Exhibits	8055

		Signature	8156

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)

Overstock.com, Inc.

Consolidated Balance Sheets (Unaudited)

(in ~~thousands)~~thousands, except per share data)


	September 30, 2017			December 31, 2016			March 31, 2019			December 31, 2018
Assets
Current assets:
Cash and cash equivalents	$	92,266		$	183,098		$	119,632		$	141,512
Restricted cash	562			430			2,483			1,302
Accounts receivable, net	24,328			28,142			30,819			35,930
Inventories, net	13,562			18,937			13,554			14,108
Prepaid inventories, net	1,766			2,112
Prepaids and other current assets	18,498			11,654			18,465			22,415
Total current assets	150,982			244,373			184,953			215,267
Fixed assets, net	131,981			134,552
Precious metals	250			9,946
Deferred tax assets, net	74,250			56,266
Property and equipment, net							131,656			134,687
Intangible assets, net	8,288			10,913			17,243			13,370
Goodwill	14,698			14,698			25,434			22,895
Equity securities							48,466			60,427
Operating lease right-of-use assets							37,262			—
Other long-term assets, net	14,992			14,328			7,875			14,573
Total assets	$	395,441		$	485,076		$	452,889		$	461,219
Liabilities and Stockholders’ Equity
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable	$	70,543		$	106,337		$	74,658		$	102,574
Accrued liabilities	58,784			96,216			81,224			87,858
Deferred revenue	41,505			41,780			39,938			50,578
Finance obligations, current	3,326			3,256
Other current liabilities, net	1,507			1,627
Operating lease liabilities, current							5,726			—
Other current liabilities							482			476
Total current liabilities	175,665			249,216			202,028			241,486
Long-term debt, net	43,406			44,179			3,098			3,069
Finance obligations, non-current	9,325			11,831
Operating lease liabilities, non-current							36,108			—
Other long-term liabilities	7,159			6,890			2,093			5,958
Total liabilities	235,555			312,116			243,327			250,513
Commitments and contingencies (Note 6)
Stockholders’ equity:
Commitments and contingencies (Note 7)
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	—			—
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
Series B, issued and outstanding - 355 and 355							—			—
Common stock, $0.0001 par value, Authorized shares - 100,000
Issued shares - 37,802 and 35,346
Outstanding shares - 34,483 and 32,146							3			3
Additional paid-in capital	387,195			383,348			701,877			657,981
Accumulated deficit	(158,893		)	(153,898		)	(497,716		)	(458,897		)
Accumulated other comprehensive loss	(1,420		)	(1,540		)	(580		)	(584		)
Treasury stock:
Shares at cost - 3,132 and 2,463	(63,691		)	(52,587		)
Treasury stock at cost - 3,319 and 3,200							(68,753		)	(66,757		)
Equity attributable to stockholders of Overstock.com, Inc.	163,194			175,326			134,831			131,746
Equity attributable to noncontrolling interests	(3,308		)	(2,366		)	74,731			78,960
Total equity	159,886			172,960
Total liabilities and stockholders’ equity	$	395,441		$	485,076
Total stockholders' equity							209,562			210,706
Total liabilities and stockholders' equity							$	452,889		$	461,219

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 March 31,
	2017			2016			2017			2016			2019			2018
Revenue, net
Direct	$	19,645		$	24,620		$	64,572		$	75,901
Partner and other	404,362			416,944			1,223,894			1,197,880
Retail													$	362,625		$	439,996
Other													5,104			5,335
Total net revenue	424,007			441,564			1,288,466			1,273,781			367,729			445,331
Cost of goods sold
Direct(1)	19,577			23,955			61,687			72,459
Partner and other	320,755			337,893			972,026			967,977
Retail(1)													290,640			347,580
Other													3,965			3,882
Total cost of goods sold	340,332			361,848			1,033,713			1,040,436			294,605			351,462
Gross profit	83,675			79,716			254,753			233,345			73,124			93,869
Operating expenses:
Sales and marketing(1)	45,153			34,707			126,068			99,516			33,477			77,214
Technology(1)	28,746			26,739			85,982			78,249			35,433			31,294
General and administrative(1)	21,651			23,317			66,622			67,843			40,232			39,755
Litigation settlement	—			—			—			(19,520		)
Total operating expenses	95,550			84,763			278,672			226,088			109,142			148,263
Operating income (loss)	(11,875		)	(5,047		)	(23,919		)	7,257
Operating loss													(36,018		)	(54,394		)
Interest income	189			73			450			228			403			544
Interest expense	(713		)	(212		)	(2,139		)	(219		)	(127		)	(874		)
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													(6,272		)	(9		)
Loss before income taxes													(42,014		)	(54,733		)
Provision (benefit) from income taxes													878			(277		)
Net loss													$	(42,892	)	$	(54,456	)
Less: Net loss attributable to noncontrolling interests	(319		)	(294		)	(942		)	(940		)	(3,648		)	(3,547		)
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.													$	(39,244	)	$	(50,909	)
Net loss per common share—basic:
Net loss attributable to common shares—basic													$	(1.18	)	$	(1.74	)
Weighted average common shares outstanding—basic	25,003			25,356			25,024			25,326			32,370			28,566
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													$	(1.18	)	$	(1.74	)
Weighted average common shares outstanding—diluted	25,003			25,356			25,024			25,388			32,370			28,566


(1) Includes stock-based compensation as follows (Note 8):
Cost of goods sold — direct	$	46	$	69	$	134	$	200
(1) Includes stock-based compensation as follows (Note 10):
Cost of goods sold — retail									$	47	$	70
Sales and marketing	109		102		318		234		441		873
Technology	166		210		476		615		1,227		521
General and administrative	703		1,009		2,081		3,056		2,270		4,971
Total	$	1,024	$	1,390	$	3,009	$	4,105	$	3,985	$	6,435

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 March 31,
	2019			2018
Net loss	$	(42,892	)	$	(54,456	)
Other comprehensive loss:
Unrealized gain on cash flow hedges, net of expense for taxes of $0, and $0	4			4
Other comprehensive income	4			4
Comprehensive loss	$	(42,888	)	$	(54,452	)
Less: Comprehensive loss attributable to noncontrolling interests	(3,648		)	(3,547		)
Comprehensive loss attributable to stockholders of Overstock.com, Inc.	$	(39,240	)	$	(50,905	)

See accompanying notes to unaudited consolidated financial statements.

Overstock.com, Inc.

Consolidated Statements of Changes in ~~Stockholders’~~Stockholders' Equity (Unaudited)

(in thousands)



	Three months ended March 31,
	2019			2018
Equity attributable to stockholders of Overstock.com, Inc.
Number of common shares issued
Balance at beginning of period	35,346			30,632
Common stock issued upon vesting of restricted stock	242			166
Exercise of stock warrants	—			1,250
Common stock sold through ATM offering	2,214			—
Balance at end of period	37,802			32,048

Number of treasury stock shares
Balance at beginning of period	3,200			3,135
Common stock repurchased through business combination	47			—
Tax withholding upon vesting of restricted stock	72			47
Balance at end of period	3,319			3,182
Total number of outstanding shares	34,483			28,866

Common stock	$	3		$	3

Number of Series A preferred shares issued and outstanding	127			127

Number of Series B preferred shares issued and outstanding	355			555

Preferred stock	$	—		$	—

Additional paid-in capital
Balance at beginning of period	$	657,981		$	494,732
Stock-based compensation to employees and directors	3,985			2,395
Exercise of stock warrants	—			50,562
Common stock sold through ATM offering, net	39,914			—
Other	(3		)	(505		)
Balance at end of period	$	701,877		$	547,184

Accumulated deficit
Balance at beginning of period	$	(458,897	)	$	(254,692	)
Cumulative effect of change in accounting principle	—			5,040
Net loss attributable to stockholders of Overstock.com, Inc.	(39,244		)	(50,909		)
Other	425			—
Balance at end of period	$	(497,716	)	$	(300,561	)

Accumulated other comprehensive loss
Balance at beginning of period	$	(584	)	$	(599	)
Net other comprehensive income	4			4
Balance at end of period	$	(580	)	$	(595	)

Treasury stock
Balance at beginning of period	$	(66,757	)	$	(63,816	)
Common stock repurchased through business combination	(643		)	—
Tax withholding upon vesting of restricted stock	(1,353		)	(2,354		)
Balance at end of period	(68,753		)	(66,170		)
Total equity attributable to stockholders of Overstock.com, Inc.	$	134,831		$	179,861

Continued on the following page

Overstock.com, Inc.

Consolidated Statements of Changes in Stockholders' Equity (Unaudited)

(in thousands)

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



	Three months ended March 31,
	2019			2018
Total equity attributable to stockholders of Overstock.com, Inc.	$	134,831		$	179,861

Equity attributable to noncontrolling interests
Balance at beginning of period	$	78,960		$	(3,505	)
Proceeds from security token offering, net	—			75,951
Stock-based compensation to employees and directors	—			4,040
Tax withholding upon vesting of restricted stock	—			(1,680		)
Net loss attributable to noncontrolling interests	(3,648		)	(3,547		)
Fair value of noncontrolling interest at acquisition	—			4,468
Other	(581		)	505
Total equity attributable to noncontrolling interests	$	74,731		$	76,232

Total stockholders' equity	$	209,562		$	256,093

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,
2017 2016 2017 2016
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:

Depreciation of fixed assets 21,895
19,710
29,468
26,729
Amortization of intangible assets 2,839
3,193
3,614
3,444
Stock-based compensation to employees and directors 3,009
4,105
3,795
5,054
Deferred income taxes, net (8,682 ) 6,688
(7,651 ) 4,701
(Gain) loss on investment in precious metals (1,907 ) —
(2,108 ) 521
Gain on sale of cryptocurrencies (845 ) —
(845 ) —
Impairment of cost method investment 4,500
2,850
4,500
2,850
Termination costs of cryptobond financing —
—
—
850
Other 420
207
569
212
Changes in operating assets and liabilities, net of acquisitions:

Restricted cash (207 ) —
(207 ) —
Accounts receivable, net 3,814
(2,909 ) (3,283 ) (2,108 )
Inventories, net 5,375
4,325
2,155
7,489
Prepaid inventories, net 346
(226 ) (229 ) (259 )
Prepaids and other current assets (6,296 ) (3,456 ) (451 ) (1,012 )
Other long-term assets, net (121 ) (356 ) (551 ) (670 )
Accounts payable (35,794 ) (40,247 ) (14,370 ) 17,548
Accrued liabilities (35,831 ) (8,678 ) (10,217 ) 4,920
Deferred revenue (275 ) (9,687 ) 248
(3,896 )
Other long-term liabilities 235
555
280
754
Net cash (used in) provided by operating activities (62,655 ) (15,439 ) (7,652 ) 75,477
Cash flows from investing activities:

Proceeds from sale of precious metals 11,603
—
13,213
—
Investment in precious metals —
—
(1,633 ) —
Disbursement of note receivable (750 ) (3,050 ) (1,368 ) (3,050 )
Cost method investments (2,188 ) (4,000 ) (2,938 ) (4,000 )
Equity method investment (2,000 ) —
(2,000 ) —
Acquisitions of businesses, net of cash acquired —
1,220
28
1,192
Expenditures for fixed assets, including internal-use software and website development (20,873 ) (59,382 ) (33,772 ) (75,514 )
Other (160 ) 46
(179 ) 14
Net cash used in investing activities (14,368 ) (65,166 ) (28,649 ) (81,358 )
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 interest swap —
(563 ) —
(620 )
Proceeds from finance obligations —
6,075
5,324
11,773
Payments on short-term debt —
—
—
(750 )
Proceeds from long-term debt —
31,447
4,826
40,935
Payments on long-term debt (750 ) —
(750 ) —
Change in restricted cash 75
—
75
75
Proceeds from exercise of stock options 654
—
1,473
—
Proceeds from rights offering, net of offering costs —
—
7,591
—
Proceeds from issuance of stock warrants 3
—
3
—
Purchase of treasury stock (11,104 ) (737 ) (11,207 ) (737 )
Payment of debt issuance costs (251 ) —
(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



	Three months ended March 31,
	2019			2018
Cash flows from operating activities:
Net loss	$	(42,892	)	$	(54,456	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation of property and equipment	6,575			6,581
Amortization of intangible assets	1,481			918
Amortization of right-of-use assets	1,667			—
Stock-based compensation to employees and directors	3,985			6,435
Deferred income taxes, net	895			(267		)
Purchase price allocation adjustments	(1,988		)	—
(Gain)/loss on sale of cryptocurrencies	9			(1,529		)
Impairment of cryptocurrencies	318			8,793
Loss on sale of equity securities	977			—
Impairment of and loss on equity securities, net	4,601			—
Allowance on notes receivable	1,237			—
Other	1,014			185
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable, net	14,068			8,282
Inventories, net	554			1,232
Prepaids and other current assets	3,106			2,238
Other long-term assets, net	(189		)	(2,261		)
Accounts payable	(28,023		)	4,325
Accrued liabilities	(6,962		)	9,274
Deferred revenue	(10,640		)	284
Operating lease liabilities	(1,249		)	—
Other long-term liabilities	27			(216		)
Net cash used in operating activities	(51,429		)	(10,182		)
Cash flows from investing activities:
Purchase of intangible assets	—			(9,181		)
Purchase of equity securities	(2,500		)	(16,970		)
Proceeds from sale of equity securities	5,535			—
Disbursement of notes receivable	(2,000		)	—
Acquisitions of businesses, net of cash acquired	4,885			(11,769		)
Expenditures for property and equipment, including internal-use software and website development	(4,144		)	(4,029		)
Other	(2		)	(1		)
Net cash provided by (used in) investing activities	1,774			(41,950		)
Cash flows from financing activities:
Payments on finance/capital lease obligations	(126		)	(123		)
Proceeds from issuance and exercise of stock warrants	—			50,562
Proceeds from security token offering, net of offering costs and withdrawals	—			62,073
Proceeds from sale of common stock, net of offering costs	30,957			—
Payments of taxes withheld upon vesting of restricted stock	(1,353		)	(4,034		)
Other	(522		)	—
Net cash provided by financing activities	28,956			108,478
Net increase (decrease) in cash, cash equivalents and restricted cash	(20,699		)	56,346
Cash, cash equivalents and restricted cash, beginning of period	142,814			203,670
Cash, cash equivalents and restricted cash, end of period	$	122,115		$	260,016

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,
2017 2016 2017 2016
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
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
Capitalized interest cost —
117
(12 ) 157
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



	Three months ended March 31,
	2019		2018
Supplemental disclosures of cash flow information:
Cash paid during the period:
Interest paid, net of amounts capitalized	$	86	$	789
Income taxes paid, net	130		7
Non-cash investing and financing activities:
Property and equipment, including internal-use software and website development costs, financed through accounts payable and accrued liabilities	$	304	$	965
Common stock repurchased through business combination	643		—
Note receivable converted to equity security	359		200
Cryptocurrency received in security token offering	—		13,878
Proceeds from sale of common stock included in accounts receivable	8,957		—
Deposit applied to business combination purchase price	7,347		—
Equity method security applied to business combination purchase price	3,707		—
Recognition of right-of-use assets upon adoption of ASC 842	30,968		—

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.~~2018. 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~~ months ended ~~September 30, 2017~~March 31, 2019 are not necessarily indicative of the results to be expected for any future period or the full fiscal year.

~~For purposes~~In the fourth quarter of ~~comparability,~~2018, we completed our annual review of our segment reporting and in light of a strategic shift in our Chief Operating Decision Maker's long-term strategic focus for our organization of transitioning our retail business to focus on the ~~presentation~~retail partner portion of ~~certain immaterial amounts~~our business which has resulted in the retail direct portion of our business becoming less significant, we no longer consider the split of retail direct and retail partner as a distinct and relevant measure of our business. Accordingly, revenues and cost of goods sold previously recorded in "Direct" and "Partner and Other" are now split between "Retail" and "Other" on the consolidated statements of operations. "Retail" includes retail revenue and costs of goods sold from both "Direct" and "Partner" transactions. Our revenues and costs of goods sold related to our Medici business remains in "Other". In addition, we have recast the prior ~~periods~~period revenues and cost of goods sold to conform with current year presentation. Direct and Partner are no longer considered separate reportable segments in our Business Segment disclosures. In addition, tZERO has been ~~conformed with the current period presentation. We also retrospectively applied certain accounting standard updates~~identified as ~~discussed in Note 2—Accounting Policies,~~ ~~Recently adopted accounting standards~~.a reportable segment separate from Other due to its operating activities exceeding quantitative thresholds for separate reporting.

2. ACCOUNTING POLICIES

Principles of consolidation

The accompanying consolidated financial statements include our accounts and the accounts of our wholly-owned subsidiaries and ~~majority-owned subsidiaries.~~other subsidiaries for which we exercise control. All intercompany account balances and transactions have been eliminated in consolidation. Included in our consolidated financial statements are the financial results of Bitsy, Inc. from the acquisition date of January 1, 2019, Verify Investor, LLC from the acquisition date of February 12, 2018, and Mac Warehouse, LLC from the acquisition date of 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, Club O and gift card breakage, sales returns, incentive discount offers, inventory valuation, depreciable lives of ~~fixed assets~~property and equipment and internally-developed software, goodwill valuation, intangible asset valuation, ~~cost method and~~ equity ~~method investment~~securities 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~~$3.0 million and ~~$75.2~~$3.1 million at ~~September 30, 2017~~March 31, 2019 and December 31, ~~2016,~~2018, 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, surety bonds, 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, trading~~cash equivalents, certain equity 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, finance obligations, and debt are carried at cost, which approximates their fair ~~values of our derivative instruments~~value. Certain assets, including long-lived assets, certain equity securities, goodwill, cryptocurrencies, and other intangible assets, 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 themeasured at fair value ~~of derivative instruments~~on a nonrecurring basis; that is, ~~an adjustment for nonperformance risk. The adjustment for nonperformance risk did~~the assets are not ~~have a significant impact on the estimated~~measured at fair value on an ongoing basis, but are subject to fair value adjustments using fair value measurements with unobservable inputs (level 3), apart from cryptocurrencies which use quoted prices from various digital currency exchanges with active markets, in certain circumstances (e.g., when there is evidence of ~~our derivative instruments. For additional disclosures related to our derivative instruments, see~~ ~~Derivative financial instruments~~ ~~below.~~impairment).

The following tables summarize our assets and liabilities measured at fair value on a recurring basis using the following levels of inputs as of ~~September 30, 2017~~March 31, 2019 and December 31, ~~2016~~2018, as indicated (in thousands):


p	Fair Value Measurements at September 30, 2017:								Fair Value Measurements at March 31, 2019:
	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	$	—	$	—	$	2,975	$	2,975	$	—	$	—
Equity securities, at fair value									2,018		2,018		—		—
Trading securities held in a "rabbi trust" (1)	70		70		—		—		95		95		—		—
Total assets	$	40,460	$	40,460	$	—	$	—	$	5,088	$	5,088	$	—	$	—
Liabilities:
Derivatives (2)	$	1,609	$	—	$	1,609	$	—
Deferred compensation accrual "rabbi trust" ~~(3)~~(2)	76		76		—		—		$	96	$	96	$	—	$	—
Total liabilities	$	1,685	$	76	$	1,609	$	—	$	96	$	96	$	—	$	—


	Fair Value Measurements at December 31, 2016:								Fair Value Measurements at December 31, 2018:
	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	$	—	$	—	$	3,135	$	3,135	$	—	$	—
Equity securities, at fair value									2,636		2,636		—		—
Trading securities held in a "rabbi trust" (1)	58		58		—		—		84		84		—		—
Total assets	$	75,235	$	75,235	$	—	$	—	$	5,855	$	5,855	$	—	$	—
Liabilities:
Derivatives (2)	$	1,816	$	—	$	1,816	$	—
Deferred compensation accrual "rabbi trust" ~~(3)~~(2)	61		61		—		—		$	85	$	85	$	—	$	—
Total liabilities	$	1,877	$	61	$	1,816	$	—	$	85	$	85	$	—	$	—

___________________________________________


(1)	— Trading securities held in a rabbi trust are included in Prepaids and other current assets and Other long-term assets, net in the consolidated balance sheets.


(2)	— ~~Derivative financial instruments are included in Other current liabilities, net and Other long-term liabilities in the consolidated balance sheets.~~


~~(3)~~	~~— Non qualified~~Non-qualified deferred compensation in a rabbi trust is included in Accrued liabilities and Other long-term liabilities in the consolidated balance sheets.

~~Our other financial instruments, including cash, restricted cash, accounts~~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 carrier rebates, trade amounts due from customers in the United States, and ~~from~~ uncleared credit card transactions at period end. Accounts receivable are recorded at invoiced amounts and do not bear interest.

~~Allowance for doubtful accounts~~

From time to time, we grant credit to some of our business customers on normal credit terms (typically 30 days). We maintain an allowance for doubtful accounts receivable based upon our business customers' financial condition and payment history, and our historical collection experience and expected collectability of accounts receivable. The allowance for doubtful accounts receivable was ~~$1.2~~$2.4 million and ~~$2.0~~$2.1 million at ~~September 30, 2017~~March 31, 2019 and December 31, ~~2016~~2018, 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~~ ~~banks~~One bank held the majority of our cash and cash ~~equivalents.~~equivalents at March 31, 2019 and December 31, 2018. 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~~prepaid inventories, other miscellaneous ~~costs.~~

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

~~improvements,~~Cryptocurrencies

We hold cryptocurrency-denominated assets ("cryptocurrencies") such as bitcoin and we include them in Prepaids and other current assets in our consolidated balance sheets. Our cryptocurrencies were $2.1 million and $2.4 million at March 31, 2019 and December 31, 2018, respectively, and are recorded at cost less impairment.

We recognize impairment on these assets caused by decreases in market value, determined by taking quoted prices from various digital currency exchanges with active markets, whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. 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 $318,000 for the three months ended March 31, 2019. There was $8.8 million impairment on cryptocurrencies during the three months ended March 31, 2018.

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. These non-cash transactions as well as gains (losses) from cryptocurrencies received through our tZERO security token offering are also presented as an adjustment to reconcile Net income (loss) to Net cash provided by (used in) operating activities in our consolidated statements of cash flows. Further, the proceeds from the sale of cryptocurrencies received through our tZERO security token offering are presented as a financing activity in our consolidated statements of cash flows due to its near immediate conversion into cash and its economic similarity to the receipt of cash proceeds under the tZERO security token offering. Realized gains on sale of cryptocurrencies were $9,000 for the three months ended March 31, 2019. There were $1.5 million realized gains on sale of cryptocurrencies during the three months ended March 31, 2018.

Property and equipment, net

Property and equipment are recorded at cost and stated net of depreciation and amortization. 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 our consolidated statements of operations. Property and equipment are depreciated using the straight-line method over the estimated useful lives of the related assets or the term of the related ~~capital~~finance 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~~property and equipment 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 30, 2017~~March 31, 2019 and ~~2016,~~2018, we capitalized ~~$2.2~~$3.5 million and ~~$3.2~~$2.4 million, respectively, of costs associated with internal-use software and website development, both developed internally and acquired externally. ~~Amortization~~Depreciation of ~~costs associated with~~ internal-use software and website development during the three months ended March 31, 2019 and 2018 was ~~$3.9~~$3.2 million and ~~$5.0~~$3.4 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 March 31,
	2017		2016		2017		2016		2019		2018
Cost of goods sold - direct	$	72	$	77	$	230	$	235	$	175	$	83
Technology	5,940		6,952		18,802		18,755		5,175		5,478
Sales and marketing	—		29		—		29
General and administrative	974		357		2,863		691		1,225		1,020
Total depreciation, including internal-use software and website development	$	6,986	$	7,415	$	21,895	$	19,710	$	6,575	$	6,581

Total accumulated depreciation of ~~fixed assets~~property and equipment was ~~$201.6~~$209.0 million and ~~$180.3~~$204.9 million at ~~September 30, 2017~~March 31, 2019 and December 31, ~~2016,~~2018, respectively.

Upon sale or retirement of assets, cost and related accumulated depreciation and amortization are removed from the balance sheet and the resulting gain or loss is reflected in the consolidated statements of operations.Equity securities under ASC 321

~~Fixed assets included assets under capital leases and finance obligations of $17.0 million and $21.5 million at September 30, 2017 and December~~At March 31, 2016, respectively. Accumulated depreciation related to assets under capital leases and finance obligations was $7.7 million and $8.7 million at September 30, 2017 and December 31, 2016, respectively.

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

~~Cost method investments~~

~~At September 30, 2017,~~2019, we held minority interests (less than 20%) in ~~seven~~thirteen privately held entities accounted for under Accounting Standards Codification ("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 securities in our consolidated balance sheets. ~~Earnings~~One of these equity securities, which had a carrying value of $2.0 million at March 31, 2019, is carried at fair value based on Level 1 inputs. See Fair value of financial instruments above. The remaining equity securities lack readily determinable fair values and therefore the securities are measured at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the ~~investments~~identical or similar equity securities of the same issuer. Dividends received are ~~recognized to the extent of dividends received,~~reported in earnings if and ~~we will recognize subsequent impairments to the investment if they are other-than-temporary.~~when received. We review ~~these investments~~our securities 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.~~which are recorded as unrealized gains or losses on our investments in Other income (expense), net on our consolidated statements of operations. 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~~these private companies are in the early startup or development stages, these entities are subject to potential changes in cash flows and valuation, ~~and~~as well as inability to ~~attract new investors~~raise additional capital 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~~$16.5 million and ~~$11.8~~$20.3 million at ~~September 30, 2017~~March 31, 2019 and December 31, ~~2016. We recognized zero~~2018, respectively.

The portion of unrealized gains and ~~$2.9 million impairment loss on these investments during~~losses for the ~~three months ended September 30, 2017~~period related to equity securities still held at March 31, 2019 and 2016, respectively, and $4.5 million and $2.9 million impairment loss during the nine months ended September 30, 2017 and 2016, respectively. These impairment losses were recorded in Other income, net on the consolidated statements of operations.2018 is calculated as follows:



	Three months ended March 31,
	2019			2018
Net (gain)/loss recognized during the period on equity securities	$	4,030		$	(453	)
Less: Net loss recognized during the period on equity securities sold	(453		)	—
Unrealized (gain)/loss recognized during the reporting period on equity securities still held	$	3,577		$	(453	)

Equity method ~~investments~~securities under ASC 323

At ~~September 30, 2017,~~March 31, 2019, we held minority ~~interests~~ interests in ~~Bitt~~eight privately held entities accounted for as equity method securities under ASC Topic 323, Investments - Equity Method and ~~Spera, two privately held entities.~~Joint Ventures ("ASC 323"), which are included in Equity securities in our consolidated balance sheets. We can exercise significant influence, but not control, over these private companies investees through either holding more than a 20% voting interest in the ~~investees. Based on the nature of one of~~entity or through our investments, we have a variable interest. However, because we do not have power to direct the investee's activities and we are not the investee's primary beneficiary, we therefore do not consolidate the investee in our financial statements.

These investments are recognized as 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~~entity's board of ~~Directors of Bitt, which gave us an ability to exercise significant influence but not control over the investee.~~directors.

The following table includes our equity method securities and related ownership interest as of March 31, 2019:



	Ownership interest
Bitt Inc.	21%
Boston Security Token Exchange LLC	50%
Chainstone Labs, Inc.	29%
GrainChain, Inc.	10%
Minds, Inc.	24%
SettleMint NV	30%
Spera, Inc.	19%
VinX Network Ltd.	21%
Voatz, Inc.	21%

The carrying amount of our equity method securities was approximately $32.0 million and $40.1 million at March 31, 2019 and December 31, 2018, respectively. The carrying value of our ~~investments~~equity method securities 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 basis difference ~~related~~attributable to amortizable 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 following table summarizes the ~~carrying amount of our~~net losses recognized on equity method investments was approximately $6.0 million, and the difference between the carrying value of this investment and the amount of underlying equity in net assets of the investee was not significant. Our proportionate share of the net income or loss of our equity method investeesecurities for the ~~nine~~three months ended ~~September 30, 2017 was not significant.~~March 31, 2019 and 2018:



	Three months ended March 31,
	2019		2018
Net loss recognized on our proportionate share of the net losses of our equity method investees and amortization of the basis difference	$	1,025	$	350
Net loss recognized during the period on equity method securities sold	524		—

Noncontrolling interests

~~tØ.com,~~Our wholly-owned subsidiary, Medici Ventures, Inc. ("Medici Ventures"), holds a majority ownership interest in tZERO Group, Inc. ("tZERO") is, formerly tØ.com, Inc., and Medici Land Governance Inc., a ~~majority owned subsidiary of Overstock, which develops blockchain and fintech technology as part of our Medici blockchain and fintech technology initiatives. During 2016,~~Delaware public benefit corporation ("MLG"). tZERO ~~completed the acquisition of~~includes a financial technology ~~firm and~~company, two related registered broker dealers, each of which was under common control with the firm from which the financial technology assets were purchased. The former owners of that firm hold noncontrolling interests in tZERO. These transactionsand an accredited investor verification company. tZERO, MLG, and their consolidated subsidiaries are 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 included in our consolidated financial statements. For controlled subsidiaries that are not wholly-owned, the noncontrolling interests are included in Net loss and Total equity. 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 determine if an arrangement is a lease at inception. We account for lease agreements as either operating or ~~capital~~finance leases depending on certain defined criteria. Operating leases are recognized in Operating lease right-of-use ("ROU") assets, Operating lease liabilities, current, and Operating lease liabilities, non-current on our consolidated balance sheets. Finance leases are included in Other long-term assets, net, Other current liabilities, and Other long-term liabilities on our consolidated balance sheets. Lease assets and liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. In certain of our lease agreements, we receive rent holidays and other incentives. We recognize lease costs on a straight-line basis over the lease term 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~~Our lease terms may include options to extend or terminate the ~~term of the lease.~~lease when it is reasonably certain that we will exercise that option. 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. We do not separate lease and non-lease components for our leases.

Treasury stock

We account for treasury stock of our common shares 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.~~annually or when we deem that a triggering event has occurred. 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~~an impairment loss is recognized in an amount equal to the ~~amount~~excess 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,~~amount over the fair value of the reporting unit, ~~is allocated~~not 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 whenexceed 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.~~the goodwill. There were no impairments to goodwill recorded during the ~~nine~~three months ended ~~September 30, 2017 or the year~~March 31, 2019 and 2018.

For three months ended ~~December~~March 31, ~~2016.~~2019, we recognized $2.5 million in goodwill related to a business acquisition as described in Note 3—Business Combinations.

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 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



	March 31, 2019			December 31, 2018
Intangible assets subject to amortization, gross (1)	$	32,993		$	29,099
Less: accumulated amortization of intangible assets subject to amortization	(15,750		)	(15,729		)
Total intangible assets, net	$	17,243		$	13,370


(1)	— At ~~September 30, 2017,~~March 31, 2019, the weighted average remaining useful life for ~~Intangible~~intangible assets ~~other,~~subject to amortization, excluding fully amortized intangible assets, was ~~3.50~~6.12 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 March 31,
	2017		2016		2017		2016		2019			2018
Technology	$	905	$	699	$	2,715	$	2,151	$	853		$	755
Sales and marketing	22		246		62		949		16			119
General and administrative	21		27		62		93		(830		)	44
Total amortization	$	948	$	972	$	2,839	$	3,193	$	39		$	918

General and administrative amortization above was net of reversals due to adjustments to the purchase price allocation for Mac Warehouse, as further described in Note 3—Business Combinations.

Estimated amortization expense for the next five years is: ~~$900,000~~$3.1 million for the remainder of ~~2017, $2.8 million in 2018, $2.0 million in~~ 2019, ~~$1.3~~$3.2 million in 2020, ~~and $1.0~~$2.9 million in 2021, $1.6 million in 2022, $1.1 million in 2023, and $695,000 thereafter.

Impairment of long-lived assets

We review property and equipment, right-of-use assets, and other long-lived assets, including intangible assets other than goodwill, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. See the Cryptocurrencies section above for our impairment policy over cryptocurrencies. 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~~three months ended ~~September 30, 2017 or the year ended December~~March 31, ~~2016.~~

~~Cryptocurrencies~~

~~We hold cryptocurrency-denominated assets ("cryptocurrencies") such as bitcoin~~2019 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, 2016.2018.

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~~expenses, deposits, and assets acquired 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.~~

finance leases.

Revenue recognition

Revenue is recognized when, or as, control of a promised product or service transfers to a customer, in an amount that reflects the consideration to which the Company expects to be entitled in exchange for transferring those products or services. Revenue excludes taxes that have been assessed by governmental authorities and that are directly imposed on revenue-producing transactions between the Company and its customers, including sales and use taxes. Revenue recognition is evaluated through the following five-step process:

1) identification of the contract with a customer;

2) identification of the performance obligations in the contract;

3) determination of the transaction price;

4) allocation of the transaction price to the performance obligations in the contract; and

5) recognition of revenue when or as a performance obligation is satisfied.

Product Revenue

We derive our revenue primarily from ~~direct revenue and partner~~our retail business through our Website, but may also derive revenue from sales of merchandise ~~sales. We also earn~~through offline and other channels. Our Retail revenue is derived primarily from ~~advertising on~~merchandise sold at a point in time and shipped to customers. Merchandise sales are fulfilled with inventory sourced through our ~~Website and~~partners or from ~~other pages. We have organized~~ our ~~operations into two principal reporting segments based~~owned inventory, depending on the ~~primary source~~most efficient means of ~~revenue: direct revenue and partner revenue (see Note 9—Business Segments).~~fulfilling the customer contract. The majority of our sales, however, are fulfilled from inventory sourced through our partners.

Revenue is recognized when control of the ~~following revenue recognition criteria are met: (1) persuasive evidence~~product passes to the customer, typically at the date of ~~an arrangement exists; (2)~~ delivery ~~has occurred~~of the merchandise to the customer or the date a service ~~has been provided; (3) the selling price or fee revenue earned~~ is ~~fixed or determinable;~~provided, and ~~(4) collection of the resulting receivable is reasonably assured. Revenue related to merchandise sales~~ is recognized ~~upon~~in an amount that reflects the expected consideration to be received in exchange for such goods or services. As such, customer orders are recorded as deferred revenue prior to delivery ~~to our customers.~~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.

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). We generally receive payments from our customers before our payments to our suppliers are due. We do not recognize assets associated with costs to obtain or fulfill a contract with a customer.

Shipping and handling is considered a fulfillment activity, as it takes place prior to the customer obtaining control of the merchandise, 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.

Our merchandise sales contracts include terms that could cause variability in the transaction price for items such as discounts, credits, or sales returns. Accordingly, the transaction price for product sales includes estimates of variable consideration to the extent it is probable that a significant reversal of revenue recognized will not occur. At the time of sale, we estimate a sales return liability for the variable consideration based on historical experience, which is recorded within Accrued liabilities in the consolidated balance sheet. 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.

We evaluate the criteria outlined in ASC ~~Topic 605-45,~~606-10-55, Principal versus Agent Considerations, in determining whether it is appropriate to record the gross amount of ~~product~~merchandise sales and related costs or the net amount earned as commissions. When we are the ~~primary obligor~~principal in a transaction ~~are subject~~and control the specific good or service before it is transferred to ~~inventory risk, have latitude in establishing prices and selecting suppliers, or have several but not all of these indicators,~~the customer, revenue is recorded ~~gross. If we are not the primary obligor in the transaction and amounts earned are determined using a fixed percentage,~~gross; otherwise, revenue is recorded on a net basis. ~~Currently,~~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 ~~both direct~~our retail 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.basis.

Our Other revenue occurs primarily through our broker dealer subsidiaries in our tZERO segment. 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 our partners which they generally ship directly to our consumers and businesses. Partner and other revenue comes from merchandise sales that occur primarily through our Website, but may also occur through offline and other channels, including through our broker dealer subsidiaries in our Other segment.

Club O loyalty program

We have a customer loyalty program called Club O Gold for which we sell annual memberships. For Club O Gold memberships, we record membership fees as deferred revenue and we recognize revenue ratably over the membership period.

The Club O Gold loyalty program allows members to earn Club O Reward dollars for qualifying purchases made on our Website. ~~We also have a co-branded credit card program (see~~ ~~Co-branded credit card program~~ ~~below for more information). Co-branded cardholders are also Club O Gold members and earn additional reward dollars for purchases made on our Website, and from other merchants.~~

~~Earned~~Customers may redeem Club O Reward dollars ~~may be redeemed~~ on future purchases made through our ~~Website.~~Website, which conveys a material right to the customer. As such, the initial transaction price giving rise to the reward dollar is allocated to each separate performance obligation based upon its relative standalone selling price. In determining the stand-alone selling price, we incorporate assumptions about the redemption rates of loyalty points. 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 to~~record the ~~elements using their relative fair values. We include the~~standalone 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 expect 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 Retail revenue in our consolidated statements of ~~operations.~~operations rather than as a component of Other income (expense), net. Breakage included in revenue was $1.1 million and $1.7 million for the three months ended March 31, 2019 and 2018, respectively.

~~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 $6.7 million and $6.9 million at March 31, 2019 and December 31, 2018, 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 are 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 Retail 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.

Revenue Disaggregation

Disaggregation of revenue by major product line is included in Segment Information in Note 12—Business Segments.

Deferred ~~revenue~~Revenue

When the timing of our provision of goods or services is different from the timing of the payments made by our customers, we recognize a contract liability (customer payment precedes performance).

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 based upon the relative standalone selling price of the Club O Reward dollar and we recognize it as Retail revenue ~~upon redemption.~~in proportion to the estimated pattern of rights exercised by the customer. If reward dollars are not redeemed, we recognize ~~other income~~Retail revenue 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~~For the unredeemed portion of our gift ~~card is not redeemed,~~cards and loyalty program rewards, we will recognize ~~other income when~~Retail revenue over the ~~likelihood~~expected redemption period based upon the estimated pattern of ~~its redemption becomes remote based on our historical redemption experience. We consider~~rights exercised by the ~~likelihood of redemption to be remote after~~ ~~36 months~~.customer.

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 asThe following table provides information about deferred revenue ~~and then recognized over our service period.~~from contracts with customers, including significant changes in deferred revenue balances during the periods presented (in thousands).



	Amount
Deferred revenue at December 31, 2017	$	46,468
Increase due to deferral of revenue at period end	43,216
Decrease due to beginning contract liabilities recognized as revenue	(39,106		)
Deferred revenue at December 31, 2018	50,578
Increase due to deferral of revenue at period end	23,742
Decrease due to beginning contract liabilities recognized as revenue	(34,382		)
Deferred revenue at March 31, 2019	$	39,938

Sales returns allowance

We inspect returned items when they arrive at our processing ~~facility.~~facilities. 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 following table provides additions to and deduction from the sales returns allowance ~~for returns was $12.9 million and $18.2 million at~~ ~~September 30, 2017~~ ~~and~~ ~~December 31, 2016, respectively.~~(in thousands):

~~Credit card chargeback allowance~~



	Amount
Allowance for returns at December 31, 2018	15,261
Additions to the allowance	31,768
Deductions from the allowance	(35,993		)
Allowance for returns at March 31, 2019	$	11,036

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~~Our Retail 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~~Our Other cost of goods sold ~~including product cost~~primarily consists of exchange fees, clearing agent fees, and other ~~costs~~exchange fees from our broker dealer subsidiaries in our tZERO segment. These fees are primarily for executing, processing, and ~~fulfillment~~settling trades on exchanges and ~~related costs are as follows (in thousands):~~other venues. These fees fluctuate based on changes in trade and share volumes, rate of clearance fees charged by clearing brokers, and exchanges.


	Three months ended September 30,								Nine months ended September 30,								Three months ended March 31,
	2017				2016				2017				2016				2019				2018
Total revenue, net	$	424,007	100	%	$	441,564	100	%	$	1,288,466	100	%	$	1,273,781	100	%	$	367,729	100	%	$	445,331	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	%	277,218		75	%	333,521		75	%
Fulfillment and related costs	18,654		4	%	18,447		4	%	55,886		4	%	54,833		4	%	17,387		5	%	17,941		4	%
Total cost of goods sold	340,332		80	%	361,848		82	%	1,033,713		80	%	1,040,436		82	%	294,605		80	%	351,462		79	%
Gross profit	$	83,675	20	%	$	79,716	18	%	$	254,753	20	%	$	233,345	18	%	$	73,124	20	%	$	93,869	21	%

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~~$28.5 million and ~~$31.5~~$68.9 million during the three months ended ~~September 30, 2017~~March 31, 2019 and ~~2016, respectively. For the nine months ended September 30, 2017 and 2016, advertising expenses totaled $114.6 million and $90.6 million,~~2018, respectively. Prepaid advertising (included in Prepaids and other current assets in the accompanying consolidated balance sheets) was ~~$2.3 million~~$478,000 and ~~$843,000~~$961,000 at ~~September 30, 2017~~March 31, 2019 and December 31, ~~2016~~,2018, 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—10—Stock-Based Awards.

~~Self-funded health insurance~~

As of January 1, 2017, we established a partially self-funded health insurance plan for our employees. We maintain a stop-loss insurance policy through an insurance company that limits our losses both on a per employee basis and an aggregate basis. Although we intend to maintain this plan indefinitely, we may terminate, modify, suspend, or discontinue this plan at any time and for any reason.

We are responsible for estimating our liability for unpaid costs of insured events that have occurred, which includes known cases on a case-by-case basis, and also for events that have occurred, but have not yet been reported. As of 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 is included in Accrued liabilities in the accompanying consolidated balance sheets.

Loss contingencies

In the normal course of business, we are involved in legal proceedings and other potential loss contingencies. We accrue a liability for such matters when it is probable that a loss has been incurred and the amount can be reasonably estimated. When only a range of probable loss can be estimated, the most probable amount in the range is accrued. If no amount within this range is a better estimate than any other amount within the range, the minimum amount in the range is accrued. We expense legal fees as incurred (see Note 6—7—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 March 31, 2019 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.

We have ~~not provided for U.S. income tax on certain~~indefinitely reinvested foreign earnings ~~because we~~of $1.5 million at March 31, 2019. We would need to accrue and pay various taxes on this amount if repatriated. We do not intend to ~~indefinitely reinvest~~repatriate these ~~earnings outside the U.S. We have begun expansion of operations outside of the U.S. and have plans for additional expansion~~earnings.

~~for which we have incurred and will continue~~We are subject to ~~incur capital requirements. We have considered ongoing capital requirements of the parent company~~taxation in the ~~U.S.~~United States and several state and foreign jurisdictions. Tax years beginning in 2014 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.

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 March 31,
	2019			2018
Net loss attributable to stockholders of Overstock.com, Inc.	$	(39,244	)	$	(50,909	)
Less: Preferred stock (Token) repurchase (gain)/loss	(425		)	—
Less: Preferred stock dividends - declared and accumulated	19			27
Undistributed loss	(38,838		)	(50,936		)
Less: Undistributed loss allocated to participating securities	(569		)	(1,186		)
Net loss attributable to common shares	$	(38,269	)	$	(49,750	)
Net loss per common share—basic:
Net loss attributable to common shares—basic	$	(1.18	)	$	(1.74	)
Weighted average common shares outstanding—basic	32,370			28,566
Effect of dilutive securities:
Stock options and restricted stock awards	—			—
Weighted average common shares outstanding—diluted	32,370			28,566
Net loss attributable to common shares—diluted	$	(1.18	)	$	(1.74	)

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 March 31,
	2019	2018
Stock options and restricted stock units	1,030	685
Common shares issuable under stock warrant	—	83

~~Stock repurchase program~~

~~On May 5, 2015, our Board of Directors authorized a stock repurchase program under which~~Subsequent to March 31, 2019, we ~~may repurchase~~sold 745,737 common shares of our outstanding common stock for up to $25 million at any time through December 31, 2017. In January 2017, we repurchased approximately 604,000 shares of our common stock for an aggregate purchase price of $10 million under the ~~stock repurchase plan. All common shares repurchased were recognized as treasury stock.~~sales agreement with JonesTrading described further in Note 9—Stockholders' Equity.

Recently adopted accounting standards

In ~~July 2015,~~February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-02, Leases (Topic 842), which requires lessees to recognize operating leases on-balance sheet and disclose key information about leasing arrangements. Topic 842 was subsequently amended by ASU No. 2018-01, Land Easement Practical Expedient for Transition to Topic 842; ASU No. 2018-10, Codification Improvements to Topic 842, Leases; and ASU No. 2018-11, Targeted Improvements. The new standard establishes a right-of-use model (ROU) that requires a lessee to recognize an ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement.

We adopted the new standard on January 1, 2019. A modified retrospective transition approach is required, applying the new standard to all leases existing at the date of initial application. An entity may choose to use either (1) its effective date or (2) the beginning of the earliest comparative period presented in the financial statements as its date of initial application. If an entity chooses the second option, the transition requirements for existing leases also apply to leases entered into between the date of initial application and the effective date. The entity must also recast its comparative period financial statements and provide the disclosures required by the new standard for the comparative periods. We adopted the new standard on January 1, 2019 and thus used the effective date as our date of initial application. Consequently, financial information has not been updated and the disclosures required under the new standard are not provided for dates and periods before January 1, 2019. Upon adoption we recognized cumulative operating lease liabilities of approximately $35.1 million and operating right-of-use assets of approximately $31.0 million which were reflected as non-cash items in the consolidated statement of cash flows. The difference of $4.2 million represented deferred rent for leases that existed as of the date of adoption, which was an offset to the opening balance of right-of-use assets.

The new standard provides a number of optional practical expedients in transition. We elected the "package of practical expedients", which permits us to not reassess under the new standard our prior conclusions about lease identification, lease classification, and initial direct costs as well as the practical expedient pertaining to land easements. We did not elect the use-of-hindsight practical expedient. The new standard also provides practical expedients for an entity's ongoing accounting. We elected the short-term lease recognition exemption for all leases that qualify. This means, for those leases that qualify, we did not recognize ROU assets or lease liabilities, and this includes not recognizing ROU assets or lease liabilities for existing short-term leases of those assets in transition. We also elected the practical expedient to not separate lease and non-lease components for all of our leases.

The standard had a material effect on our financial statements, primarily related to (1) the recognition of new ROU assets and lease liabilities on our balance sheet for our warehouse, office, data center, and equipment operating leases; and (2) providing significant new disclosures about our leasing activities. The additional operating liabilities on our consolidated balance sheets were recognized based on the present value of the remaining minimum rental payments under current leasing standards for our existing operating leases, discounted by our incremental borrowing rate for borrowings of a similar duration on a fully secured basis, with corresponding ROU assets of approximately the same amount.

In June 2018, the FASB issued ASU ~~2015-11,~~2018-07, ~~Inventory~~Compensation-Stock Compensation (Topic ~~330)~~718): ~~Simplifying~~Improvements to Nonemployee Share-Based Payment Accounting; which aligns the ~~Measurement~~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 ~~Inventory, which requires inventory to~~equity-classified nonemployee awards will be ~~measured~~fixed at the ~~lower of cost and net realizable value. Net realizable value is~~grant date. We adopted the ~~estimated selling prices in~~changes under the ~~ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. We implemented the provisions of ASU 2015-11~~new standard on January 1, ~~2017~~2019 on a prospective basis. The implementation of ASU ~~2015-11~~2017-01 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 new standard becomes effective for us on January 1, 2018. In March 2016, the FASB issued ASU 2016-08, ~~Revenue from Contracts with Customers - Principal versus Agent Considerations~~. This ASU clarifies the implementation guidance for principal versus agent considerations in ASU 2014-09 and provides indicators that assist in the assessment of control. ASU 2016-08 is also effective for us on January 1, 2018. We are continuing 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 related to the unredeemed portion of our gift cards and loyalty program rewards will be recognized 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 revenue recognized, but would accelerate the timing of when revenue is recognized. We plan to adopt these ASUs in the first

~~quarter 2018 and with a cumulative adjustment to retained earnings (cumulative effect transition method) as opposed to retrospectively adjusting prior periods.~~

~~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 adoption is permitted. 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, the FASB issued ASU 2016-18,~~ ~~Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force)~~, which provides guidance on the presentation of restricted cash or restricted cash equivalents in the statement of cash flows, thereby reducing the diversity in practice. The new standard becomes effective for us on January 1, 2018. The standard requires entities to apply this standard using the retrospective transition method to each period presented. The adoption of this standard will require that amounts generally described as restricted cash and restricted cash equivalents be included with cash and cash equivalents when reconciling beginning-of-period and end-of-period total amounts shown in the statement of cash flows, rather than as currently presented within the operating activities and financing activities in the statement of cash flows. We do not expect that ASU 2016-18 will 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.

3. BUSINESS COMBINATIONS

~~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.Bitsy, Inc.

~~In August 2017,~~Through a series of transactions in 2018, Medici Ventures acquired a 33% equity interest in Bitsy, Inc. ("Bitsy"), a U.S.-based startup company that plans to build a regulatory-compliant bridge between the ~~FASB issued ASU 2017-12,~~ ~~Derivatives~~U.S. Dollar and ~~Hedging (Topic 815): Targeted Improvements~~cryptocurrencies and offer our customers the ability to ~~Accounting for Hedging Activities, which more closely aligns an entity's risk management activities~~purchase cryptocurrencies. Bitsy was founded by Steve Hopkins, Medici Ventures' former chief operating officer and ~~financial reporting for hedging relationships through changes to both designation~~general counsel, and ~~measurement guidance for qualifying hedging relationships and the presentation~~current president 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~~tZERO, who held 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~~significant equity interest in Bitsy. On December 21, 2018, tZERO entered into a stock purchase agreement with the owners of Bitsy to acquire ~~Cirrus Technologies LLC,~~the remaining 67% equity interest in Bitsy for $8.0 million with effective control of Bitsy transferring to tZERO effective January 1, 2019. tZERO plans to integrate the software and technology of Bitsy to offer customers a ~~financial technology firm.~~ digital wallet service intended to create a bridge between traditional fiat currencies and cryptocurrencies.

In connection with the ~~Cirrus Technology acquisition, a subsidiary of tZERO also entered into an~~December 2018 stock purchase agreement, to purchase SpeedRoute LLC and all of the outstanding membership interests not already owned by tZERO in Pro Securities LLC. Both SpeedRoute and Pro Securities were under common control with Cirrus Technologies LLC by a party that holds a noncontrollingMedici Ventures transferred its 33% equity interest in Bitsy to tZERO ~~SpeedRoute~~for a $4.0 million convertible promissory note due December 31, 2020 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 pricean assignment of this acquisition was $29.7 million, consisting of approximately $11.6 million in cash (which excludes $2.2 million in cash acquired, primarily during Q1 2016) and 908,364 shares of Overstock's common stock valued at approximately $18.1 million. The proceeds for the acquisition were financed by tZERO through a note payablecertain intellectual property 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.Medici Ventures.

The acquisition of Cirrus Technologies and the acquisition of the membership interests of SpeedRoute and Pro Securities were negotiated and contemplated in conjunction with each other. As such, this was recognized as a single transaction. We estimated the fair value of the acquired assets based on Level 3 inputs, which were unobservable (see Note 2—Accounting Policies, Fair value of financial ~~instruments)~~instruments). These inputs included our estimate of future revenues, operating margins, discount 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 pending our receipt of a completed valuation report and other information. These preliminary estimates and assumptions could change significantly during the measurement period as we finalize the valuations of the intangible assets acquired and related tax impact. 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 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	$	3,115
Fair value of equity interest in Bitsy held before business combination	3,707
Less: Fair value of Overstock.com common stock held by Bitsy at acquisition date	(643		)
Less: Settlement of receivable due from tZERO at acquisition date	(10		)
Total transaction consideration, net of cash acquired	$	6,169

Allocation
Prepaids and other current assets	$	71
Property and equipment	16
Intangible assets and other	6,743
Other liabilities assumed	(661		)
Total net assets, net of cash acquired	$	6,169

Acquired intangible assets primarily include technology, patents, and license. The acquired assets, liabilities, and associated operating results of Bitsy were consolidated into our financial statements at the acquisition date. Pro forma results of operations have not been presented because the effects of this acquisition were not material to our consolidated results of operations.

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, to complement our retail business. As of December 31, 2018, our determination and allocation of the purchase price to net tangible and intangible assets was based upon preliminary estimates. As of March 31, 2019, we received the final valuation information and completed our determination and allocation of the purchase price and recognized adjustments to the provisional values as of March 31, 2019 which decreased the recognized Intangibles assets by $2.8 million, increased Accrued liabilities by $527,000, decreased Deferred tax liabilities by $837,000 and resulted in a corresponding increase to Goodwill of $2.5 million. Additionally, the change to the provisional amount resulted in a decrease in amortization expense and accumulated depreciation of $1.4 million, of which $981,000 relates to the year ended December 31, 2018, and a $459,000 increase in Other Income related to the Accrued Liabilities that were expensed in 2018. We estimated the fair value of the acquired assets and liabilities based on Level 3 inputs, which were unobservable (see Note 2—Accounting Policies, Fair value of financial instruments). These inputs included our estimate of future revenues, operating margins, discount rates, royalty rates, and assumptions about the relative competitive environment.

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

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

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

Intangible Assets Fair Value Weighted Average Useful Life (years)
Technology and developed software $ 13,600
3.31
Customer relationships 1,900
—
Trade names 300
6.39
Other 200

Total acquired intangible assets at the acquisition dates 16,000

Less: accumulated amortization of acquired intangible assets (8,160 )
Total acquired intangible assets, net $ 7,840

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

Acquired intangible assets primarily include technology, customer relationships, and trade names. As described above, we determined the fair value of these assets using an income approach method to determine the present value of expected future cash flows for each identifiable intangible asset. This method was based on discount rates which incorporate a risk premium to take into account the risks inherent in those expected cash flows. The expected cash flows were estimated using the expectations of market participants.

The acquired assets, liabilities, and associated operating results were consolidated into our financial statements at the acquisition dates, or the dates on which we obtained control of the acquired assets or interests.



Purchase Price	Fair Value
Cash paid, net of cash acquired	$	1,143
Allocation
Accounts receivable, net	$	399
Inventories, net	1,033
Prepaids and other current assets	29
Property and equipment	154
Intangible assets	653
Goodwill	3,376
Accounts payable and accrued liabilities	(1,432		)
Long-term debt, net	(3,069		)
Total net assets, net of cash acquired	$	1,143

4. ACCRUED LIABILITIES

Accrued liabilities consist of the following (in thousands):


	September 30, 2017		December 31, 2016		March 31, 2019		December 31, 2018

Accrued compensation and other related costs					$	15,162	$	12,099
Accrued loss contingencies					11,088		10,940
Allowance for returns					11,036		15,261
Sales and other taxes payable					10,543		9,923
Accrued marketing expenses	$	13,467	$	26,358	10,385		14,150
Allowance for returns	12,857		18,176
Accrued compensation and other related costs	12,109		8,903
Accounts payable accruals	8,956		17,229		10,172		15,872
Accrued freight					7,058		5,343
Other accrued expenses	6,307		6,315		5,780		4,270
Accrued freight	5,038		10,062
Accrued loss contingencies	50		9,173
Total accrued liabilities	$	58,784	$	96,216	$	81,224	$	87,858

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~~only payments with the ~~otherwise applicable rate.~~

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

~~a fixed charge coverage ratio on a trailing 12-month basis of no less than 1.15 to 1.00;~~

~~a cash flow leverage ratio on a trailing 12-month basis not greater than 2.75 to 1.00; and~~

~~minimum liquidity of at least $50.0 million.~~

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

~~At September 30, 2017,~~March 31, 2019, 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 30, 2017~~March 31, 2019 and December 31, ~~2016,~~2018, letters of credit totaling ~~$355,000~~$280,000 and ~~$430,000,~~$280,000, 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 30, 2017, $509,000~~March 31, 2019, $59,000 was outstanding and ~~$4.5 million~~$941,000 was available under the Purchasing Card. At December 31, ~~2016, $811,000~~2018, $48,000 was outstanding and ~~$4.2 million~~$952,000 was available under the Purchasing Card.

6. ~~COMMITMENTS AND CONTINGENCIES~~

~~Summary of future minimum lease payments for all operating leases~~LEASES

We have operating and finance leases for warehouses, office space, data centers, and certain equipment. Our leases have remaining lease terms of 1 year to 12 years, some of which may include options to extend the leases perpetually, and some of which may include options to terminate the leases within 1 year. We note our finance leases are immaterial to our financial statements as a whole and thus are not discussed below.

The following table provides a summary of leases by balance sheet location as of March 31, 2019 (in thousands):



	March 31, 2019
Operating right-of-use assets	$	37,262
Operating lease liability - current	5,726
Operating lease liability - non-current	36,108

The components of lease expenses for the three months ended March 31, 2019 were as follows (in thousands):



	Three months ended March 31, 2019
Operating lease cost	$	2,505
Short-term lease cost	34
Variable lease cost	528

The following tables provides a summary of other information related to leases for the three months ended March 31, 2019 (in thousands, apart from weighted-average lease term and weighted average discount rate):



	Three months ended March 31, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	(2,018	)
Right-of-use assets obtained in exchange for new operating lease liabilities	$	7,961
Weighted-average remaining lease term - operating leases	7.27 years
Weighted-average discount rate - operating leases	8		%

Maturity of lease liabilities under our non-cancellable operating leases as of March 31, 2019, are as follows (in thousands):



Payments due by period
2019 (Remainder)	$	6,847
2020	7,531
2021	7,694
2022	7,580
2023	6,678
Thereafter	19,571
Total lease payments	$	55,901
Less interest	(14,067		)
Present value of lease liabilities	$	41,834

As of March 31, 2019, we have an additional operating lease for office space, that has not yet commenced with future lease payments expected of $1.9 million. This operating lease will commence in the second quarter of 2019 with a lease term of 8 years.

Information for our leases for the year ended December 31, 2018 under ASC Topic 840, Leases, follows for comparative purposes.

Minimum future payments under all operating leases as of ~~September 30, 2017, are~~December 31, 2018, were as follows (in thousands):

Payments due by period
2017 (Remainder) $ 2,273
2018 6,962
2019 6,733
2020 4,292
2021 4,336
Thereafter 20,775
$ 45,371



Payments due by period
2019	$	8,822
2020	7,414
2021	7,654
2022	7,579
2023	6,677
Thereafter	19,571
Total lease payments	$	57,717

~~Rental expense for operating leases totaled $2.1 million and $3.3 million for~~Our subsidiary, tZERO, commenced a new lease subsequent to December 31, 2018. We have included the ~~three months ended September 30, 2017 and 2016, respectively, and $7.0 million and $10.1 million for~~future lease payments associated with this lease in the ~~nine months ended September 30, 2017 and 2016, respectively.~~table above.

7. COMMITMENTS AND CONTINGENCIES

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 have been in the past and we may be in the future 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~~such 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,~~On September 20, 2018, a jury returned a verdict against us in our Delaware unclaimed property case, which is expected to result in a judgment against us in the amount of approximately $7.3 million (for certain unredeemed gift card balances, treble damages, and penalties) plus attorneys’ fees and costs. Our estimated liability for these amounts was included in Accrued liabilities at March 31, 2019. The expense associated with these litigation charges was included in general and administrative expense in our consolidated statement of operations for the year ended December 31, 2018. William French ~~filed suit against~~("French") and the State of Delaware ("Delaware") sued us, ~~and 46~~along with numerous 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~~Delaware for alleged violations of Delaware's unclaimed property ~~laws~~laws. French and ~~for recovery of the unredeemed gift card value allegedly attributable to~~ Delaware ~~residents. French's complaint alleges~~alleged 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 filed motions for summary judgment, along with other defendants, to dismiss the case. The court has not yet ruled on these motions. The case is in its discovery stages. We intend to ~~vigorously defend this action. The nature of~~file an appeal once the ~~loss contingencies relating to claims that have~~judgment has been ~~asserted against us are described above.~~

On April 28, 2016, the State of South Dakota sued us along with three other defendants in the Sixth Judicial Circuit Court of South Dakota. South Dakota alleges that U.S. constitutional law should be revised to permit South Dakota to require out-of-state ecommerce websites to withhold and remit sales tax in South Dakota in accordance with South Dakota's sales tax statute. Pursuant to the statute, we would not be required to withhold and remit sales tax until there was a verdict in favor of South Dakota which was then upheldentered by the ~~highest applicable appellate~~ court. The statute does not require us to pay sales tax retroactively if we were to lose. The state court 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,~~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 and tZERO voluntarily provide certain information and documents related to tZERO and the tZERO security token offering in connection with its investigation. In December of 2018, we received a ~~letter~~follow-up request from the ~~District Attorney of Sonoma County, California who is acting as part~~SEC expanding the scope of the ~~Consumer Protection Divisions~~investigation into certain public statements made by us. We 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 extensive regulatory requirements under federal and state laws and regulations and self-regulatory organization ("SRO") rules. Each of SpeedRoute LLC ("SpeedRoute") and PRO Securities LLC ("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 (as applicable). 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, investigation, 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. Moreover, 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 oral and written communications with regulatory authorities. As previously disclosed, tZERO's broker-dealer subsidiaries are currently undergoing various examinations, inquiries, and/or investigations undertaken by various regulatory authorities; as appropriate or required, we will provide further information to such regulatory authorities regarding such matters. Any failure by tZERO's broker-dealer subsidiaries to satisfy regulatory authorities that they are in compliance with all applicable rules and regulations could have a material adverse effect on tZERO and on us.

On January 31, 2019, a putative class action lawsuit was filed against us in the United States District Court, Southern District of New York, alleging that our website violates the Americans with Disabilities Act ("ADA") in addition to other New York specific laws, because it is not accessible to blind and visually impaired people. No estimate 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,possible loss or ~~decomposable constitute false advertising under California law. On July 24, 2017, we agreed to the terms~~range 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.

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

On ~~August 28, 2017, the State of Indiana sued~~March 15, 2019, Consolidated Transaction Processing, LLC, filed suit against us ~~along with one other defendant~~ in the ~~Superior~~United States District Court for the District of ~~Indiana, Marion County. Indiana alleges that U.S. constitutional law should~~Delaware. We are alleged to have infringed patents covering electronic transaction processing methods. No estimate of the possible loss or range of loss can be revised to permit Indiana to require out-of-state ecommerce websites to withhold and remit sales tax in Indiana in accordance with Indiana's sales tax statute. Pursuant to the statute, we would not be required to withhold and remit sales tax until there was a verdict in favor of Indiana and the verdict was no longer subject to appeal. The statute does not require us to pay sales tax retroactively if we were to lose.made. We intend to vigorously defend this ~~action.~~action and pursue any indemnification rights that exist with our vendors.

We establish liabilities when a particular contingency is probable and estimable. At ~~September 30, 2017,~~March 31, 2019 and December 31, 2018, we ~~had~~have accrued ~~$50,000 in light of probable~~$10.6 million and ~~estimable liabilities net of related indemnities,~~$10.3 million, 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.

7.8. 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.

8.9. STOCKHOLDERS' EQUITY

Common Stock

Each share of common stock has the right to one vote. The holders of common stock are also entitled to receive dividends declared by the Board of Directors out of funds legally available, subject to prior rights of holders of all classes of

stock outstanding having priority rights as to dividends. No dividends have been declared or paid on our common stock through March 31, 2019.

Preferred Stock

Each share of Series A Preferred and each share of Series B Preferred (collectively the "preferred shares") is intended to have voting and dividend rights similar to those of one share of common stock. Preferred shares rank senior to common stock with respect to dividends. Holders of the preferred shares will be 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 of the Company legally available for payment of dividends and subject to declaration by our Board of Directors. Holders of the preferred shares 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 and 2018.

Neither the Series A Preferred nor Series B Preferred is required to be converted into or exchanged for shares of our common stock or any other entity; however, at our sole discretion, we may convert the Series A Preferred shares into Series B Preferred shares at any time on a one-to-one basis. Until the third anniversary of the original issuance date, we may redeem, at our discretion, both the Series A and Series B Preferred shares for an amount equal to the highest of the following: (1) the subscription price plus any accrued but unpaid dividends, (2) 105% of the average trading price of our common stock during a five-trading-day period and (3) 105% of the average trading price of the series of preferred shares during the same five-day-trading period. In the event of any liquidation, any amount available for distribution to stockholders after payment of all liabilities will be distributed proportionately, with each share of Series A Preferred and each share of Series B Preferred being treated as though it were a share of our common stock.

JonesTrading Sales Agreement

In August 2018, we entered into a sales agreement with JonesTrading Institutional Services LLC ("JonesTrading"), under which we conducted "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 additional 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. As of March 31, 2019, we had sold 5,097,410 shares of our common stock pursuant to the sales agreement and have received $134.5 million in proceeds, net of $3.1 million of offering costs, including commissions paid to JonesTrading. During the quarter ended March 31, 2019, we sold shares of common stock for $39.9 million, net of offering expenses (including commissions), of which $9.0 million was recorded as a receivable at March 31, 2019 and collected shortly thereafter. The average gross price per share of stock sold pursuant to the sales agreement during the quarter ended March 31, 2019 was $18.25. We sold the remaining capacity under the sales agreement with JonesTrading (745,737 shares) the first week in April 2019, raising additional gross proceeds of $12.4 million.

tZERO Tokens

On December 18, 2017, tZERO launched an offering (the "security token offering") of the right to acquire tZERO Preferred Equity Tokens (the "tZERO Security Token") through a Simple Agreement for Future Equity ("SAFE"). The security token offering closed on August 6, 2018, and on October 12, 2018 tZERO issued the tZERO Security Tokens in settlement of the SAFEs. tZERO Security Token holders have the right to, prior to distributing earnings to tZERO common shareholders, a noncumulative dividend equal to 10% of tZERO's consolidated Adjusted Gross Revenue (as defined by the security token offering documents) for the most recently completed fiscal quarter, if declared by tZERO's Board of Directors, to be paid out of funds lawfully available on a quarterly basis. tZERO Security Token holders are not entitled to participate in any dividends paid to the holders of tZERO's common stock, have no rights to vote, and have no rights to the undistributed earnings of tZERO and are not entitled to any utility functionality as part of the tZERO Security Tokens. Any remaining undistributed earnings or losses of tZERO for a period shall be allocated to the noncontrolling interest held by the tZERO Security Token holders based on the contractual participation rights of the security to share in those earnings as if all the earnings for the period had been distributed and the effect will be reflected in determining net income/(loss) per share under the two-class method. In the event of any liquidation, dissolution or winding up of tZERO, the tZERO Security Token holders will be entitled to the limited preferential liquidation rights equal to USD $0.10 per token to the extent funds are available.

At December 31, 2018, cumulative proceeds since December 18, 2017 from the security token offering totaling $104.8 million, net of $22.0 million of withdrawals, have been classified as a component of noncontrolling interest within our consolidated financial statements. As of December 31, 2018, tZERO incurred $21.5 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. During the three months ended March 31, 2018, proceeds from the security token offering were $92.9 million, net of $11.4 million of withdrawals. During the three months ended March 31, 2018, tZERO incurred offering costs of $16.0 million.

Warrants

On November 8, 2017, we issued warrants to purchase up to 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 $6.5 million, 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 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 stock for $50.6 million.

GSR Agreement

In August 2018, Overstock signed a Token Purchase Agreement with GSR Capital Ltd., a Cayman Islands exempted company ("GSR"). 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. On May 8, 2019, the parties agreed to replace the Token Purchase Agreement with an executed Investment Agreement under which GSR purchased 508,710 shares of tZERO which represents approximately 0.5% of the issued and outstanding Common Stock of tZERO. In exchange, GSR agreed to transfer to tZERO a total $5.0 million in consideration, consisting of $1.0 million U.S. dollars, $1.0 million U.S. dollars' worth of Chinese Renminbi, and securities traded on the Hong Kong Stock Exchange with a market value of $3.0 million U.S. dollars.

10. 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. Employee accounting applies to awards granted by the Company or subsidiary in the company or subsidiary's shares only to its own employees, respectively. 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 March 31,
	2019		2018
Total stock-based compensation expense	$	3,985	$	6,435

~~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~~Company to our officers, board members and employees. ~~The~~These 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~~In addition to our traditional equity awards, during the three months ended March 31, 2019, we granted 502,765 restricted stock awards ~~that remained outstanding.~~with a cumulative grant date fair value of $8.6 million which vest over a one-year period.

The cost of restricted stock ~~awards~~units 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~~three months ended ~~September 30, 2017~~March 31, 2019 (in thousands):


	Nine months ended September 30, 2017				Three months ended March 31, 2019
	Units		Weighted Average Grant Date Fair Value		Units		Weighted Average Grant Date Fair Value
Outstanding—beginning of year	560		$	17.46	559		$	44.08
Granted at fair value	299		16.71		960		17.92
Vested	(202	)	19.82		(242	)	35.89
Forfeited	(114	)	16.20		(60	)	21.62
Outstanding—end of period	543		$	16.43	1,217		$	26.19

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 approximately 10% of the authorized shares of Medici Ventures' common stock. During the three months ended March 31, 2019, Medici Ventures granted 25,000 stock options with a cumulative grant date fair value of $2.2 million which vest over a three year period.

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. During the three months ended March 31, 2019, tZERO granted awards to acquire 20,000 shares of its stock with a cumulative grant date fair value of $5,000 which will be expensed on a straight-line basis over the vesting period of two to three years.

9.11. OTHER INCOME (EXPENSE), NET

Other income (expense), net consisted of the following (in thousands):



	Three months ended March 31,
	2019			2018
Impairment of and loss on equity securities	$	(4,602	)	$	103
Allowance on notes receivable	(1,237		)	—
Loss on sale of equity securities	(977		)	—
Other	544			(112		)
Total other income (expense), net	$	(6,272	)	$	(9	)

12. BUSINESS SEGMENTS

Segment information has been prepared in accordance with ASC Topic 280 Segment Reporting. As described in Note 1—Basis of Presentation, we have recast our segment information to conform with current year presentation. We determined our segments based on how we manage our ~~business, which,~~business. In the fourth quarter of 2018, we completed our review of our segment reporting and in light of a strategic shift in our ~~view, consists primarily~~Chief Operating Decision Maker's long-term strategic focus for our organization, we no longer consider the split of retail direct and retail partner as a distinct and relevant measure of our ~~Retail and Medici businesses. Our Retail business consists of our~~business. Accordingly, Direct and Partner are no longer considered separate reportable ~~segments.~~segments but are included under Retail in our Business Segment disclosures. Beginning in the first quarter of 2019, we began allocating corporate support costs (administrative functions such as finance, human resources, and legal) to our operating segments based on their estimated usage and based on how we manage our business. Comparative prior year information has not been recast and as a result our corporate support costs for those comparative prior periods remain allocated to our Retail segment. Our Medici business includes one reportable segment, tZERO. We use ~~gross profit~~pre-tax net income (loss) 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, the remainder of our Medici business is not significant as compared to our ~~Direct~~Retail and ~~Partner segments and is included in Other.~~tZERO segments. Our Other segment consists of ~~Medici. Although~~Medici Ventures' remaining operations and the remainder of our ~~Direct and Partner segments both relate to our Retail business, we do not combine these segments because they have dissimilar economic characteristics,~~unallocated corporate support costs (administrative functions such as ~~gross profit margins.~~ finance, human resources, and legal).

Our Retail segment primarily consists of amounts earned through e-commerce sales through our Website.

Our tZERO segment primarily consists of amounts earned through securities transactions through our broker-dealers and costs incurred to execute our tZERO business initiatives.

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~~ months ended ~~September 30, 2017~~March 31, 2019 and ~~2016.~~

2018.

The following table summarizes information about reportable segments for three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2019 and ~~2016~~2018 (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



	Retail			tZERO			Other			Total
2019
Revenue, net	$	362,625		$	4,496		$	608		$	367,729
Cost of goods sold	290,640			3,357			608			294,605
Gross profit	$	71,985		$	1,139		$	—		$	73,124
Operating expenses (1)	85,336			15,553			8,253			109,142
Interest and other income (expense), net (2)	135			(963		)	(5,168		)	(5,996		)
Pre-tax loss	$	(13,216	)	$	(15,377	)	$	(13,421	)	(42,014		)
Provision for income taxes										878
Net loss (3)										$	(42,892	)

2018
Revenue, net	$	439,996		$	4,852		$	483		$	445,331
Cost of goods sold	347,580			3,399			483			351,462
Gross profit	$	92,416		$	1,453		$	—		$	93,869
Operating expenses	125,532			19,959			2,772			148,263
Interest and other income (expense), net (2)	(455		)	453			(337		)	(339		)
Pre-tax loss	$	(33,571	)	$	(18,053	)	$	(3,109	)	(54,733		)
Benefit from income taxes										(277		)
Net loss (3)										$	(54,456	)


(1)	— Corporate support costs have been allocated $12.6 million, $1.8 million, and $3.6 million to Retail, tZERO, and Other, respectively. Unallocated corporate support costs of $1.8 million are included in Other.

~~(1) — The above amounts include Retail depreciation and amortization expense of $6.7 million and $7.3~~


(2)	— Excludes intercompany transactions eliminated in consolidation, which consist primarily of service fees and interest. The net amounts of these intercompany transactions were $415,000 and $2.0 million for the three months ended March 31, 2019 and 2018.


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

For the three months ended ~~September 30, 2017~~March 31, 2019 and ~~2016, respectively, and $21.1 million and $19.5 million for the nine months ended September 30, 2017 and 2016.~~

(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 months ended September 30, 2017 and 2016,~~2018, substantially all of our ~~sales~~ revenues were attributable to customers in the United States. At ~~September 30, 2017~~March 31, 2019 and December 31, ~~2016,~~2018, substantially all of our ~~fixed assets~~property and equipment were located in the United States.

~~10.~~13. BROKER DEALERS

~~As part of our Medici blockchain and fintech technology initiatives, we hold a controlling interest in~~tZERO wholly owns each of two broker dealers, SpeedRoute ~~LLC ("SpeedRoute")~~ and ~~Pro~~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~~PRO Securities is a FINRA-registered broker dealer that owns and operates the ~~Pro~~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~~PRO Securities ATS is a closed system available only to its broker dealer subscribers. ~~Pro~~PRO Securities does not accept orders from non-broker dealers, nor does it hold, own or sell securities.

SpeedRoute and ~~Pro~~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 30, 2017,~~March 31, 2019, SpeedRoute had net capital of ~~$496,480,~~$1,112,135, which was ~~$391,483~~$1,000,903 in excess of its required net capital of ~~$104,997~~$111,232 and SpeedRoute's net capital ratio was ~~3.17~~1.5 to 1. At ~~September 30, 2017, Pro~~March 31, 2019, PRO Securities had net capital of ~~$9,194~~$87,159 which was ~~$4,194~~$82,159 in excess of its required net capital of $5,000 and ~~Pro~~PRO Securities net capital ratio was ~~2.34~~0.2 to 1. At December 31, 2018, SpeedRoute had net capital of $1,251,579, which was $1,152,854 in excess of its required net capital of $98,725 and SpeedRoute's net capital ratio was 1.2 to 1. At December 31, 2018, PRO Securities had net capital of $13,958, which was $8,958 in excess of its required net capital of $5,000 and PRO Securities net capital ratio was 2 to 1.

SpeedRoute and ~~Pro~~PRO Securities did not have any securities owned or securities sold, not yet purchased at ~~September 30, 2017.~~March 31, 2019 and December 31, 2018, respectively.

~~11. SUBSEQUENT EVENTS~~

~~New loan agreement~~

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 and any then unpaid interest will be due and payable on May 1, 2019 (subject to mandatory prepayment 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. As a result of the termination of the U.S. Bank agreements, we are required to write-off the remaining unamortized debt issuance costs of $816,000 associated with the U.S. Bank agreements.

~~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, and relate to future events or~~the risks described in our ~~future financial or operating performance. The~~Annual Report on Form 10-K for the year ended December 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 retail business and our Medici businesses, including our tZERO initiatives;

the ~~anticipated~~possibility that we will sell or attempt to sell our retail business or pursue or attempt to pursue one or more other strategic alternatives that could change our business dramatically, as well as the possibility that we will determine not to sell or attempt to sell our retail business or pursue any other strategic alternative at all in the foreseeable future;

the possibility that we may sell our retail business and all statements about the potential effects of any such sale;

whether we would or would not submit any sale of our retail business to a vote of our stockholders;

whether we would or would not distribute any proceeds of any sale of our retail business to our stockholders by any means or use those proceeds in our blockchain initiatives;

our expectations regarding the costs, benefits and risks of Medici Ventures' and tZERO's initiatives, including their acquisitions or purchases of interests in other companies;

potential negotiated equity investments in Overstock and/or tZERO, including the timing of such investments and their likelihood of closing on the agreed upon time frames, if at all;

the plans of tZERO and Medici Ventures and the costs, benefits and risks of their initiatives, including those of tZERO's ownership of SpeedRoute and PRO Securities;

our expectations regarding the costs, benefits and risks of the tZERO security token offering completed in 2018;

our expectations regarding the costs, benefits and risks of our ~~business~~efforts and ~~plans;~~plans to advertise or offer other additional businesses, innovations and projects that we or our subsidiaries may engage in, offer or advertise in the future;

our ~~beliefs~~expectations regarding Medici Land Governance Inc., a newly-formed public benefit corporation;

our ~~ability~~efforts to ~~attract and retain customers~~improve our natural search results in ~~a cost-efficient manner;~~

~~the anticipated effectiveness of~~ our ~~marketing;~~

retail business;

our future operating ~~and~~or 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~~GAAP 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 third-party operated warehouse facilities;~~

~~our belief that we can maintain compliance with the requirements of our credit facility;~~

~~our future~~ capital requirements and our ability to ~~satisfy our capital needs;~~fund them;

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

tZERO's plans, including without limitation its plans regarding its Token Trading Systems, as well as its joint venture with Box Digital;

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;

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

~~our beliefs regarding the costs and benefits of our "spend and defend" policy under which we generally refuse to settle abusive patent suits brought against us;~~

~~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 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;

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

our ~~belief that~~expectations regarding our ~~sales through other ecommerce marketplace channels will~~potential liabilities or exposure to claims under Delaware's Abandoned Property Law;

our expectations regarding the actual costs of our employees' health insurance claims for which we may be ~~successful;~~liable; and

our ~~belief that we can successfully offer~~other statements about the anticipated benefits and ~~sell a constantly changing mix~~risks of ~~products~~our business and ~~services.~~

plans.

Further, in some cases, you can identify 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 retail business and/or additional equity or debt financings;

the possibility that we may sell our retail business and retain 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 retail business and the significant annual net revenues that it generates, 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 retail business in a taxable transaction;

the possibility that our well-publicized review of potential strategic alternatives including the potential sale of our retail business may distract our management and other employees, may cause members of our management and/or other key 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 from our blockchain initiatives;

our ability to reach a definitive agreement or complete a capital raising transaction for tZERO on the terms contemplated by the previously-disclosed memorandum of understanding we signed with GSR Capital and Makara Capital in early 2019;

the possibility that the proceeds of the security token offering completed by tZERO in 2018 might be treated as income to us for federal income tax purposes;

difficulties we have encountered and ~~may~~ continue to encounter with changes that Google has made ~~and that Google and other search engine companies may make~~ to ~~their~~its natural search engine algorithms, which have periodically resulted in lower rankings of our products and may continue to do ~~so;~~so, and future changes that Google and other search engine companies may make to their natural search engine algorithms, which may have similar effects on us;

increasing competition, including from Amazon, from well‑funded companies willing to incur substantial losses in order to build market share, and from others including competitors with 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 retail business;

difficulties, including expense and any operational or regulatory issues we may encounter in connection with tZERO or its subsidiaries;

technical, operational, regulatory or other difficulties we may encounter with our Medici or tZERO blockchain and financial technology initiatives, including any difficulties we 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 incur in connection with our Medici and tZERO blockchain and technology initiatives;

the difficulties tZERO will face in attempting to generate revenues from blockchain-based applications of any nature, including its potential DLR software product;

impairment charges we may recognize with respect to assets or businesses that we, Medici Ventures or tZERO have acquired or may acquire;

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;

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

the imposition of tariffs or occurrence of other factors 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 or discourage or prevent consumers from shopping online or via mobile apps;

~~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~~sell in our ~~product offerings;~~

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

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;~~time;

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;

~~any substantial decrease in~~the possibility that we will be unable to raise additional capital or obtain financing adequate to enable us to continue our ~~liquidity, whether as a result of stock repurchases we may make or as a result of 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;

~~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 our new corporate headquarters;~~

~~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 and online payments to mobile and multi-channel commerce and payments;~~

the extent 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;

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;

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 build market share, and from others including competitors with business models thatany difficulties we may ~~include delivery capabilities~~encounter as a result of our reliance on numerous third parties that we ~~may be unable~~do not control for the performance of critical functions material to ~~match;~~

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

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;

any difficulties we may have optimizing our warehouse operations;

any decrease in the ~~risks~~volume of ~~inventory management~~retail sales, particularly in home goods, and ~~seasonality, particularly with inventory subject to rapid price declines;~~the occurrence of any event that would adversely affect e-commerce or discourage or prevent consumers from shopping online or via mobile apps;

the ~~cost and availability~~possibility that our liability for our employees' health insurance claims increases as a result of ~~traditional and online advertising, the rapid changes~~more claims or larger claims than we expect and/or increases in the ~~online advertising business and the longer-term changes in the traditional advertising business, and the results~~costs 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;~~healthcare generally; 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, 2018 filed with the SEC, especially under the headings "Risk Factors," "Legal Proceedings," and "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. Our retail business initiatives are described in more detail below under "Our Retail Business".

~~In late 2014, we began working on~~Our Medici business initiatives seek to develop and advance the concepts of "Government as a Service" and a "Technology Stack for Civilization" by creating or fostering a set of products and solutions that leverage the transparency and immutability of blockchain technology ~~which we refer~~ to ~~collectively as Medici. As part~~generate efficiencies and increase security and control in six areas of ~~our~~civilizational necessity: identity management, property rights and management, central banking and currencies, capital markets, supply chains and commerce, and voting systems. Our Medici business initiatives ~~we have formed a~~include our wholly-owned subsidiary, Medici Ventures, Inc. ~~and acquired a~~("Medici Ventures"), which conducts the majority ~~interest in~~of its business through its majority-owned subsidiary tZERO Group, Inc. ("tZERO"), formerly tØ.com, Inc., a financial technology company ~~and two related registered broker dealers which we have rolled into the majority-owned subsidiary tØ.com, Inc. ("tZERO"). We have also made~~pursuing potential financial applications of blockchain technologies as well as non-blockchain businesses. Medici Ventures currently holds minority ~~investments~~equity interests in several ~~blockchain~~ technology ~~companies. In 2015, we were~~companies whose focuses include the ~~first public company to issue~~areas mentioned above. Our Medici business initiatives are described in more detail below under "Our Medici Business—Medici Ventures" and our tZERO business initiatives are described in more detail below under "Our Medici Business—tZERO".

We are considering a ~~private security using blockchain technology and in December 2016, as~~range of potential transactions, including a ~~successful demonstration~~sale of our ~~technology, we issued publicly traded blockchain preferred shares~~retail business and additional equity or debt financings. Our Board of ~~Overstock.com, Inc.~~Directors continually discusses a variety of potential strategic and financial options and other changes to our business, but has not approved or made any determination to consummate any strategic transaction, and may choose not to do so in the foreseeable future or at all.

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,"~~"Overstock", ~~"O.co,"~~"Overstock.com", "O.co", "the Company", "we," "our" and similar terms include Overstock.com, Inc. and our majority-owned subsidiaries, unless the context indicates otherwise.

Our Retail Business

~~Retail~~Our retail business,

through March 31, 2019, generated nearly all of our net revenues. In our retail business, our goal is to provide goods to furnish and accessorize "dream homes" for our target customers—consumers who seek quality, stylish merchandise at bargain prices. At March 31, 2019, we ~~deal~~offered 4.9 million products (8.9 million SKUs), of which over 99% were in-line products (products in active production), including more than 25,000 private label products offered under eleven private label brands. We believe that the furniture and home goods market, which is highly fragmented and has traditionally been served by brick and mortar stores, will continue transitioning to online sales, particularly as Millennial consumers (defined as those aged 20-36), who are generally comfortable shopping online, start families and move into new homes. We regularly change our product assortment to meet the evolving preferences of our customers and current trends. Our products include, among others, furniture, home décor including rugs, bedding and bath, home improvement, and kitchen items. We compete primarily based on:

Quality customer experience with an emphasis on price, value, and a wide assortment of products delivered in ~~price-competitive, new~~a personalized format with the convenience of our mobile app, and ~~replenishable merchandise~~with the benefits of our award-winning customer care;

Proprietary technologies which we believe help us provide our customers with a quality shopping experience;

Logistics capabilities tailored to the furniture and home goods category and developed over our many years of e-commerce experience;

Long-term mutually beneficial relationships with our partners, which currently number approximately 4,000; and

Our Club O Loyalty Program, which we believe increases customer engagement and retention.

For the quarter ended March 31, 2019, nearly all our retail sales through our Website were from transactions in which we fulfilled orders through our network of approximately 4,000 third-party manufacturers, distributors and other suppliers ("partners") selling on our Website. Our use of the ~~Internet to aggregate both supply and demand to create an efficient marketplace for selling these products.~~term "partner" does not mean that we have formed any legal partnerships with any of our retail partners. 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 supplierspartners 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 supply chain allows us to ship directly to our customers from our suppliers or from our warehouses. Our retail sales also includes direct sales of our own inventory shipped from our warehouses, including some customer returns of partner products.

During the quarters ended March 31, 2019, 2018 and 2017 our sales were almost entirely to customers located in the United States and no single customer accounted for more than 1% of our total net revenue.

Additional Offerings

We offer additional products or services that may complement our primary retail offerings, but are not significant to our retail revenues. These include:

Our international business where we offer products to customers outside the United States using third party logistics providers;

Worldstock Fair Trade, a store within our Website isthat offers handcrafted products made by artisans all over the world to help improve the lives of people in emerging economies;

Pet Adoptions, a free service and portal within our Website that leverages our technology to display pets available for adoption from ~~a variety~~shelters across the United States;

Overstock Hotels, portal within our Website that enables customers to search and book hundreds of ~~sources~~thousands of properties worldwide, 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~~big box brands, modern boutiques, 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 assistsmore;

~~customers by telephone, instant online chat~~Supplier Oasis, a single integration point through which our partners can manage their products, inventory and ~~e-mail. We~~sales channels, and also ~~derive revenue from other businesses~~obtain multi-channel fulfillment services through our distribution network; and

Businesses advertising products or services on our Website. ~~Our sales are primarily to customers located in the United States.~~

Our ~~retail direct business includes sales made to individual consumers and businesses from our owned inventory and that are fulfilled primarily from our warehouse in Salt Lake City, Utah.~~

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 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~~Retail revenues are seasonal, with revenues historically being the highest in the fourth quarter, which ends December 31, reflecting higher consumer holiday spending. WeWhile we had lower sales volume during Q4 2018, we anticipate ~~this will~~the trend of higher sales volume during our fourth quarter to 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~~retail businesses.

Our Medici ~~business initiatives~~Business

Medici Ventures

Medici Ventures' strategy is to develop and advance the concepts of "Government as a Service" and a "Technology Stack for Civilization" by creating or fostering a set of products and solutions that leverage blockchain technology to generate efficiencies and increase security and control in six areas of civilizational necessity: identity management, property rights and management, central banking and currencies, capital markets, supply chains and commerce, and voting systems. A blockchain is a cryptographically secured, distributed infrastructure, or network, which may be accessed and, in some cases, maintained by each member of 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 of securities settlement. Through our wholly-owned subsidiary,network. Medici Ventures ~~Inc., we hold~~has a team of approximately 37 software engineers, developers and other technologists who work in blockchain development and deployment and enterprise level software development and deployment. Medici Ventures provides the services of its software engineers, developers, or other technologists to other blockchain companies. Medici Ventures also owns strategic minority ~~investments~~equity interests in several blockchain-related companies, each of which focuses on at least one of the Government as a Service areas mentioned above. Medici Ventures takes an active interest in and holds seats on the boards of some of these companies. These companies include 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,~~for identity ~~voting,~~ and ~~land.~~social media, property and land, money and banking, capital markets, supply chain, and voting. All of the companies in which Medici Ventures ~~Inc.'s primary~~holds strategic equity interests are startup businesses, businesses in the development stage, or businesses with a short operating history. The majority of Medici Ventures' business is its ~~majority~~80% interest in tZERO, which, ~~includes~~as described below, is a financial technology company ~~and two related registered broker dealers.~~pursuing potential financial applications for blockchain technologies.

~~As described further~~tZERO

tZERO is a financial technology company pursuing potential financial applications of blockchain technologies as well as non-blockchain businesses. tZERO’s primary focus at present is on its recent launch of a facility for the trading of digital securities tokens and on its joint venture with BOX Digital Markets LLC ("BOX Digital") intended to develop a U.S. national securities exchange (the "Exchange") with regulatory approvals that would enable the Exchange to trade digital securities.

tZERO continues to identify, evaluate and pursue various opportunities for strategic acquisitions or purchases of interests to add to the services and expertise it offers its customers. Subject to board approval, tZERO's management exercises substantial discretion in ~~Item 1~~identifying appropriate strategic transactions and negotiating the terms of ~~Part I, "Financial Statements (Unaudited)"-Note 9. Business Segments, we determined our segments~~such transactions. Management's determinations are based on ~~how we manage our business, which,~~numerous financial, strategic and operational assumptions, and there can be no assurance that such assumptions will prove to be true. Moreover, such strategic transactions may fail to produce the benefits expected at the time of tZERO's acquisitions or purchases of interests.

The businesses, products, and services that tZERO is pursuing or contemplating will require substantial additional funding, initially for technology development and regulatory compliance, as well as for working capital, marketing and sales, and other substantial costs of developing new products and businesses in ~~our view, consists primarily~~emerging areas of ~~our Retail~~technology. These costs have been and ~~Medici businesses. As described above, our Retail business consists of our Direct~~are expected to continue to be material, both to tZERO 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.Overstock.

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 decreased 17% in ~~Q3 2017 decreased 4%~~Q1 2019 compared to ~~Q3 2016. In Q2 2017~~Q1 2018. This decrease was primarily due to a significant reduction in sales and ~~continuing in Q3 2017, we have experienced slowing~~marketing expenses as part of our ~~overall~~effort to return to retail profitability. In January 2018, we shifted our retail strategy to aggressively pursue revenue growth which we believe is due 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~~new customers with a large ~~number of resources around addressing~~increase in sales and marketing expenses. We discontinued this ~~current challenge, as well as seeking~~strategy in August 2018 and have now returned to ~~prevent it from occurring again. We have implemented~~ a ~~variety of innovations and technical improvements in this area and expect~~disciplined approach 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.~~

marketing.

Gross profit in ~~Q3 2017 increased 5%~~Q1 2019 decreased 22% compared to ~~Q3 2016~~Q1 2018 primarily as a result of ~~increased~~decreased revenue and a decrease to gross margin. Gross margin ~~increased~~decreased to ~~19.7%~~19.9% in ~~Q3 2017~~Q1 2019, compared to ~~18.1%~~21.1% in ~~Q3 2016.~~Q1 2018. The ~~increase~~decrease in gross margin was primarily due to ~~a continued shift in sales mix into higher margin home and garden products,~~increased freight costs, partially offset by ~~increased~~decreased promotional activities, including coupons and site sales, due to our driving a ~~higher~~lower proportion of our sales using such promotions.

Sales and marketing expenses as a percentage of revenue ~~increased~~decreased from ~~7.9%~~17.3% to ~~10.6% during Q3 2017~~9.1% in Q1 2019 as compared to ~~Q3 2016,~~Q1 2018, primarily due to ~~increased~~our return to our historical focus on operational efficiency as we have shifted away from our aggressive retail marketing strategy from early 2018. As part of this effort, we significantly reduced spending in the sponsored search, display ads on social media, 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.~~channels.

While 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 in recent quarters. We expect this trend to continue.

As a result of these factors, our contribution decreased 20% in Q3 2017 compared to Q3 2016 (see Non-GAAP Financial Measures below for a reconciliation of Contribution to Gross Profit). Contribution margin was 9.2% in Q3 2017 compared to 11.1% in Q3 2016.

Technology expenses in ~~Q3 2017~~Q1 2019 increased ~~$2.0~~$4.1 million compared to ~~Q3 2016,~~Q1 2018 primarily due to ana $2.8 million increase in ~~staff related~~staff-related costs, ~~of $1.5 million, an~~a $555,000 increase in technology licenses and maintenance costs, ~~of $1.3 million, partially offset by~~and a ~~decrease~~$538,000 increase in ~~depreciation of $848,000.~~consulting expenses.

General and administrative expenses in ~~Q3 2017 decreased $1.7 million~~Q1 2019 increased $477,000 compared to ~~Q3 2016,~~Q1 2018, primarily due to a ~~decrease in bad debt expense of $1.1~~$3.1 million ~~a decrease~~increase in consulting ~~and outside services expense of $479,000, and~~expenses, a ~~decrease~~$2.6 million increase in legal fees, a $1.8 million increase in staff-related costs due to employee severance, and an $820,000 increase in audit and tax preparation fees. These increases were largely offset by a $6.9 million decrease in cryptocurrency losses and a $783,000 decrease in depreciation. The cryptocurrency losses in Q1 2018 were primarily related to a decline in the value of ~~$434,000. These decreases were~~cryptocurrency received during the tZERO STO.

Liquidity

In Q1 2019, our consolidated cash and cash equivalents balance decreased $21.9 million, from $141.5 million to $119.6 million, primarily as the result of cash outflows from operating activities of $51.4 million for the quarter, which was partially offset by ~~an increase in staff related~~cash inflows from the sale of common stock under our "at the market" sales agreement with JonesTrading of $31.0 million, net of offering costs ~~of $509,000.~~(including commissions).

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 continue 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, and ~~the seasonality of~~potential 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 interests 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 March 31,
	2017		2016		2017		2016		2019		2018
	(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	%
Partner and other	95.4		94.4		95.0		94.0
Retail									98.6	%	98.8	%
Other									1.4		1.2
Total net revenue	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
Partner and other	75.6		76.5		75.4		76.0
Retail									79.0		78.0
Other									1.1		0.9
Total cost of goods sold	80.3		81.9		80.2		81.7		80.1		78.9
Gross profit	19.7		18.1		19.8		18.3		19.9		21.1
Operating expenses:
Sales and marketing	10.6		7.9		9.8		7.8		9.1		17.3
Technology	6.8		6.1		6.7		6.1		9.6		7.0
General and administrative	5.1		5.3		5.2		5.3		10.9		8.9
Litigation settlement	—		—		—		(1.5	)
Total operating expenses	22.5		19.2		21.6		17.7		29.7		33.3
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									(9.8	)	(12.2	)
Other income (expense), net									(1.6	)	(0.1	)
Loss before income taxes									(11.4	)	(12.3	)
Provision (benefit) from income taxes									0.2		(0.1	)
Consolidated net loss									(11.7	)%	(12.2	)%

Comparisons of Three Months Ended ~~September 30, 2017~~March 31, 2019 to Three Months Ended ~~September 30, 2016, and Nine Months Ended September 30, 2017 to Nine Months Ended September 30, 2016~~March 31, 2018

Revenue

The following table reflects our net revenues for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2019 and ~~2016~~2018 (in thousands):


	Three months ended September 30,									Nine months ended September 30,									Three months ended March 31,
	2017		2016		$ Change			% Change		2017		2016		$ Change			% Change		2019		2018		$ Change			% Change
Revenue, net
Direct	$	19,645	$	24,620	$	(4,975	)	(20.2	)%	$	64,572	$	75,901	$	(11,329	)	(14.9	)%
Partner and other	404,362		416,944		(12,582		)	(3.0	)	1,223,894		1,197,880		26,014			2.2
Retail																			$	362,625	$	439,996	$	(77,371	)	(17.6	)%
Other																			5,104		5,335		(231		)	(4.3	)%
Total revenue, net	$	424,007	$	441,564	$	(17,557	)	(4.0	)%	$	1,288,466	$	1,273,781	$	14,685		1.2	%	$	367,729	$	445,331	$	(77,602	)	(17.4	)%

The ~~primary reason for decreased~~17% decrease in total net revenue for the three months ended ~~September 30, 2017,~~March 31, 2019, as compared to the same period in 2016, was 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 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.~~

The primary reason for increased total net revenue for the nine months ended September 30, 2017, as compared to the same period in 2016, was 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 due to our driving a higher proportion of our sales using such promotions. Also, we had an increase in product sales for which we record only our commission as revenue. These decreases to revenue 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 to revenue 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 increase in partner revenue for the nine months ended September 30, 2017, as compared to the same period in 2016,~~2018, was primarily due to ana significant reduction in sales and marketing expenses as part of our effort to return to retail profitability. In January 2018, we shifted our retail strategy to aggressively pursue revenue growth and new customers with a large increase in sales ~~of home~~ and ~~garden products. This increase was partially offset by increased promotional activities, including coupons~~marketing expenses. We discontinued this strategy in August 2018 and ~~site sales due~~have now returned to ~~our driving~~ a ~~higher proportion of our sales using such promotions. Also, we had an increase in product sales for which we record only our commission as revenue. These decreases~~disciplined approach to ~~revenue were partially offset by a decrease in Club O Rewards earned due to discontinuing rewards on the Club O Silver program in Q4 2016.~~marketing.

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% of total net revenues for each of the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2019 and ~~2016.~~2018.

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 30, 2017~~March 31, 2019 (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 March 31, 2019
Change in the Estimate of Average Transit Times (Days)	Increase (Decrease) Revenue			Increase (Decrease) Pre-Tax Income
2	$	(17,855	)	$	(3,146	)
1	$	(7,507	)	$	(1,312	)
As reported	As reported			As reported
-1	$	5,346		$	913
-2	$	9,507		$	1,629

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;~~price, including competitive pricing; inventory management ~~decisions within the direct business;~~decisions; 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~~ months ended ~~September 30, 2017~~March 31, 2019 and ~~2016~~2018 (in thousands):


	Three months ended September 30,									Nine months ended September 30,									Three months ended March 31,
	2017		2016		$ Change			% Change		2017		2016		$ Change			% Change		2019		2018		$ Change			% Change
Revenue, net
Direct	$	19,645	$	24,620	$	(4,975	)	(20.2	)%	$	64,572	$	75,901	$	(11,329	)	(14.9	)%
Partner and other	404,362		416,944		(12,582		)	(3.0	)	1,223,894		1,197,880		26,014			2.2
Retail																			$	362,625	$	439,996	$	(77,371	)	(17.6	)%
Other																			5,104		5,335		(231		)	(4.3	)
Total net revenue	$	424,007	$	441,564	$	(17,557	)	(4.0	)%	$	1,288,466	$	1,273,781	$	14,685		1.2	%	$	367,729	$	445,331	$	(77,602	)	(17.4	)%
Cost of goods sold
Direct	$	19,577	$	23,955	$	(4,378	)	(18.3	)%	$	61,687	$	72,459	$	(10,772	)	(14.9	)%
Partner and other	320,755		337,893		(17,138		)	(5.1	)	972,026		967,977		4,049			0.4
Retail																			$	290,640	$	347,580	$	(56,940	)	(16.4	)%
Other																			3,965		3,882		83			2.1
Total cost of goods sold	$	340,332	$	361,848	$	(21,516	)	(5.9	)%	$	1,033,713	$	1,040,436	$	(6,723	)	(0.6	)%	$	294,605	$	351,462	$	(56,857	)	(16.2	)%
Gross Profit
Direct	$	68	$	665	$	(597	)	(89.8	)%	$	2,885	$	3,442	$	(557	)	(16.2	)%
Partner and other	83,607		79,051		4,556			5.8		251,868		229,903		21,965			9.6
Retail																			$	71,985	$	92,416	$	(20,431	)	(22	)%
Other																			1,139		1,453		(314		)	(21.6	)
Total gross profit	$	83,675	$	79,716	$	3,959		5.0	%	$	254,753	$	233,345	$	21,408		9.2	%	$	73,124	$	93,869	$	(20,745	)	(22.1	)%

Gross margins for the past ~~seven~~five quarterly periods and fiscal year ending ~~2016~~2018 were:

Q1 2016 Q2 2016 Q3 2016 Q4 2016 FY 2016 Q1 2017 Q2 2017 Q3 2017
Direct 4.7 % 6.2 % 2.7 % 7.3 % 5.2 % 8.2 % 4.3 % 0.3 %
Partner and other 19.7 % 19.0 % 19.0 % 19.2 % 19.2 % 20.8 % 20.3 % 20.7 %
Combined 18.7 % 18.2 % 18.1 % 18.6 % 18.4 % 20.1 % 19.5 % 19.7 %



	Q1 2018		Q2 2018		Q3 2018		Q4 2018		FY 2018		Q1 2019
Retail	21.0	%	18.9	%	19.5	%	17.9	%	19.3	%	19.9	%
Other	27.2	%	24.1	%	33.1	%	26.8	%	27.6	%	22.3	%
Combined	21.1	%	19.0	%	19.7	%	18.0	%	19.4	%	19.9	%

Gross profit for the three months ended ~~September 30, 2017 increased 5%~~March 31, 2019 decreased 22% compared to the same period in ~~2016~~2018 primarily as a result of ~~increased~~decreased revenue and a decrease to gross margin. Gross margin ~~increased~~decreased to ~~19.7%~~19.9% for the three months ended ~~September 30, 2017~~March 31, 2019, compared to ~~18.1%~~21.1% for the same period in ~~2016.~~2018. The ~~increase~~decrease in gross margin was primarily due to ~~a continued shift in sales mix into higher margin home and garden products,~~increased freight costs, partially offset by ~~increased~~decreased promotional activities, including coupons and site sales, due to our driving a ~~higher~~lower proportion of our sales using such promotions.

Gross profit for the nine months ended September 30, 2017 increased 9% compared to the same period in 2016 primarily as a result of increased gross margin. Gross margin increased to 19.8% for the nine months ended September 30, 2017 compared to 18.3% for the same period in 2016. This increase in gross margin was primarily due to 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.

The 235 basis point decrease in direct gross margin for the three months ended September 30, 2017, as compared to the same period in 2016, was primarily due to increased promotional activities, including coupons and site sales due to our driving a higher proportion of our sales using such promotions and increased warehousing costs, 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 basis point increase in partner gross margin for the three months ended September 30, 2017, as compared to the same period in 2016 was primarily due to 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.

The 139 basis point increase in partner gross margin for the nine months ended September 30, 2017, as compared to the same period in 2016 was primarily due to 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.

Cost of goods sold includes stock-based compensation expense of ~~$46,000~~$47,000 and ~~$69,000~~$70,000 for the three months ended ~~September 30, 2017~~March 31, 2019 and ~~2016, respectively, and $134,000 and $200,000 for the nine months ended September 30, 2017 and 2016,~~2018, 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 March 31,
	2017			2016			2017			2016			2019			2018
Total revenue, net	$	424,007	100%	$	441,564	100%	$	1,288,466	100%	$	1,273,781	100%	$	367,729	100%	$	445,331	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%	277,218		75%	333,521		75%
Fulfillment and related costs	18,654		4%	18,447		4%	55,886		4%	54,833		4%	17,387		5%	17,941		4%
Total cost of goods sold	340,332		80%	361,848		82%	1,033,713		80%	1,040,436		82%	294,605		80%	351,462		79%
Gross profit	$	83,675	20%	$	79,716	18%	$	254,753	20%	$	233,345	18%	$	73,124	20%	$	93,869	21%

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 slightly during the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2019 as compared to the same ~~periods~~period in ~~2016.~~2018.

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 months ended September 30, 2017 and 2016 (in thousands):~~

Three months ended
September 30, Nine months ended
September 30,
2017 2016 $ Change % Change 2017 2016 $ Change % Change
Sales and marketing expenses $ 45,153
$ 34,707
$ 10,446
30.1 % $ 126,068
$ 99,516
$ 26,552
26.7 %
Sales and marketing expenses as a percent of net revenues 10.6 % 7.9 %

9.8 % 7.8 %

The 279 basis point increase in sales and marketing expenses as a percentage of revenue for the three months ended September 30, 2017, as compared to the same period in 2016, was 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 we work to adapt to Google's changes in its natural search engine algorithms as noted above, 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 may not choose to match their levels of spending, this has increased our marketing costs in recent quarters. We expect this trend to continue.~~

The 197 basis point increase in sales and marketing expenses as a percentage of revenue for the nine months ended September 30, 2017, as compared to the same period in 2016, was primarily due to increased spending in sponsored search and display ads on social media marketing channels, and increased staff related costs.

Sales and marketing expenses include stock-based compensation expense of $109,000 and $102,000 for the three months ended September 30, 2017 and 2016, respectively, and $318,000 and $234,000 for the nine months ended September 30, 2017 and 2016, respectively.

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.

The following table reflects our sales and marketing expenses for the three months ended March 31, 2019 and 2018 (in thousands):



	Three months ended March 31,
	2019			2018			$ Change			% Change
Sales and marketing expenses	$	33,477		$	77,214		$	(43,737	)	(56.6	)%
Sales and marketing expenses as a percent of net revenues	9.1		%	17.3		%

The 823 basis point decrease in sales and marketing expenses as a percentage of revenue for the three months ended March 31, 2019, as compared to the same period in 2018, was primarily due to our return to our historical focus on operational efficiency as we have shifted away from our aggressive retail marketing strategy from early 2018. As part of this effort, we significantly reduced spending in the sponsored search, display ads on social media, and television marketing channels.

Sales and marketing expenses include stock-based compensation expense of $441,000 and $873,000 for the three months ended March 31, 2019 and 2018, respectively.

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~~continues to increase. The impact of such attacks, their costs, and the costs we incur to protect ourselves against future attacks have not been material. However, we consider the ~~threat from~~risk introduced by cyberattacks to be serious and will continue to incur costs related to efforts to protect ourselves against them.

The following table reflects our technology expenses for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2019 and ~~2016~~2018 (in thousands):


	Three months ended September 30,										Nine months ended September 30,										Three months ended March 31,
	2017			2016			$ Change		% Change		2017			2016			$ Change		% Change		2019			2018			$ Change		% Change
Technology expenses	$	28,746		$	26,739		$	2,007	7.5	%	$	85,982		$	78,249		$	7,733	9.9	%	$	35,433		$	31,294		$	4,139	13.2	%
Technology expenses as a percent of net revenues	6.8		%	6.1		%					6.7		%	6.1		%					9.6		%	7.0		%

The ~~$2.0~~$4.1 million increase in technology costs for the three months ended ~~September 30, 2017,~~March 31, 2019, as compared to the same period in ~~2016,~~2018, was primarily due to ana $2.8 million increase in ~~staff related~~staff-related costs, ~~of $1.5 million, an~~a $555,000 increase in technology licenses and maintenance costs, ~~of $1.3 million, partially offset by~~and a ~~decrease in depreciation of $848,000.~~

~~The $7.7 million~~$538,000 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.consulting expenses.

Technology expenses include stock-based compensation expense of ~~$166,000~~$1.2 million and ~~$210,000~~$521,000 for the three months ended ~~September 30, 2017~~March 31, 2019 and ~~2016, respectively, and $476,000 and $615,000 for the nine months ended September 30, 2017 and 2016,~~2018, respectively.

General and administrative expenses

The following table reflects our general and administrative expenses ~~("G&A")~~ for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2019 and ~~2016~~2018 (in thousands):


	Three months ended September 30,											Nine months ended September 30,											Three months ended March 31,
	2017			2016			$ Change			% Change		2017			2016			$ Change			% Change		2019			2018			$ Change		% Change
General and administrative expenses	$	21,651		$	23,317		$	(1,666	)	(7.1	)%	$	66,622		$	67,843		$	(1,221	)	(1.8	)%	$	40,232		$	39,755		$	477	1.2	%
General and administrative expenses as a percent of net revenues	5.1		%	5.3		%						5.2		%	5.3		%						10.9		%	8.9		%

The ~~$1.7 million decrease~~$477,000 increase in general and administrative expenses ~~("G&A")~~ for the three months ended ~~September 30, 2017,~~March 31, 2019, as compared to the same period in ~~2016,~~2018, was primarily due to a ~~decrease in bad debt expense of $1.1~~$3.1 million ~~a decrease~~increase in consulting ~~and outside services expense of $479,000, and~~expenses, a ~~decrease~~$2.6 million increase in legal fees, ~~of $434,000.~~a $1.8 million increase in staff-related costs due to employee severance, and an $820,000 increase in audit and tax preparation fees. These ~~decreases~~increases were ~~partially~~largely offset by ~~an increase in staff related costs of $509,000.~~

~~The $1.2~~a $6.9 million decrease in ~~general~~cryptocurrency losses and ~~administrative expenses ("G&A") for the nine months ended September 30, 2017, as compared to the same period~~a $783,000 decrease in ~~2016, was~~depreciation. The cryptocurrency losses in Q1 2018 were primarily ~~due~~related to a ~~decrease~~decline in ~~legal costs~~the value of ~~$1.8 million, a decrease in bad debt expense of $1.1 million, a $617,000 decrease in travel,~~cryptocurrency received during the tZERO STO.

General 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.~~

~~G&A~~administrative expenses include stock-based compensation expense of approximately ~~$703,000~~$2.3 million and ~~$1.0~~$5.0 million for the three months ended ~~September 30, 2017~~March 31, 2019 and ~~2016, respectively, and $2.1 million and $3.1 million for the nine months ended September 30, 2017 and 2016.~~2018, respectively.

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 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 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.

~~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 March 31,
	2017		2016		2017		2016		2019		2018
Cost of goods sold - direct	$	72	$	77	$	230	$	235	$	175	$	83
Technology	5,940		6,952		18,802		18,755		5,175		5,478
Sales and marketing	—		29		—		29
General and administrative	974		357		2,863		691		1,225		1,020
Total depreciation, including internal-use software and website development	$	6,986	$	7,415	$	21,895	$	19,710	$	6,575	$	6,581

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,				Three months ended March 31,
	2017		2016		2017		2016		2019			2018
Technology	$	905	$	699	$	2,715	$	2,151	$	853		$	755
Sales and marketing	22		246		62		949		16			119
General and administrative	21		27		62		93		(830		)	44
Total amortization of intangible assets other than goodwill	$	948	$	972	$	2,839	$	3,193	$	39		$	918

~~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 primarilyGeneral and administrative amortization above was net of reversals due to ~~no longer capitalizing interest on our headquarters loan due~~adjustments to ~~construction completion~~the purchase price allocation for Mac Warehouse, as further described 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.Note 3—Business Combinations.

Other income (expense), net

Other ~~income,~~expense, net for the three months ended ~~September 30, 2017~~March 31, 2019 was ~~$5.9~~$6.3 million as compared to ~~$1.3 million in 2016.~~$9,000 for the three months ended March 31, 2018. 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. The decrease is~~ primarily due to a ~~decrease in Club O Rewards breakage of $10.4~~$6.4 million ~~due to discontinuing our Club O Silver rewards program in Q4 2016, and an~~ increase in ~~impairment charges of $1.7 million related to cost method investments. These decreases were partially offset by an increase in realized gains~~non-cash losses on ~~sales of cryptocurrencies~~equity holdings and ~~precious metals of $5.5 million.~~other assets.

Income taxes

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,~~laws, 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.

Our ~~provision~~ expense/(benefit) ~~for~~from income taxes for the three months ended ~~September 30, 2017~~March 31, 2019 and ~~2016~~2018 was ~~$(5.4) million~~$878,000 and ~~$(543,000)~~$(277,000). 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.

The effective tax rate for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2019 and ~~2016~~2018 was ~~33.8%~~(2.1)% and ~~49.1%~~0.5%, respectively. ~~The decrease in the~~Our low effective tax rate is primarily attributable to athe valuation allowance ~~recorded during the three months ended~~

~~June 30, 2017 against certain state~~we are maintaining on our net deferred tax credits and an impairment loss on a cost method investment that we recognized during 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, 2017.assets.

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~~$1.5 million at ~~September 30, 2017.~~March 31, 2019. We would need to accrue and pay ~~U.S. income tax~~various taxes on this amount if repatriated. We do not intend to repatriate these earnings.

We are subject to taxation in the United States and several state and foreign jurisdictions. Tax years beginning in ~~2012~~2014 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. We expect the audit to complete during 2017.~~2016.

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 March 31, 2019 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. While we had lower sales volume during the fourth quarter of 2018 compared to the comparable period in 2017, we anticipate the trend of higher sales volume during our fourth quarter to continue for the foreseeable future. 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 ~~2017, 2016~~2019, 2018 and ~~2015~~2017 (in thousands):

First
Quarter

Second
Quarter

Third
Quarter

Fourth
Quarter
2017 $ 432,435
$ 432,024
$ 424,007
$ N/A
2016 413,677
418,540
441,564
526,182
2015 398,344
388,013
391,211
480,270



	First Quarter		Second Quarter		Third Quarter		Fourth Quarter
2019	$	367,729	$	N/A	$	N/A	$	N/A
2018		445,331		483,133		440,580		452,548
2017		432,435		432,024		424,007		456,290

Liquidity and Capital Resources

Overview

~~Current sources~~

We are proactively seeking opportunities to improve the efficiency of ~~liquidity~~

our operations and are considering a comprehensive set of actions to do so. During the latter end of 2018 we began taking and continue to take significant steps to realize internal cost savings, including staff reductions and process streamlining. Additionally, we intend to further reduce costs in future periods. We believe that our cash and cash equivalents currently on hand and expected cash flows from future operations will be sufficient to continue operations for at least the next twelve months. ~~Our failure~~We also believe that we may need to ~~generate sufficient revenues or profits or to obtain additional financing or~~ raise additional capital ~~could have a material adverse effect on~~and/or obtain additional debt financing to be able to fully pursue some or all of our ~~operations and on~~strategies, including plans for our ~~ability to achieve~~retail business while also funding our ~~business objectives. Any projections of future cash needs and cash flows are subject to substantial uncertainty.~~Medici initiatives, beyond the next twelve months.

~~In December 2016, as a successful demonstration of~~We have developed and implemented initiatives within our retail business around improving our Club O rewards program primarily to increase member benefits and to develop additional personalization programs; improving our organic search engine rankings; additional distribution facilities to speed shipping and improve our customer service; additional automation, technology and engineering resources to improve our customers' shopping experience; and improving our private label initiative to generate significant brand equity and customer loyalty. We believe these initiatives will have significant long-term positive results; however, the ~~platform~~expenditures will likely adversely affect our short-term results. See "Our Retail Business" above.

Our Medici initiatives also require substantial funding. Medici Ventures and ~~technology developed by our~~its majority-owned subsidiary, tZERO, ~~we issued preferred shares~~continue to identify, evaluate and pursue various opportunities for strategic acquisitions or purchases of ~~Overstock.com, Inc. for proceeds of $7.6 million, net of offering costs.~~interests to add to the services and expertise they offer their customers. See "Our Medici Business—Medici Ventures" and "Our Medici Business—tZERO" above.

~~Subsequent~~Our ability to ~~September 30, 2017,~~pursue some or all of these plans, and the extent to which we ~~entered into a $40.0 million loan agreement dated November 6, 2017 with PCL L.L.C., an entity directly~~would be able to pursue some or ~~indirectly wholly owned by~~all of them, will depend on the ~~mother~~resources we have available, and ~~brother of our Chief Executive Officer, Dr. Patrick Byrne. For additional information, see~~ ~~Borrowings -~~ ~~below.~~will require significantly more capital than we currently have.

~~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.~~Current sources of liquidity

In January 2017, we repurchased approximately 604,000 shares of our common stock for an aggregate purchase price of $10 million under our stock repurchase plan, utilizing cash on hand. All common shares repurchased were recognized as treasury stock. We may repurchase additional shares in the future.

Our principal sources of liquidity are ~~cash flows generated from operations, and our~~ existing cash and cash equivalents. At ~~September 30, 2017,~~March 31, 2019, we had cash and cash equivalents of ~~$92.3~~$119.6 million. Our ability to access the liquidity of our subsidiaries may be limited by tax and legal considerations and other factors.

Cash flow information is as follows (in thousands):


	Nine months ended September 30,						Twelve months ended September 30,						Three months ended March 31,
	2017			2016			2017			2016			2019			2018
Cash provided by (used in):
Operating activities	$	(62,655	)	$	(15,439	)	$	(7,652	)	$	75,477		$	(51,429	)	$	(10,182	)
Investing activities	(14,368		)	(65,166		)	(28,649		)	(81,358		)	1,774			(41,950		)
Financing activities	(13,809		)	34,814			4,096			49,084			28,956			108,478

In August 2018, we entered into a sales agreement with JonesTrading Institutional Services LLC ("JonesTrading"), under which we conducted "at the market" public offerings of up to $150 million of our common stock. As of March 31, 2019, we had sold 5,097,410 shares of our common stock pursuant to the sales agreement and have received $134.5 million in proceeds, net of $3.1 million of offering costs, including commissions paid to JonesTrading. During the quarter ended March 31, 2019, we sold shares of common stock for $39.9 million, net of offering expenses (including commissions). The average gross price per share of stock sold pursuant to the sales agreement during the quarter ended March 31, 2019 was $18.25. We sold the remaining capacity under the sales agreement with JonesTrading (745,737 shares) the first week in April 2019, raising additional gross proceeds of $12.4 million. As a result, no additional shares are currently available under the sales agreement. We cannot assure you that we will be able to replace, extend, or modify this facility on acceptable terms in a timely manner or at all.

~~Free cash flow~~Contemplated Financing Transactions

~~"Free Cash Flow" (a non-GAAP measure)~~In August 2018, Overstock signed a Token Purchase Agreement with GSR Capital Ltd., a Cayman Islands exempted company ("GSR"), and a term sheet contemplating a sale of Overstock common stock to GSR. 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 ~~nine months ended September 30, 2017~~parties, security tokens at a price of $6.67 per security token. On May 8, 2019, the parties agreed to replace the Token Purchase Agreement with an Investment Agreement under which GSR purchased 508,710 shares of tZERO which represents approximately 0.5% of the issued and ~~2016, was $(83.5)~~outstanding Common Stock of tZERO. In exchange, GSR agreed to transfer to tZERO a total $5.0 million in consideration, consisting of $1.0 million U.S. dollars, $1.0 million U.S. dollars' worth of Chinese Renminbi, and ~~$(74.8)~~securities traded on the Hong Kong Stock Exchange with a market value of $3.0 million ~~respectively,~~U.S. dollars.

The previously-announced memorandum of understanding (“MOU”) in which GSR and ~~$(41.4)~~Makara Capital ("Makara") would co-lead an investment of up to $100 million in tZERO common stock did not close in April as previously expected. However, we remain in discussions with Makara and ~~$(37,000) for~~GSR and if a definitive agreement is reached, the ~~twelve months ended September 30, 2017 and 2016, respectively. See~~ ~~Non-GAAP Financial Measures~~ ~~below for~~terms, including the amount purchased, number of shares, and/or post money valuation of tZERO, may be less favorable than the terms contemplated under the MOU. There can be no assurance that tZERO, GSR, or Makara will enter into a ~~reconciliation~~definitive agreement regarding the proposed transaction in the near-term, or at all, or that it will be on terms set forth in the MOU, including the amount of ~~Free Cash Flow to net cash provided by (used in) operating activities.~~the investment or post-money valuation.

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~~$51.4 million of net cash used in operating activities during the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2019 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~~$42.9 million, decreases in accounts payables of $28.0 million, accrued liabilities ~~decreased~~of $7.0 million, and deferred revenues of $10.6 million primarily 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~~lower sales volume during the ~~nine months ended September 30, 2017 was~~first quarter of 2019 which were partially offset by ~~non-cash~~an increase in accounts receivable of $14.1 million, depreciation and amortization expense of ~~$21.9~~$8.1 million, stock-based compensation of $4.0 million, and net losses recognized on equity securities of $5.6 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~~$10.2 million of net cash used in operating activities during the ~~nine~~three months ended ~~September 30, 2016~~March 31, 2018 was primarily due to ~~decreases~~consolidated net loss of $54.5 million, offset by increases in accrued liabilities of $9.3 million and accounts payable of ~~$40.2~~$4.3 million, ~~deferred revenue~~decrease in accounts receivable of ~~$9.7~~$8.3 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 partially offset by non-cash depreciation expense of ~~$19.7 million, consolidated net income of $8.5~~$6.6 million, and ~~deferred income taxes~~stock-based compensation of ~~$6.7~~$6.4 million. Accrued liabilities increased due to the increase in marketing expense as a result of our initiative to drive revenue growth with significant marketing efforts in early 2018 and ending in early August 2018. Accounts payable increased due to the revenue growth during 2018.

Notwithstanding our current negative cash flows from operating activities, we believe that our cash and cash equivalents currently on hand and expected cash flows from future operations will be sufficient to continue operations for at least the next twelve months. However, 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~~three months ended ~~September 30, 2017,~~March 31, 2019, investing activities resulted in net cash inflows of $1.8 million primarily due to $5.5 million sale of equity securities and $4.9 million of cash acquired through a business combination that was funded at the end of the fourth quarter of 2018 but closed in the first quarter of 2019, partially offset by $4.1 million of expenditures for property and equipment, $2.5 million investment in equity securities, and $2.0 million disbursement of notes receivable.

For the three months ended March 31, 2018, investing activities resulted in net cash outflows of ~~$14.4~~$42.0 million primarily due to ~~$20.9~~$17.0 million investment in equity securities, $11.8 million acquisition of business, net of cash acquired, $9.2 million purchase of intangible assets, and $4.0 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 million of expenditures for fixed assets.~~property and equipment.

Cash flows from financing activities

For the ~~nine~~three months ended ~~September 30, 2017, financing activities resulted in net cash outflows of $13.8 million primarily due to the purchase of treasury stock for $11.1 million.~~

~~For the nine months ended September 30, 2016,~~March 31, 2019, financing activities resulted in net cash inflows of ~~$34.8~~$29.0 million primarily due to ~~$31.4~~$31.0 million of net proceeds from ~~our U.S. Bank term loan and $6.1~~the sale of common stock under the at the market offering, partially offset by $1.4 million of taxes withheld upon vesting of restricted stock.

For the three months ended March 31, 2018, financing activities resulted in net cash inflows of $108.5 million primarily due to $62.1 million proceeds from ~~lease finance obligations with U.S. Bank.~~security token offering, $50.6 million proceeds from exercise of stock warrants, offset by $4.0 million of taxes withheld upon vesting of restricted stock.

Contractual Obligations and Commitments

The following table summarizes our contractual obligations as of ~~September 30, 2017~~March 31, 2019 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




Contractual Obligations	Remainder of 2019		2020		2021		2022		2023	Thereafter		Total
Operating leases	6,847		7,531		7,694		7,580		6,678	19,571		55,901
Purchase obligations	144		—		—		—			—		144
Technology services	1,527		1,697		—		—			—		3,224
High Bench Senior Credit Agreement	—		3,098		—		—			—		3,098
Total contractual cash obligations	$	8,518	$	12,326	$	7,694	$	7,580		$	19,571	$	62,367

~~___________________________________________~~

~~(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 30, 2017.~~March 31, 2019. 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 responsiblefinance 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 30, 2017,~~March 31, 2019, accrued tax contingencies were ~~$1.7~~$1.6 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~~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 ~~the construction and long-term financing~~our acquisition of our corporate headquarters (the "Project"). The Agreement provides for a senior secured real-estate loan of $45.8 million (the "Term Loan") that we used to finance a portion of the Project and a $25.0 million senior secured revolving credit facility (the "Revolving Loan") to be used for working capital and other permitted purposes, including stock repurchases. The Term Loan and the Revolving Loan are both secured by the Project, our inventory and accounts receivable, substantially all of our deposit accounts and related assets. On January 1, 2017, the Term Loan was converted from a real estate loan used in the construction of our headquarters into an approximately 6.75-year loan due October 1, 2023. The aggregate principal amount converted was $45.8 million. The Revolving Loan terminates June 30, 2020.

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, we entered into a loan agreement 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. The agreement provides for a $40.0 million term 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 March 31, 2019, our outstanding balance on the High Bench Loan was $3.1 million.

Letters of credit

At March 31, 2019 and ~~any then unpaid interest will be due~~December 31, 2018, letters of credit totaling $280,000 and ~~payable~~$280,000, 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.

Transactions with Related Parties

Our related party Transactions include our recent acquisition of Bitsy, In. as discussed in Item 1 of Part I, "Financial Statements (Unaudited)"—Note 3. Business Combinations, contained in the "Notes to Unaudited Consolidated Financial Statements" of this Quarterly Report on Form 10-Q.

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~~2018, 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 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, we implemented ASU No. 2015-17, ~~Income Taxes (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~~ ~~on a modified retrospective basis and 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. The adoption of these new accounting standards is discussed further in Note 2 to the financial statements included in this 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.

For information about recently ~~issued~~adopted accounting standards, ~~not yet~~see Recently adopted ~~see Note 2, Recently issued~~ accounting standards ~~not yet adopted,~~, included in ~~Note 2 to the financial statements included in this 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,~~2. Accounting Policies, 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 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. 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,
2017 2016 2017 2016
Net cash (used in) provided by operating activities $ (62,655 ) $ (15,439 ) $ (7,652 ) $ 75,477
Expenditures for fixed assets, including internal-use software and website development (20,873 ) (59,382 ) (33,772 ) (75,514 )
Free cash flow $ (83,528 ) $ (74,821 ) $ (41,424 ) $ (37 )

Government Regulation

We are subject to a wide variety of laws, rules and regulations, some of which apply or may apply to us as a result of our retail business, some of which apply or may apply to us as a result of our Medici business, and others of which apply to us for other reasons, such as our status as a publicly held company or the places in which we sell certain types or amounts of products. Our ~~main~~retail business is subject to general business regulations and laws, as well as regulations and laws specifically governing the Internet, e-commerce, and other ~~services.~~services we offer. Existing and future laws and regulations may result in increasing expense and may impede our growth. ~~These~~Applicable and potentially applicable regulations and laws ~~may cover~~include regulations and laws regarding taxation, privacy, data protection, pricing, content, copyrights, distribution, mobile communications, electronic device certification, electronic waste, energy consumption, environmental regulation, electronic contracts and other communications, competition, consumer protection, employment, import and export matters, information reporting requirements, access to our services and facilities, the design and operation of websites, health and sanitation standards, the characteristics and quality of products and ~~services. New state tax regulations in states where we do not now collect state~~services, product labeling 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. 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 Part II - Item 1A - "Risk Factors - The registered broker dealers we acquired are subject to extensive regulation."

Our efforts to expand our ~~sales~~retail business outside of the U.S. expose us to foreign and 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 in Bitt Inc.~~Medici and tZERO businesses are subject to general business regulations and laws, including some of those described above, but are also ~~may expose us~~affected by a number of other laws and regulations, including but not limited to, ~~additional~~ laws and regulations relating to money transmitters and money services ~~businesses. See Part II - Item 1A - "Risk Factors - Our investment~~businesses, including the requirements of the Financial Crimes Enforcement Network of the U.S. Department of the Treasury ("FinCEN"), cryptocurrencies, public benefit corporations, provisions of various securities laws and other laws and regulations governing broker dealers, alternative trading systems and national securities exchanges, anti-money laundering requirements, know-your-customer requirements, record-keeping, reporting and capital and bonding requirements, and a variety of other matters. Blockchain and distributed ledger platforms are recent technological innovations, and the regulation of securities tokens and other digital assets is developing. In the U.S., the businesses that we are working to develop are or may be subject to a wide variety of complex statutes and rules, most of which were implemented prior to the development of these technologies, and it is sometimes unclear whether or how various statutes or regulations apply.

The Token Trading System launched in ~~Bitt Inc.~~January 2019 is subject to or affected by numerous laws and regulations. The Token Trading System relies on the PRO Securities ATS, which is subject to Regulation ATS as well as other regulations, and which utilizes the tZERO Platform, partnering with broker-dealers that are also subject to regulation by the SEC and FINRA, in order to facilitate private resales of tZERO Security Tokens to accredited investors in reliance upon an exemption from registration under Section 4(a)(7) of the Securities Act. The joint venture that tZERO and BOX Digital announced in June 2018 is seeking regulatory approvals that would enable the parties to operate a national securities exchange to trade security tokens. A national securities exchange, which will require approval from the U.S. Securities and Exchange Commission prior to beginning operations, will be subject to provisions of the Securities Exchange Act of 1934 and regulation substantially greater than that applicable to tZERO's current operations. In addition, depending on the digital assets traded, the U.S. Commodity Futures Trading Commission may ~~expose us~~consider the assets to be commodities or derivatives and subject to additional ~~risks."~~regulation. Certain aspects of our Medici business, including Bitsy's operations which were subsequently acquired by tZERO, are or may be subject to the state and federal laws and regulations applicable to money service businesses, including the requirements of FinCEN.

Other Factors that May Affect Future Results

We believe that our cash and cash equivalents currently on hand and expected cash flows from future operations will be sufficient to continue operations for at least the next twelve months. 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. See Item 1A of Part II, "Risk Factors."

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 in, or acquisition of, complementary businesses, products, services, or technologies, 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, if at all.

~~On January 27, 2017, we repurchased approximately $10 million of~~ Our future results may be significantly different from our ~~common stock under~~historical results for several other reasons as well, including the ~~$25 million stock repurchase plan authorized by~~possibility discussed in our ~~Board of Directors~~Annual Report on ~~May 5, 2015. We are considering additional repurchases of our common stock, which~~Form 10-K that we may ~~finance through additional debt.~~sell our retail business, which would have a dramatic effect on our future results. Other reasons that our future results may be significantly different from our historical results include the potential effects on us of the accounting and tax changes discussed in our Annual Report on Form 10-K, and other reasons described in Item 1. "Business" under "Our Retail Business" and "Our Medici Business", as well as the risk factors described in Item 1A. "Risk Factors" of Part II, "Risk Factors" of this report.

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, 2018, 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, 2018 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 30, 2017~~,March 31, 2019, we had ~~$92.3~~$119.6 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~~$1.2 million on our earnings or loss, or the cash flows of these instruments.

At March 31, 2019, letters of credit totaling $280,000 were outstanding under collateralized compensating cash balances held at our bank. 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 March 31, 2019, we had cryptocurrency-denominated assets totaling $2.1 million. Hypothetically, an increase or decrease in the market value of one hundred basis points would have an estimated impact of $21,000 on our earnings or loss, or the recorded value of these instruments. It is generally not our policy to hold material amounts of cryptocurrency because of volatility and market risk.

At March 31, 2019, our recorded value in equity securities in public and private companies was $48.5 million. Our equity securities in publicly traded companies represent $2.0 million of our equity securities as of March 31, 2019, and are recorded at fair value, which is subject to market price volatility. We perform a qualitative assessment for our equity securities in private companies to identify impairment. If this assessment indicates that an impairment exists, we estimate the fair value of the investment and, if the fair value is less than carrying value, we write down the investment to fair value. Our assessment includes a review of recent operating results and trends, recent sales/acquisitions of the investee securities, and other publicly available data. Valuations of private companies are inherently more complex due to the lack of readily available market data. As such, we believe that market sensitivities are not practicable.

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 the ~~most recent fiscal quarter,~~three-months ended March 31, 2019, we implemented ASU 2016-02, Leases (Topic 842). In connection with its adoption, we implemented changes to our processes and internal control activities over financial reporting to ensure compliance with the 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—7—"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

~~Please consider the following risk factors carefully. If any one or more of the following risks were to occur, it could have a~~There are no 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 ofchanges from the risk factors below carefully, including 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 investorspreviously disclosed in ~~our Series A Preferred Stock should also read "Additional Risks Related Primarily to our Series A Preferred Stock,~~Part I - Item 1A - "Risk Factors," 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.

Any investment in our securities involves a high degree of risk. Investors should consider carefully the risks and uncertainties described below, and all other information in this Form 10-Q 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 risks described in this Form 10-Q 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.~~

~~We have a history of significant losses. If we do not maintain profitability, our financial results and business could be harmed, and our stock price could suffer.~~

We have a history of losses, and we may incur operating and net losses in the foreseeable future. At September 30, 2017, our accumulated deficit was $158.9 million. We need to generate significant revenues to be profitable, and we may not be able to do so. Although we have generated positive net income in recent years, we incurred a net loss for 2011, and interim net losses during 2015, 2016 and 2017. We may be unable to maintain profitability in the future. If our revenues grow more slowly than we anticipate or decline, or if our expenses exceed our expectations, our financial results would be harmed and our business, prospects, financial condition and results of operations could fall below the expectations of our 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 effectAnnual Report on ~~our financial results and business.~~

~~Our business depends on the Internet, our infrastructure and transaction-processing systems.~~

We are completely dependent on our infrastructure and on the availability, reliability and security 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 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, 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 of which could have a material adverse effect on our financial results 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.

~~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.~~

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 competitors, including Amazon, will continue to increase their offerings and delivery capabilities. 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. Competition from Amazon and from other competitors, many of whom have longer operating histories, larger customer bases, greater brand recognition and significantly greater financial, marketing and other resources than we do, affect us and could have a material adverse effect on our financial results 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 agreementForm 10-K 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 throughyear ended 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, 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 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 Chief Executive Officer and then Chairman of the Board, Dr. Patrick Byrne, took a two-month leave of absence for medical reasons, and in 2016 he took a three-month leave of absence for medical reasons. 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 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 is intense. Our failure to attract and retain the necessary personnel could have a

material adverse effect on our financial results 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.

~~Mobile commerce is becoming increasingly significant to us.~~

Mobile commerce within our iOS and Android apps is becoming increasingly significant to us. Customers who shop on mobile devices may behave differently from our other customers. If we fail to successfully develop app-specific features or if we fail to keep up with mobile technology and adapt to the changing mobile landscape, it could have a material adverse effect on our business.

~~Changes we are making to Club O or our loss of Club O Gold members could adversely affect us.~~

We recently have made changes and are planning additional 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 incur 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 with respect to our employees' health insurance. If the actual costs of 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 to the extent 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, which could have a material adverse effect on our financial results and business.

~~Risks Related Primarily to our Common Stock and Other Securities~~

(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 senior 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, in preference to any dividend payment to the holders of the common

stock. 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 any non-cash dividends we pay to holders of the common stock, subject to different treatment if we effect 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 a party to any merger or consolidation in which the common stock is changed into or exchanged for stock or other securities of any other person (or the Company) or cash or any other property (or a right to receive the foregoing), 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 foregoing could have a material adverse effect on the holders of the common stock.

~~Our quarterly operating results are volatile and may adversely affect the market price of our securities, and you may lose all or a part of your investment.~~

We have experienced and expect to continue to experience significant fluctuations in our operating results because of seasonal fluctuations in traditional retail patterns. Our gross revenues have historically been significantly lower in the first and second calendar quarters than in the fourth quarter of the prior year due primarily to increased shopping activity during the fourth quarter holiday season. Further, 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 in the first calendar quarter. Our revenues and operating results have varied in the past and may continue to vary significantly from quarter to quarter due to a number 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 of the foregoing 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.

~~Sales by our significant stockholders could have an adverse effect on the market price of our stock.~~

A small number of our stockholders own significant percentages of our common stock 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.

~~We do not intend to pay dividends on our common stock and you may lose the entire amount of your investment in our common stock.~~

We have never declared or paid any cash dividends on our common stock 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

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

~~Provisions in our amended and restated certificate 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, 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 or otherwise, which would result in an increase in the number of shares outstanding, and would dilute stockholders' ownership of 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 may adversely affect our share price and trading volume.~~

We generally have not received significant coverage by securities analysts, 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.

~~Accounts for the Series A Preferred are held directly in the customer's name, rather than in "street name."~~

Each investor in the Series A Preferred is required to open an online brokerage account in his, her or its name with Keystone. Investors cannot hold their Series A Preferred in "street name." The Series A Preferred shares are directly recorded on 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 accounts and other fiduciary or nominee accounts including 401(k) accounts are unable to acquire shares 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, 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 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.

~~The same-day settlement 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 errors may be impossible. The occurrence of 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.

~~The technology on which the tZERO Platform depends is in an area in which tZERO and PRO Securities have limited experience.~~

Neither tZERO nor PRO Securities has significant experience with the technology on which the tZERO Platform depends or the operation 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 may continue to modify the tZERO Platform, and 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 Platform could cause service interruptions and interruptions in trading on the PRO Securities ATS, which could make it impossible to trade the Series A Preferred from time to time. 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.~~

The Series A Preferred trades exclusively on the PRO Securities ATS utilizing the tZERO Platform. The ATS is operated and maintained by PRO Securities, and the tZERO Platform is maintained by tZERO. Each of PRO Securities 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 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 foregoing 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 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.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

~~Issuance~~Unregistered issuance of equity securities

On September 22, 2017, we issued 14,639 shares of our common stock in exchange for 14,639 shares of our Voting Series B Preferred Stock in an exchange exempt from registration under the Securities Act of 1933, as amended, pursuant to Section 3(a)(9) thereof. The class 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.None.

Issuer purchases of equity securities

~~None.~~The following table sets forth all purchases made by us or on our behalf or any "affiliated purchaser" as defined in Rule 10b-18(a)(3) under the Exchange Act, of shares of our common stock made during each month within the first quarter of 2019, including all purchases made pursuant to publicly announced plans or programs and those not made pursuant to publicly announced plans or programs.



Period	(a) Total Number of Shares Purchased	(b) Average Price Paid per Share		(c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	(d) Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plan
January 1, 2019 to January 31, 2019	47,378	$	13.58	—	$	15,000,000
February 1, 2019 to February 28, 2019	—	—		—	—
March 1, 2019 to March 31, 2019	—	—		—	—
Total	47,378			—	$	15,000,000

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~~481,259 shares remained outstanding at ~~September 30, 2017.~~March 31, 2019. 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 and 2018.

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~~	~~Medici Ventures, Inc. 2017 Stock Option Plan (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on August 1, 2017 (File No. 000-49799)).~~
	*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.

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~~May 9, 2019	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)

8156



	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	)



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



Payments due by period
2017 (Remainder)	$	2,273
2018	6,962
2019	6,733
2020	4,292
2021	4,336
Thereafter	20,775
	$	45,371



	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	)



	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



	Q1 2016		Q2 2016		Q3 2016		Q4 2016		FY 2016		Q1 2017		Q2 2017		Q3 2017
Direct	4.7	%	6.2	%	2.7	%	7.3	%	5.2	%	8.2	%	4.3	%	0.3	%
Partner and other	19.7	%	19.0	%	19.0	%	19.2	%	19.2	%	20.8	%	20.3	%	20.7	%
Combined	18.7	%	18.2	%	18.1	%	18.6	%	18.4	%	20.1	%	19.5	%	19.7	%



	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



	Nine months ended September 30,						Twelve months ended September 30,
	2017			2016			2017			2016
Net cash (used in) provided by operating activities	$	(62,655	)	$	(15,439	)	$	(7,652	)	$	75,477
Expenditures for fixed assets, including internal-use software and website development	(20,873		)	(59,382		)	(33,772		)	(75,514		)
Free cash flow	$	(83,528	)	$	(74,821	)	$	(41,424	)	$	(37	)