Table of Contents



 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark One)
ýQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 20172019
 
Or 
oTRANSITION 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
overstockcoma10.jpgoverstocklogoa09.jpg
OVERSTOCK.COM, INC.
(Exact name of registrant as specified in its charter) 
Delaware 87-0634302
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification Number)
799 West Coliseum Way, Midvale, Utah 84047
(Address of principal executive offices) (Zip Code)
(801) 947-3100
(Registrant's telephone number, including area code)
 

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, $0.0001 par valueOSTKNASDAQ Global Market
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 25,023,32835,249,070 shares of the Registrant's common stock, par value $0.0001, outstanding on November 3, 2017.6, 2019




Table of Contents



OVERSTOCK.COM, INC.
FORM 10-Q
For the Quarterly Period Ended September 30, 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 Stockholders' Equity
6
Consolidated Statements of Cash Flows
8
Notes to Unaudited Consolidated Financial Statements
10
  
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
3337
   
Item 3.
Quantitative and Qualitative Disclosures aboutAbout Market Risk
5557
   
Item 4.
Controls and Procedures
5658
   
PART II. OTHER INFORMATION
   
Item 1.
Legal Proceedings
5859
   
Item 1A.
Risk Factors
5859
   
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
7967
   
Item 3.
Defaults Upon Senior Securities
8067
   
Item 4.
Mine Safety Disclosures
8067
   
Item 5.
Other Information
8067
   
Item 6.
Exhibits
8067
   
Signature
8168

Table of Contents



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		September 30,
2019		 December 31,
2018
Assets 
  
 
  
Current assets: 
  
 
  
Cash and cash equivalents$92,266
 $183,098
$83,546
 $141,512
Restricted cash562
 430
2,251
 1,302
Accounts receivable, net24,328
 28,142
22,407
 35,930
Inventories, net13,562
 18,937
7,244
 14,108
Prepaid inventories, net1,766
 2,112
Prepaids and other current assets18,498
 11,654
18,233
 22,415
Total current assets150,982
 244,373
133,681
 215,267
Fixed assets, net131,981
 134,552
Precious metals250
 9,946
Deferred tax assets, net74,250
 56,266
Property and equipment, net132,696
 134,687
Intangible assets, net8,288
 10,913
12,879
 13,370
Goodwill14,698
 14,698
27,120
 22,895
Equity securities41,713
 60,427
Operating lease right-of-use assets43,266
 —
Other long-term assets, net14,992
 14,328
8,446
 14,573
Total assets$395,441
 $485,076
$399,801
 $461,219
Liabilities and Stockholders’ Equity 
  
Liabilities and Stockholders' Equity 
  
Current liabilities: 
  
 
  
Accounts payable$70,543
 $106,337
$60,557
 $102,574
Accrued liabilities58,784
 96,216
79,440
 87,858
Deferred revenue41,505
 41,780
40,512
 50,578
Finance obligations, current3,326
 3,256
Other current liabilities, net1,507
 1,627
Operating lease liabilities, current5,725
 —
Other current liabilities489
 476
Total current liabilities175,665
 249,216
186,723
 241,486
Long-term debt, net43,406
 44,179
—
 3,069
Finance obligations, non-current9,325
 11,831
Operating lease liabilities, non-current42,510
 —
Other long-term liabilities7,159
 6,890
1,616
 5,958
Total liabilities235,555
 312,116
230,849
 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 25,4323
 3
Series A, issued and outstanding - 0 and 127—
 —
Series A-1, issued and outstanding - 3,702 and 0 (including 3,577 shares declared as a stock dividend, not yet distributed)—
 —
Series B, issued and outstanding - 357 and 355—
 —
Common stock, $0.0001 par value, authorized shares - 100,000 
  
Issued shares - 38,565 and 35,346 
  
Outstanding shares - 35,242 and 32,1463
 3
Additional paid-in capital387,195
 383,348
726,132
 657,981
Accumulated deficit(158,893) (153,898)(553,335) (458,897)
Accumulated other comprehensive loss(1,420) (1,540)(572) (584)
Treasury stock: 
  
Shares at cost - 3,132 and 2,463(63,691) (52,587)
Treasury stock at cost - 3,323 and 3,200(68,773) (66,757)
Equity attributable to stockholders of Overstock.com, Inc.163,194
 175,326
103,455
 131,746
Equity attributable to noncontrolling interests(3,308) (2,366)65,497
 78,960
Total equity159,886
 172,960
Total liabilities and stockholders’ equity$395,441
 $485,076
Total stockholders' equity168,952
 210,706
Total liabilities and stockholders' equity$399,801
 $461,219

See accompanying notes to unaudited consolidated financial statements.

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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
September 30,		 Nine months ended
September 30,
2017 2016 2017 20162019 2018 2019 2018
Revenue, net 
  
  
  
 
  
  
  
Direct$19,645
 $24,620
 $64,572
 $75,901
Partner and other404,362
 416,944
 1,223,894
 1,197,880
Retail$340,798
 $435,775
 $1,070,898
 $1,353,454
Other6,301
 4,805
 17,639
 15,590
Total net revenue424,007
 441,564
 1,288,466
 1,273,781
347,099
 440,580
 1,088,537
 1,369,044
Cost of goods sold 
  
  
  
 
  
  
  
Direct(1)
19,577
 23,955
 61,687
 72,459
Partner and other320,755
 337,893
 972,026
 967,977
Retail(1)
272,545
 350,651
 858,169
 1,085,483
Other5,006
 3,213
 13,797
 11,233
Total cost of goods sold340,332
 361,848
 1,033,713
 1,040,436
277,551
 353,864
 871,966
 1,096,716
Gross profit83,675
 79,716
 254,753
 233,345
69,548
 86,716
 216,571
 272,328
Operating expenses: 
  
  
  
 
  
  
  
Sales and marketing(1)
45,153
 34,707
 126,068
 99,516
34,215
 55,312
 102,252
 226,942
Technology(1)
28,746
 26,739
 85,982
 78,249
32,782
 33,880
 101,368
 97,597
General and administrative(1)
21,651
 23,317
 66,622
 67,843
32,681
 45,356
 104,877
 116,551
Litigation settlement—
 —
 —
 (19,520)
Total operating expenses95,550
 84,763
 278,672
 226,088
99,678
 134,548
 308,497
 441,090
Operating income (loss)(11,875) (5,047) (23,919) 7,257
Operating loss(30,130) (47,832) (91,926) (168,762)
Interest income189
 73
 450
 228
449
 383
 1,482
 1,547
Interest expense(713) (212) (2,139) (219)(57) (101) (289) (1,370)
Other income, net5,882
 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) $8,487
Other expense, net(4,781) (1,848) (14,048) (1,489)
Loss before income taxes(34,519) (49,398) (104,781) (170,074)
Provision (benefit) from income taxes23
 (141) 279
 (445)
Net loss$(34,542) $(49,257) $(105,060) $(169,629)
Less: Net loss attributable to noncontrolling interests(319) (294) (942) (940)(3,604) (1,334) (10,197) (5,886)
Net income (loss) attributable to stockholders of Overstock.com, Inc.$(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) $0.37
Net loss attributable to stockholders of Overstock.com, Inc.$(30,938) $(47,923) $(94,863) $(163,743)
Net loss per common share—basic: 
  
  
  
Net loss attributable to common shares—basic$(0.89) $(1.55) $(2.74) $(5.47)
Weighted average common shares outstanding—basic25,003
 25,356
 25,024
 25,326
35,241
 30,279
 34,289
 29,256
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$(0.89) $(1.55) $(2.74) $(5.47)
Weighted average common shares outstanding—diluted25,003
 25,356
 25,024
 25,388
35,241
 30,279
 34,289
 29,256

(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$55
 $41
 $156
 $152
Sales and marketing109
 102
 318
 234
486
 277
 1,460
 1,465
Technology166
 210
 476
 615
1,428
 583
 4,325
 1,725
General and administrative703
 1,009
 2,081
 3,056
2,498
 1,345
 7,682
 8,312
Total$1,024
 $1,390
 $3,009
 $4,105
$4,467
 $2,246
 $13,623
 $11,654

See accompanying notes to unaudited consolidated financial statements.

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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 $71852
 (64) 120
 (1,624)
Other comprehensive income (loss)52
 (64) 120
 (1,624)
Comprehensive income (loss)$(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) $7,803
 Three months ended
September 30,		 Nine months ended
September 30,
 2019 2018 2019 2018
Net loss$(34,542) $(49,257) $(105,060) $(169,629)
Other comprehensive income:       
Unrealized gain on cash flow hedges, net of expense for taxes of $0, and $04
 4
 12
 12
Other comprehensive income4
 4
 12
 12
Comprehensive loss$(34,538) $(49,253) $(105,048) $(169,617)
Less: Comprehensive loss attributable to noncontrolling interests(3,604) (1,334) (10,197) (5,886)
Comprehensive loss attributable to stockholders of Overstock.com, Inc.$(30,934) $(47,919) $(94,851) $(163,731)

See accompanying notes to unaudited consolidated financial statements.


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Overstock.com, Inc.
Consolidated Statements of Changes in Stockholders’Stockholders' Equity (Unaudited)
(in thousands)
 Three months ended September 30, Nine months ended September 30,

2019 2018 2019
2018
Equity attributable to stockholders of Overstock.com, Inc.     
  
Number of common shares issued       
Balance at beginning of period38,561
 32,203
 35,346
 30,632
Common stock issued upon vesting of restricted stock4
 5
 259
 226
Common stock issued for asset purchase—
 47
 —
 147
Exercise of stock warrants—
 —
 —
 1,250
Common stock sold through ATM offering—
 2,883
 2,960
 2,883
Balance at end of period38,565
 35,138
 38,565
 35,138
Number of treasury stock shares       
Balance at beginning of period3,322
 3,196
 3,200
 3,135
Common stock repurchased through business combination—
 —
 47
 —
Tax withholding upon vesting of restricted stock1
 1
 76
 62
Balance at end of period3,323
 3,197
 3,323
 3,197
Total number of outstanding shares35,242
 31,941
 35,242
 31,941
Common stock$3
 $3
 $3
 $3
Number of Series A preferred shares issued and outstanding       
Balance at beginning of period3
 127
 127
 127
Exchange of shares to Series A-1(2) —
 (125) —
Conversion of shares to Series B(1) —
 (2) —
Balance at end of period—
 127
 —
 127
Number of Series A-1 preferred shares issued and outstanding       
Balance at beginning of period123
 —
 —
 —
Exchange of shares from Series A2
 —
 125
 —
Dividend declared, not yet distributed3,577
 —
 3,577
 —
Balance at end of period3,702
 —
 3,702
 —
Number of Series B preferred shares issued and outstanding       
Balance at beginning of period356
 555
 355
 555
Conversion of shares from Series A1
 —
 2
 —
Balance at end of period357
 555
 357
 555
Preferred stock$—
 $—
 $—
 $—
Additional paid-in capital       
Balance at beginning of period$719,010
 $553,112
 $657,981
 $494,732
Stock-based compensation to employees and directors4,467
 2,246
 13,623
 7,614
Common stock issued for asset purchase—
 1,500
 —
 4,430
Issuance and exercise of stock warrants—
 —
 —
 50,587
Common stock sold through ATM offering, net—
 94,624
 52,112
 94,624
Other2,655
 —
 2,416
 (505)
Balance at end of period$726,132
 $651,482
 $726,132
 $651,482
 
Continued on the following page

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Overstock.com, Inc.
Consolidated Statements of Changes in Stockholders' Equity (Unaudited)
(in thousands)

Overstock.com, Inc.
Consolidated Statements of Changes in Stockholders' Equity (Unaudited)
(in thousands)

Nine months ended
 September 30, 2017		Three months ended September 30, Nine months ended September 30,
Equity attributable to stockholders of Overstock.com, Inc. 
Number of common shares issued 
Balance at beginning of period27,895
Common stock issued upon vesting of restricted stock202
Exercise of stock options38
Conversion of preferred shares14
Balance at end of period28,149
 
Number of treasury stock shares 
Balance at beginning of period2,463
Purchases of treasury stock669
Balance at end of period3,132
Total number of outstanding shares25,017
 
Common stock$3
 
Number of Series A preferred shares issued and outstanding127
 
Number of Series B preferred shares issued and outstanding 
Balance at beginning of period569
Conversion of preferred shares(14)
Balance at end of period555
 
Preferred stock$—
 
Additional paid-in capital 
Balance at beginning of period$383,348
Stock-based compensation to employees and directors3,009
Exercise of stock options654
Conversion of preferred shares181
Issuance of stock warrants3
Balance at end of period$387,195
 2019 2018 2019 2018
Accumulated deficit        
Balance at beginning of period$(153,898)$(522,397) $(365,472) $(458,897) $(254,692)
Cumulative effect of change in accounting principle9,374
—
 —
 —
 5,040
Net loss attributable to stockholders of Overstock.com, Inc.(14,188)(30,938) (47,923) (94,863) (163,743)
Conversion of preferred shares(181)
Other—
 —
 425
 —
Balance at end of period$(158,893)$(553,335) $(413,395) $(553,335) $(413,395)
 
Accumulated other comprehensive loss        
Balance at beginning of period$(1,540)$(576) $(591) $(584) $(599)
Net other comprehensive income120
4
 4
 12
 12
Balance at end of period$(1,420)$(572) $(587) $(572) $(587)
 
Treasury stock        
Balance at beginning of period$(52,587)$(68,746) $(66,662) $(66,757) $(63,816)
Purchases of treasury stock(11,104)
Common stock repurchased through business combination—
 —
 (643) —
Tax withholding upon vesting of restricted stock(27) (47) (1,373) (2,893)
Balance at end of period(63,691)(68,773) (66,709) (68,773) (66,709)
Total equity attributable to stockholders of Overstock.com, Inc.$163,194
$103,455
 $170,794
 $103,455
 $170,794
        
Equity attributable to noncontrolling interests        
Balance at beginning of period$(2,366)$71,786
 $77,718
 $78,960
 $(3,505)
Proceeds from security token offering, net—
 4,167
 —
 82,610
Stock-based compensation to employees and directors—
 —
 —
 4,040
Tax withholding upon vesting of restricted stock—
 —
 —
 (1,681)
Net loss attributable to noncontrolling interests(942)(3,604) (1,334) (10,197) (5,886)
Fair value of noncontrolling interest at acquisition—
 —
 —
 4,468
Paid in capital for noncontrolling interest—
 6,700
 —
 6,700
Other(2,685) —
 (3,266) 505
Total equity attributable to noncontrolling interests$(3,308)$65,497
 $87,251
 $65,497
 $87,251
        
Total equity$159,886
Total stockholders' equity$168,952
 $258,045
 $168,952
 $258,045

See accompanying notes to unaudited consolidated financial statements.

Overstock.com, Inc.Table of Contents
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 assets21,895
 19,710
 29,468
 26,729
Amortization of intangible assets2,839
 3,193
 3,614
 3,444
Stock-based compensation to employees and directors3,009
 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 investment4,500
 2,850
 4,500
 2,850
Termination costs of cryptobond financing—
 —
 —
 850
Other420
 207
 569
 212
Changes in operating assets and liabilities, net of acquisitions: 
  
  
  
Restricted cash(207) —
 (207) —
Accounts receivable, net3,814
 (2,909) (3,283) (2,108)
Inventories, net5,375
 4,325
 2,155
 7,489
Prepaid inventories, net346
 (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 liabilities235
 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 metals11,603
 —
 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 cash75
 —
 75
 75
Proceeds from exercise of stock options654
 —
 1,473
 —
Proceeds from rights offering, net of offering costs—
 —
 7,591
 —
Proceeds from issuance of stock warrants3
 —
 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 period183,098
 170,262
 124,471
 81,268
Cash and cash equivalents, end of period$92,266
 $124,471
 $92,266
 $124,471
Overstock.com, Inc.
Consolidated Statements of Cash Flows (Unaudited)
(in thousands)
 Nine months ended
September 30,
 2019 2018
Cash flows from operating activities: 
  
Net loss$(105,060) $(169,629)
Adjustments to reconcile net loss to net cash used in operating activities: 
  
Depreciation of property and equipment19,387
 19,437
Amortization of intangible assets3,646
 3,596
Non-cash operating lease cost4,940
 —
Stock-based compensation to employees and directors13,623
 11,654
Deferred income taxes, net(26) (383)
Gain on sale of cryptocurrencies(311) (8,412)
Impairment of cryptocurrencies318
 9,641
Impairment of equity securities6,964
 511
Losses on equity method securities4,922
 2,504
Impairments on intangible assets1,406
 —
Other non-cash adjustments1,997
 (1,480)
Changes in operating assets and liabilities, net of acquisitions: 
  
Accounts receivable, net12,858
 (73)
Inventories, net6,864
 (1,833)
Prepaids and other current assets5,473
 (4,806)
Other long-term assets, net(1,046) (4,120)
Accounts payable(42,110) 7,143
Accrued liabilities(8,683) 18,044
Deferred revenue(10,066) (1,511)
Operating lease liabilities(4,086) —
Other long-term liabilities(205) (583)
Net cash used in operating activities(89,195)
(120,300)
Cash flows from investing activities: 
  
Purchase of intangible assets—
 (9,583)
Purchase of equity securities(5,106) (43,670)
Proceeds from sale of equity securities7,082
 —
Disbursement of notes receivable(3,250) (2,700)
Acquisitions of businesses, net of cash acquired4,886
 (12,912)
Expenditures for property and equipment(17,902) (20,677)
Other investing activities, net31
 34
Net cash used in investing activities(14,259) (89,508)


Continued on the following page
 

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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 paid492
 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 investment869
 2,850
 869
 2,850
Overstock.com, Inc.
Consolidated Statements of Cash Flows (Unaudited)
(in thousands)
 Nine months ended September 30,
 2019 2018
Cash flows from financing activities: 
  
Payments on long-term debt(3,141) (40,000)
Proceeds from issuance and exercise of stock warrants—
 50,587
Proceeds from security token offering, net of offering costs and withdrawals—
 82,610
Proceeds from sale of common stock, net of offering costs52,112
 94,624
Paid in capital for noncontrolling interest—
 6,700
Payments of taxes withheld upon vesting of restricted stock(1,373) (4,574)
Other financing activities, net(1,161) (372)
Net cash provided by financing activities46,437
 189,575
Net decrease in cash, cash equivalents and restricted cash(57,017) (20,233)
Cash, cash equivalents and restricted cash, beginning of period142,814
 203,670
Cash, cash equivalents and restricted cash, end of period$85,797
 $183,437
    
Supplemental disclosures of cash flow information:   
Cash paid during the period:   
Interest paid, net of amounts capitalized$218
 $1,232
Income taxes paid (refunded), net(469) 59
Non-cash investing and financing activities: 
  
Property and equipment financed through accounts payable and accrued liabilities$227
 $731
Acquisition of assets through stock issuance—
 4,430
Common stock repurchased through business combination643
 —
Receivables converted to equity security1,024
 200
Deposit applied to business combination purchase price7,347
 —
Equity method security applied to business combination purchase price3,800
 —
Recognition of right-of-use assets upon adoption of ASC 84230,968
 —

See accompanying notes to unaudited consolidated financial statements.


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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 allcertain 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 completeSEC. 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, 20172019 are not necessarily indicative of the results to be expected for any future period or the full fiscal year.year, due to seasonal and other factors.

In light of a shift in the long-term strategic focus of our organization to transition our retail business to concentrate on the retail partner portion of our business, we no longer consider the split of retail direct and retail partner as a distinct and relevant measure of our business. Accordingly, in the fourth quarter of 2018, 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 period revenues and cost of goods sold to conform with current year presentation.

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

2. ACCOUNTING POLICIES
 
Principles of consolidation
 
The accompanying consolidated financial statements include our accounts and the accounts of our wholly-owned 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 principlesGAAP requires estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent liabilities in theour 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 assetsproperty and equipment and internally-developed software, goodwill valuation, intangible asset valuation, cost method and equity method investmentsecurities valuation, income taxes, stock-based compensation, performance-based compensation, self-funded health insurance liabilities and contingencies. ActualAlthough these estimates are based on our best knowledge of current events and actions that we may undertake in the future, actual results couldmay 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, 20172019 and December 31, 2016,2018, respectively.

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Restricted cash
 
We consider cash that is legally restricted and cash that is held as a compensating balancebalances 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, tradingcash 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 instrumentsvalue. 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 instrumentson a nonrecurring basis; that is, an adjustment for nonperformance risk. The adjustment for nonperformance risk didthe assets are not have a significant impact on the estimatedmeasured 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, 20172019 and December 31, 20162018, as indicated (in thousands):
pFair Value Measurements at September 30, 2017:Fair Value Measurements at September 30, 2019:
Total Level 1 Level 2 Level 3Total Level 1 Level 2 Level 3
Assets: 
  
  
  
 
  
  
  
Cash equivalents - Money market mutual funds$40,390
 $40,390
 $—
 $—
$3,008
 $3,008
 $—
 $—
Equity securities, at fair value818
 818
 —
 —
Trading securities held in a "rabbi trust" (1)70
 70
 —
 —
103
 103
 —
 —
Total assets$40,460
 $40,460
 $—
 $—
$3,929
 $3,929
 $—
 $—
Liabilities: 
  
  
  
 
  
  
  
Derivatives (2)$1,609
 $—
 $1,609
 $—
Deferred compensation accrual "rabbi trust" (3)(2)76
 76
 —
 —
$103
 $103
 $—
 $—
Total liabilities$1,685
 $76
 $1,609
 $—
$103
 $103
 $—
 $—


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Fair Value Measurements at December 31, 2016:Fair Value Measurements at December 31, 2018:
Total Level 1 Level 2 Level 3Total 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 value2,636
 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 qualifiedNon-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, accountsAccounts receivable, accounts payable, accrued liabilities, finance obligations and debt are carried at cost, which approximates their fair value.

Accounts receivablenet
 
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, 20172019 and December 31, 20162018, 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 banksOne bank held the majority of our cash and cash equivalents.equivalents at September 30, 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 inventoriesInventories, net
 
Inventories, consisting ofnet 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 damageInventory 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 obsolescenceliquidations, and to lowerexpected 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, andprepaid inventories, other miscellaneous costs.
Fixedcosts, 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 $2.5 million and $2.4 million at September 30, 2019 and December 31, 2018, respectively, and are recorded at cost less impairment.


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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 zero and $318,000 for the three and nine months ended September 30, 2019. There was $150,000 and $9.6 million impairment on cryptocurrencies during the three and nine months ended September 30, 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 $183,000 and $311,000 for the three and nine months ended September 30, 2019. There were $64,000 and $8.4 million realized gains on sale of cryptocurrencies for the three and nine months ended September 30, 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 capitalfinance lease, whichever is shorter, as follows: 
 
Life
(years)
Building40
Land improvements20
Building machinery and equipment15-20
Furniture and equipment5-7
Computer hardware3-4
Computer software, including internal-use software and website development2-4
 
Leasehold improvements are amortized over the shorter of the term of the related leases or estimated useful lives.

Included in fixed assetsproperty 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, 20172019 and 2016,2018, we capitalized $2.2$3.3 million and $3.2$4.0 million, respectively, of costs associated with internal-use software and website development, both developed internally and acquired externally. AmortizationDepreciation of costs for the same periods associated with internal-use software and website development was $3.2 million and $3.4 million, respectively. During the nine months ended September 30, 2019 and 2018, we capitalized $10.8 million and $14.7 million, respectively, of costs associated with internal-use software and website development, was $3.9 millionboth developed internally and $5.0 million, respectively. Duringacquired externally. Depreciation of internal-use software and website development during the nine months ended September 30, 20172019 and 2016, we capitalized $8.02018 was $9.5 million and $13.3$10.0 million, respectively,respectively.


Table of such costs and had amortization of $12.2 million and $12.7 million for those respective periods.Contents



Depreciation expense is classified within the corresponding operating expense categories on theour consolidated statements of operations as follows (in thousands): 
 Three months ended
 September 30,		 Nine months ended
 September 30,
 2017 2016 2017 2016
Cost of goods sold - direct$72
 $77
 $230
 $235
Technology5,940
 6,952
 18,802
 18,755
Sales and marketing—
 29
 —
 29
General and administrative974
 357
 2,863
 691
Total depreciation, including internal-use software and website development$6,986
 $7,415
 $21,895
 $19,710
 Three months ended
September 30,		 Nine months ended
September 30,
 2019 2018 2019 2018
Cost of goods sold - retail$170
 $85
 $516
 $252
Technology5,042
 5,330
 15,109
 16,103
General and administrative1,261
 1,038
 3,762
 3,082
Total depreciation$6,473
 $6,453
 $19,387
 $19,437

Total accumulated depreciation of fixed assetsproperty and equipment was $201.6$219.8 million and $180.3$204.9 million at September 30, 20172019 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 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 sevencertain 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, netEquity securities in our consolidated balance sheets. Earnings from the investmentsDividends 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 investmentsour securities individually for impairment by evaluating if events or circumstances have occurred that may have a significant adverse effect on theirindicate 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 declinerecognize an impairment loss in Other expense, net on our consolidated statements of operations equal to the difference between the fair value of the investment belowand its carrying value is other-than-temporary.value. In such cases, the estimated fair value of the investment is determined using unobservable inputs including assumptions by the investee's management.management including quantitative information such as lower valuations in recently completed or proposed financings. These inputs are classified as Level 3. See Fair value of financial instruments above. Because several of our investeesthese private companies are in the early startup or development stages, these entities are subject to potential changes in cash flows and valuation, andas well as inability to attract new investorsraise additional capital which may be necessary for the liquidity needed to support their operations.

Certain of our 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 identical or similar equity securities of the same issuer. The carrying amount of our cost method investmentsequity securities without readily determinable fair values was approximately $6.3$11.9 million and $11.8$17.7 million at September 30, 20172019 and December 31, 2016. We recognized zero2018, respectively. Cumulative downward adjustments for price changes and $2.9impairments for our equity securities without readily determinable fair values were $11.6 million, impairment loss on theseand the cumulative upward adjustments for price changes to equity investments during the three months endedwere $958,000 as of September 30, 20172019. The impairments and 2016, respectively, and $4.5 million and $2.9 million impairment loss duringdownward adjustments for the nine months endedperiod related to equity securities without readily determinable fair values at September 30, 20172019 and 2016, respectively. These impairment2018 is as follows (in thousands):
 Three months ended
September 30,		 Nine months ended
September 30,
 2019 2018 2019 2018
Impairments and downward adjustments of equity securities without readily determinable fair values$(2,750) $(511) $(5,708) $(511)


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One of these equity securities, which had a carrying value of $818,000 at September 30, 2019 and $2.6 million at December 31, 2018, is carried at fair value based on Level 1 inputs. See Fair value of financial instruments above. The portion of unrealized gains and losses were recorded in Other income, net onfor the consolidated statements of operations.period related to equity securities with readily determinable fair value still held at September 30, 2019 and 2018 is calculated as follows (in thousands):
 Three months ended
September 30,		 Nine months ended
September 30,
 2019 2018 2019 2018
Net gains/(losses) recognized during the period on equity securities$(700) $(72) $(1,818) $1,764
Less: Net gains recognized during the period on equity securities sold—
 —
 —
 —
Unrealized gains/(losses) during the reporting period on equity securities still held$(700) $(72) $(1,818) $1,764

Equity method investmentssecurities under ASC 323

At September 30, 2017,2019, we held minority interests interests in Bittcertain 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 entities through either holding more than a 20% voting interest in the investees. Basedentity or through our representation on the natureentity's board of onedirectors. For certain of our investments,these entities, we have a variable interest. However, because we do not have power to directprovide developer services. For the investee's activitiesthree 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, 2017,2019, we acquired additional representationrecognized $639,000 and $1.9 million of developer service revenue, respectively, in Other revenue on our consolidated statements of operations. For the Boardthree and nine months ended September 30, 2018, we recognized $467,000 and $1.5 million of Directorsdeveloper service revenue, respectively, in Other revenue on our consolidated statements of Bitt, which gave us an ability to exercise significant influence but not control over the investee.operations.

The following table includes our equity method securities and related ownership interest as of September 30, 2019:
Ownership
interest
Bitt Inc.21%
Boston Security Token Exchange LLC50%
Chainstone Labs, Inc.29%
FinClusive Capital, Inc.10%
GrainChain, Inc.10%
Minds, Inc.24%
SettleMint NV30%
Spera, Inc.19%
VinX Network Ltd.25%
Voatz, Inc.20%

The carrying amount of our equity method securities was approximately $29.0 million and $40.1 million at September 30, 2019 and December 31, 2018, respectively. The carrying value of our investmentsequity method securities exceeded the amount of underlying equity in net assets of the investeesour equity method securities and the difference was primarily related to goodwill and the fair value of its intangible assets. The basis difference relatedattributable to amortizable intangible assets is amortized over their estimated useful lives. We record our proportionate share of the net income or loss from our equity method securities and the amortization of the investeebasis difference related to intangible assets in Other income,expense, net on thein our consolidated statements of operations with corresponding adjustments to thetheir carrying value of the investment.value.

At September 30, 2017,

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The following table summarizes the carrying amount of ournet 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 three and nine months ended September 30, 2017 was not significant.2019 and 2018 (in thousands):
 Three months ended
September 30,		 Nine months ended
September 30,
 2019 2018 2019 2018
Net loss recognized on our proportionate share of the net losses of our equity method securities and amortization of the basis difference$1,864
 $1,123
 $4,922
 $2,504
Impairments on equity method securities—
 —
 1,256
 —
Net loss recognized during the period on equity method securities sold—
 —
 524
 —

Noncontrolling interests in Controlled Subsidiaries

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, tZERO completed the acquisition ofDelaware public benefit corporation ("MLG"). tZERO's subsidiaries include a financial technology firm andcompany, two related registered broker dealers each ofand a recently incorporated company 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 transactionshas applied to become a registered broker dealer, a digital wallet and exchange services company, and 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 capitalfinance 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 overOur lease terms may include options to extend or terminate the termlease, and we adjust our measurement of the lease.lease when it is reasonably certain that we will exercise that option. Lease payments used in measurement of the lease liability typically do not include executory costs, such as taxes, insurance, and maintenance, unless those costs can be reasonably estimated at lease commencement. 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.combinations (see Note 3—Business Combinations for current period activity). 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 itsthe 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, thenan impairment loss is recognized in an amount equal to the amountexcess of the impairment loss must be measured. The impairment loss, if any, is calculated by comparing the implied fair valuecarrying

Table of the goodwill to its carrying amount. In calculating the implied fair value of goodwill,Contents



amount over the fair value of the reporting unit, is allocatednot 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 months ended September 30, 2017 or2019 and 2018.

The following table provides information about changes in the year ended December 31, 2016.carrying amount of goodwill for the periods presented (in thousands):
 Amount
Balances as of December 31, 2017 (1)$14,698
Goodwill acquired during year8,197
Balances as of December 31, 2018 (2)22,895
Goodwill acquired during year1,685
Purchase price adjustment2,540
Balances as of September 30, 2019 (3)$27,120

(1), (2), (3) — Goodwill is net of an accumulated impairment loss of $3.3 million.

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. IntangibleDefinite lived intangible assets other than goodwill are amortized using the straight-line method of amortization over their useful lives, with the exception of certain intangibles (such as acquired technology, customer relationships, and trade names) which are amortized using an accelerated method of amortization based on cash flows. These 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
 September 30,
2019		 December 31,
2018
Intangible assets subject to amortization, gross (1)$30,284
 $29,099
Less: accumulated amortization of intangible assets subject to amortization(17,405) (15,729)
Total intangible assets, net$12,879
 $13,370

(1)
 — At September 30, 2017,2019, the weighted average remaining useful life for Intangible assets, other, excluding fully amortized intangible assets subject to amortization was 3.505.66 years.

Amortization of intangible assets other than goodwill is classified within the corresponding operating expense categories on thein our consolidated statements of operations as follows (in thousands):
Three months ended
 September 30,		 Nine months ended
 September 30,		Three months ended
September 30,		 Nine months ended
September 30,
2017 2016 2017 20162019 2018 2019 2018
Technology$905
 $699
 $2,715
 $2,151
$896
 $885
 $2,687
 $2,534
Sales and marketing22
 246
 62
 949
16
 119
 48
 442
General and administrative21
 27
 62
 93
133
 542
 (526) 620
Total amortization$948
 $972
 $2,839
 $3,193
$1,045
 $1,546
 $2,209
 $3,596

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$1.1 million for the remainder of 2017, $2.8 million in 2018, $2.0 million in 2019, $1.3$3.7 million in 2020, and $1.0$3.3 million in 2021, $2.1 million in 2022, $1.6 million in 2023, and $1.1 million thereafter.

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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. During the three and nine months ended September 30, 2019, we realized a $1.4 million impairment loss included in General and administrative expense in our consolidated statements of operations related to certain patents held by our Medici Ventures segment. The estimated fair value of the patents were determined based on Level 3 inputs, which were unobservable (see Note 2—Accounting Policies, Fair value of financial instruments), including market participant assumptions for similar assets in an inactive market. There were no impairments to long-lived assets recorded during the nine months ended September 30, 2017 or the year ended December 31, 2016.

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 $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 borrowingexpenses, 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 partnerour retail business through our Website but may also derive revenue from sales of merchandise sales. We also earnthrough offline and other channels. Our Retail revenue is derived primarily from advertising onmerchandise sold at a point in time and shipped to customers. Merchandise sales are fulfilled with inventory sourced through our Website andpartners or from other pages. We have organized our operations into two principal reporting segments basedowned inventory, depending on the primary sourcemost 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 evidenceproduct passes to the customer, typically at the date of an arrangement exists; (2) delivery has occurredof 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 uponin 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.


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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 productmerchandise sales and related costs or the net amount earned as commissions. When we are the primary obligorprincipal in a transaction are subjectand 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 directour 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.


EarnedCustomers 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 dollarssuch rewards as part of a purchase on our Website.

We account for these transactions as multiple element arrangements and allocate revenue torecord the elements using their relative fair values. We include thestandalone 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 rewardReward dollars expire 90 days after the customer's Club O Gold membership expires. WhenWe 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 breakageand gift cards as Other income, neta 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 $1.5 million and $1.3 million for the three months ended September 30, 2019 and 2018 and $3.5 million and $4.2 million for the nine months ended September 30, 2019 and 2018.

Beginning in 2015, we enrolled a significant number of members in Club O Silver, a newly introduced Club O membership tier for customers who agreeOur 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 freeoutstanding Club O Reward dollars not associated with any purchases, we account forwas $6.6 million and $6.9 million at September 30, 2019 and December 31, 2018, respectively. The timing of revenue recognition of these transactions as sales incentivesreward dollars is driven by actual customer activities, such as couponsredemptions and record a reduction of revenue at the time the reward dollars are redeemed.expirations.

Co-branded credit card program

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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 Revenue

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 pointsdisplay advertisements that customers will accrue from card usage and can use to make purchasesare placed on our Website, (see Club O loyalty program above for more information). New account feesdistributed 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 asrendered. 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 revenueRevenue

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 incomeRetail 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 aFor the unredeemed portion of our gift card is not redeemed,cards and loyalty program rewards, we will recognize other income whenRetail revenue over the likelihoodexpected redemption period based upon the estimated pattern of its redemption becomes remote based on our historical redemption experience. We considerrights 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 end43,216
Decrease due to beginning contract liabilities recognized as revenue(39,106)
Deferred revenue at December 31, 201850,578
Increase due to deferral of revenue at period end34,789
Decrease due to beginning contract liabilities recognized as revenue(44,855)
Deferred revenue at September 30, 2019$40,512

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.


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The following table provides additions to and deductions 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, 2017$17,391
Additions to the allowance174,864
Deductions from the allowance(176,994)
Allowance for returns at December 31, 201815,261
Additions to the allowance87,620
Deductions from the allowance(94,984)
Allowance for returns at September 30, 2019$7,897
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
 
CostOur 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. CostOur Other cost of goods sold including product costprimarily consists of exchange fees, clearing agent fees, and other costsexchange fees from our broker dealer subsidiaries in our tZERO segment. These fees are primarily for executing, processing, and fulfillmentsettling trades on exchanges and related costs are as followsother venues. These fees fluctuate based on changes in trade and share volumes, rate of clearance fees charged by clearing brokers, and exchanges (in thousands):thousands, except for percentages).
Three months ended
 September 30,		 Nine months ended
 September 30,		Three months ended
September 30,		 Nine months ended
September 30,
2017 2016 2017 20162019 2018 2019 2018
Total revenue, net$424,007
 100% $441,564
 100% $1,288,466
 100% $1,273,781
 100%$347,099
 100% $440,580
 100% $1,088,537
 100% $1,369,044
 100%
Cost of goods sold 
  
  
  
  
  
  
  
 
  
  
  
  
  
  
  
Product costs and other cost of goods sold321,678
 76% 343,401
 78% 977,827
 76% 985,603
 77%261,670
 75% 334,156
 76% 822,390
 76% 1,039,518
 76%
Fulfillment and related costs18,654
 4% 18,447
 4% 55,886
 4% 54,833
 4%15,881
 5% 19,708
 4% 49,576
 5% 57,198
 4%
Total cost of goods sold340,332
 80% 361,848
 82% 1,033,713
 80% 1,040,436
 82%277,551
 80% 353,864
 80% 871,966
 80% 1,096,716
 80%
Gross profit$83,675
 20% $79,716
 18% $254,753
 20% $233,345
 18%$69,548
 20% $86,716
 20% $216,571
 20% $272,328
 20%
 
Advertising expense
 
We expense the costs of producing advertisements the first time the advertising takes place and expense the cost of communicating advertising in the period during which the advertising space or airtime is used. Internet advertising expenses are recognized as incurred based on the terms of the individual agreements, which are generally: 1) a commission for traffic driven to our Website that generates a sale or 2) a referral fee based on the number of clicks on keywords or links to our Website generated during a given period. Advertising expense is included in salesSales and marketing expenses and totaled $41.2$29.7 million and $31.5$49.7 million during the three months ended September 30, 20172019 and 2016,2018, respectively. For the nine months ended September 30, 20172019 and 2016,2018, advertising expensesexpense totaled $114.6$88.1 million and $90.6$207.5 million, respectively. Prepaid advertising (included in Prepaids and other current assets in the accompanying consolidated balance sheets) was $2.3 million$677,000 and $843,000$961,000 at September 30, 20172019 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 stockthe 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

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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, or a range of amounts, 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 allthe available positive and negative evidence to determineestimate 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, projectedexisting 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 feasibleincluding 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 stateour deferred tax credits as of June 30, 2017, because estimates ofassets not supported by carryback ability or taxable temporary differences, primarily due to uncertainty regarding our future apportioned taxable income duringincome. We have considered, among other things, the carryforwardcumulative loss incurred over the three-year period were reduced. During the three months ended September 30, 2017, we sold precious metals and cryptocurrencies and generated capital gain income.2019 as a significant piece of objective negative evidence. We haveintend 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, auntil there is sufficient evidence to support the reversal of all or some portion of these allowances. The amount of the capitaldeferred tax asset considered realizable could be adjusted if objective negative evidence in the form of cumulative losses can nowis no longer present and additional weight may be utilized and we released $2.2 million of valuation allowancegiven 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 certainindefinitely reinvested foreign earnings because weof $2.3 million at September 30, 2019. We would need to accrue and pay various taxes on this amount if repatriated. We do not intend to indefinitely reinvestrepatriate these earnings outside the U.S. We have begun expansion of operations outside of the U.S. and have plans for additional expansionearnings.

for which we have incurred and will continueWe are subject to incur capital requirements. We have considered ongoing capital requirements of the parent companytaxation 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. An audit by the Ireland Revenue Agency for the calendar year 2016 was finalized during 2019 with no assessment.

Net income (loss)loss per share
 
In 2016, we issued shares of ourOur Blockchain Voting Series A Preferred Stock, par value $0.0001 per share (the "Series A Preferred"), Digital Voting Series A-1 Preferred Stock, par value $0.0001 per share (the "Series A-1 Preferred"), and our Voting Series B Preferred Stock, (collectivelypar value $0.0001 per share (the "Series B Preferred" together with the Series A Preferred and Series A-1 Preferred, 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.


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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.

On July 30, 2019, we announced that our Board of Directors had declared a dividend (the "Dividend") payable in shares of our Series A-1 Preferred. The Dividend is payable at a ratio of 1:10, meaning that one share of Series A-1 will be issued for every ten shares of common stock, Series A-1 or Series B Preferred held by all holders of such shares as of the record date for the Dividend. As of September 30, 2019, the Dividend had not been distributed.

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) $9,427
Less: Preferred stock dividends - accumulated27
 —
 80
 —
Undistributed income (loss)(813) (3,098) (14,268) 9,427
Less: Undistributed loss allocated to participating securities(22) —
 (386) —
Net income (loss) attributable to common shares$(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—basic25,003
 25,356
 25,024
 25,326
Effect of dilutive securities: 
  
  
  
Stock options and restricted stock awards—
 —
 —
 62
Weighted average common shares outstanding—diluted25,003
 25,356
 25,024
 25,388
Net income (loss) attributable to common shares—diluted$(0.03) $(0.12) $(0.55) $0.37
 Three months ended
September 30,		 Nine months ended
September 30,
 2019 2018 2019 2018
Net loss attributable to stockholders of Overstock.com, Inc.$(30,938) $(47,923) $(94,863) $(163,743)
Less: Preferred stock (Token) repurchase (gain)/loss—
 —
 (425) —
Less: Preferred stock dividends - declared and accumulated837
 27
 875
 80
Undistributed loss(31,775) (47,950) (95,313)
(163,823)
Less: Undistributed loss allocated to participating securities(428) (1,055) (1,319) (3,728)
Net loss attributable to common shares$(31,347) $(46,895) $(93,994) $(160,095)
Net loss per common share—basic: 
  
  
  
Net loss attributable to common shares—basic$(0.89) $(1.55) $(2.74) $(5.47)
Weighted average common shares outstanding—basic35,241
 30,279
 34,289
 29,256
Effect of dilutive securities: 
  
  
  
Stock options and restricted stock awards—
 —
 —
 —
Weighted average common shares outstanding—diluted35,241
 30,279
 34,289
 29,256
Net loss attributable to common shares—diluted$(0.89) $(1.55) $(2.74) $(5.47)
 
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 units192
 765
 165
 536


Stock repurchase program

On May 5, 2015, our Board of Directors authorized a stock repurchase program under which we may repurchase shares of our outstanding common stock for up to $25 million at any time through December 31, 2017. In January 2017, we repurchased approximately 604,000 shares of our common stock for an aggregate purchase price of $10 million under the stock repurchase plan. All common shares repurchased were recognized as treasury stock.
 Three months ended
September 30,		 Nine months ended
September 30,
 2019 2018 2019 2018
Stock options and restricted stock units1,088
 498
 1,088
 578
Common shares issuable under stock warrant—
 —
 —
 28

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.


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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, InventoryCompensation-Stock Compensation (Topic 330)718): SimplifyingImprovements to Nonemployee Share-Based Payment Accounting, which aligns the Measurementmeasurement 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 toequity-classified nonemployee awards will be measuredfixed at the lower of cost and net realizable value. Net realizable value isgrant date. We adopted the estimated selling prices inchanges under the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. We implemented the provisions of ASU 2015-11new standard on January 1, 20172019 on a prospective basis. The implementation of ASU 2015-112017-01 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.

Recently issued accounting standards

In January 2017,June 2016, the FASB issued ASU 2017-04,2016-13, Intangibles, GoodwillFinancial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which revises how entities account for credit losses for most financial assets and Other (Topic 350): Simplifyingcertain other instruments that are not measured at fair value through net income. For public entities, ASU 2016-13 is required to be adopted for annual periods beginning after December 15, 2019, including interim periods within those fiscal years. Management is currently evaluating the Test for Goodwill Impairment, which simplifiesimpact of 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 inof this update should be applied on a prospective basis. We do not expect that ASU 2017-04 will have a material impact on our consolidated financial statements and related disclosures.

In May 2017, the FASB issued ASU 2017-09, Compensation - Stock Compensation (Topic 718): Scope

Table 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.Contents

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

3. BUSINESS COMBINATIONS
3. ACQUISITIONS, GOODWILL, AND ACQUIRED INTANGIBLE ASSETS
Bitsy, Inc.
As part
Through a series of ourtransactions in 2018, Medici blockchainVentures acquired a 33% equity interest in Bitsy, Inc. ("Bitsy"), a U.S.-based startup cryptocurrency wallet and fintech technology initiatives, during 2015,exchange services company that has built a subsidiaryregulatory-compliant bridge between traditional fiat currencies and cryptocurrencies, allowing customers the ability to store, purchase and sell cryptocurrencies. Bitsy was founded by Steve Hopkins, Medici Ventures' former chief operating officer and general counsel, and current president of tZERO, who held a 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, a financial technology firm.the remaining 67% equity interest in Bitsy for $8.0 million with effective control of Bitsy transferring to tZERO effective January 1, 2019. In connection with the Cirrus Technology acquisition, a subsidiary of tZERO also entered into anDecember 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 SpeedRoutefor a $4.0 million convertible promissory note due December 31, 2020 and Pro Securities are FINRA-registered broker dealers.an assignment of certain intellectual property to Medici Ventures.

This acquisition closed in two parts. The Cirrus Technologies acquisition closed in Q3 2015tZERO has expanded the wallet's capabilities and launched it as the membership interests in SpeedRoutetZERO Crypto wallet and Pro Securities closed in Q1 2016 after receiving approval from FINRA. The total gross purchase priceexchange service. tZERO plans to offer these services as part of this acquisition was $29.7 million, consistinga suite of approximately $11.6 million in cash (which excludes $2.2 million in cash acquired, primarily during Q1 2016)products that includes a digital wallet and 908,364 shares of Overstock's common stock valued at approximately $18.1 million. The proceeds for the acquisition were financed by tZERO through a note payable to Overstock that bears interest that approximates the Federal Funds Rate. The total purchase price has been allocated to the assets acquiredexchange service between traditional fiat currencies 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.cryptocurrencies.

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. As of March 31, 2019, our determination and allocation of the purchase price to net tangible and intangible assets was based upon preliminary estimates. During the quarter ended June 30, 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 June 30, 2019, which decreased Intangible assets by $650,000, increased Deferred tax liabilities by $943,000 and resulted in a corresponding increase to Goodwill of $1.7 million. We recognized an impairment of $1.3 million as a result of remeasuring to fair value our 33% equity interest in Bitsy held before the business combination which was based on Level 3 inputs (see Note 2—Accounting Policies, Fair value of financial instruments). The impairment is included in Other expense, net in our consolidated statement of operations for the nine months ended September 30, 2019.

The fair values of the assets acquired and liabilities assumed at the acquisition date are as follows (in thousands):
Purchase PriceFair Value
Cash paid, net of cash acquired$3,115
Fair value of equity interest in Bitsy held before business combination3,800
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$6,262
  
Allocation 
Prepaids and other current assets$71
Property and equipment16
Intangible assets6,093
Goodwill1,685
Deferred tax liability(943)
Other liabilities assumed(660)
Total net assets, net of cash acquired$6,262


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The following table details the identifiable intangible assets acquired at their fair value and their corresponding useful lives at the acquisition date (in thousands): 
Intangible AssetsFair Value Weighted Average Useful Life (years)
Patents$4,293
 20
Technology1,500
 5
Licenses300
 1
Total acquired intangible assets as of the acquisition date$6,093
  

Acquired intangible assets primarily include patents, technology, and licenses. The acquired assets, liabilities, and associated operating results of Bitsy were consolidated into our financial statements at the acquisition date. The goodwill recognized arises from expected synergies with our tZERO operations that do not qualify for separate recognition as intangible assets and also the deferred tax liabilities arising from the business combination. None of the goodwill recognized is expected to be deductible for tax purposes. 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. During the quarter ended 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 datesdate are as follows (in thousands):
Purchase PriceFair ValueFair Value
Cash paid, net of cash acquired$9,353
$1,143
Common stock issued18,149
$27,502
Allocation  
Accounts receivable, net$399
Inventories, net1,033
Prepaids and other current assets29
Property and equipment154
Intangible assets653
Goodwill$11,914
3,376
Intangibles16,000
Accounts receivable and other assets2,565
Other liabilities assumed(2,977)
$27,502
Accounts payable and accrued liabilities(1,432)
Long-term debt, net(3,069)
Total net assets, net of cash acquired$1,143

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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 AssetsFair Value Weighted Average Useful Life (years)
Technology and developed software$13,600
 3.31
Customer relationships1,900
 —
Trade names300
 6.39
Other200
  
Total acquired intangible assets at the acquisition dates16,000
  
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.

4. ACCRUED LIABILITIES

Accrued liabilities consist of the following (in thousands):
September 30,
2017		 December 31,
2016		September 30,
2019		 December 31,
2018
   
Accounts payable accruals$12,235
 $15,872
Accrued compensation and other related costs14,854
 12,099
Accrued loss contingencies9,359
 10,940
Allowance for returns7,897
 15,261
Sales and other taxes payable9,813
 9,923
Accrued marketing expenses$13,467
 $26,358
10,182
 14,150
Allowance for returns12,857
 18,176
Accrued compensation and other related costs12,109
 8,903
Accounts payable accruals8,956
 17,229
Accrued freight7,743
 5,343
Other accrued expenses6,307
 6,315
7,357
 4,270
Accrued freight5,038
 10,062
Accrued loss contingencies50
 9,173
Total accrued liabilities$58,784
 $96,216
$79,440
 $87,858

5. BORROWINGS

U.S. Bank term loan and revolving loan agreementHigh Bench Senior Credit Agreement

We areOn June 25, 2018, we became party to a loansenior credit agreement, (asas amended, through March 30, 2017, the "Agreement") dated October 24, 2014 with U.S. Bank National Association and other banksHigh Bench-Mac Warehouse-Senior Debt, LLC (the "Banks""High Bench Loan"), in connection with our acquisition of Mac Warehouse, LLC. Under the construction and long-term financing of our corporate headquarters (the "Project"). The Agreement provides for a senior secured real estate loan of $45.8 million (the "Term Loan") that we used to finance a portionamended agreement, at the time 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 andacquisition, 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 intocarried 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 anannual interest rate based on one-month LIBOR plus 2.00% or an Alternate Base Rate plus 1.00%of 11.0%. 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 interest would be 2.00% above the otherwise applicable rate.

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

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

At September 30, 2017, we were in compliance with the financial covenants.

At September 30, 2017, our outstanding balance on the Term 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.

On November 6, 2017,During July 2019, we repaid the entire outstanding balance and terminated bothof the TermHigh Bench Loan andeffectively terminating the Revolving Loan (see Note 11—Subsequent Events).agreement.


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 lettersLetters of credit

At September 30, 20172019 and December 31, 2016,2018, letters of credit totaling $355,000$205,000 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 accompanyingour consolidated balance sheets.

U.S. Bank commercialCommercial 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, $509,0002019, $43,000 was outstanding and $4.5 million$957,000 was available under the Purchasing Card. At December 31, 2016, $811,0002018, $48,000 was outstanding and $4.2 million$952,000 was available under the Purchasing Card.


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

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 September 30, 2019 (in thousands):
 September 30, 2019
Operating right-of-use assets$43,266
Operating lease liability - current5,725
Operating lease liability - non-current42,510

The components of lease expenses for the three and nine months ended September 30, 2019 were as follows (in thousands):
 Three months ended
September 30, 2019		 Nine months ended
September 30, 2019
Operating lease cost$2,685
 $7,556
Short-term lease cost28
 90
Variable lease cost406
 1,378

The following tables provides a summary of other information related to leases for the nine months ended September 30, 2019 (in thousands, apart from weighted-average lease term and weighted average discount rate):
 Nine months ended
September 30, 2019
Cash paid for amounts included in the measurement of lease liabilities: 
Operating cash flows used in operating leases$(6,629)
Right-of-use assets obtained in exchange for new operating lease liabilities$17,238
Weighted-average remaining lease term - operating leases6.82 years
Weighted-average discount rate - operating leases8%

Maturity of lease liabilities under our non-cancellable operating leases as of September 30, 2019, are as follows (in thousands):
Payments due by period  
2019 (Remainder) $2,222
2020 9,377
2021 9,826
2022 9,820
2023 8,979
Thereafter 22,754
Total lease payments 62,978
Less interest (14,743)
Present value of lease liabilities $48,235
Information for our leases for the year ended December 31, 2018 under ASC Topic 840, Leases, follows for comparative purposes.


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Minimum future payments under all operating leases as of September 30, 2017, areDecember 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 forOur 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 forfuture 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 thesesuch 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 natureNo estimate of the loss contingencies relating to claims that have been asserted against us are described above. However, no estimate of thepossible loss or range of loss can be made.made at this time. We intend to continue vigorously defenddefending 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 Eastern District of Texas for infringement of patents covering products and services that verify the delivery and integrity of email messages. We tendered defense of the case to an indemnitor who accepted the defense. The nature of the loss contingencies relating to claims that have been asserted against us are described above. However, no estimate of the loss or range of loss can be made. We intend to vigorously defend this action and pursuepursuing our indemnification rights with our vendors.

In June 2013, William French filed suit against("French") and the State of Delaware ("Delaware") sued us, and 46along 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 behalfDelaware for alleged violations of Delaware's unclaimed property lawslaws. French and for recovery of the unredeemed gift card value allegedly attributable to Delaware residents. French's complaint allegesalleged 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
On June 28, 2019, the court entered a judgment against us in the amount of approximately $7.3 million (for certain unredeemed gift card balances, treble damages, and penalties), and attorney's as a result of a jury verdict which was returned September 20, 2018. On October 23, 2019, the court entered an award of attorneys’ fees and costs. costs of $1.3 million and entered final judgment in the amount of $8.6 million. We have commenced an appeal and filed our appellate brief. Our estimated liability for these amounts was included in Accrued liabilities at September 30, 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.

In February 2018, the early stagesDivision 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 follow-

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up request from the SEC relating to its investigation. On October 7, 2019, we received a subpoena from the SEC requesting documents related to the Dividend we announced to shareholders in June of 2019 and requesting 10b-5-1 plans of our officers and directors that were in effect during the period of January 1, 2018 through October 7, 2019. Under the umbrella of this investigation, we have received requests from the SEC regarding both the GSR transaction and our communications with our former chief executive officer and director, Patrick Byrne. We are in regular contact with the SEC and are cooperating fully with the SEC in connection with its investigation and information requests.

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 is registered with the SEC as a broker-dealer under the Securities Exchange Act of 1934 ("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, which may result in financial and other settlements or penalties. Any significant 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. In addition, a recently incorporated tZERO subsidiary has applied for regulatory approvals to operate as a broker-dealer in a variety of areas, including retail activities. The approval process will involve satisfying the regulatory authorities that the tZERO subsidiary can operate in the manner it proposes and, in addition, if approval is granted, the tZERO subsidiary will be subject to a number of legal and regulatory requirements, some of which will be new to tZERO’s broker-dealer subsidiaries. 

tZERO’s subsidiary, Bitsy is registered as or is applying to become a money transmitter (or its equivalent) in many states and is subject to extensive regulatory requirements applicable to money services businesses, including the requirements of the Financial Crimes Enforcement Network of the U.S. Department of the Treasury ("FinCEN"), anti-money laundering requirements, know-your-customer requirements, record-keeping, reporting and capital and bonding requirements, and inspection by state and federal regulatory agencies. Compliance with these requirements requires the dedication of significant resources and any material failure by Bitsy to remain in compliance with these requirements could subject it to liability or limit the services it may offer.
On January 31, 2019, Yassen Traynor filed a putative class action lawsuit against us in the United States District Court, Southern District of New York, alleging that our website violated the Americans with Disabilities Act ("ADA") in addition to other New York specific laws, because it was not accessible to blind and visually impaired people. On October 23, 2019, the case we, along with others,was dismissed.

On September 27, 2019, a purported securities class action lawsuit was filed motions to dismissagainst us and our former chief executive officer and former chief financial officer in the case. TheUnited States District Court in the Central District of Utah, alleging violations under Section 10(b), Rule 10b-5, Section 20(a), Section 20(A) of the Exchange Act. On October 8, 2019, October 17, 2019, and October 31, 2019, three similar lawsuits were filed in the same court dismissed one count, but allowed one count to remain. Recently, we filed motions for summary judgment, along with otheralso naming the Company and the above referenced former executives as defendants, to dismissbringing similar claims under the case. The court has not yet ruled on these motions. The case is in its discovery stages.Exchange Act, and seeking similar relief. No estimates of the possible losses or range of losses can be made at this time. We intend to vigorously defend this action. The nature of the loss contingencies relating to claims that have been asserted against us are described above.these actions.

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 upheld by the highest applicable appellate court. The statute does not require us to pay sales tax retroactively if we were to lose. The state court granted summary judgment in our favor, and on September 13, 2017 the South Dakota Supreme Court denied South Dakota’s appeal and ruled in our favor. South Dakota has now filed a petition with the U.S. Supreme Court to hear the case. We intend to oppose the petition and continue to vigorously defend this action.

In September 2016, we received a letter from the District Attorney of Sonoma County, California who is acting as part of the Consumer Protection Divisions of the following counties in California: Sonoma, Alameda, Monterey, Napa, Solano, Fresno, Sacramento, Shasta, Santa Cruz, Butte, and Merced. The District Attorney alleges that certain plastic products on our site which are labeled as biodegradable, degradable, or decomposable constitute false advertising under California law. On July 24, 2017, we agreed to the terms of a Final Judgment pursuant to which we paid the Sonoma County District Attorney's Office

a civil penalty of $27,000 and agreed to a five-year injunction. The injunction requires us to comply with the biodegradability law, to search our Website and re-label or remove any non-compliant products, and to certify our compliance to Sonoma each year during the five-year term of the injunction.

On July 7, 2017, the State of Wyoming sued us along with five other defendants in the Second Judicial District Court of Wyoming. Wyoming alleges that U.S. constitutional law should be revised to permit Wyoming to require out-of-state ecommerce websites to withhold and remit sales tax in Wyoming in accordance with Wyoming's sales tax statute. Pursuant to the statute, Wyoming is prohibited by an injunction from requiring 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. We intend to vigorously defend this action.

On August 28, 2017, the State of Indiana sued us along with one other defendant in the Superior Court of Indiana, Marion County. Indiana alleges that U.S. constitutional law should 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. We intend to vigorously defend this action.

We establish liabilities when a particular contingency is probable and estimable. At September 30, 2017,2019 and December 31, 2018, we hadhave accrued $50,000 in light of probable$9.4 million and estimable liabilities net of related indemnities,$10.3 million, respectively, which isare included in accruedAccrued liabilities in theour 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. Bankprior loan agreements, customary indemnification arrangements in underwriting agreements and other banks,similar agreements, and indemnities to our directors and officers to the maximum

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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.

On July 30, 2019, we announced that our Board of Directors had declared the Dividend payable in shares of our Series A-1 Preferred Stock. Existing Series A-1 shares can currently only be traded on the PRO Securities ATS. On September 18, 2019, we announced our intent to register the Series A-1 Preferred to be issued pursuant to the Dividend under the Securities Act of 1933, and postponed the previously announced record and distribution dates for the Dividend. Accordingly, the Dividend has not been distributed as of September 30, 2019. On October 28, 2019, we announced that we would seek a shareholder vote at a shareholder special meeting to allow us to amend the certificates of designation for our preferred shares, removing certain restrictions and permitting us to reallocate the number of shares among the series of preferred shares, to facilitate issuance of the Dividend. On November 10, 2019, our Board of Directors approved December 18, 2019 as the record date for the shareholder vote and February 13, 2020 as the shareholder special meeting date.

Preferred Stock

On May 1, 2019, we informed holders of our Series A Preferred of an opportunity to exchange (the "Exchange") outstanding Series A Preferred for newly-issued shares of the Company's Series A-1 Preferred. On June 26, 2019, the Exchange was completed for participating stockholders. In connection with the Exchange, 122,526 shares of Series A Preferred were validly tendered and accepted for exchange by the Company and the Company issued 122,526 shares of Series A-1 Preferred in exchange therefore.

On June 26, 2019, in connection with the completion of the Exchange, 1,144 shares of Series A Preferred were converted into shares of Series B Preferred (such transaction, the "Conversion"). Following the Conversion, 2,895 shares of Series A Preferred remained outstanding as of June 30, 2019 and in July 2019, 2,020 of those remaining shares were exchanged for shares of Series A-1 Preferred and 875 of those remaining shares were converted into shares of Series B Preferred. Following that time, the Company eliminated the Series A Preferred by filing a Certificate of Elimination with the Delaware Secretary of State.

Except as required by law, the preferred shares are 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 to the holders of our preferred stock during 2017 and 2018.

Neither the Series A Preferred, Series A-1 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 or Series A-1 Preferred shares into Series B Preferred shares at any time on a one-to-one basis. Until December 15, 2019, we may redeem, at our discretion, the Series A, Series A-1, and Series B Preferred shares for an amount equal to the highest of the following: (1) $15.68 plus any accrued but unpaid dividends, (2) 105% of the average trading price of our common stock during a five-trading-day period determined by the Company and (3) 105% of the average trading price of the

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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, each share of Series A-1 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, sold 5,843,147 shares of our common stock resulting in $146.7 million in proceeds, net of $3.3 million of offering costs, including commissions paid to JonesTrading. Of the cumulative amount sold under the sales agreement, we sold shares of common stock for $52.1 million, net of offering expenses (including commissions) during the nine months ended September 30, 2019. The average gross price per share of stock sold pursuant to the sales agreement during the nine months ended September 30, 2019 was $17.84.

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 funded through August 8, 2018, and on October 12, 2018 tZERO distributed 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, were 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 nine months ended September 30, 2018, proceeds from the security token offering were $104.8 million, net of $22.0 million of withdrawals. During the nine months ended September 30, 2018, tZERO incurred offering costs of $21.3 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 had agreed to purchase, for $30 million, on May 6, 2019 or such other date as agreed by the parties, security tokens at a price of $6.67 per security token. On May 8, 2019, the parties executed an Investment Agreement to replace the Token Purchase Agreement under which GSR agreed to purchase 508,710 shares of tZERO common stock, representing 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 on the date of the Investment Agreement of $3.0 million U.S. dollars. As of September 30, 2019, GSR had provided $2.0 million of U.S. dollars pursuant to the Investment Agreement and such amount is included in Accrued liabilities at September 30, 2019. On September 16, 2019, in recognition of GSR's remaining obligations under the Investment Agreement, tZERO and GSR entered into a Promissory Note under which GSR promised to pay the remaining $3.0 million in consideration due to tZERO under the Investment Agreement in the form of U.S. dollars in multiple installments by December 6, 2019.


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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.
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 awards1,015
 1,390
 3,000
 4,105
Total stock-based compensation expense$1,024
 $1,390
 $3,009
 $4,105
 Three months ended
September 30,		 Nine months ended
September 30,
 2019 2018 2019 2018
Overstock restricted stock awards$3,821
 $1,779
 $12,249
 $6,863
Medici Ventures stock options329
 138
 862
 273
tZERO equity awards317
 329
 512
 4,518
Total stock-based compensation expense$4,467
 $2,246
 $13,623
 $11,654

MediciOverstock restricted stock optionsawards

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 OptionAmended and Restated 2005 Equity Incentive Plan which provides for the grant of options to employeesrestricted stock units and directorsother 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 stockequity 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 awardsCompany to our officers, board members and employees. TheThese restricted stock awards generally vest over three years at 33.3% at the end of the first year, 33.3% at the end of the second year and 33.3% at the end of the third year, and are subject to the recipient's continuing service to us. At September 30, 2017, there were 542,525 unvestedIn addition to our traditional equity awards, during the quarter 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 awardsunits 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 months ended September 30, 20172019 (in thousands)thousands, except per share data):
Nine months ended
 September 30, 2017		Nine months ended
September 30, 2019
Units Weighted
Average
Grant Date
Fair Value		Units Weighted
Average
Grant Date
Fair Value
Outstanding—beginning of year560
 $17.46
559
 $44.08
Granted at fair value299
 16.71
981
 17.80
Vested(202) 19.82
(259) 35.28
Forfeited(114) 16.20
(193) 23.33
Outstanding—end of period543
 $16.43
1,088
 $26.16

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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 9% of the authorized shares of Medici Ventures' common stock. Medici Ventures authorized 1.5 million shares, 900,000 of which are issued and outstanding to Overstock, and 130,000 of which are subject to the 2017 Stock Option Plan. The remaining 470,000 are authorized but unissued. During the nine months ended September 30, 2019, Medici Ventures granted 27,550 stock options with a cumulative grant date fair value of $2.4 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 nine months ended September 30, 2019, tZERO granted awards to acquire 3,492,762 shares of its stock with a cumulative grant date fair value of $506,000 which will be expensed on a straight-line basis over the vesting period of three years. Additionally, during the nine months ended September 30, 2019, tZERO granted 245,500 restricted stock awards with a cumulative grant date fair value of $749,000 which will be expensed on a straight-line basis over a cliff vesting period of two years.
 
9.11. OTHER EXPENSE, NET

Other expense, net consisted of the following (in thousands):
  Three months ended
September 30,		 Nine months ended
September 30,
  2019 2018 2019 2018
Equity method losses $(1,864) $(1,123) $(4,922) $(2,504)
Impairment of equity securities (2,750) (511) (6,964) (511)
Unrealized gain/(loss) on equity securities (700) (72) (1,818) 1,764
Allowance on notes receivable —
 —
 (1,242) —
Gain/(loss) on sale of equity securities —
 —
 (258) —
Other 533
 (142) 1,156
 (238)
Total other expense, net $(4,781) $(1,848) $(14,048) $(1,489)

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 primarilyChief 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 ourbusiness. 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 two reportable segments, tZERO and the unconsolidated financial information for Medici Ventures ("MVI"). MVI consists of the Medici business not associated with tZERO or MLG. We use gross profitpre-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 MLG portion of our Medici businessBusiness is not significant as compared to our DirectRetail, tZERO, and Partner segments and is included in Other.MVI segments. Our Other segment consists of Medici. AlthoughMLG and our Directunallocated corporate support costs.

Our Retail segment primarily consists of amounts earned through e-commerce sales through our Website, excluding intercompany transactions eliminated in consolidation. 


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Our tZERO segment primarily consists of amounts earned through securities transactions through our broker-dealers and Partner segments both relatecosts incurred to execute our RetailtZERO business we do not combine these segments because they have dissimilar economic characteristics, such as gross profit margins. initiatives, excluding intercompany transactions eliminated in consolidation.

Our MVI segment primarily consists of costs incurred to develop and advance the concept of "Technology Stack for Civilization", excluding intercompany transactions eliminated in consolidation.

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, 20172019 and 2016.2018.

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The following table summarizes information about reportable segments for three and nine months ended September 30, 20172019 and 20162018 (in thousands):
 Three months ended
 September 30,
 Direct Partner Retail Total Other Total
2017 
  
      
Revenue, net$19,645
 $400,419
 $420,064
 $3,943
 $424,007
Cost of goods sold (1)19,577
 318,121
 337,698
 2,634
 340,332
Gross profit$68
 $82,298
 $82,366
 $1,309
 $83,675
Operating expenses (1) (2) 
  
 90,592
 4,958
 95,550
Interest and other income (expense), net (3) 
  
 5,375
 (17) 5,358
Pre-tax loss    (2,851) (3,666) (6,517)
Benefit for income taxes 
  
 (3,993) (1,419) (5,412)
Net income (loss) (4) 
  
 $1,142
 $(2,247) $(1,105)
          
2016 
  
      
Revenue, net$24,620
 $413,019
 $437,639
 $3,925
 $441,564
Cost of goods sold (1)23,955
 335,306
 359,261
 2,587
 361,848
Gross profit$665
 $77,713
 $78,378
 $1,338
 $79,716
Operating expenses (1) (2) 
  
 80,497
 4,266
 84,763
Interest and other income (expense), net (3) 
  
 1,177
 (65) 1,112
Pre-tax loss    (942) (2,993) (3,935)
Provision (benefit) for income taxes 
  
 713
 (1,256) (543)
Net loss (4) 
  
 $(1,655) $(1,737) $(3,392)

 Nine months ended
 September 30,
 Direct Partner Retail Total Other Total
2017 
  
      
Revenue, net$64,572
 $1,211,536
 $1,276,108
 $12,358
 $1,288,466
Cost of goods sold (1)61,687
 963,310
 1,024,997
 8,716
 1,033,713
Gross profit$2,885
 $248,226
 $251,111
 $3,642
 $254,753
Operating expenses (1) (2) 
  
 264,455
 14,217
 278,672
Interest and other income (expense), net (3) 
  
 5,490
 (4,428) 1,062
Pre-tax loss    (7,854) (15,003) (22,857)
Benefit for income taxes 
  
 (3,280) (4,447) (7,727)
Net loss (4) 
  
 $(4,574) $(10,556) $(15,130)
          
2016 
  
      
Revenue, net$75,901
 $1,187,364
 $1,263,265
 $10,516
 $1,273,781
Cost of goods sold (1)72,459
 961,227
 1,033,686
 6,750
 1,040,436
Gross profit$3,442
 $226,137
 $229,579
 $3,766
 $233,345
Operating expenses (1) (2) 
  
 213,502
 12,586
 226,088
Interest and other income (expense), net (3) 
  
 9,409
 (1) 9,408
Pre-tax income (loss)    25,486
 (8,821) 16,665
Provision (benefit) for income taxes 
  
 11,626
 (3,448) 8,178
Net income (loss) (4) 
  
 $13,860
 $(5,373) $8,487
 Three months ended September 30,
 Retail tZERO MVI Other Total
2019    

 

  
Revenue, net$340,798
 $5,662
 $639
 $—
 $347,099
Cost of goods sold272,545
 4,367
 639
 —
 277,551
Gross profit68,253
 1,295
 —
 —
 69,548
Operating expenses (1)77,641
 14,114
 4,427
 3,496
 99,678
Interest and other income (expense), net (2)137
 (475) (4,057) 6
 (4,389)
Pre-tax loss$(9,251) $(13,294) $(8,484) $(3,490) (34,519)
Provision for income taxes      

 23
Net loss (3)      

 $(34,542)

      

  
2018      

  
Revenue, net$435,775
 $4,338
 $467
 $—
 $440,580
Cost of goods sold350,651
 2,746
 467
 —
 353,864
Gross profit85,124
 1,592
 —
 —
 86,716
Operating expenses124,571
 7,235
 1,845
 897
 134,548
Interest and other income (expense), net (2)(515) 96
 (1,147) —
 (1,566)
Pre-tax loss$(39,962) $(5,547) $(2,992) $(897) (49,398)
Benefit from income taxes        (141)
Net loss (3)        $(49,257)
          
 Nine months ended September 30,
 Retail tZERO MVI Other Total
2019    

 

  
Revenue, net$1,070,898
 $15,709
 $1,930
 $—
 $1,088,537
Cost of goods sold858,169
 11,867
 1,930
 —
 871,966
Gross profit212,729
 3,842
 —
 —
 216,571
Operating expenses (1)244,571
 41,410
 11,583
 10,933
 308,497
Interest and other income (expense), net (2)312
 (1,098) (12,068) (1) (12,855)
Pre-tax loss$(31,530) $(38,666) $(23,651) $(10,934) (104,781)
Provision for income taxes    

 

 279
Net loss (3)    

 

 $(105,060)

    

 

  
2018    

 

  
Revenue, net$1,353,454
 $14,080
 $1,510
 $—
 $1,369,044
Cost of goods sold1,085,483
 9,723
 1,510
 —
 1,096,716
Gross profit267,971
 4,357
 —
 —
 272,328
Operating expenses399,540
 33,119
 6,445
 1,986
 441,090
Interest and other income (expense), net (2)654
 513
 (2,479) —
 (1,312)
Pre-tax loss$(130,915) $(28,249) $(8,924) $(1,986) (170,074)
Benefit from income taxes        (445)
Net loss (3)        $(169,629)

(1) — The above amounts include Retail depreciation and amortization expense

Table of $6.7 million and $7.3 million for the three months ended September 30, 2017 and 2016, respectively, and $21.1 million and $19.5 million for the nine months ended September 30, 2017 and 2016.Contents

(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.

(1)
— Corporate support costs for three months ended September 30, 2019 have been allocated $9.4 million, $1.3 million, $0.9 million, and $1.8 million to Retail, tZERO, MVI, and Other, respectively. Unallocated corporate support costs of $1.3 million are included in Other. Corporate support costs for the nine months ended September 30, 2019 have been allocated $31.5 million, $4.5 million, $3.1 million, and $5.8 million to Retail, tZERO, MVI, and Other, respectively. Unallocated corporate support costs of $4.5 million are included in Other.
(2)
— Excludes intercompany transactions eliminated in consolidation, which consist primarily of service fees and interest. The net amounts of these intercompany transactions were $739,000 and $539,000 for the three months ended September 30, 2019 and 2018 and $1.7 million and $3.0 million for the nine months ended September 30, 2019 and 2018.
(3)
— Net income (loss) 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, 20172019 and 2016,2018, substantially all of our sales revenues were attributable to customers in the United States. At September 30, 20172019 and December 31, 2016,2018, substantially all of our fixed assetsproperty 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 each of two broker dealers, SpeedRoute LLC ("SpeedRoute") and ProPRO 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.

ProPRO Securities is a FINRA-registered broker dealer that owns and operates the ProPRO 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 ProPRO Securities ATS is a closed system available only to its broker dealer subscribers. ProPRO Securities does not accept orders from non-broker dealers, nor does it hold, own or sell securities.

SpeedRoute and ProPRO 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, 2017,2019, SpeedRoute had net capital of $496,480,$782,105, which was $391,483$652,732 in excess of its required net capital of $104,997$129,373 and SpeedRoute's net capital ratio was 3.172.48 to 1. At September 30, 2017, Pro2019, PRO Securities had net capital of $9,194$18,739 which was $4,194$13,739 in excess of its required net capital of $5,000 and ProPRO Securities net capital ratio was 2.341.22 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 ProPRO Securities did not have any securities owned or securities sold, not yet purchased at September 30, 2017.2019 and December 31, 2018, respectively.

11.14. SUBSEQUENT EVENTS

New loan agreementOn October 22, 2019 and November 1, 2019, we purchased additional minority interests in the equity securities of certain privately held entities for an aggregate of $9.0 million.

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% and a default rate of 18.0%. The loan is for a term of 18 months, 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 and any then unpaid interest will be due and payable on May 1, 2019 (subject to mandatory prepayment in the event

Table 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.Contents

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.federal securities laws. These statements are therefore entitledrelate to the protectionour financial condition, liquidity, results of the safe harbor provisionsoperations, earnings outlook and prospects. You can find many of these laws.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 involveare 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 relatethat actual results may be materially different from the results expressed or implied by any of our forward-looking statements.
Unless otherwise required by law, we also disclaim any obligation to future eventsupdate our view of any such risks or uncertainties or to announce publicly any revisions to any forward-looking statements 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, the risks described in our future financial or operating performance. TheAnnual Report on Form 10-K for the year ended December 31, 2018, and the risks described in our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2019 and June 30, 2019. 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 anticipatedpossibility 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;
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 or for other purposes;
our plans and expectations around the dividend of shares of our Series A-1 Preferred Stock that we originally announced on July 30, 2019, including specifically, whether we are able to ultimately issue this dividend on substantially similar terms to the terms that were originally announced and the timing of the dividend;
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 amount and structure of any such investments, 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 businessefforts 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 beliefsexpectations regarding Medici Land Governance Inc., a public benefit corporation formed in mid-2018;
our abilityefforts to attract and retain customersimprove our natural search results in a cost-efficient manner;
the anticipated effectiveness of our marketing;
retail business;
our future operating andor 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 amountsGAAP or non-GAAP financial measures or amounts or anticipated changes in any of them;them, including our recently announced change in guidance for fiscal year 2019;
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 efforts to develop blockchain technology, including its joint venture with Box Digital;

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our abilityplans and expectations regarding the costs, benefits, and risks of attempting to improvedevelop technology applications including applications using or relating to blockchain technology and our liquidity throughplans 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;regulation, including but not limited to the information requests we received from the Securities and Exchange Commission, and any liabilities or other costs or operational changes that result from any current proceeding, investigations or discussions with regulators in which we are involved;
the effects of current and future litigation, including shareholder class action lawsuits, and any liabilities or other costs that result from any such proceedings;
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 thatexpectations regarding our sales through other ecommerce marketplace channels willshipping costs and timing of shipments;
our expectations regarding our 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 offerother statements about the anticipated benefits and sell a constantly changing mixrisks of productsour 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:

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, including tZERO;
our ability to enforce definitive agreements already entered by tZERO on the terms contemplated by the previously-disclosed binding agreements we signed with GSR Capital;
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 theirits 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;
difficulties we may encounter in connection with recent departures of our chief executive officer and director, Patrick Byrne, and our chief financial officer, Gregory Iverson, both of which occurred and were announced in the third quarter;
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 we may encounter in connection with tZERO or its subsidiaries, including those related to expense and any operational or regulatory issues for such entities;
technical, operational, regulatory or other difficulties we may encounter with our Medici or tZERO 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

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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 initiatives;
uncertainties regarding the dividend of shares of our Series A-1 Preferred Stock, including as to timing and structure of the dividend, the ability of our subsidiary and its business partners to handle the anticipated increased volume of trading of those securities on the alternative trading system operated by our subsidiary, PRO Securities, as well as any potential effect such dividend may have on the market price of our common stock;
the difficulties tZERO will face in attempting to generate revenues of any nature;
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 andor 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 interestsell 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 inthe 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 capabilitiesencounter as a result of our reliance on numerous third parties that we may be unabledo 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;
the risks of inventory management and seasonality, particularly with inventory subject to rapid price declines;
the cost and availability of traditional and online advertising, the rapid changesany decrease in the online advertising businessvolume of retail sales, particularly in home goods, and the longer-term changes in the traditional advertising business, and the resultsoccurrence of our various brand building and marketing campaigns;
risksany event 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;would adversely affect e-commerce or discourage or prevent consumers from shopping online or via mobile apps; 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 andor elsewhere in this report and the risks described in our Report on Form 10-K for the year ended December 31, 2018 and the risks described in our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2019 and June 30, 2019 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

Table 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.Contents

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 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 theseour 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 onOur Medici business initiatives seek to develop and advance the concept of "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 partgenerate efficiencies and increase security and control in six areas of ourcivilizational 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 ainclude our wholly-owned subsidiary, Medici Ventures, Inc. and acquired a("Medici Ventures"), which conducts the majority interest inof 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 madepursuing potential financial applications of blockchain technologies as well as non-blockchain businesses. Medici Ventures currently holds minority investmentsequity interests in several blockchain technology companies. In 2015, we werecompanies whose focuses include the first public company to issueareas 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, asrange of potential transactions, including a successful demonstrationsale of our technology, we issued publicly traded blockchain preferred sharesretail 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 Business

Retail business

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

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

Our retail direct business, includesthrough September 30, 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 September 30, 2019, we offered 2.5 million products (7.6 million SKUs), of which over 99% were in-line products (products in active production), including more than 30,000 private label products offered under twelve 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, madeparticularly 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 individual consumersmeet the evolving preferences of our customers and businesses fromcurrent 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 a personalized format with the convenience of our owned inventorymobile app, and that are fulfilled primarily fromwith the benefits of our warehouse in Salt Lake City, Utah.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; and
Our Club O Loyalty Program, which we believe increases customer engagement and retention.

For the quarter ended September 30, 2019, nearly all our retail partner business,sales through our Website were from transactions in which we sell merchandise fromfulfilled orders through our network of manufacturers, distributors and other suppliers ("partners") primarily throughselling on 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 retail partners. These third-partyWe provide our partners generally perform the samewith access to a large customer base and convenient services for order fulfillment, operations ascustomer service,

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returns handling, and other services. Our supply chain allows us to ship directly to our customers from our suppliers or from our warehouses. Our retail sales also includes sales of our own inventory shipped from our warehouses, such as order pickingincluding some customer returns of partner products.

During the quarters ended September 30, 2019, and shipping; however,2018 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 handle returnsoffer products to customers outside the United States using third-party logistics providers;
Worldstock Fair Trade, a store within our Website that 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 customerportal within our Website that leverages our technology to display pets available for adoption from shelters across the United States;
Overstock Hotels, a free service relatedand portal within our Website that enables customers to substantially all orders placedsearch and book hundreds of thousands of properties worldwide, including big box brands, modern boutiques, and more;
Supplier Oasis, a single integration point through which our partners can manage their products, inventory and sales channels, and also obtain multi-channel fulfillment services through our Website. Revenue generated from salesdistribution network; and
Businesses advertising products or services on our Shopping site from both the direct and partner businesses is recorded net of returns, coupons and other discounts.Website.

Both direct and partnerOur 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 the fourth fiscal quarter of 2018, we anticipate this willthe 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 businessretail businesses.

Our Medici business initiativesBusiness

Medici Ventures

Medici Ventures' strategy is to develop and advance the concept of "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 holdhas a team of approximately 53 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 some of its software engineers, developers, or other technologists to other blockchain companies. Medici Ventures also owns strategic minority investmentsequity interests in several blockchain-related companies, each of which focuses on at least one of the Technology Stack for Civilization 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 primaryholds 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 majority80% interest in tZERO, which, includesas described below, is a financial technology company and two related registered broker dealers.pursuing potential financial applications for blockchain technologies.

As described furthertZERO

tZERO is a financial technology company pursuing financial applications utilizing blockchain technologies as well as non-blockchain technologies. tZERO's primary focus at present is on its facility for the trading of digital security tokens on an Alternative Trading System ("ATS") and on its joint venture with BOX Digital Markets LLC ("BOX Digital") intended to develop a U.S. national securities exchange with regulatory approvals that would enable it to trade digital securities.


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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 1identifying appropriate strategic transactions and negotiating the terms of Part I, "Financial Statements (Unaudited)"-Note 9. Business Segments, we determined our segmentssuch 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 primarilyemerging areas of our Retailtechnology. These costs have been and Medici businesses. As described above, our Retail business consists of our Directare 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."

RevenuesRevenue decreased 21% in Q3 2017 decreased 4%2019 compared to Q3 2016.2018. This decrease was primarily due to decreased product sales that resulted from a significant reduction in sales and marketing activities, which was part of our effort to return to retail profitability. In Q2 2017January 2018, we shifted our retail strategy to aggressively pursue revenue growth and continuingnew customers with a large increase in Q3 2017,sales and marketing expenses. We discontinued this strategy in August 2018 and have returned to a more disciplined approach to marketing. In addition, we have experienced slowing ofseen our overall revenue growth which we believe isrevenues negatively impacted due to increased tariffs on goods manufactured in partChina, search traffic taking longer than expected to changes that Google, Inc. ("Google") has madetranslate into purchasing customers, waning consumer confidence decreasing conversion on high dollar purchases industry wide, and other more general decreases in its natural search engine algorithms. We have found that the algorithm adjustments that Google has made have introduced more volatility than past years and the length of the tuning has been significantly greater than previous years. This has created tremendous headwind for our business beginning in May and continuing. We have reorganized a large number of resources around addressing this current challenge, as well as seeking to prevent it from occurring again. We have implemented a variety of innovations and technical improvements in this area and expect to continue to do so. This decrease to revenue was partially offset by efforts to increase revenue in other marketing channels such as sponsored search and email.

conversion.

Gross profit in Q3 2017 increased 5%2019 decreased 20% compared to Q3 20162018 primarily as a result of increaseddue to the decrease in net revenue in the retail business, partially offset by an increase in gross margin. Gross margin increased to 20.0% in Q3 2019, compared to 19.7% in Q3 2017 compared to 18.1% in Q3 2016.2018. The increase in gross margin was primarily due to a continued shiftimprovements in sales mix into higher margin homeour promotional pricing strategy and garden products, partially offset by increased promotional activities, including coupons and site sales due to our driving a higher proportion of our revenue coming from marketplace sales, using such promotions.which we recognize on a net basis. These increases to gross margin were partially offset by increased freight costs resulting from the business closure of one of our freight carriers, cancellation of services with a freight carrier that failed to deliver acceptable service levels, and an increase in volume of large package shipments.

Sales and marketing expenses as a percentage of revenue increaseddecreased from 7.9%12.6% to 10.6% during9.9% in Q3 20172019 as compared to Q3 2016,2018, primarily due to increasedour 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 and televisiondisplay ads on social media marketing channels, due in part to our seeking to increase revenue in these channels to partially offset the effects of the Google algorithm changes described above.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 increased $2.02019 decreased $1.1 million compared to Q3 2016,2018 primarily due to an increasea $435,000 decrease in staff relatedoutside service costs of $1.5 million, an increaseand a $413,000 decrease in technology licenses and maintenance costs of $1.3 million, partially offset by a decrease in depreciation of $848,000.costs.

General and administrative expenses in Q3 20172019 decreased $1.7$12.7 million compared to Q3 2016,2018, primarily due to $10.8 million in special legal costs in Q3 2018 related to our gift card escheatment case in Delaware and capital raising efforts. In addition, we had a decrease in bad debt expense of $1.1$1.8 million a decrease in consulting and outside services expense of $479,000, and aexpenses, an $862,000 decrease in legal fees of $434,000.staff-related costs, and an $834,000 decrease in travel expenses. These decreases were partially offset by a $1.4 million impairment charge on certain intangible assets and an $844,000 increase in staff relatedcorporate insurance costs.


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Liquidity

Our consolidated cash and cash equivalents balance decreased from $141.5 million as of December 31, 2018 to $83.5 million, as of September 30, 2019, a decrease of $58.0 million, primarily as the result of cash outflows from operating activities of $89.2 million and expenditures for fixed assets of $17.9 million for the nine months ended September 30, 2019, which was partially offset by cash inflows from the sale of common stock under our "at the market" sales agreement with JonesTrading of $52.1 million, net of offering costs (including commissions) during the first half of $509,000.2019.

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 maywill continue to incur additional expenses and may purchase interests in, or make investments in, or acquisitions of, other technologies andor businesses. We also anticipate that our Medici initiatives willmay cause us to continue to incur losses in the near term.foreseeable future. These losses, additional expenses, acquisitions or investmentspurchases may be material, and, coupled with existing marketing expense trends, and the seasonality ofpotential strategic changes in our retail business, may lead to reducedincreased consolidated income or losses in some periods, and to reduced liquidity. Additionally,

Digital Dividend

On July 30, 2019, we may recognize additional impairment charges fromannounced that our investments. We are considering other alternativesBoard of Directors had declared the Dividend payable in shares of our Series A-1 Preferred Stock. Existing Series A-1 shares can currently only be traded on the PRO Securities ATS. On September 18, 2019, we announced our intent to register the Series A-1 Preferred to be issued pursuant to the Dividend under the Securities Act of 1933, and postponed the previously announced record and distribution dates for Medici, including raising capital.the Dividend. Accordingly, the Dividend has not been distributed as of September 30, 2019. On October 28, 2019, we announced that we would seek a shareholder vote at a shareholder special meeting to allow us to amend the certificates of designation for our preferred shares, removing certain restrictions and permitting us to reallocate the number of shares among the series of preferred shares, to facilitate issuance of the Dividend. On November 10, 2019, our Board of Directors approved December 18, 2019 as the record date for the shareholder vote and February 13, 2020 as the shareholder special meeting date. Upon approval by the shareholders, we intend to promptly announce the revised dividend record and distribution dates, with the aim of distributing the dividend to investors as soon as reasonably possible.

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.

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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
September 30,		 Nine months ended
September 30,
 2017 2016 2017 2016 2019 2018 2019 2018
 
(as a percentage of total net
revenue)
 
(as a percentage of total net
revenue)
 (as a percentage of total net revenue) (as a percentage of total net revenue)
Revenue, net  
  
  
  
  
  
  
  
Direct 4.6 % 5.6 % 5.0 % 6.0 %
Partner and other 95.4
 94.4
 95.0
 94.0
Retail 98.2 % 98.9 % 98.4 % 98.9 %
Other 1.8
 1.1
 1.6
 1.1
Total net revenue 100.0
 100.0
 100.0
 100.0
 100.0
 100.0
 100.0
 100.0
Cost of goods sold                
Direct 4.6
 5.4
 4.8
 5.7
Partner and other 75.6
 76.5
 75.4
 76.0
Retail 78.5
 79.6
 78.8
 79.3
Other 1.5
 0.7
 1.3
 0.8
Total cost of goods sold 80.3
 81.9
 80.2
 81.7
 80.0
 80.3
 80.1
 80.1
Gross profit 19.7
 18.1
 19.8
 18.3
 20.0
 19.7
 19.9
 19.9
Operating expenses:                
Sales and marketing 10.6
 7.9
 9.8
 7.8
 9.9
 12.6
 9.4
 16.6
Technology 6.8
 6.1
 6.7
 6.1
 9.4
 7.7
 9.3
 7.1
General and administrative 5.1
 5.3
 5.2
 5.3
 9.4
 10.3
 9.6
 8.5
Litigation settlement —
 —
 —
 (1.5)
Total operating expenses 22.5
 19.2
 21.6
 17.7
 28.7
 30.5
 28.3
 32.2
Operating income (loss) (2.8) (1.1) (1.9) 0.6
Other income, net 1.3
 0.3
 0.1
 0.7
Income (loss) before income taxes (1.5) (0.9) (1.8) 1.3
Provision (benefit) for income taxes (1.3) (0.1) (0.6) 0.6
Consolidated net income (loss) (0.3)% (0.8)% (1.2)% 0.7 %
Operating loss (8.7) (10.9) (8.4) (12.3)
Interest and other income (expense), net (1.3) (0.4) (1.2) (0.1)
Loss before income taxes (9.9) (11.2) (9.6) (12.4)
Provision (benefit) from income taxes —
 —
 —
 —
Consolidated net loss (10.0)% (11.2)% (9.7)% (12.4)%
 
Comparisons of Three Months Ended September 30, 20172019 to Three Months Ended September 30, 2016,2018, and Nine Months Ended September 30, 20172019 to Nine Months Ended September 30, 20162018

Revenue
 
The following table reflects our net revenues for the three and nine months ended September 30, 20172019 and 20162018 (in thousands):
 Three months ended
 September 30,		     Nine months ended
 September 30,		     Three months ended
September 30,		     Nine months ended
September 30,		    
 2017 2016 $ Change % Change 2017 2016 $ Change % Change 2019 2018 $ 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 $340,798
 $435,775
 $(94,977) (21.8)% $1,070,898
 $1,353,454
 $(282,556) (20.9)%
Other 6,301
 4,805
 1,496
 31.1 % 17,639
 15,590
 2,049
 13.1 %
Total revenue, net $424,007
 $441,564
 $(17,557) (4.0)% $1,288,466
 $1,273,781
 $14,685
 1.2 % $347,099
 $440,580
 $(93,481) (21.2)% $1,088,537
 $1,369,044
 $(280,507) (20.5)%

The primary reason for decreased21% decrease in total net revenue for the three months ended September 30, 2017,2019, as compared to the same period in 2016,2018, was primarily due to decreased product sales that resulted from a significant reduction in sales and marketing activities, which was 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 yearseffort to return to retail profitability. In January 2018, we shifted our retail strategy to aggressively pursue revenue growth 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 reorganizednew customers with a large numberincrease in sales and marketing expenses. We discontinued this strategy in August 2018 and have returned to a more disciplined approach to marketing. In addition, we have seen our revenues negatively impacted due to increased tariffs on goods manufactured in China, search traffic taking longer than

Table 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 andContents

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.

expected to translate into purchasing customers, waning consumer confidence decreasing conversion on high dollar purchases industry wide, and other more general decreases in conversion.
The primary reason for increased20% decrease in total net revenue for the nine months ended September 30, 2017,2019, 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 an increasedecreased product sales that resulted from a significant reduction in sales and marketing activities, which was part of home and garden products. This increase was partially offset by increased promotional activities, including coupons and site salesour effort to return to retail profitability, as described above. In addition, we have seen our revenues negatively impacted due to our driving a higher proportion of our sales using such promotions. Also, we had an increaseincreased tariffs on goods manufactured in product sales for which we record only our commission as revenue. TheseChina, search traffic taking longer than expected to translate into purchasing customers, waning consumer confidence decreasing conversion on high dollar purchases industry wide, and other more general 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.

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, is generally an economic result of the factors described above, which may change from time to time.

conversion.

International net revenues were less than 2% of total net revenues for each of the three and nine months ended September 30, 20172019 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, 20172019 (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
September 30, 2019
Change in the Estimate of Average Transit Times (Days) 
Increase (Decrease)
Revenue
 
Increase (Decrease)
 Pre-Tax Income
2 $(8,171) $(1,429)
1 $(3,751) $(659)
As reported  As reported
  As reported
-1 $3,553
 $629
-2 $7,271
 $1,272
 
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.


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The following table reflects our net revenues, cost of goods sold and gross profit for the three and nine months ended September 30, 20172019 and 20162018 (in thousands):
 Three months ended
 September 30,		     Nine months ended
 September 30,		     Three months ended
September 30,		     Nine months ended
September 30,		    
 2017 2016 $ Change % Change 2017 2016 $ Change % Change 2019 2018 $ 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 $340,798
 $435,775
 $(94,977) (21.8)% $1,070,898
 $1,353,454
 $(282,556) (20.9)%
Other 6,301
 4,805
 1,496
 31.1 % 17,639
 15,590
 2,049
 13.1 %
Total net revenue $424,007

$441,564
 $(17,557) (4.0)% $1,288,466
 $1,273,781
 $14,685
 1.2 % $347,099

$440,580
 $(93,481) (21.2)% $1,088,537
 $1,369,044
 $(280,507) (20.5)%
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 $272,545
 $350,651
 $(78,106) (22.3)% $858,169
 $1,085,483
 $(227,314) (20.9)%
Other 5,006
 3,213
 1,793
 55.8 % 13,797
 11,233
 2,564
 22.8 %
Total cost of goods sold $340,332
 $361,848
 $(21,516) (5.9)% $1,033,713
 $1,040,436
 $(6,723) (0.6)% $277,551
 $353,864
 $(76,313) (21.6)% $871,966
 $1,096,716
 $(224,750) (20.5)%
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 $68,253
 $85,124
 $(16,871) (19.8)% $212,729
 $267,971
 $(55,242) (20.6)%
Other 1,295
 1,592
 (297) (18.7)% 3,842
 4,357
 (515) (11.8)%
Total gross profit $83,675
 $79,716
 $3,959
 5.0 % $254,753
 $233,345
 $21,408
 9.2 % $69,548
 $86,716
 $(17,168) (19.8)% $216,571
 $272,328
 $(55,757) (20.5)%

Gross margins for the past seven quarterly periods and fiscal year ending 20162018 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 Q2 2019 Q3 2019
Retail 21.0% 18.9% 19.5% 17.9% 19.3% 19.9% 19.7% 20.0%
Other 27.2% 24.1% 33.1% 26.8% 27.6% 22.3% 22.6% 20.6%
Combined 21.1% 19.0% 19.7% 18.0% 19.4% 19.9% 19.8% 20.0%

Gross profit for the three months ended September 30, 2017 increased 5%2019 decreased 20% compared to the same period in 20162018 primarily as a result of increaseddue to the decrease in net revenue in the retail business, partially offset by an increase in gross margin. Gross margin increased to 19.7%20.0% for the three months ended September 30, 20172019, compared to 18.1%19.7% for the same period in 2016.2018. The increase in gross margin was primarily due to a continued shiftimprovements in sales mix into higher margin homeour promotional pricing strategy and garden products, partially offset by increased promotional activities, including coupons and site sales due to our driving a higher proportion of our revenue coming from marketplace sales, using such promotions.which we recognize on a net basis. These increases to gross margin were partially offset by increased freight costs resulting from the business closure of one of our freight carriers, cancellation of services with a freight carrier that failed to deliver acceptable service levels, and an increase in volume of large package shipments.

Gross profit for the nine months ended September 30, 2017 increased 9%2019 decreased 20% compared to the same period in 20162018 primarily as a result of increased gross margin.due to the decrease in net revenue in the retail business. Gross margin increased to 19.8%was 19.9% for the nine months ended September 30, 2017 compared to 18.3% for2019, unchanged from 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 and $69,000 for the three months ended September 30, 2017 and 2016, respectively, and $134,000 and $200,000 for the nine months ended September 30, 2017 and 2016, respectively.
See "Executive Commentary" above for additional discussion.2018.

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.
 

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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
September 30,		 Nine months ended
September 30,
2017 2016 2017 20162019 2018 2019 2018
Total revenue, net$424,007
 100% $441,564
 100% $1,288,466
 100% $1,273,781
 100%$347,099
 100% $440,580
 100% $1,088,537
 100% $1,369,044
 100%
Cost of goods sold 
    
    
    
   
    
    
    
  
Product costs and other cost of goods sold321,678
 76% 343,401
 78% 977,827
 76% 985,603
 77%261,670
 75% 334,156
 76% 822,390
 76% 1,039,518
 76%
Fulfillment and related costs18,654
 4% 18,447
 4% 55,886
 4% 54,833
 4%15,881
 5% 19,708
 4% 49,576
 5% 57,198
 4%
Total cost of goods sold340,332
 80% 361,848
 82% 1,033,713
 80% 1,040,436
 82%277,551
 80% 353,864
 80% 871,966
 80% 1,096,716
 80%
Gross profit$83,675
 20% $79,716
 18% $254,753
 20% $233,345
 18%$69,548
 20% $86,716
 20% $216,571
 20% $272,328
 20%
 
Fulfillment costs as a percentage of sales may vary due to several factors, such as our ability to manage costs at our warehouses, significant changes in the number of units received and fulfilled, the extent to which we use third-party fulfillment services and warehouses, and our ability to effectively manage customer service costs and credit card fees. Fulfillment and related costs increased slightly during the three and nine months ended September 30, 20172019 as compared to the same periodsperiod 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 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.

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 revenueconsideration we expect to receive in exchange for goods or services and therefore affect salesnet 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 and nine months ended September 30, 2019 and 2018 (in thousands):
  Three months ended
September 30,		     Nine months ended
September 30,		    
  2019 2018 $ Change % Change 2019 2018 $ Change % Change
Sales and marketing expenses $34,215
 $55,312
 $(21,097) (38.1)% $102,252
 $226,942
 $(124,690) (54.9)%
Sales and marketing expenses as a percent of net revenues 9.9% 12.6%  
  
 9.4% 16.6%    
The 38% decrease in sales and marketing expenses for the three months ended September 30, 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 and display ads on social media marketing channels.


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The 55% decrease in sales and marketing expenses for the nine months ended September 30, 2019, as compared to the same period in 2018, was primarily due to our shift in retail marketing strategy, as described above.

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 continuecontinues 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 fromrisk 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, 20172019 and 20162018 (in thousands):
 Three months ended
 September 30,		     Nine months ended
 September 30,		     Three months ended
September 30,		     Nine months ended
September 30,		    
 2017 2016 $ Change % Change 2017 2016 $ Change % Change 2019 2018 $ Change % Change 2019 2018 $ Change % Change
Technology expenses $28,746
 $26,739
 $2,007
 7.5% $85,982
 $78,249
 $7,733
 9.9% $32,782
 $33,880
 $(1,098) (3.2)% $101,368
 $97,597
 $3,771
 3.9%
Technology expenses as a percent of net revenues 6.8% 6.1%  
  
 6.7% 6.1%  
  
 9.4% 7.7%  
  
 9.3% 7.1%  
  
 
The $2.0$1.1 million increasedecrease in technology costs for the three months ended September 30, 2017,2019, as compared to the same period in 2016,2018, was primarily due to an increasea $435,000 decrease in staff relatedoutside service costs of $1.5 million, an increaseand a $413,000 decrease in technology licenses and maintenance costs of $1.3 million, partially offset by a decrease in depreciation of $848,000.costs.

The $7.7$3.8 million increase in technology costs for the nine months ended September 30, 2017,2019, as compared to the same period in 2016,2018, was primarily due to ana $2.9 million increase in staff relatedstaff-related costs of $3.5and a $1.0 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.

Technology expenses include stock-based compensation expense of $166,000 and $210,000 for the three months ended September 30, 2017 and 2016, respectively, and $476,000 and $615,000 for the nine months ended September 30, 2017 and 2016, respectively.costs.
 
General and administrative expenses
 
The following table reflects our general and administrative expenses ("G&A") for the three and nine months ended September 30, 20172019 and 20162018 (in thousands):

 Three months ended
 September 30,		     Nine months ended
 September 30,		     Three months ended
September 30,		     Nine months ended
September 30,		    
 2017 2016 $ Change % Change 2017 2016 $ Change % Change 2019 2018 $ 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)% $32,681
 $45,356
 $(12,675) (27.9)% $104,877
 $116,551
 $(11,674) (10.0)%
General and administrative expenses as a percent of net revenues 5.1% 5.3%  
  
 5.2% 5.3%  
  
 9.4% 10.3%  
  
 9.6% 8.5%  
  

The $1.7$12.7 million decrease in general and administrative expenses ("G&A") for the three months ended September 30, 2017,2019, as compared to the same period in 2016,2018, was primarily due to $10.8 million in special legal costs in the third fiscal quarter of 2018 related to our gift card escheatment case in Delaware and capital raising efforts. In addition, we had a decrease in bad debt expense of $1.1$1.8 million a decrease in consulting and outside services expense of $479,000, and aexpenses, an $862,000 decrease in legal fees of $434,000.staff-related costs, and an $834,000 decrease in travel expenses. These decreases were partially offset by a $1.4 million impairment charge on certain intangible assets and an $844,000 increase in staff related costscorporate insurance costs.


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The $1.2$11.7 million decrease in general and administrative expenses ("G&A") for the nine months ended September 30, 2017,2019, as compared to the same period in 2016,2018, was primarily due to a $12.1 million decrease in legal costs of $1.8largely due to expenses we incurred in 2018 for our gift card escheatment case in Delaware and capital raising efforts, as well as a $2.5 million a decrease in bad debt expense of $1.1 million, a $617,000 decrease in travel expenses, a $1.5 million decrease in consulting expenses, and a $547,000 contract termination fee$1.2 million decrease in Q1 2016.cryptocurrency losses. These decreases were partially offset by ana $2.4 million increase in staff relatedcorporate insurance costs of $3.2 million.

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

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$1.4 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.on certain intangible assets.

Depreciation and amortization expense
 
Depreciation expense is classified within the corresponding operating expense categories on theour consolidated statements of operations as follows (in thousands):
 Three months ended
 September 30,		 Nine months ended
 September 30,
 2017 2016 2017 2016
Cost of goods sold - direct$72
 $77
 $230
 $235
Technology5,940
 6,952
 18,802
 18,755
Sales and marketing—
 29
 —
 29
General and administrative974
 357
 2,863
 691
Total depreciation, including internal-use software and website development$6,986
 $7,415
 $21,895
 $19,710
 Three months ended
September 30,		 Nine months ended
September 30,
 2019 2018 2019 2018
Cost of goods sold - retail$170
 $85
 $516
 $252
Technology5,042
 5,330
 15,109
 16,103
General and administrative1,261
 1,038
 3,762
 3,082
Total depreciation$6,473
 $6,453
 $19,387
 $19,437
 

Amortization of intangible assets other than goodwill is classified within the corresponding operating expense categories on theour consolidated statements of operations as follows (in thousands):
Three months ended
 September 30,		 Nine months ended
 September 30,		Three months ended
September 30,		 Nine months ended
September 30,
2017 2016 2017 20162019 2018 2019 2018
Technology$905
 $699
 $2,715
 $2,151
$896
 $885
 $2,687
 $2,534
Sales and marketing22
 246
 62
 949
16
 119
 48
 442
General and administrative21
 27
 62
 93
133
 542
 (526) 620
Total amortization of intangible assets other than goodwill$948
 $972
 $2,839
 $3,193
$1,045
 $1,546
 $2,209
 $3,596

Interest expenseGeneral and administrative amortization above was net of reversals due to adjustments to the purchase price allocation for Mac Warehouse.

Total interestStock-based compensation expense increased $500,000, from $212,000
Stock-based compensation expense is classified within the corresponding operating expense categories on our consolidated statements of operations as follows (in thousands):
 Three months ended
September 30,		 Nine months ended
September 30,
 2019 2018 2019 2018
Cost of goods sold — retail$55
 $41
 $156
 $152
Sales and marketing486
 277
 1,460
 1,465
Technology1,428
 583
 4,325
 1,725
General and administrative2,498
 1,345
 7,682
 8,312
Total stock-based compensation$4,467
 $2,246
 $13,623
 $11,654

Other expense, net

Other expense, net for the three months ended September 30, 20162019 was $4.8 million as compared to $713,000$1.8 million for the three months ended September 30, 2017.2018. The increase in interest expense iswas primarily due to no longer capitalizing interesta $3.6 million increase in non-cash losses on our headquarters loan due to construction completion in late 2016.equity holdings and other assets.

Total interest

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Other expense, increased $1.9 million, from $219,000net for the nine months ended September 30, 20162019 was $14.0 million as compared to $2.1$1.5 million for the nine months ended September 30, 2017.2018. The increase in interest expense is primarily due to no longer capitalizing interest on our headquarters loan due to construction completion.

Other income, net

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

Other income, net for the nine months ended September 30, 2017 was $2.8 million as compared to $9.4 million in 2016. The decrease is primarily due to a decrease in Club O Rewards breakage of $10.4$14.0 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 gainsnon-cash losses on sales of cryptocurrenciesequity holdings and precious metals of $5.5 million.other assets.

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,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 income taxes for the three months ended September 30, 2017 and 2016 was $(5.4) million and $(543,000). The decrease in the provision is due to the release of a valuation allowance against capital losses and a decrease in pre-tax income during the three months ended September 30, 2017, as compared to the same period in 2016. Our provision (benefit) for income taxes for the nine months ended September 30, 20172019 and 20162018 was $(7.7) million$23,000 and $8.2 million,$(141,000) and $279,000 and $(445,000), 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 months ended September 30, 20172019 and 20162018 was 33.8%(0.3)% and 49.1%0.3%, respectively. The decrease in theOur low effective tax rate is primarily attributable to athe valuation allowance recorded during the three months ended

June 30, 2017 against certain statewe 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$2.3 million at September 30, 2017.2019. We would need to accrue and pay U.S. income taxvarious 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 20122014 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 underAn audit by the InternalIreland Revenue Service ("IRS")Agency for the calendar year 2015. The IRS has not indicated or communicated any deficiencies. We expect the audit to complete2016 was finalized during 2017.

Each quarter we assess the recoverability2019 with no assessment. For additional information see Item 1 of our deferred tax assets under ASC 740. We assess all available positive and negative evidence to determine whether we will generate sufficient future taxable income to use the existing deferred tax assets. We consider, among other things, our recent financial and operating results, along with our forecasted growth rates, projected future taxable income, carryforward periods, our utilization experience with operating loss and tax credit carryforwards, and prudent and feasible tax planning strategies. 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. We established a valuation allowance of $2.3 million for certain state tax credits as of June 30, 2017, because estimates of 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 deferred tax assets based on capital losses, which were offset by a valuation allowance. Since we generated capital gain income, a portion of the capital losses can now be utilized and we released $2.2 million of valuation allowance as of September 30, 2017. We will continue to monitor the need for a valuation allowance against our remaining deferred tax assets on a quarterly basis.Part I, "Financial Statements (Unaudited)"—Note 2. Accounting Policies, Income taxes.

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, 20162019, 2018 and 20152017 (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
 $373,709
 $347,099
 $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

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operations will be sufficient to continue operations for at least the next twelve months. Our failureWe 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 onand/or obtain additional debt financing to be able to fully pursue some or all of our operations and onstrategies, including plans for our ability to achieveretail 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 ofWe 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 platformexpenditures 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 ourits majority-owned subsidiary, tZERO, we issued preferred sharescontinue 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.

SubsequentOur 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 directlywould be able to pursue some or indirectly wholly owned byall of them, will depend on the motherresources 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, 2017,2019, we had cash and cash equivalents of $92.3$83.5 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,
  2017 2016 2017 2016
Cash provided by (used in):  
  
  
  
Operating activities $(62,655) $(15,439) $(7,652) $75,477
Investing activities (14,368) (65,166) (28,649) (81,358)
Financing activities (13,809) 34,814
 4,096
 49,084
Free cash flow
  Nine months ended
September 30,
  2019 2018
Cash provided by (used in):  
  
Operating activities $(89,195) $(120,300)
Investing activities (14,259) (89,508)
Financing activities 46,437
 189,575

"Free Cash Flow" (a non-GAAP measure) forIn 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 September 30, 2019, we had sold 5,843,147 shares of our common stock pursuant to the sales agreement and have received $146.7 million in proceeds, net of $3.3 million of offering costs, including commissions paid to JonesTrading. During the nine months ended September 30, 2017 and 2016, was $(83.5)2019, we sold shares of common stock for $52.1 million, and $(74.8) million, respectively, and $(41.4) million and $(37,000) fornet of offering expenses (including commissions). The average gross price per share of stock sold pursuant to the twelvesales agreement during the nine months ended September 30, 20172019 was $17.84. 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.
Contemplated Financing Transactions

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 had agreed to purchase, for $30 million, on May 6, 2019 or such other date as agreed by the parties, security tokens at a price of $6.67 per security token. On May 8, 2019, the parties executed an Investment Agreement to replace the Token Purchase Agreement under which GSR agreed to purchase 508,710 shares of tZERO common stock, representing approximately 0.5% of the issued and 2016, respectively. See Non-GAAP Financial Measures below foroutstanding common stock of tZERO. In exchange, GSR agreed to transfer to tZERO a reconciliationtotal $5.0 million in consideration, consisting of Free Cash Flow$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 on the date of the Investment Agreement of $3.0 million U.S. dollars. As of September 30, 2019, GSR provided $2.0 million of U.S. dollars pursuant to net cash providedthe Investment Agreement and such amount is included in Accrued liabilities

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at September 30, 2019. On September 16, 2019, in recognition of GSR's remaining obligations under the Investment Agreement, tZERO and GSR entered into a Promissory Note under which GSR promised to pay the remaining $3.0 million in consideration due to tZERO under the Investment Agreement in the form of U.S. dollars in multiple installments by (used in) operating activities.December 6, 2019.

Upon full payment under the Investment Agreement or, alternatively, the Promissory Note, tZERO expects to issue the shares of its common stock and the amounts included in Accrued liabilities will be reflected as Noncontrolling interest.

The previously-announced memorandum of understanding in which GSR and Makara Capital would co-lead an investment of up to $100 million in tZERO common stock did not close in April as initially expected and, following further discussions, GSR and Makara Capital informed tZERO that they would not be pursuing an investment in tZERO pursuant to the memorandum of understanding.

Cash flows from operating activities
 
ForOur 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, 2017timing of cash receipts and 2016, our operating activities resulted in net cash outflows of $62.7 millionpayments, 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$89.2 million of net cash used in operating activities during the nine months ended September 30, 20172019 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$105.1 million and accrued liabilities decreased due to seasonality which caused high balances at year-end 2016 and a significant decline during 2017, and due to decreased revenue growth in 2017. The net cash used inby operating activities during the nine months ended September 30, 2017 wasassets and liabilities of $41.0 million, which were partially offset by certain non-cash items including depreciation and amortization expense, including non-cash operating lease costs of $21.9$28.0 million, stock-based compensation of $13.6 million, impairments recognized on equity securities of $7.0 million, and losses recognized on equity method securities of $4.9 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$120.3 million of net cash used in operating activities during the nine months ended September 30, 20162018 was primarily due to decreases in accounts payableconsolidated net loss of $40.2$169.6 million, deferred revenue of $9.7 million, and accrued liabilities of $8.7 million. Accounts payable, accrued liabilities and deferred revenue decreased due to seasonality which caused high balances at year-end 2015 and a significant decline during 2016. The net cash used in operating activities during the nine months ended September 30, 2016 was partially offset by cash provided by operating assets and liabilities of $12.3 million, and certain non-cash items including depreciation and amortization expense of $19.7$23.0 million, consolidated net incomestock-based compensation of $8.5$11.7 million, and deferred income taxesimpairment losses, net of $6.7realized gains, recognized on cryptocurrency holdings of $1.2 million.

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 months ended September 30, 2017,2019, investing activities resulted in net cash outflows of $14.4$14.3 million primarily due to $20.9$17.9 million of expenditures for fixed assets.property and equipment, $5.1 million purchase of equity securities, and $3.3 million disbursement of notes receivable, partially offset by $7.1 million in proceeds from the 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.

For the nine months ended September 30, 2016,2018, investing activities resulted in net cash outflows of $65.2$89.5 million primarily due to $59.4$43.7 million investment in equity securities, $12.9 million acquisition of businesses, net of cash acquired, $20.7 million of expenditures for fixed assets, and $9.6 million purchase of intangible assets.


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Cash flows from financing activities

For the nine months ended September 30, 2017,2019, financing activities resulted in net cash outflowsinflows of $13.8$46.4 million primarily due to $52.1 million of net proceeds from the purchasesale of treasurycommon stock for $11.1 million.under the at the market offering, partially offset by $1.4 million of taxes withheld upon vesting of restricted stock, and $3.1 million payment on long-term debt.

For the nine months ended September 30, 2016,2018, financing activities resulted in net cash inflows of $34.8$189.6 million primarily due to $31.4$94.6 million of net proceeds from the sale of common stock under the at the market offering, $82.6 million of net proceeds from the security token offering, $50.6 million of proceeds from our U.S. Bank term loanthe sale and $6.1exercise of stock warrants, and $6.7 million of proceeds from lease finance obligations with U.S. Bank.capital contributions received by a consolidated subsidiary, partially offset by a $40.0 million repayment of long-term debt and $4.6 million of taxes withheld upon vesting of restricted stock.    

Contractual Obligations and Commitments
 
The following table summarizes our contractual obligations as of September 30, 20172019 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 Total Less than 1 year 1-3 years 3-5 years More than 5 years
Operating leases $62,978
 $9,123
 $19,649
 $17,351
 $16,855
Purchase obligations 125
 125
 —
 —
 —
Technology services 3,268
 3,017
 251
 —
 —
Total contractual cash obligations $66,371
 $12,265
 $19,900
 $17,351
 $16,855
 ___________________________________________
(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. During the nine months ended September 30, 2019, we renewed a lease for one of our warehouses and entered into a new office lease that increased our future operating lease payments by $11.4 million.

(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, 2017.2019. 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 planenter 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.
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 to make monthly interest-only payments during the term of the loan and a balloon payment of all unpaid principal and interest on May 1, 2019 (see Borrowings below).such service agreements.

Tax contingencies

We are involved in various tax matters, the outcomes of which are uncertain. As of September 30, 2017,2019, accrued tax contingencies were $1.7$1.6 million. We expect the total amount of tax contingencies to increase in the future. In addition, changesChanges 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 itIt 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

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U.S. Bank term loan and revolving loan agreement

We are party to a loan agreement (as amended through March 30, 2017, the "Agreement") dated October 24, 2014 with U.S. Bank National Association and other banks (the "Banks") in connection with the construction and long-term financingLetters 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, 2017,2019 and December 31, 2018, letters of credit totaling $205,000 and $280,000, were issued on our outstanding balance onbehalf collateralized by compensating cash balances held at a bank, which are included in Restricted cash in 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 ouraccompanying 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

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 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% and a default rate of 18.0%. The loan is for a term of 18 months, 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 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.

U.S. Bank commercialCommercial 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, $509,0002019, $43,000 was outstanding and $4.5 million$957,000 was available under the Purchasing Card. At December 31, 2016, $811,0002018, $48,000 was outstanding and $4.2 million$952,000 was available under the Purchasing Card.

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, Inc. 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, 20162018, 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 inUnaudited 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 issuedadopted accounting standards, not yetsee 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,
 DirectPartnerRetail Total Other Total
2017       
Total net revenue$19,645
$400,419
$420,064
 $3,943
 $424,007
Cost of goods sold19,577
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 sold23,955
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,
 DirectPartnerRetail Total Other Total
2017       
Total net revenue$64,572
$1,211,536
$1,276,108
 $12,358
 $1,288,466
Cost of goods sold61,687
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 sold72,459
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 mainretail 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. TheseApplicable and potentially applicable regulations and laws may coverinclude 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 stateservices, 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 salesretail 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,

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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 usaffected 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 investmentbusinesses, including the requirements of the Financial Crimes Enforcement Network of the U.S. Department of 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.

Pro Securities, a wholly-owned subsidiary of tZERO, operates the PRO Securities ATS, which is subject to Regulation ATS as well as other regulations, partnering with broker-dealers that are also subject to regulation by the SEC and FINRA. The Pro Securities ATS facilitates the current trading of our outstanding Series A-1 Preferred as well as the tZERO Security Tokens. Secondary resales of our Series A-1 Preferred to be issued in Bitt Inc.connection with the Dividend will need to be conducted in compliance with federal and state securities laws and we are actively coordinating with regulatory authorities for this purpose.

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 SEC 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. The SEC released proposed rule changes relating to the proposed national securities exchange on October 11, 2019, soliciting public comments thereon. In addition, depending on the digital assets traded, the U.S. Commodity Futures Trading Commission may expose usconsider the assets to be commodities or derivatives and subject to additional risks."regulation. Certain aspects of our Medici and tZERO businesses, including Bitsy's operations, are or may become subject to the state and federal laws and regulations applicable to money services 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. Our future results may be significantly different from our historical results for several other reasons as well, including the possibility discussed in our Annual Report on Form 10-K that we may sell our retail business, which would have a dramatic effect on our future results.

On January 27, 2017, we repurchased approximately $10 millionOther 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 common stockAnnual 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 $25 million stock repurchase plan authorized by our Boardrisk factors described in Item 1A. "Risk Factors" of Directors on May 5, 2015. We are considering additional repurchasesPart II, "Risk Factors" of our common stock, which we may finance through additional debt.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.
 

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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 ofcurrently 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, 2017,2019, we had $92.3$83.5 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$835,000 on our earnings or loss, or the cash flows of these instruments.

At September 30, 2019, letters of credit totaling $205,000 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 $2,000 on our earnings or loss if the letters of credit were fully drawn.

At September 30, 2019, we had cryptocurrency-denominated assets totaling $2.5 million. Hypothetically, a decrease in the market value of one hundred basis points would have an estimated impact of $25,000 on our losses, or the recorded value of these instruments. Increases in the market value of cryptocurrency-denominated assets are only recognized when they are sold. It is generally not our policy to hold material amounts of cryptocurrency because of volatility and market risk.

At September 30, 2019, our recorded value in equity securities in public and private companies was $41.7 million. Our equity securities in publicly traded companies represent $818,000 of our equity securities as of September 30, 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 equity security and, if the fair value is less than carrying value, we write down the equity security to fair value. Our assessment includes a review of recent operating results and trends, recent sales/acquisitions of the equity 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.
 

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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, 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.



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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

Any investment in our securities involves a high degree of risk. Please consider the following risk factors carefully. If any one or more of the following risks were to occur, it could have a material adverse effect on our business, prospects, financial condition and results of operations, and the market price of our securities could decrease significantly. Statements below to the effect that an event could or would harm our business (or have an adverse effect on our business or similar statements) mean that the event could or would have a material adverse effect on our business, prospects, financial condition and results of operations, which in turn could or would have a material adverse effect on the market price of our securities. Many of the risks we face involve more than one type of risk. Consequently, you should read all of the risk factors below carefully, includingas well as the risk factors under the caption "Risks Related Primarily to our Common Stock and Other Securities" before making any decision to acquire or hold our common stock. Holders of, and potential investorsdescribed in our Series A Preferred Stock should also read "Additional Risks Related Primarily to our Series A Preferred Stock," and "Additional Risks Related to our Series A Preferred Stock and our Series B Preferred Stock," below. Holders of, and potential investorsForm 10-K for the year ended December 31, 2018, the risk factors described in our Series B Preferred Stock should also read "Additional Risks Related to our Series A Preferred Stock and our Series B Preferred Stock," below.

Any investment in our securities involves a high degree of risk. Investors should consider carefullyForm 10-Q for the risks and uncertainties described below, and all other information in this Form 10-Qquarter ended June 30,2019, 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 thethese risks described in this Form 10-Q could harm our business. Thebusiness, the trading price of our securities could decline, due to any of these risks and uncertainties, and investors maycould lose part or all of their investment.

We have a historyThe following supplements, and, to the extent inconsistent, amends the risk factors previously disclosed in Part I - Item 1A - "Risk Factors," of significant losses. If we do not maintain profitability, our financial results and business could be harmed,Annual Report on Form 10-K for the year ended December 31, 2018 and our stock price could suffer.Quarterly Report on Form 10-Q for the quarter ended June 30, 2019.

We and certain of our former officers and directors have a historybeen named in shareholder class action lawsuits, which could require significant additional management time and attention, result in significant additional legal expenses or result in government enforcement actions.

We and certain of our former officers and directors have been named in shareholder class action lawsuits, and may become subject to further litigation, government investigations or proceedings arising therefrom. The pending litigation and any future litigation, investigation or other actions that may be filed or initiated against us or our current or former officers or directors may be time consuming and expensive. We cannot predict what losses, andif any, we may incur operatingin these litigation matters, and net lossesexpect to incur significant legal expenditures in the foreseeable future. At September 30, 2017,defending and responding to these litigation matters.

Any such legal proceedings, if decided adversely to us, could result in significant monetary damages, penalties and reputational harm, and will likely involve significant defense and other costs. We have entered into indemnification agreements with each of our accumulated deficit was $158.9 million. We needdirectors and certain of our officers, requiring us to generate significant revenuesindemnify them. Further, our insurance may not cover all claims that have been or may be brought against us, and insurance coverage may not continue to be profitable, andavailable to us at a reasonable cost. As a result, we may not be ableexposed 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 unablesubstantial uninsured liabilities, including pursuant 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 andindemnification obligations, which could materially adversely affect our business, prospects, financial condition and results of operations could fall belowand financial condition.

We are both the expectationssubjects of, and parties to, investigations by the SEC Division of Enforcement, which has required us to expend significant financial and legal resources. The resolution of those investigations may have a material adverse effect on our business, financial condition, results of operations and cash flows.

In February 2018, the Division of Enforcement of the SEC informed tZERO and subsequently informed us that it is conducting an investigation and requested that we 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 follow-up request from the SEC relating to its investigation and relating to GSR. On October 7, 2019, we received a subpoena from the SEC’s Division of Enforcement pursuant to a formal SEC order of investigation requiring us to produce documents and other information related to the Dividend we announced to shareholders in June of 2019 and requesting 10b5-1 plans entered into by certain officers and directors. We have also received recent requests from the SEC regarding GSR and our communications with our former chief executive officer and director, Patrick Byrne. We are cooperating with the SEC’s investigation and have provided documents and are preparing to provide further documents and information requested in the subpoena, as modified by any agreement we have reached or may reach with the SEC. Although we believe that we have fully complied with all relevant

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laws and regulations, there can be no assurance that the SEC will not commence an enforcement action against us or members of our partners and other companies with which we do business,management, or as well as public market analysts and investors. The occurrenceto the ultimate resolution of any enforcement action that the SEC may decide to bring. Under applicable law, the SEC has the ability to impose significant sanctions on companies and individuals who are found to have violated the provisions of applicable federal securities laws, including cease and desist orders, civil money penalties, and barring individuals from serving as directors or officers of public companies. We have expended significant financial and legal resources responding to the foregoingSEC subpoena. Defending any enforcement action brought by the SEC against us or members of our management would involve further significant expenditures and the resolution of any such enforcement action could have a material adverse effect on our business, financial condition, results of operations and business.cash flows.

Our business depends onThe SEC Enforcement Division has requested information from the Internet, our infrastructureCompany, and transaction-processing systems.

We are completely dependent on our infrastructure and onif 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 vulnerableSEC chooses 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 systemspursue enforcement actions, it could have a material adverse effect on our financial results and business.the Company.


We are subject to cyber security risks and risksAs set out above, the Company has previously disclosed an investigation by the enforcement staff 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,SEC 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 ornow also covers the communication infrastructure on which we depend. Any compromisedeparture of our securityformer chief executive officer. The Company is cooperating with the staff’s investigation. There can be no assurance that the SEC will not take actions that could adversely affect the Company as a result of the matters described above. Among other things, if the SEC were to authorize and obtain officer and director bars 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,SEC civil injunctive action against any of whichthe members of management, the Company would lose the services of key personnel that could be expected to have a material adverse effect on our financial resultsthe Company. We have incurred significant legal fees 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 rulesexpenses in connection with the SEC investigation 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 costslegal fees and other expenses 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.

Tariffsfines or other measures that increasepenalties in connection with 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 manyongoing SEC investigation. In addition, members of our suppliers and fulfillment partners source a large percentage ofmanagement have devoted in 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 competitionpast, and may not be ableneed 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 sharedevote in the online retail market. Competition from Amazon and from other competitors, manyfuture, a significant amount 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 these matters, which would reduce the amount of time in orderthey can devote to decrease our costs,

whichbusiness and therefore 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 materialan adverse effect on our business.

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

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

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

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

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

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

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

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

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

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

We sell products in international markets, and are attempting to expand into some of these markets. International sales and transactions, and our efforts to expand them, are subject to inherent risks and challenges that could adversely affect us, including:
•the need to develop new supplier and manufacturer relationships;
•the need to comply with additional U.S. and foreign laws and regulations;
•changes in international laws, regulatory requirements, taxes and tariffs;
•our limited experience with different local cultures and standards;
•geopolitical events, such as war and terrorist attacks;
•the risk that the products we offer may not appeal to customers in international markets; and
•the additional resources and management attention required for such expansion.

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

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

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

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

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

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

We have incurred substantial indebtedness and may incur additional indebtedness.

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

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

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

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

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

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

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

We face risks relating to our inventory and returns.

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

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

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

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

We depend on a large numberissue the previously-announced dividend of other companies to perform functions critical to our ability to deliver products and services to our customers.

We depend on a large numbershares 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 dependSeries A-1 Preferred Stock, whether on the delivery servicesoriginally disclosed terms, on modified terms, or at all.
On July 30, 2019, we announced that we and they utilize. Difficulties with anyour Board of Directors had declared a dividend (the “Dividend”) payable in shares of our significant fulfillment partnersDigital Voting Series A-1 Preferred Stock (the “Series A-1”). The announcement stated that the Dividend would be payable at a ratio of 1:10, meaning that one share of Series A-1 will be issued for every ten shares of common stock, Series A-1 or with anyVoting Series B Preferred Stock held by all holders of such shares as of the delivery services, regardlessrecord date. On September 18, 2019, we announced that, in light of the reason, could have a material adverse effect on our financial resultsfeedback we had received from industry participants, investors, and business.

Risks associatedregulators, we were working to register the Dividend with the suppliers from whom we orSEC so that the Dividend shares would be freely tradable by non-affiliates immediately upon distribution, and accordingly were postponing the originally-announced record date. On October 28, 2019, the Company announced that it was submitting the Dividend to a shareholder vote at a shareholder special meeting in order to make changes to the Company's Certificate of Designation to facilitate the Dividend. On November 10, 2019, our fulfillment partners source productsBoard of Directors approved December 18, 2019 as the record date for the shareholder vote and risks regardingFebruary 13, 2020 as the safety, labelling, content or qualityshareholder special meeting date. No assurance can be given that the shareholders will approve payment of those products could adversely affect our financial performance.

We depend on ourthe Dividend, and, our fulfillment partners' abilityuntil shareholder approval occurs, there can be no certainty as 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 partnerswhen the Dividend might be issued. Our inability 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 inissue the expenditure of funds and management time andDividend could have a negative impact on our business. The occurrence of any of the foregoing could have a material adverse effect onstock price and relations with 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.investors.

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),D&O insurance policy cost 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, whichcoverage could adversely affect our operating results.business. 

From our inception to December 31, 2013, we established a valuation allowanceWe carry directors and officers liability insurance (D&O insurance) for our deferred tax assets, primarily due to realized losses and uncertainty regardingadvancement of defense costs in the event legal actions are brought against the company’s directors and officers for alleged wrongful acts in their capacity as directors or officers. Our current annual D&O insurance policy, effective on October 1, 2019, contains significantly larger self-insured-retention amounts and more exclusions to coverage than in the past. As such, our future taxable income. Determining whether a valuation allowanceD&O insurance may not be adequate to fully protect the company against liability for deferred tax assets is appropriate requires significant judgmentthe conduct of its directors 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.officers.

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 onecosts of our majority-owned broker dealer subsidiaries,D&O insurance policy premiums increased substantially in 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 subjectcurrent year, renewal effective October 1, 2019, compared to the risksprior year policy premiums. If the costs 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 andmaintaining adequate 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, whichcoverage 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 maysignificantly 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, weoperating results 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.materially adversely affected.

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 operationTable 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.Contents


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. ChangesOur former chief executive officer and director, Dr. Patrick Byrne, and our former chief financial officer, Gregory Iverson, resigned from their positions with the company in the rolesAugust 2019 and responsibilities of members of management or theSeptember 2019, respectively. The loss of the services of these executive officers, and 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.personnel. Our future success, in both our e-commerce business and in our Medici business, also depends on our ability to identify, attract, hire, train, retain and motivate other highly-skilled technical, managerial, editorial, merchandising, marketing and customer service personnel. Competition for such personnel is intense. Our failure to attract and retain the necessary personnel could have a

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

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.prospects.

We recentlyrely upon paid and unpaid natural search engines to rank our product offerings, and our financial results may suffer if we are unable to regain our prior rankings in natural searches.

We rely on paid and unpaid natural search engines to attract consumer interest in our product offerings, including Google, Bing, and Yahoo!. Changes to their ranking algorithms and ranking methodologies may further adversely affect our product offerings 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. Search engine companies change their natural search engine algorithms and ranking methodologies periodically, and our ranking in natural searches may be adversely affected by those changes, as has occurred from time to time, and which have made changesled us to pursue revenue growth in other more expensive marketing channels. Google's search engine is dominant in our business and are planning additional changeshas historically been a significant source of traffic to our Club O offerings. For example,website, much of it at essentially no incremental cost to us. If the algorithm changes we believe Google made in Q4 20162017, or the changes Google made in the fourth quarter of 2019 that base our ranking positions on our mobile website rather than our desktop website, prevent us from regaining our prior rankings in Google's natural search engine, we discontinued rewards onmay have to utilize more expensive marketing channels or otherwise compensate for 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 numbersome of them would have an adverse effect on us. Further,the natural search traffic, and if we failare unable to successfully implementdo so, our financial results may suffer and the changes we are planning or otherwise fail to develop and market our Club O offerings, it couldmay have a material adverse effect on our business.

Our insurance coverageIf we fail to comply with ongoing Nasdaq listing standards and indemnity rights may not adequately protect us against loss.corporate governance requirements, we could be subject to de-listing.

The types, coverage, orOur common stock is currently listed on the amounts of any insurance coverageNasdaq Global Market. In order to maintain this listing, we may carry from timeare required to time may not be adequate to compensate us for any losses we may actually incurcomply with various continued listing standards, including corporate governance requirements, set forth in the operationNasdaq Listing Rules. These standards and requirements include an obligation to maintain a Board of Directors, a majority of whom are deemed to be independent and that we maintain an Audit Committee consisting of at least three independent Board Members. Our Board of Directors currently has five members, three of whom are deemed independent, and our Audit Committee consists of these three independent directors. If one of our business. Further, any insuranceindependent directors should cease to be on the Board, we may desirewould no longer have a majority of independent Directors on our Board and our Audit Committee would no longer have at least three independent directors. If such a scenario was not rectified in accordance with applicable Nasdaq Listing Rules, we could become subject to purchase may not be available to us on terms we find acceptable or at all. We are not indemnified by allNasdaq delisting procedures.

Future sales of our suppliers, and any indemnification rights wecommon or preferred stock may have may not be enforceable or adequate to cover actual losses we may incur as a result ofdepress 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.stock price.

We are partially self-insured with respect to our employees' health insurance. If the actual costsSales 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 asubstantial 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 holdersshares of our common stock or our preferred 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 calledpublic market or otherwise, by us or by a significant stockholder, could depress the "Preferred Stock") in a registered rights offering (the "rights offering"). The Preferred Stock could adversely affect the holderstrading price 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 commonor preferred 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 onimpair our ability to raise capital and could have a material adverse effect onthrough the holderssale of ouradditional equity 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 percentagesIn addition, we may issue additional shares of our common or preferred stock and preferred stock. If one or morefrom time to time in the future in amounts that may be significant. The sale of them were to offer or sell all or a portion of their holdings, the market pricesubstantial amounts of our common stock,or 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 periodperception that these sales may occur, could adversely affect our ability to use our net operating losses to offset future taxable net income. Anythe trading prices 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 declaredeither 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 termsboth 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.securities.

Additional Risks Related Primarily to our Series AA-1 Preferred Stock

TheOur Series AA-1 Preferred may only be sold through the PRO Securities ATS.

By virtue of the Amended and the tZERO Platform are novel,Restated Certificate of Designation setting forth its rights, powers, preferences and the useprivileges, shares of our Series A-1 Preferred can be sold only on the PRO Securities ATS utilizing the tZERO Platform, for trading public digital securities was untested prior towith the December 2016 closingrecord of the offeringbeneficial ownership updated and recorded by a stockholder’s PRO Securities ATS-subscribing broker-dealer on a

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book-entry basis. As a result, we expect that sales 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 AA-1 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 Preferredwill 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 AA-1 Preferred is not and will not be listed on any national securities exchange; priorexchange or other trading market of any kind. The limitation on trading Series A-1 Preferred through the PRO Securities ATS may adversely affect the liquidity for, and the market price of shares of the Series A-1 Preferred. It may at times be very difficult to December 2016sell any shares of the Series A-1 Preferred.

The Series A-1 Preferred may only be sold through an online brokerage account established with a broker-dealer that subscribes to the PRO Securities ATS. Currently, Dinosaur Financial Group, LLC (“Dinosaur”) is the only broker-dealer that facilitates trades of any security on the PRO Securities ATS. Unless and until another broker-dealer subscribes to the PRO Securities ATS or maintains an account with a PRO Securities ATS-subscribing broker-dealer, any holder of Series A-1 Preferred that wishes to sell its shares must open an account at Dinosaur. If Dinosaur for any reason ceases to operate, there waswould be no broker-dealer to effect sales of the Series A-1 Preferred on PRO Securities ATS. This could prevent all trading in the Series A-1 Preferred and would likely materially and adversely affect the trading prices of the Series A-1 Preferred.

Likewise, Electronic Transaction Clearing, Inc. ("ETC") is the only clearing firm for the PRO Securities ATS. If for any reason ETC ceases to clear trades for subscribers of PRO Securities ATS and no clearing firm succeeds to ETC, trading in the Series A-1 Preferred on the PRO Securities ATS may be interrupted and such an interruption would likely materially and adversely affect the trading price of the Series A-1 Preferred.

The PRO Securities ATS has had limited volume. Even if a more liquid 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 AA-1 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 AA-1 Preferred may nevertheless be very limited, which may have a material adverse effect on the liquidity for, and the market price of, the Series A-1 Preferred.

Moreover, peer-to-peer transfers of the Series A-1 Preferred outside of orders submitted to the PRO Securities ATS by a subscribing broker-dealer, or with a broker-dealer that itself maintains an account with a PRO Securities ATS-subscribing broker-dealer, on behalf of its customers, are not permitted, subject to limited circumstances. Outside of the following limited circumstances, Computershare (as our transfer agent) will not register peer-to-peer transfers of record ownership of the Series A-1 Preferred, and the only way to effect a sale of the Series A-1 Preferred is through an order submitted to the PRO Securities ATS’ order matching system by a PRO Securities ATS-subscribing broker-dealer on behalf of its customer. Computershare may register peer-to-peer transfers in its official record only in limited circumstances, such as a transfer from broker-dealer to broker-dealer, with the stockholder’s carrying broker-dealer being reflected as the record holder, or a transfer by a stockholder who is the record holder pursuant to a divorce decree or other transfers from record holders that do not constitute a “sale” for securities laws purposes, such as gifts (and then only following compliance with Computershare’s procedures, including delivery of appropriate documentation).

We have the right to convert the outstanding shares of Series A-1 Preferred into shares of Series B Preferred at any time.

We have the right to convert the Series A-1 Preferred into Series B Preferred at any time, and the terms of the Series B Preferred may be amended at any time without the consent of the holders of the Series A-1 Preferred. Any such conversion and any such amendment of the Series B Preferred could have a material adverse effect on the trading price of the Series A-1 Preferred. 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-1 Preferred, holders of Series A-1 Preferred would likely experience an immediate and potentially material decrease in the market value of the Series A-1 Preferred they hold and of the Series B Preferred they would receive upon the conversion. Moreover, the existence of this conversion right could have a negative impact on the liquidity for, and market value of, our Series A-1 Preferred.

Our obligation to pay dividends on the Series A-1 Preferred is limited, and our ability to pay dividends on the Series A-1 Preferred may be limited.

Our obligation to pay preferential dividends on the Series A-1 Preferred is subject to our Board 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 $0.16 per share annual dividends on the Series A-1 Preferred and preferential cumulative 1.0% annual dividends on the Series B Preferred, we have never paid a dividend on the common stock and we have no intention of doing so. Consequently, our failure to pay preferential dividends on the Series A-1 Preferred and on the Series B Preferred might have no legal effect on us at all, although it could adversely affect the liquidity for, and trading prices of, the Series A-1 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. Further, we may elect not to pay dividends on the Series A-1 Preferred, the Series B Preferred or both rather than limiting other proposed expenditures, including expenditures that may not be contractually required. Moreover, agreements governing any future indebtedness of ours may further limit our ability to pay

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dividends on our capital stock, including the Series A-1 Preferred and the Series B Preferred. In addition, our ability to pay dividends is limited by applicable law. Although there are no arrearages in cumulative preferred dividends and we declared and paid a cash dividend of $0.16 per share to the holders of our then outstanding preferred stock during 2017 and 2018, there is no assurance that we will be able or that our board will decide to do so in the future. Any of the foregoing facts or events could have a material adverse effect on the holders of the Series A-1 Preferred and the holders of the Series B Preferred and on the liquidity for, and trading prices of, the Series A-1 Preferred and the Series B Preferred.

Voting rights on the Series A-1 Preferred generally will be limited to voting together with the holders of the common stock and Series B Preferred as a single class, and the holders of the Series A-1 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-1 Preferred and Series B Preferred, voting together as a single class.

Voting rights of the Series A-1 Preferred generally will be limited to voting together with the holders of the common stock and Series B Preferred, as a single class. If an amendment requiring stockholder approval is proposed to our Amended and Restated Certificate of Incorporation, the holders of the Series A-1 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-1 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-1 Preferred or Series B Preferred, respectively, or increase or decrease the aggregate number of authorized shares of Series A-1 Preferred or Series B Preferred. These limited voting rights could have a material adverse effect on holders of Series A-1 Preferred and holders of Series B Preferred and on the trading prices of the Series A-1 Preferred and the Series B Preferred.

Holders of the Series A-1 Preferred will not have any right, as a separate class, to elect any members of our board of directors.

The holders of the Series A-1 Preferred will have no right as a separate class to elect any members of our board of directors under any circumstances, including upon any failure of our board to declare or pay any dividend on the Series A-1 Preferred. Further, the holders of the Series A-1 Preferred and the holders of the Series B Preferred, together, also will have no right by themselves to elect any members of our board of directors under any circumstances. The holders of the Series A-1 Preferred and the holders of the Series B Preferred will be entitled only to vote with the holders of the common stock as a single class in the election of directors and on any other matter coming before a vote of the holders of the common stock. Holders’ lack of such rights could have a material adverse effect on holders of the Series AA-1 Preferred and the holders of the Series B Preferred and the liquidity for, and trading prices of, the Series A-1 Preferred and the Series B Preferred.

Holders of Series A-1 Preferred will have no rights with respect to our common stock.

Holders of Series A-1 Preferred will have no rights with respect to our common stock, and no right to convert shares of Series A-1 Preferred into shares of common stock or to exchange shares of Series A-1 Preferred for shares of common stock, except that holders of Series A-1 Preferred will have the right to vote with the common stock on any matter submitted to a vote of the holders of the common stock, the right to receive payments upon liquidation equally with the holders of the common stock and the right to receive dividends in preference to the holders of the common stock and to participate in dividends, if any, paid on the common stock, subject to the limitations set forth in the Amended and Restated Certificate of Designation relating to the Series A-1 Preferred.

The Series A-1 Preferred and the Series B Preferred will rank junior to all of our and our subsidiaries’ liabilities 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-1 Preferred and to holders of Series B Preferred only after all of our liabilities have been paid, and neither the Series A-1 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-1 Preferred and Series B Preferred will rank structurally junior to all existing and future liabilities of our subsidiaries. The rights of holders of Series A-1 Preferred to participate in the assets of our subsidiaries upon any liquidation or reorganization of any subsidiary will rank junior to the claims of creditors. In the event of our bankruptcy, liquidation or winding up, there may not be sufficient assets remaining, after paying our and our subsidiaries’ liabilities, to pay any amounts to the holders of Series A-1 Preferred or Series B Preferred then outstanding. We may incur significant debt or other liabilities in the future, and the Series A-1 Preferred and Series B Preferred contain no covenant or restriction on our ability to incur debt or other obligations. Any bankruptcy, liquidation or winding up of our company or any of its wholly or partially owned subsidiaries would have a material adverse effect on the liquidity for, and trading prices of, the Series A-1 Preferred.

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Moreover, we do not own all of the equity securities of our subsidiaries, including our majority owned subsidiary, tZERO. For example, we have adopted an employee equity incentive plan pursuant to which tZERO has issued, and may continue to issue, shares or other equity interests or awards having the economic effects of equity interests to employees. As a result, following satisfaction of the claims of creditors of those subsidiaries as discussed above, our right to receive distributions as a shareholder with respect to our equity interests in those majority owned subsidiaries will be shared with third party equity holders of tZERO and our other subsidiaries, whether now existing or created in the future, including our employees holding shares of any of them.

The restrictions on the tax reporting of holder’s cost basis in shares of Series A-1 Preferred will not allow normal tax planning in the sale of shares of Series A-1 Preferred and may result in disadvantageous tax consequences to a seller of Series A-1 Preferred.

Only one method of cost basis reporting (the first-in, first-out, or FIFO, method) is available for the Series A-1 Preferred. As a result, sellers of Series A-1 Preferred may be required to pay more tax on their sales or to pay taxes earlier than if other normal methods of cost basis reporting had been available, which could have an adverse tax effect on sellers of Series A-1 Preferred and the market price of the Series A-1 Preferred.

The record of ownership of each digital wallet will be available to the general public and it may be possible for members of the public to determine the identity of the record holders of wallets.

Although the record of ownership included in the blockchain is a non-controlling “courtesy copy” of the records maintained by Computershare, it will be made publicly available. The publicly available information will include the digital wallet address of each holder of record transacting in Series A-1 Preferred and the entire history of each digital wallet, but it will not include any personal identifiable information. As a result, it may be possible for members of the public to determine the identity of the record holders of certain wallets based on the publicly available information in the blockchain copy, as well as other publicly available information, including any ownership reports required to be filed with the SEC regarding the Series A-1 Preferred.

The Series A-1 Preferred depends on Computershare as the transfer agent for the Series A-1 Preferred.

Computershare serves as the transfer agent for the Series A-1 Preferred and ownership of the Series A-1 Preferred is based upon the books and records of Computershare. Our agreement with Computershare can be terminated by either party on 60 days’ notice. If Computershare chooses to exercise its termination rights or otherwise ceases to operate as a transfer agent, we would seek to engage a successor transfer agent. In the absence of finding such a successor, Overstock would need to assume the role of transfer agent. While we believe we could successfully assume the role of transfer agent, no assurance can be given that we would be able to do so and if we are unable to do so the trading market for the Series A-1 Preferred would be adversely affected and it may be difficult or impossible for Overstock to pay dividends or liquidation preference or provide voting rights to the correct holders of record of the Series A-1 Preferred.

The potential application of U.S. laws regarding traditional investment securities to the Series A-1 Preferred is unclear.

We believe that the Series A-1 Preferred should be treated as any other conventional, uncertificated book-entry security. However, various regulators may disagree with this assertion and conclude that the Series A-1 Preferred should not be treated as any other traditional investment security. For example, we believe that the Series A-1 Preferred is not a “digital asset security” within the meaning of the July 8, 2019 Joint Staff Statement on Broker-Dealer Custody of Digital Asset Securities (the “July Statement”), and that as a result, broker-dealers will have a good control location consistent with the July Statement. However, federal securities regulatory authorities may disagree with that conclusion and we could be required to take further steps with regulators to establish a good control location. The occurrence of any such issue or dispute could have a material adverse effect on the liquidity for, and market price of, the Series A-1 Preferred. In addition, if regulatory authorities take the position that Series A-1 Preferred is a “digital asset security,” then broker-dealers may need to submit a Form CMA with FINRA in order to hold the Series A-1 Preferred, and that could prevent other broker-dealers from becoming subscribers to the PRO Securities ATS. As a result, holders of the Series A-1 Preferred may not be able to open an account with another subscribing broker-dealer authorized to facilitate trading of the Series A-1 Preferred on the PRO Securities ATS.

If we elect to repurchase the Series A-1 Preferred on the PRO Securities ATS, it could have a material adverse effect on the liquidity in, and trading prices of, the Series A-1 Preferred.


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We do not currently intend to repurchase any of the Series A-1 Preferred on the PRO Securities ATS after they are issued. However, we could do so, subject to applicable regulations regarding issuer repurchases of their capital stock. If we do so, we would do so only at prices lower than the prices at which we are entitled to redeem the shares. If we repurchase shares of Series A-1 Preferred, the trading market for the Series A-1 Preferred could become less liquid, which would likely cause the trading prices of the Series A-1 Preferred to decrease, which would give us an economic incentive to repurchase additional shares. The occurrence of the foregoing could have a material adverse effect on the liquidity in, and trading prices of, the Series A-1 Preferred. There are no restrictions on our repurchase of shares of Series A-1 Preferred while there is any arrearage in the payment of dividends.

PRO Securities and tZERO are involved in ongoing discussions with regulatory authorities.

PRO Securities and tZERO have been and remain involved in ongoing oral and written communications with regulatory authorities in connection with ongoing examinations, inquiries, or investigations. Any failure of PRO Securities, PRO Securities ATS, or tZERO to satisfy the requirements of FINRA, the SEC, or any other regulatory could result in trading halts on PRO Securities ATS. Any such trading halt would adversely affect the trading market for the Series A-1 Preferred and may prevent the sale of Series A-1 Preferred until the failure is rectified.

Technology on which PRO Securities ATS relies for its operations may not function properly.

The technology on which PRO Securities ATS relies may not function properly because of internal problems or as a result of cyber-attacks or external security breaches. Any such malfunction may adversely affect the ability of holders to execute trades of the Series A-1 Preferred on PRO Securities ATS. Moreover, since trading in the Series A-1 Preferred has been limited, the PRO Securities ATS platform may not function properly in cases of increased trading volume. If the technology used by PRO Securities ATS does not work as anticipated, trading of the Series A-1 Preferred could be limited or even suspended.

The technology on which the tZERO PlatformPRO Securities ATS depends has been developed by our indirectly held majority-owned subsidiary, tZERO, and is licensed byto its wholly-owned subsidiary, PRO Securities, and the Series AA-1 Preferred depends on both tZERO and on PRO Securities, neither of which has substantial resources.

tZERO is aan indirectly held majority-owned subsidiary of ours and owns 100% of the equity interest in PRO Securities. tZERO licenses the tZERO Platformtechnology to PRO Securities, and PRO Securities operatesuses tZERO technology to operate 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. Neitheris a growth-stage company, and 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,our 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,PRO Securities ATS, and the Series AA-1 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. Ifif the PRO Securities ATS or the tZERO Platform were to failbe unable to operate as intended for any reason, trading inholders of our capital stock, including the Series AA-1 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 ourlose their ability to execute or settle trades oftrade our 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 AA-1 Preferred, which would have a material adverse effect on the holdersmarket value of the Series A Preferred.

The tZERO Platform relies on technologythat stock, 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 holdersliquidity for, and the price of, our common stock.

Transactions involving the Series A-1 Preferred may not be properly reflected in the digital wallet.

A significant feature of the Series A Preferred.

The potential applicationA-1 Preferred is that, while the records of U.S. laws regarding traditional investment securities toComputershare (as our transfer agent) govern record ownership of the Series AA-1 Preferred, is unclear.

The commercial law regarding traditional investment securities infor all record holders on 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,transfer agent’s controlling records there is a riskdigital wallet which is shown as a non-controlling digital “courtesy copy” on the blockchain. Following Computershare’s approval of any change in record ownership, the digital wallets on the blockchain are updated to match Computershare’s conventional books and records. To the extent that issues that might easilyComputershare’s records and the duplicative records on the blockchain get out of sync, there could be resolved by existing law if traditional securities were involveda delay while we correct any such errors, and such errors may not be easily resolved forcause investors confusion with respect to their record holdings of the Series A Preferred. The occurrenceA-1 Preferred, which could adversely affect the liquidity for, and market value of, any such issue or dispute could have a material adverse effect on the holders of Series AA-1 Preferred.

The potential application of U.S. laws regarding virtual currencies and money transmission to PRO Securities'Securities’ use of the BitcoinEthereum 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 used by the PRO Securities ATS uses the BitcoinEthereum 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 itselfblockchain’s non-controlling “courtesy copy” records maintained by Computershare. Although tZERO’s wholly owned subsidiary, Bitsy, Inc, maintains certain licenses in order to embed data relating to Series A Preferred transactions into the Bitcoin blockchain. Noneconnection with virtual currency applications, none of the parties involved in the operation of the PRO Securities ATS using the tZERO Platform is licensed under the virtual currency or money transmission regulations of any

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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, ifFinCEN. 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 bethat additional licensing or registration was 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 orby PRO Securities or tZERO, it could affect the tZERO Platform to regulation by any authority in any jurisdiction outsideoperations or viability of either of them and could adversely affect the availability 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 onATS as a trading venue for the Series A Preferred, whichA-1 Preferred. This in turn would have a material adverse effect on the holdersliquidity of the Series A Preferred.

Regulatory or factual developments may adversely affectA-1 Preferred and 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 itsholders’ ability to utilize the Bitcoin blockchain,trade such regulatory requirements would have a material adverse effect on the holders of the Series A Preferred.

securities. In addition, because PRO Securities is involved in an ongoing dialog with regulatory authorities.

PRO Securities has been and remains involved in ongoing discussions with regulatory authorities abouta wholly-owned subsidiary of tZERO, any negative impact on the operationvalue of the PRO Securities ATS utilizingor 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 materialan adverse effectimpact 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 theyOverstock, which would receive upon the conversion. Investors should not purchase shares of Series A Preferred unless they are willingcause our stock price 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.decrease.

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 AA-1 Preferred and the Series B Preferredhas characteristics similar 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 pricethose 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 Preferreddifferences 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 AA-1 Preferred.

Each share of Series A-1 Preferred is intended to have voting and dividend rights and rights upon liquidation substantially similar to those of one share of our common stock, except that the Series A-1 Preferred will have a dividend preference over the common stock, the Series A-1 Preferred will be limited to trading on the PRO Securities ATS, and we will have the right to redeem shares of Series A-1 Preferred, in whole or in part, at the Redemption Price as set forth in the Amended and Restated Certificate of Designation, prior to December 15, 2019 and to convert the Series A-1 Preferred into 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 oursThese provisions 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 holdersliquidity for, and trading price of, the Series A Preferred and the holdersA-1 Preferred.

Table of the Series B Preferred.Contents

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
 
IssuanceUnregistered 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.

Limitations upon the payment of dividends

We have never declared or paid any cash dividends on our common stock. We currently intend to retain any earnings for future growth and do not anticipate paying any cash dividends on our common stock in the foreseeable future. Any future determination to pay dividends on our common stock will be at the discretion of our board of directors and will depend on our results of operations, financial conditions, contractual and legal restrictions and other factors the board of directors deems relevant.

In December 2016, we issued a total of 695,898 shares of our preferred stock (the "Preferred Stock"), of which 681,259 shares remained outstanding at September 30, 2017. 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 of 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.None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES
 
None.
 
ITEM 4. MINE SAFETY DISCLOSURES
 
Not applicable.
 
ITEM 5. OTHER INFORMATION
 
None.

ITEM 6. EXHIBITS

(a) Exhibits  
  10.13.1 
Medici Ventures,Amended and Restated Certificate of Designation of Voting Series B Preferred Stock of Overstock.com, Inc. 2017 Stock Option Plan (incorporated, incorporated by reference to Exhibit 10.13.1 to our Current Report on Form 8-K filed on August 1, 2017 (File No. 000-49799)).July 30, 2019.
  *31.13.2
Certificate of Elimination of Blockchain Voting Series A Preferred Stock of Overstock.com, Inc., incorporated by reference to Exhibit 3.2 to our Form 8-K filed on July 30, 2019.
3.3
Amended and Restated Certificate of Designation of Digital Voting Series A-1 Preferred Stock of Overstock.com, Inc., incorporated by reference to Exhibit 3.3 to our Form 8-K filed on July 30, 2019.
31.1* 
Exhibit 31.1 Certification of Chief Executive Officer
  *31.231.2* 
Exhibit 31.2 Certification of Chief Financial Officer
  32.1**32.1 
Exhibit 32.1 Section 1350 Certification of Chief Executive Officer
  32.2**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.
** Furnished herewith.

Table of Contents



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, 201712, 2019OVERSTOCK.COM, INC.
   
  /s/ ROBERT P. HUGHES
  Robert P. Hughes
  
Senior Vice President, Finance and Risk ManagementActing Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)

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