Overstock Annual Report 2014

Plain-text annual report

Table of Contents UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549FORM 10-K(Mark One)ýýANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2014 OrooTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number: 000-49799 OVERSTOCK.COM, INC.(Exact name of registrant as specified in its charter) Delaware 87-0634302(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification Number) 6350 South 3000 East Salt Lake City, Utah 84121 (801) 947-3100(Address, including zip code, of Registrant’s principal executive offices) (Registrant’s telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act:Title of Each Class Name of Each Exchange on Which RegisteredCommon Stock, $0.0001 par value Nasdaq Global MarketSecurities registered pursuant to Section 12(g) of the Act: NoneIndicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No ýIndicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No ýIndicate 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 thepreceding 12 months (or for such shorter period that the registrant was required to file such reports), (2) has been subject to such filing requirements for the past 90 days. Yes ý No o Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted andposted 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 andpost such files). Yes ý No oIndicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant'sknowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K, or any amendment to this Form 10-K. ý Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of“large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.Large accelerated filer o Accelerated filer x Non-accelerated filer o Smaller reporting company o(Do not check if a smaller reporting company) Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the act). Yes o No ýThe aggregate market value of voting and non-voting common equity held by non-affiliates of the registrant as of the last business day of the registrant's most recentlycompleted second quarter (June 30, 2014), was approximately $186.9 million based upon the last sales price reported by Nasdaq. For purposes of this disclosure, shares of CommonStock held by persons who hold more than 5% of the outstanding shares of Common Stock and shares held by officers and directors of the registrant have been excluded in that suchpersons may be deemed to be affiliates. This determination is not necessarily conclusive.There were 24,267,099 shares of the Registrant’s common stock, par value $0.0001, outstanding on March 2, 2015.DOCUMENTS INCORPORATED BY REFERENCECertain information required by Part III of Form 10-K is incorporated by reference to the Registrant's proxy statement for the 2015 Annual StockholdersMeeting, which will be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year to which this Report relates.Table of ContentsTABLE OF CONTENTS Special Cautionary Note Regarding Forward-Looking Statements3 Part I Item 1.Business6Item 1A.Risk Factors12Item 1B.Unresolved Staff Comments32Item 2.Properties32Item 3.Legal Proceedings32Item 4.Mine Safety Disclosures32 Part II Item 5.Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities33Item 6.Selected Financial Data35Item 7.Management's Discussion and Analysis of Financial Condition and Results of Operations36Item 7A.Quantitative and Qualitative Disclosures About Market Risk60Item 8.Financial Statements and Supplementary Data61Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure61Item 9A.Controls and Procedures61Item 9B.Other Information65 Part III Item 10.Directors, Executive Officers and Corporate Governance66Item 11.Executive Compensation66Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters66Item 13.Certain Relationships and Related Transactions, and Director Independence67Item 14.Principal Accounting Fees and Services67 Part IV Item 15.Exhibits, Financial Statement Schedules69 Signatures74Financial Statements76O, Overstock.com, O.com, O.co, Club O, Main Street Revolution, Worldstock Fair Trade, Worldstock and OVillage are registered trademarks. O.biz,Club O Dollars and OGlobal are trademarks of Overstock.com, Inc. The Overstock.com, Club O, and Worldstock Fair Trade logos are also registeredtrademarks of Overstock.com, Inc. Other service marks, trademarks and trade names referred to in this Annual Report on Form 10-K are the property of theirrespective owners.2Table of ContentsSPECIAL CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTSThis Annual Report on Form 10-K and the documents incorporated herein by reference, as well as our other public documents and statements ourofficers and representatives may make from time to time, contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933and Section 21E of the Securities Exchange Act of 1934, as amended. These statements are therefore entitled to the protection of the safe harbor provisionsof these laws. These forward-looking statements involve risks and uncertainties, and relate to future events or our future financial or operatingperformance. The forward-looking statements include all statements other than statements of historical fact, including, without limitation, all statementsregarding:•the anticipated benefits and risks of our business and plans;•our beliefs regarding our ability to attract and retain customers in a cost-efficient manner; •the anticipated effectiveness of our marketing; •our future operating and financial results, including any projections of revenue, capital expenditures or other financial measures oramounts;•our plans and expectations regarding our design and construction of an office campus in Salt Lake City to serve as our corporateheadquarters; our beliefs and expectations regarding the adequacy of our office and warehouse facilities and our anticipated transitionfrom our current facilities to our anticipated new facilities;•our expectations regarding the benefits and risks of the Construction Agreement and related agreements we recently entered into inconnection with our construction of our planned corporate headquarters and of the credit facility we recently entered into for the purposeof, among other things, financing a portion of the costs of that construction;•our expectations regarding our ability to secure the additional financing that we will need to complete our corporate headquarters;•our future capital requirements and our ability to satisfy our capital needs;•our expectations regarding the adequacy of our liquidity;•our ability to retire or refinance any debt we may have or incur in the future;•our decision to accept bitcoins as payment for the goods and services we sell and our expectations regarding the advantages and risks ofdoing so, and our expectations that Coinbase.com and any other bitcoin transaction processing agents we utilize will perform inaccordance with our expectations regardless of fluctuations in the value of bitcoin or other developments that may affect us or suchprocessing agents; •our decision to acquire and hold bitcoins and other cryptocurrencies and our expectations regarding the advantages and risks of doingso;•the competition we currently face and will face in our business as the ecommerce business continues to evolve and to become morecompetitive, and as additional competitors, including competitors based in China or elsewhere, continue to increase their efforts in ourprimary markets; •the effects of government regulation; •our plans for international markets, our expectations for our international sales efforts and the anticipated results of our internationaloperations;•our plans and expectations regarding our recently-announced launch of our Supplier Oasis Fulfillment Services and our efforts toprovide multi-channel fulfillment services;•our plans and expectations regarding our recently-announced launch of our Farmers Market offerings;•our plans and expectations regarding our recently-announced launch of 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 patentsuits 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; •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 beliefsregarding the adequacy of our disaster planning and our ability to recover from a disaster or other interruption of our ability to operateour website at its highest level of functionality; •our beliefs regarding our cybersecurity efforts and measures and the costs we will incur in our ongoing efforts to avoid interruptions toour product offerings and other business processes from cyber attacks; •our belief that we can meet our published product shipping standards even during periods of relatively high sales activity; 3Table of Contents•our belief that we can 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 including our new and used car listing service, our WorldstockFair Trade offerings, our Main Street Revolution offerings, our consignment services, our ecommerce marketplace channel offerings, andother future businesses and the anticipated functionality and results of operations of them;•our expectations regarding the costs and benefits of various programs we offer, including Club O and programs pursuant to which weoffer 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 belief that we and our partners will be able to maintain inventory levels at appropriate levels despite the seasonal nature of ourbusiness; •our belief that our sales through other ecommerce marketplace channels will be successful and will become an important part of ourbusiness; and •our belief that we can successfully offer and sell a constantly changing mix of products and services.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 comparableterminology. These statements are only predictions. Actual events or results may differ materially from those contemplated by forward-looking statementsfor a variety of reasons, including among others:•changes in U.S. and global economic conditions and consumer spending;•world events;•the rate of growth of the Internet and online commerce, and the occurrence of any event that would discourage or prevent consumers fromshopping online;•any failure to maintain our existing relationships or build new relationships with partners on acceptable terms;•any difficulties we may encounter maintaining optimal levels of product quality and selection or in attracting sufficient consumer interestin our product offerings;•modifications we may make to our business model from time to time, including aspects relating to our product mix and the mix ofdirect/partner sourcing of the products we offer;•the mix of products purchased by our customers;•problems with cyber security or data breaches or Internet or other infrastructure or communications impairment problems or the costs ofpreventing or responding to any such problems;•problems with or affecting our credit card processors, including cyber-attacks, Internet or other infrastructure or communicationsimpairment or other events that could interrupt the normal operation of the credit card processors;•problems with or affecting the facility where substantially all of our computer and communications hardware is located or other problemsthat result in the unavailability of our Website or reduced performance of our transaction systems;•difficulties we may have in responding to technological changes;•problems with the large volume of fraudulent purchase orders we receive on a daily basis;•problems we may encounter as a result of the listing or sale of pirated, counterfeit or illegal items by third parties;•difficulties we may have financing our operations or our expansion with either internally generated funds or external sources offinancing;•any difficulties we may encounter relating to the real estate we recently purchased, the design and construction of an office campus onthat property to serve as our corporate headquarters, the financing of a substantial portion of the costs of designing and constructing theoffice campus and headquarters or in financing it after construction, or the transition from our current facilities to new facilities;•any difficulties we may encounter in connection with our Supplier Oasis Fulfillment Services and our efforts to provide multi-channelfulfillment services, our Farmers Market offerings, our insurance product offerings, our consumer finance offerings or other businesses orproduct or service offerings outside of our main shopping website offerings;•any difficulties we may encounter as a result of our reliance on third parties that we do not control for the performance of criticalfunctions material to our business;4Table of Contents•any difficulties we may encounter in connection with the rapid shift of ecommerce and online payments to mobile and multi-channelcommerce and payments;•the extent to which we owe income or sales taxes or are required to collect sales taxes or report sales or to modify our business model inorder to avoid being required to collect sales taxes or report sales;•any difficulties we may encounter as a consequence of accepting or holding bitcoins or other cryptocurrencies, whether as a result ofregulatory, tax or other legal issues, technological issues, value fluctuations, lack of widespread adoption of bitcoins or othercryptocurrencies as an acceptable medium of exchange or otherwise;•competition, including competition from well-established competitors including Amazon.com, and from others including competitors withbusiness models that may include delivery capabilities that we may be unable to match;•difficulties with the management of our growth and any periods in which we fail to grow in accordance with our plans;•fluctuations in our operating results;•difficulties we may encounter in connection with our efforts to expand internationally;•difficulties we may encounter in connection with our efforts to offer additional types of services to our customers, including insuranceproducts and consumer financing;•difficulties we may encounter in connection with our efforts to develop code for the purposes of facilitating the creation of a decentralizedfacility for the trading of securities, and to create such a decentralized trading facility; •the outcomes of legal proceedings, investigations and claims, including the outcome of our appeal of the judgment against us obtained bythe District Attorneys of a number of California counties as described in this report;•our inability to optimize our warehouse operations;•risks of inventory management and seasonality;•the cost and availability of traditional and online advertising, the rapid changes in the online advertising business and the longer-termchanges in the traditional advertising business, and the results of our various brand building and marketing campaigns; and•the other risks described in this report or in our other public filings.In evaluating all forward-looking statements, you should specifically consider the risks outlined above and in this Annual Report on Form 10-K inPart I, Item 1A under the caption “Risk Factors” in Part II, Item 7 under the caption “Management’s Discussion and Analysis of Financial Condition andResults of Operations” and elsewhere in this report. These factors may cause our actual results to differ materially from those contemplated by any forward-looking statement. Although we believe that our expectations reflected in the forward-looking statements are reasonable, we cannot guarantee or offer anyassurance of future results, levels of activity, performance or achievements or other future events.Our forward-looking statements contained in this report speak only as of the date of this report and, except as required by law, we undertake noobligation to update forward-looking statements to reflect events or circumstances occurring after the date of this report or any changes in ourexpectations or any change in any events, conditions or circumstances on which any of our forward-looking statements are based.5Table of ContentsPART IITEM 1. BUSINESS The following description of our business contains forward-looking statements relating to future events or our future financial or operatingperformance that involve risks and uncertainties, as set forth above under "Special Note Regarding Forward-Looking Statements." Our actual results coulddiffer materially from those anticipated in these forward-looking statements as a result of certain factors described in this Annual Report on Form 10-K,including those set forth above in the Special Cautionary Note Regarding Forward-Looking Statements or in Section 1A under the heading "Risk Factors"or elsewhere in this Annual Report on Form 10-K.IntroductionWe are an online retailer offering price-competitive brand name, non-brand name and closeout merchandise, including furniture, home decor,bedding and bath, housewares, jewelry and watches, apparel and designer accessories, electronics and computers, and sporting goods, among other products.We also sell hundreds of thousands of best seller and current run books, magazines, CDs, DVDs and video games (“BMMG”). We sell these products andservices through our Internet websites located at www.overstock.com, www.o.co and www.o.biz (referred to collectively as the “Website”). Although our threewebsites are located at different domain addresses, the technology and equipment and processes supporting the Website and the process of order fulfillmentdescribed herein are the same for all three websites.Our company, based in Salt Lake City, Utah, was founded in 1997. We launched our initial website in March 1999 and were re-incorporated inDelaware in 2002. Our Website offers our customers an opportunity to shop for bargains conveniently, while offering our suppliers an alternative inventoryliquidation or sales channel. We continually add new, and sometimes limited, inventory to our Website in order to create an atmosphere that encouragescustomers to visit frequently and purchase products before our inventory sells out. We sell products primarily in the United States.As used herein, “Overstock,” “Overstock.com,”, “O.co,” “we,” “our” and similar terms include Overstock.com, Inc. and its subsidiaries, unless thecontext indicates otherwise.Our BusinessWe deal primarily in price-competitive, replenishable and closeout merchandise and use the Internet to aggregate both supply and demand to createan efficient marketplace for selling these products. We provide manufacturers with a one-stop liquidation channel to sell both large and small quantities ofexcess, closeout and replenishable inventory without disrupting sales through traditional channels. The merchandise offered on our Website is from a varietyof sources including well-known, brand-name manufacturers. We have organized our shopping business (sales of product offered through the ShoppingSection of our Website) into two principal segments—a "direct" business and a "partner" business. We currently offer approximately 683,000 non-BMMGproducts and approximately 696,000 BMMG products. Consumers and businesses are able to access and purchase our products 24 hours a day from theconvenience of a computer, Internet-enabled mobile telephone or other Internet-enabled device. Our team of customer service representatives assistscustomers by telephone, instant online chat and e-mail. We also derive revenue from other businesses advertising products or services on our Website. Nearlyall of our sales are to customers located in the United States. During the years ended December 31, 2014, 2013 and 2012 no single customer accounted formore than 1% of our total net revenue.Direct businessOur direct business includes sales made to individual consumers and businesses, from our owned inventory and that are fulfilled primarily from ourwarehouse in Salt Lake City, Utah. During the year ended December 31, 2014, we fulfilled approximately 10% of our order volume through our warehouse,which generally ships between 2,000 and 5,000 packages per day and up to approximately 12,000 packages per day during peak periods, using overlappingdaily shifts.Partner businessFor our partner business, we sell merchandise of other retailers, cataloguers or manufacturers ("partners") primarily through our Website. We areconsidered 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 grossbasis. Our use of the term "partner" does not mean that we have formed any legal partnerships with any of our partners. We currently have relationships withapproximately 3,200 third parties who supply approximately 667,000 non-BMMG products, as well as most of the BMMG products, on our Website. Thesethird party partners generally perform the same fulfillment operations as our warehouses, such as order picking and shipping; however, we handle returns andcustomer service related to substantially all orders placed through our Website. Revenue6Table of Contentsgenerated from sales on our Shopping site from both the direct and partner businesses is recorded net of returns, coupons and other discounts.Both direct and partner revenues are seasonal, with revenues historically being the highest in the fourth quarter, which ends December 31, reflectinghigher consumer holiday spending. We anticipate this will continue for the foreseeable future. To the extent possible we maintain supplier relationships, andseek new supplier relationships, for both our direct and partner businesses, and also use our working capital, to ensure a continuous allotment of productofferings for our customers. Because a portion of our product offerings are closeout merchandise, some of our suppliers cannot supply products to us on acontinuous basis.Generally, we require verification of receipt of payment, or authorization from credit card or other payment vendors whose services we offer to ourcustomers (such as PayPal and BillMeLater), before we ship products to consumers or business purchasers. From time to time we grant credit to our businesspurchasers with normal credit terms (typically 30 days). For sales in our partner business, we generally receive payments from our customers before ourpayments to our suppliers are due.Other offeringsWe offer additional products or services that complement our primary offerings, but are not significant to our revenues. These include:•Worldstock Fair Trade, a store within our Website that offers handcrafted products made by artisans all over the world, which emphasizessustainability, fairness, and transparency, and which we attempt to run at 0% profit by donating net profits to fund philanthropic projects in severalcountries, including Guatemala, Kenya, Malawi, and Nepal;•Main Street Revolution, a store within our Website that features products from small businesses across the United States who offer their productsusing our national marketing and distribution channels;•Supplier Oasis Fulfillment Services ("SOFS"), a single integration point through which our partners can manage their products, inventory and saleschannels, while tapping into our distribution network;•ecommerce marketplace channels, where some of our products are offered for sale in on-line marketplaces of other Internet retailers' websites;•our international business where we offer products to customers outside the United States using U.S.-based third party logistics providers;•Pet Adoptions, a free service and tab within our Website that leverages our technology to display pets available for adoption from shelters across theUnited States;•Farmers Market, a tab within our Website where our customers can order locally grown fresh produce and other food products;•Insurance, a tab within our Website where our customers can shop for insurance from major carriers for both personal and business insurancepolicies; and•an online car listing service which allows sellers to list vehicles for sale and allows buyers to review vehicle descriptions and post offers to purchase,and provides the means for prospective purchasers to contact sellers for further information and negotiations on the purchase of an advertisedvehicle.Manufacturer, Supplier and Distribution RelationshipsGenerally, we do not enter into contracts with manufacturers or other suppliers that guarantee the availability of merchandise for a set duration. Ourmanufacturer and supplier relationships are based on historical experience with manufacturers and other suppliers and do not obligate or entitle us to receivemerchandise on a long-term or short-term basis. In our direct business, we purchase the products from manufacturers or other suppliers using standardpurchase orders. Generally, suppliers do not control the terms under which products are sold through our Website.ProductsOur Website Shopping section is organized into 28 main product and service lines or featured categories: For the Home, Furniture, Bed & Bath,Women, Men, Jewelry, Watches, Health & Beauty, Electronics, Worldstock, Sports & Outdoors, Baby, Books Movies Music Games, Kids, Luggage & Bags,Toys & Hobbies, Craft & Sewing, Office, Clothing & Shoes, Gifts & Flowers, Pet Supplies, Liquidations, As Seen on TV, Emergency Preparedness, FarmersMarket, Main Street Revolution, Pet Adoption, and Sales. From time to time, as the number of products and services and product or featured categorieschange, we may reorganize our departments and/or categories to better reflect our current product offerings.7Table of ContentsFor the years ended December 31, 2014, 2013 and 2012, the percentages of sales contributed by similar classes of products were as follows:Product Lines 2014 2013 2012Home and garden(1) Furniture 32% 31% 27%Home decor 18% 17% 15%Other 24% 24% 24%Total home and garden 74% 72% 66%Jewelry, watches, clothing and accessories 12% 13% 16%BMMG, electronics and computers 4% 4% 6%Other 10% 11% 12%Total 100% 100% 100%(1) Home and garden includes furniture, home decor, garden and patio, kitchen and dining, bedding, home improvement, housewares andother related products.Sales and MarketingWe use a variety of methods to target our consumer audience, including online campaigns, such as advertising through keywords, product listingads, display ads, search engines, affiliate marketing programs, social coupon websites, portals, banners, e-mail, direct mail and viral and social mediacampaigns. We also do brand advertising through television, radio, print ads, and event sponsorships.Customer ServiceWe are committed to providing superior customer service. We staff our customer service department with dedicated in-house and outsourcedprofessionals who respond to phone, instant online chat and e-mail inquiries on products, ordering, shipping status, returns and other areas of customerinquiry.TechnologyWe use our internally developed Website and a combination of proprietary technologies and commercially available licensed technologies andsolutions to support our operations. We use the services of multiple telecommunications companies to obtain connectivity to the Internet. Currently, ourprimary computer infrastructure is located in a co-location facility in Salt Lake City. We also have other data centers which we use for backups, redundancy,development, testing, disaster recovery, and our corporate systems infrastructure.CompetitionInternet retail is intensely competitive and has relatively low barriers to entry. We believe that competition in this industry is based predominantlyon:•price;•product quality and selection;•shopping convenience;•website organization and load speed;•order processing and fulfillment;•order delivery time;•customer service;•website functionality on mobile devices;•brand recognition; and•brand reputation.We compete with other online retailers, traditional retailers and liquidation "brokers," some of which may specifically adopt our methods and targetour customers. We currently or potentially compete with a variety of companies that can be divided into several broad categories:•liquidation e-tailers;•online discount general retailers;•private sale sites;•online specialty retailers; and8Table of Contents•traditional general merchandise and specialty retailers and liquidators, many of which have a significant online presence.Many of our current and potential competitors have greater brand recognition, longer operating histories, larger customer bases and significantlygreater financial, marketing and other resources than we do. Further, any of them may enter into strategic or commercial relationships with larger, moreestablished and well-financed companies, including exclusive distribution arrangements with our vendors or service suppliers that could deny us access tokey products or needed services, or acquisitions of our suppliers or service providers, having the same effect. Many of them do or could devote greaterresources to marketing and promotional campaigns and devote substantially more resources to their website and systems development than we do. Manyhave supply chain operations that decrease product shipping times to their customers, or have options for in-store product pick-up options or allow in-storereturns and offer other delivery and returns options that we do not have. New technologies and the continued enhancement of existing technologies anddevelopments in related areas, such as same-day product deliveries, also may increase competitive pressures on us. Our competitors include Amazon.com, Incand Wayfair LLC. We cannot ensure that we will be able to compete successfully against current or future competitors or address increased competitivepressures (see Item 1A—"Risk Factors").SeasonalityOur business is affected by seasonality because of the holiday retail season, which historically has resulted in higher sales volume during our fourthquarter, which ends December 31. We recognized 31.4%, 30.5% and 31.1% of our annual revenue during the fourth quarter of 2014, 2013, and 2012,respectively.Financial Information about Business Segments and Geographic AreasSee Item 15 of Part IV, "Financial Statements"—Note 21. Business Segments for information regarding our business segments and geographicalareas.Intellectual Property and Trade SecretsWe regard our domain names and similar intellectual property as critical to our success. We rely on a combination of laws and contractualrestrictions with our employees, customers, suppliers, affiliates and others to establish and protect our proprietary rights, including the law pertaining to tradesecrets. Despite these precautions, it may be possible for a third party to copy or otherwise obtain and use our intellectual property or trade secrets withoutauthorization. In addition, we cannot ensure that others will not independently develop similar intellectual property. Although we have registered and arepursuing the registration of our key trademarks in the United States and some other countries, some of our trade names may not be eligible to receiveregistered trademark protection. In addition, effective trademark protection may not be available or we may not seek protection in every country in which wemarket or sell our products and services, including in the United States. Additionally, our efforts to protect our trade secrets may not succeed.Third parties have in the past recruited and may in the future recruit our employees who have had access to our proprietary technologies, processesand operations. These recruiting efforts expose us to the risk that such employees and those hiring them will misappropriate and exploit our intellectualproperty and trade secrets.Legal and Regulatory MattersFrom time to time, we receive claims and become subject to regulatory investigations or actions, consumer protection, employment, intellectualproperty and other commercial litigation related to the conduct of our business. We also prosecute lawsuits to enforce our legal rights. Such litigation iscostly and time consuming and can divert our management and key personnel from our business operations. The uncertainty of litigation increases theserisks. In connection with such litigation, we may be subject to significant damages, associated costs, or equitable remedies relating to the operation of ourbusiness and the sale of products on our Website. Any such litigation may materially harm our business, prospects, results of operations, financial conditionor cash flows.These and other types of claims could result in increased costs of doing business in the form of legal expenses, adverse judgments or settlements orrequire us to change our business practices in expensive and significant ways. In addition, litigation could result in interpretations of the law that may limitour current or future business, require us to change our business practices, or otherwise increase our costs.Additional litigation may be necessary in the future to enforce our intellectual property rights, to protect our trade secrets or to determine thevalidity and scope of the proprietary rights of others. Any litigation, regardless of outcome or merit, could result in substantial costs and diversion ofmanagement and technical resources, any of which could materially harm our business (see Item 1A—"Risk Factors").9Table of ContentsFor further information, see the information set forth under Item 15 of Part IV, "Financial Statements"—Note 13. Commitments and Contingencies,Legal Proceedings, contained in the "Notes to Consolidated Financial Statements" of this Annual Report on Form 10-K.Government RegulationOur services are subject to federal and state consumer protection laws including laws protecting the privacy of consumer information and regulationsprohibiting unfair and deceptive trade practices. In particular, under federal and state financial privacy laws and regulations, we must provide notice toconsumers of our privacy policies and advance notice of any changes to our policies and, with limited exceptions we must give consumers the right toprevent sharing of their non-public personal information with unaffiliated third parties. Further, the growth and demand for online commerce could result inmore stringent consumer protection laws that impose additional compliance burdens on online companies. These consumer protection laws could result insubstantial compliance costs.New disclosure and reporting requirements, established under existing or new state or federal laws could increase the cost of doing business,adversely affecting our results of operations.In many states, there is currently great uncertainty whether or how existing laws governing issues such as property ownership, sales and other taxes,libel and personal privacy apply to the Internet and commercial online services. In addition, new state tax regulations in states where we do not now collectstate 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 incometaxes, or to requirements intended to assist states with their tax collection efforts. New legislation or regulation, the application of laws and regulations fromjurisdictions whose laws do not currently apply to our business or the application of existing laws and regulations to the Internet and commercial onlineservices could result in significant additional taxes on our business. These taxes or tax collection obligations could have an adverse effect on our cash flowsand results of operations. Further, there is a possibility that we may be subject to significant fines or other payments for any past failures to comply with theserequirements.As with the state and federal law, these same types of regulatory laws in foreign countries where international customers reside, may also apply to usand, in the case of non-compliance, may subject us to penalties and other requirements that could have an adverse effect on our business.EmployeesAt December 31, 2014, we had approximately 1,700 full-time employees. We seasonally augment our workforce with temporary employees duringour fourth quarter to handle increased workload in both our warehouse and customer service operations. We have never had a work stoppage, and none of ouremployees are represented by a labor union. We consider our employee relationships to be good. Competition for qualified personnel in our industry hashistorically been intense, particularly for software engineers and other technical staff.Executive Officers of the RegistrantThe following persons were executive officers of Overstock as of March 2, 2015:Executive Officers Age PositionPatrick M. Byrne 52 Chief Executive Officer and DirectorStormy D. Simon 46 President and DirectorMark J. Griffin 59 Senior Vice President, General Counsel and Corporate SecretaryRobert P. Hughes 55 Senior Vice President, Finance and Risk ManagementCarter P. Lee 44 Senior Vice President, TechnologySeth L. Marks 41 Senior Vice President, Merchandising and Strategic SourcingDavid J. Nielsen 45 Senior Vice President, Business DevelopmentSam "Saum" Noursalehi 35 Senior Vice President, Product DevelopmentBrian L. Popelka 48 Senior Vice President, Supplier, Customer and People CareDr. Patrick M. Byrne has served as our Chief Executive Officer (principal executive officer) and as a Director since 1999, and as Chairman of theboard of directors from 2001 through 2005 and 2006 through March 2014. From 1997 to 1999, Dr. Byrne served as President and Chief Executive Officer ofFechheimer Brothers, Inc., a manufacturer and distributor of uniforms. From 1995 until its sale in September 1999, Dr. Byrne was Chairman, President andChief Executive Officer of Centricut, LLC, a manufacturer and distributor of industrial torch parts. From 1994 to the present, Dr. Byrne has served as aManager of the Haverford Group, an investment company and an affiliate of Overstock. Dr. Byrne has a Bachelor of Arts10Table of ContentsDegree in Chinese studies from Dartmouth College, a Master's Degree from Cambridge University as a Marshall Scholar, and a a doctorate in philosophy fromStanford University.Ms. Stormy D. Simon has served as President since April 2014. Ms. Simon previously served as Co-President. Ms. Simon has also served as a memberof our board of directors since 2011. Ms. Simon previously served as our Senior Vice President, Customer and Partner Care; Senior Vice President, Marketing;Vice President, BMMG; Travel and Off-Line Advertising; Chief of Staff and as our Director of B2B. Prior to joining Overstock in 2001, Ms. Simon worked inthe media and travel industries.Mr. Mark J. Griffin has served as Senior Vice President, General Counsel since February 2014. He also serves as Corporate Secretary. He began hisservice as Vice President and General Counsel when he joined Overstock in 2006. Before joining Overstock, Mr. Griffin was a partner at the Salt Lake Citylaw firm, Woodbury & Kesler. Prior to that, Mr. Griffin was Director of the Utah Securities Division, Deputy Secretary of State for the State of Nevada, andalso served as an Assistant Utah Attorney General handling securities, antitrust cases and white collar fraud prosecutions. Mr. Griffin served in the leadershipof the North American Securities Administrators Association, including serving as its President, and is an active member of the Utah State Bar with JurisDoctor and Bachelor of Arts degrees from Brigham Young University.Mr. Robert P. Hughes (principal financial and accounting officer) has served as our Senior Vice President, Finance and Risk Management sinceFebruary 2013. He previously served as Vice President and Controller. Prior to joining the Company in 2008, Mr. Hughes served as Chief Financial Officerand Chief of Staff of TenFold Corporation. Prior to working for TenFold, Mr. Hughes held a number of senior accounting and internal audit positions withOracle Corporation. He holds a B.S. in Business Administration with an emphasis in accounting and finance from the University of California Berkeley, HaasSchool of Business, and is a certified public accountant (CA - inactive status).Mr. Carter P. Lee has served as our Senior Vice President, Technology since February 2015. Prior to this, Mr. Lee was Vice President, TechnologyOperations from 2008 through January 2015, Director, Internal Systems from 2004 through 2007 and a Systems Engineer from 2001 through 2003. Prior tojoining Overstock.com, Mr. Lee was a Systems Engineer for Hospice of the Valley and Vice President of Technology for Motherboard Discount Center inPhoenix, AZ.Mr. Seth L. Marks has served as our Senior Vice President, Merchandising and Strategic Sourcing since April 2014. Prior to this, Mr. Marks was VicePresident of Sales and Special Acquisitions. Before joining Overstock.com in 2013, Mr. Marks served as Chief Marketing Officer and President of theacquisition group of Tuesday Morning Corporation beginning in 2011. Prior to this, Mr. Marks was named as CEO of Talon Merchant Capital in 2008, whichlater became part of Liquidation World. Additionally, Mr. Marks co-founded Big Lots Capital, the special acquisitions arm of Big Lots, Inc., and served thereas the Vice President of Merchandising.Mr. David J. Nielsen has served as Senior Vice President, Business Development since August 2014. Mr. Nielsen previously served as Co-Presidentand as Senior Vice President, Merchandising & Supply Chain. Prior to joining Overstock in 2009, Mr. Nielsen was with Payless ShoeSource, Inc., a shoeretailer from 2005 through 2009. At Payless he held a variety of positions, most recently serving as the Vice President of Merchandise Distribution.Additionally, Mr. Nielsen worked at Old Town Imports, LLC, a retail company, where he served as President and CEO. Mr. Nielsen holds a Bachelor's Degreein Business Management with an emphasis in Marketing from Brigham Young University. Mr. Saum Noursalehi has served as our Senior Vice President, Product Development since February 2015. Mr. Noursalehi previously served asSenior Vice President, Marketing, as Vice President of OLabs, a research and development group within the Company, and as Vice President of new productdevelopment. Prior to his appointment as a Vice President, Mr. Noursalehi was the Company’s senior director of website, mobile and search engineoptimization. Mr. Noursalehi has been with Overstock since 2005. Prior to joining Overstock Mr. Noursalehi worked as a software developer. Mr. Noursalehiholds a bachelor's degree in Computer Science from the University of Utah.Mr. Brian L. Popelka has served as our Senior Vice President, Supplier, Customer and People Care since June 2013. Mr. Popelka previously servedas Vice President of Customer Care. Since joining Overstock in 2002, Mr. Popelka has held several positions including the director of Books, Media, Moviesand Games Department, and was the manager of the Business-to-Business Department. Mr. Popelka holds a bachelor's degree in Journalism, Broadcasting,Film and History from the University of Nebraska in Lincoln.Available InformationOur Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and other reports filed or furnished pursuant toSection 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, are available free of charge through the Investor Relations section of our mainwebsite, www.overstock.com, as soon as reasonably practicable after11Table of Contentswe electronically file such material with, or furnish it to, the Securities and Exchange Commission. Our Internet Website and the information containedtherein or connected thereto are not a part of or incorporated into this Annual Report on Form 10-K.ITEM 1A. RISK FACTORS Please consider the following risk factors carefully. If any one or more of the following risks were to occur, it could have a material adverse effecton our business, prospects, financial condition and results of operations, and the market price of our securities could decrease significantly. Statementsbelow to the effect that an event could harm our business (or similar statements) mean that the event could have a material adverse effect on our business,prospects, financial condition and results of operations, which in turn could have a material adverse effect on the market price of our securities. These arenot the only risks we face. We are an e-commerce business and we depend on the continued use of the Internet and the adequacy of the Internet infrastructure. Our business depends upon the widespread use of the Internet and e-commerce. Factors which could reduce the widespread use of the Internet for e-commerce include: •actual or perceived lack of security of information or privacy protection;•cyber-attacks or other disruptions or damage to the Internet or to users’ computers or mobile devices, or the software or cloud-based serviceprograms on which they may depend;•significant increases in the costs of transportation of goods; and•taxation and governmental regulation. We depend on our relationships with independent partners for a large portion of the products that we offer for sale on our Website. If we fail to maintainthese relationships, our business will suffer. At December 31, 2014, we had relationships with approximately 3,200 independent partners whose products we offer for sale on our Website. Salesthrough our partners accounted for approximately 90% of our net revenues for the year ended December 31, 2014. If we do not maintain our existingrelationships or build new relationships with partners on acceptable commercial terms, we may not be able to maintain a broad selection of merchandise, andour business and prospects would suffer severely. Our agreements with partners are generally terminable at will by either party upon short notice. We depend on our partners to perform critical services regarding the products that we offer. In general, we agree to offer the partners’ products on our Website and these partners agree to conduct a number of other traditional retail operationssuch as maintaining inventory, preparing merchandise for shipment to our customers and delivering purchased merchandise on a timely basis. We have noability to ensure that these third parties will continue to perform these services to our satisfaction or on terms we or our customers consider reasonable. Inaddition, because we do not take possession of these fulfillment parties’ products (other than on the return of such products), we are generally unable to fulfillthese traditional retail operations ourselves. If our customers become dissatisfied with the services provided by these third parties, our business and reputationand brand would suffer.Risks associated with the suppliers from whom our products are sourced and the safety of those products could adversely affect our financial performance. Global sourcing of many of the products we sell is an important aspect of our business. We depend on our ability to access products from qualifiedsuppliers in a timely and efficient manner. Our ability to find qualified suppliers who meet our standards and supply products in a timely and efficient manneris a significant challenge, especially with respect to goods sourced from outside the U.S. Political and economic instability, the financial stability ofsuppliers, suppliers’ ability to meet our standards, labor problems experienced by our suppliers, the availability of raw materials, merchandise quality issues,currency exchange rates, transport availability and cost, transport security, inflation, and other factors relating to the suppliers and the countries in whichthey are located or from which they may source materials or products are beyond our control. We also largely rely on our suppliers’ representations of productcontent and quality. Concerns regarding product content or quality, or the safety of products that we source from our suppliers, could cause shoppers to avoidpurchasing certain products from us, or to seek alternative sources of supply for all of their needs, even if the basis for the concern is outside of our control.Any lost confidence on the part of our customers would be difficult and costly to reestablish. As such, any issue regarding the safety of any items we sell,regardless of the cause, could adversely affect our financial performance. Further, if any product we sell were to cause physical injury or injury to property,the injured party or parties might bring claims against us. Any indemnity12Table of Contentsagreement we may have with the supplier may be inadequate or inapplicable, and any insurance coverage we may carry may not be adequate to cover claimsthat could be asserted. Even unsuccessful claims could result in the expenditure of funds and management time and could have a negative impact on ourbusiness.Manufacturers may refuse to sell to us or through our site. We rely upon our partners and other suppliers for the product offerings sold on our website and other products and services we use to run ourbusiness. Our ability to retain or attract new partners and other suppliers may depend in part on our financial performance. Poor financial performance couldresult in suppliers choosing to limit or suspend doing business with us or require us to prepay for our purchases. Further, some manufacturers are unwilling tooffer products for sale on the Internet or on sites like ours. Our inability to source and offer popular products could be a significant problem for us. Our business depends on our Website, network infrastructure and transaction-processing systems. As an e-commerce company, we are completely dependent on our infrastructure. Any system interruption that results in the unavailability of ourWebsite or reduced performance of our transaction systems could substantially reduce our ability to conduct our business. If our Website and related systemsfail at any time to operate well and quickly enough to satisfy a potential customer, we may quickly lose the opportunity to convert that potential customerinto an actual or regular customer. We use internally and externally developed systems for our Website and our transaction processing systems, includingpersonalization databases used for internal analytics, recommendations and order verifications. We have experienced periodic systems interruptions due toserver failure and power failure in the past, which we expect will continue to occur from time to time. We have also experienced and may continue toexperience temporary capacity constraints due to sharply increased traffic during sales or other promotions and during the holiday shopping season. Capacityconstraints can cause system disruptions, slower response times, delayed page presentation, degradation in levels of customer service and other problems. Inthe past we have also experienced difficulties with our infrastructure upgrades. Any future difficulties with our transaction processing systems or difficultiesupgrading, expanding or integrating aspects of our systems may cause system disruptions, slower response times, and degradation in levels of customerservice, additional expense, impaired quality and speed of order fulfillment or other problems. If the facility where substantially all of our computer and communications hardware is located fails, our business, prospects, financial condition andresults of operations could be harmed. If the facility where substantially all of our computer and communications hardware is located fails, or if we suffer an interruption or degradation ofservices at the facility for any reason, our business could be harmed. Our success, and in particular, our ability to successfully receive and fulfill orders andprovide high-quality customer service, largely depends on the efficient and uninterrupted operation of our computer and communications systems.Substantially all of our computer and communications hardware is located at a single co-location facility in Salt Lake City, Utah. In the event of anearthquake or other local disaster, or any other cause of interruption of service, both our primary and back-up sites could be adversely affected. Our systemsand operations are vulnerable to damage or interruption from fire, flood, power loss, telecommunications failure, terrorist attacks, cyber-attacks, acts of war,break-ins, earthquake and similar events. In the event of a failure of our primary facility, the failover to our back-up facility would take at least several hours,during which time our Website would be completely shut down. Our back-up facility is not adequate to support sales at a high level. The back-up facilitymay not process effectively during time of higher traffic to our Website and may process transactions more slowly and may not support all of thefunctionality of our primary site. These limitations could have an adverse effect on our conversion rate and sales. Our disaster recovery plan may beinadequate, and we do not carry business interruption insurance sufficient to compensate us for the losses that could occur. Our servers are vulnerable tocomputer viruses, physical or electronic break-ins and similar disruptions, the occurrence of any of which could lead to interruptions, delays, loss of criticaldata or the inability to accept and fulfill customer orders. The occurrence of any of the foregoing risks could harm our business.We depend upon third party fulfillment and delivery services to fulfill and deliver products to our customers on a timely and consistent basis. Deteriorationin our relationship with any one of these third parties could decrease our ability to track shipments, cause shipment delays, and increase our shipping costsand the number of damaged products. We rely upon third party fulfillment and delivery providers for the shipment of products to customers. We cannot be sure that these relationships willcontinue on terms we find acceptable, or at all. Increases in shipping or fulfillment costs or delivery times, particularly during the holiday season, could harmour business. If our relationships with these third parties are terminated or impaired or if these third parties are unable to deliver products for us, whether as aresult of labor shortage, slow down or stoppage, deteriorating financial or business condition, fulfillment facilities impairment, terrorist attacks, cyber-attacks,Internet or other infrastructure or communications impairment, natural disasters, unexpectedly high shipping volumes13Table of Contentsor for any other reason, we would be required to use alternative fulfillment service providers or carriers for the shipment of products to our customers, if suchalternatives were available. Conditions such as adverse weather or natural disasters can prevent any carrier from performing its delivery services, which canhave an adverse effect on our customers’ satisfaction with us. In any of these circumstances, we may be unable to engage alternative fulfillment services orcarriers on a timely basis, upon terms we find acceptable, or at all. Changing fulfillment services or carriers, or absence of fulfillment services or carrieravailability, could have a material adverse effect on our business.We depend upon our credit card processors and payment card associations. Our customers primarily use credit cards to buy from us. We are dependent upon our credit card processors to process the sales transactions and remitthe proceeds to us. The credit card processors have the right to withhold funds otherwise payable to us to establish or increase a reserve based on theirassessment of the inherent risks of credit card processing and their assessment of the risks of processing our customers’ credit cards at any time, and have doneso from time to time in the past. We are also subject to payment card associations’ operating rules, certification requirements and rules governing electronicfunds transfers, which could change or be reinterpreted to make it difficult or impossible for us to comply. If we fail to comply with these rules orrequirements, we may be subject to fines and higher transaction fees and lose our ability to accept credit and debit card payments from our customers, processelectronic funds transfers, or facilitate other types of online payments. In addition, events affecting our credit card processors, including cyber-attacks, Internet or other infrastructure or communications impairment or other events that could interrupt the normal operation of the credit card processors,could have a material adverse effect on our business. We rely upon paid and natural search engines including Google, Bing, and Yahoo! to rank our product offerings. Our financial results may suffer if searchengines change their ranking algorithms and our product offerings are ranked lower, and we may at times be subject to ranking penalties if the operatorsof search engines believe we are not in compliance with their guidelines. We rely on paid and natural search engines to attract consumer interest in our product offerings. Potential and existing customers use search enginesprovided by search engine companies, including, but not limited to, Google, Bing, and Yahoo!, which use algorithms and other devices to provide users anatural ranked listing of relevant Internet sites matching a user’s search criteria and specifications. Generally, Internet sites ranked higher in the paid andnatural search results attract the largest visitor share among similar Internet sites, and often benefit from increased sales. Natural search engine algorithms useinformation available throughout the Internet, including information available on our site. Search engine companies change their natural search enginealgorithms periodically, and our ranking in natural searches may be adversely affected by those changes. When this occurs, our financial results may sufferfrom reduced revenues and from increased marketing expenses as we seek to replace lost revenues by using other sources.Rules and guidelines of these natural search engine companies govern our participation on their sites and how we share relevant Internet informationthat may be considered or incorporated into the algorithms used by these sites. If these rules and guidelines change, or if we fail to present, or improperlypresent, our site information for use by natural search engine companies, or if any of these natural search engine companies determine that we have violatedtheir rules or guidelines, as Google did in February 2011 through April 2011, or if others improperly present our site information to these search enginecompanies, we may fail to achieve an optimum ranking in natural search engine listing results, or we may be penalized in a way that could harm our business. In addition, large marketplace websites and sites which aggregate marketplace sellers with a large product selection are becoming increasinglypopular, and we may not be able to place our products on these sites to take advantage of their internal search platforms. Our inability to place products on oraccess these sites may have a material adverse effect on our business.Our business depends on effective marketing, and we change our advertising and marketing programs often.We depend on effective marketing and high customer traffic. We have many initiatives in this area, and often change our advertising and marketingprograms. The results of our advertising and marketing programs vary. If we are unable to develop and implement effective and efficient advertising andmarketing programs, our business and results of operations would be harmed.Our business relies heavily on email, and any restrictions on the sending of commercial email could have a material adverse effect our business.14Table of ContentsWe depend on email to promote our site and offerings. We provide daily emails to potential customers about our offerings, and email promotions arean important part of our marketing and help generate a substantial portion of our net revenue. If we are unable to effectively deliver email to our potentialcustomers, our business, financial condition and operating results would be harmed. Changes in webmail applications’ organization or prioritization of emailcould reduce the number of potential customers opening our email. For example, Google Inc.’s Gmail service introduced a feature that organizes incomingemails into categories (for example, primary, social and promotions). Such categorization or similar inbox organizational features may result in our emailsbeing delivered in a less prominent location in a subscriber’s inbox or viewed as “spam” by our subscribers and may reduce the likelihood of that subscriberopening our emails. Anything, including legal or regulatory restrictions, that blocks, imposes restrictions on or imposes charges for the delivery of emailcould also harm our business. We also rely on social networking messaging services to send communications and to encourage customers to sendcommunications. Changes to the terms of these social networking services to limit promotional communications, any restrictions that would limit our abilityor our customers’ ability to send communications through their services, disruptions or downtime experienced by these social networking services or declinein the use of or engagement with social networking services by customers and potential customers could materially adversely affect our business, financialcondition and operating results.We intend to increase the amount we spend on Club O Rewards to Club O members and decrease the amount we spend on coupon marketing to non-Club Omembers, which may adversely affect our revenues.We engage in significant promotional activities involving coupons, and we depend heavily on coupon marketing to generate sales. We intend toattempt to increase the amounts we spend on Club O Rewards to members of Club O, and to decrease the amounts we spend on coupon marketing to non-Club O members. If we are unable to generate sales to Club O members at rates equal to or better than the rates we have been generating through our couponmarketing to non-Club O members, our business, financial condition and operating results could be materially adversely affected.We depend upon third parties for all or substantially all of the services we offer.In addition to the many third parties we rely on in connection with our sale and the delivery of products to our customers, we depend upon thirdparties for all or substantially all of the services we offer, including our insurance offerings, our consumer financing offerings, our new and used car listings,our car-related services and our pet adoption services. Service offerings are inherently different from product offerings, and we may encounter difficulties withour services offerings that may be different from the types of issues we face with our product offerings. We are subject to cyber security risks and risks of data loss or other security breaches, and may incur increasing costs in an effort to minimize those risksand to respond to cyber incidents. Our business is entirely dependent on the secure operation of our Website and systems as well as the operation of the Internet generally. Our businessinvolves 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 and litigation. A number of large Internet companies have suffered security breaches, many of which have involved intentionalattacks. From time to time we and many other Internet businesses also experience denial of service attacks in which attackers attempt to block customers’access to our Website. If we are unable to avert a denial of service attack for any significant period, we could sustain substantial revenue loss from lost salesand customer dissatisfaction. We may not have the resources or technical sophistication to anticipate or prevent rapidly evolving types of cyber-attacks.Cyber-attacks may target us, our customers, our suppliers, banks, credit card processors, delivery services, e-commerce in general or the communicationinfrastructure on which we depend. If an actual or perceived attack or breach of our security occurs, customer and/or supplier perception of the effectivenessof our security measures could be harmed and we could lose customers, suppliers or both. Actual or anticipated attacks and risks may cause us to incurincreasing costs, including costs to deploy additional personnel and protection technologies, train employees, and engage third party experts andconsultants.A person who is able to circumvent our security measures might be able to misappropriate our or our users’ proprietary information, causeinterruption in our operations, damage our computers or those of our users, or otherwise damage our reputation and business. Any compromise of our securitycould result in a violation of applicable privacy and other laws, significant legal and financial exposure, damage to our reputation, and a loss of confidencein our security measures, which could harm our business.Most of our customers use credit cards to pay for their purchases. We rely on encryption and authentication technology licensed from third parties toprovide the security and authentication to effectively secure transmission of confidential15Table of Contentsinformation, including customer payment card numbers. We cannot provide assurance that our technology can prevent breaches of the systems that we use toprotect customer data. Data breaches can also occur as a result of non-technical issues.Under payment card rules and our contracts with our card processors, if there is a breach of payment card information that we store, we could beliable to the payment card issuing banks for their cost of issuing new cards and related expenses. In addition, if we fail to follow payment card industrysecurity standards, even if there is no compromise of customer information, we could incur significant fines or lose our ability to give customers the option ofusing payment cards to fund their payments or pay their fees. If we were unable to accept payment cards, our business would be seriously damaged.Our servers and the servers of our suppliers may also be vulnerable to computer viruses, physical or electronic break-ins, and similar disruptions,including denial-of-service attacks. We may need to expend significant resources to protect against attacks or security breaches or to address problems causedby attacks or breaches. Any attack or breach incident involving us or persons with whom we have commercial relationships, that results in the unauthorizedrelease of our users’ personal information, could damage our reputation and expose us to claims and litigation.Third parties have demonstrated that they can breach the security of customer transaction data of large sophisticated Internet retailers, governmentorganizations and others. Any breach, whether it affects us directly or not, could cause our customers to lose confidence in the security of our site or the use ofthe Internet and e-commerce in general. If third parties are able to penetrate our network security or otherwise misappropriate our customers’ personalinformation or credit card information, or if we give third parties improper access to our customers’ personal information or credit card information, we couldbe subject to claims. The claims could include claims for unauthorized purchases with credit card information, impersonation or other similar fraud claims ordamages for alleged violations of state or federal laws governing security protocols for the safekeeping of customers’ personal or credit card information.They could also include claims for other misuses of personal information, including unauthorized marketing purposes. These claims could result in litigation.Any of these types of claims could materially adversely affect our business. Cyber-attacks affecting our suppliers, delivery services or other service providers could adversely affect us. We depend on our partners to provide a large portion of the product selection we offer and on vendors for the products we purchase and offer in ourdirect business. We also depend on delivery services to deliver products, and on other service providers, including suppliers of services which supportWebsite operations, including payment systems, customer service support, and communications. Cyber-attacks affecting our delivery services or any of ourmost significant suppliers or affecting a significant number of our suppliers of products or services could have a material adverse effect on our business. Theadverse effects could include our inability to source product or fulfill orders, our customers’ or suppliers’ inability to contact us or access our Website or callcenters or chat lines, or the compromise of our customers’ confidential data.Credit card fraud and our response to it could adversely affect our business. We routinely receive orders placed with fraudulent credit card data. We do not carry insurance against the risk of credit card fraud, so our failure toadequately control fraudulent credit card transactions could reduce our net revenues and our gross profit or cause credit card or payment system companies todisallow their cards’ use for customer payments for the goods and services we sell. We may suffer losses as a result of orders placed with fraudulent credit carddata even if the associated financial institution approved payment of the orders. Under current credit card practices, we may be liable for fraudulent creditcard transactions because we do not obtain a cardholder’s signature. If we are unable to detect or control credit card fraud, claims against us for thesetransactions could harm our business, prospects, financial condition and results of operation. Further, to the extent that our efforts to prevent fraudulent ordersresult in our inadvertent refusal to fill legitimate orders, we would lose the benefit of legitimate potential sales and risk the alienation of legitimate customers.Natural disasters, pandemics, and geo-political events could adversely affect our business. Natural disasters, including hurricanes, cyclones, typhoons, tropical storms, floods, earthquakes and tsunamis, weather conditions, including winterstorms, droughts and tornados, whether as a result of climate change or otherwise, pandemics, and geo-political events, including civil unrest or terroristattacks, that affect us or our delivery services, suppliers, credit card processors or other service providers could adversely affect our business. Our insurance coverage and indemnity rights may not adequately protect us against loss. We cannot provide any assurance that the types, coverage, or the amounts of any insurance coverage we may carry from time to time will beadequate to compensate us for any losses we may actually incur in the operation of our business. We16Table of Contentsalso cannot provide any assurance that any insurance we may desire to purchase will be available to us on terms we find acceptable or at all. Similarly, we arenot indemnified by all our suppliers, nor can we be certain that any indemnification rights we may have are enforceable or would be adequate to cover actuallosses we may incur as a result of the sale or use of products our indemnitors provide to us. Actual losses for which we are not insured or indemnified, orwhich exceed our insurance coverage or the capacity of our indemnitors, could harm our business, prospects, financial condition and results of operations. We face intense competition and may not be able to compete successfully against existing or future competitors. The online retail market is rapidly evolving and intensely competitive. Barriers to entry are minimal, and current and new competitors can launchnew websites at a relatively low cost. We currently compete with numerous competitors, including: •liquidation e-tailers such as SmartBargains;•online retailers with discount departments such as AliExpress (part of the Alibaba Group), Amazon.com, Inc., eBay, Inc., andRakuten.com, Inc. (formerly Buy.com, Inc.);•private sale sites such as Gilt Groupe and Rue La La;•online specialty retailers such as Blue Nile, Inc., Bluefly, Inc., Wayfair, LLC, Zappos.com, and Zulily, Inc.; and•traditional general merchandise and specialty retailers and liquidators such as Barnes and Noble, Inc., Best Buy Co. Inc., Costco WholesaleCorporation, Home Depot, Inc., J.C. Penny Company, Inc., Ross Stores, Inc., Sears Holding Corporation, T.J. Maxx, Target Corporation, andWal-Mart Stores, Inc. all of which also have an online presence. We expect the online retail market to become even more competitive as traditional liquidators and online retailers continue to develop and improveservices that compete with our services. In addition, more traditional manufacturers and retailers may continue to add or improve their e-commerce offerings.Traditional or online retailers may create proprietary, store-based distribution and returns channels. Competitive pressures, including same-day deliverycapabilities, from any of our competitors, many of whom have longer operating histories, larger customer bases, greater brand recognition and significantlygreater financial, marketing and other resources than we do, could harm our business. Further, as a strategic response to changes in the competitive environment, we may from time to time make competitive pricing, service, marketingor other decisions that could harm our business. For example, to the extent that we enter new lines of businesses such as third party logistics or discount brickand mortar retail, we are or would be competing with large established businesses such as APL Logistics and Ross Stores, Inc. We are currently offeringinsurance products, and as such face competition from large established businesses with substantially more experience than we have. In the past we haveentered the online auctions, car listing and real estate listing businesses in which we compete or competed with large established businesses including eBay,Inc., and AutoTrader.com, Inc. We no longer offer online auctions services or real estate listing services.Mobile commerce and our Club O offerings are becoming increasingly significant to us.Mobile commerce and our Club O offerings are becoming increasingly significant to us. Customers who use mobile devices and customers who joinClub O may behave differently from our other customers. For example, the conversion rate of purchases from mobile devices is lower than from other sources.If our mobile customers or our Club O customers are less profitable to us than our other customers, our business could be harmed.If one or more states successfully assert that we should collect sales or other taxes on the sale of our merchandise or the merchandise of third parties thatwe offer for sale on our Website, or that we should pay commercial activity taxes, our business could be harmed. We 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 decisionsconstruing applicable constitutional law. One or more local, state or foreign jurisdictions may seek to impose sales tax collection obligations on us becausewe are engaged in online commerce, even though to do so would be contrary to existing court decisions. The future location of our fulfillment or customerservice centers networks, or any other operation, service contracts with third parties located in another state, channel distribution arrangements or otheragreements with third party sellers, or any act that may be deemed by a state to have established a physical presence in states where we are not now present,may result in additional sales and other tax obligations. New York and other states have passed so-called “Internet affiliate advertising” statutes, whichrequire a remote seller, with no physical presence in the state, to collect state sales tax if the remote seller contracted for advertising services with an Internetadvertiser in that state. In New York and states passing similar laws, we have terminated our use of locally based Internet advertisers. Many other statescurrently have passed17Table of Contentssimilar laws and others have legislative proposals under consideration. In a case that went up on appeal, an Illinois state court struck down on constitutionalgrounds a similar Illinois statute, and the Illinois Supreme Court has upheld that decision. If such laws survive constitutional challenge, we may elect todiscontinue in those states valuable marketing through the use of affiliates based in those states, or may begin to collect taxes in those states. In either event,our business could be harmed. Further, our business could be harmed if one or more states or any foreign country successfully asserts that we should collectsales or other taxes on the sale of our merchandise.The United States Senate passed the Marketplace Fairness Act of 2013 (“MFA”), but it failed to pass in the United States House of Representatives.There continue to be efforts to revive and pass MFA or MFA-type legislation in the current Congress. MFA or MFA-type legislation would permit qualifyingstates to force remote sellers like us to collect taxes in states where we have no physical presence. If the MFA or MFA-type legislation becomes law, ourbusiness could be harmed.Other states have enacted forms of economic taxes to which we may be subject. We have been subject to and in the past contested an audit by onesuch state of an economic tax assessment and settled the audit demand by payment of a diminished assessment without penalty or interest. Other businesseshave contested the constitutionality of these economic taxes, but these challenges are not yet concluded. If other states enact and commence enforcement ofsimilar commercial activity tax laws, these could harm our business.Several other states have enacted laws requiring remote vendors to notify resident purchasers in those states of their obligation to pay a use tax ontheir purchases and, in some instances, to report untaxed purchases to the state tax authorities. In Colorado, a federal court on constitutional grounds granteda preliminary injunction against the state’s enforcement of its tax-notice and reporting law. Colorado appealed, and the injunction was overturned onjurisdictional grounds. The ruling is being appealed to the United States Supreme Court, and the plaintiff has also commenced an action in Colorado statecourt, challenging the law. The Colorado state court has issued a preliminary injunction suspending the law's enforcement on constitutional grounds. InFebruary 2014, another bill was introduced in the Colorado House of Representatives that would require retailers without a physical presence in Colorado tocollect and remit state sales taxes if they engage in any activity in connection with the selling, leasing or delivery of tangible personal property or taxableservices within the state. Other states have enacted similar legislation and more states may enact these laws, or other laws to force or encourage througheconomic pressures remote retailers to collect and remit sales tax, despite constitutional prohibitions. Such laws could harm our business by imposingunreasonable notice burdens upon us, by interposing burdensome transaction notices that negatively affect conversion, or by discouraging customerpurchases by requiring detailed purchase reporting. Economic pressure on states could harm our business. Economic circumstances affecting many states have increased the pressures on state legislatures and agencies to find ways to increase state revenues.States may continue to increase sales and use tax rates, create new tax laws covering previously untaxed activities, increase existing license fees or create newfees, any or all of which may directly or indirectly harm our business. Similarly, administrative agencies may apply more rigorous enforcement efforts or takeaggressive positions respecting the laws they administer, especially if the laws permit the imposition of monetary penalties and fines which either the state orthe administrative agency may use to balance their budgets or otherwise fund operations. Any of these activities could directly or indirectly harm ourbusiness.If we do not respond to rapid technological changes, our services could become obsolete, and we could lose customers. The Internet and the online commerce industry are changing rapidly. To remain competitive, we must continue to enhance and improve thefunctionality and features of our e-commerce businesses. If we fail to do so, we may lose customers. If competitors introduce new products or services usingnew technologies or if new industry standards and practices emerge, our Website and our proprietary technology and systems may become obsolete. Ourfailure to respond to technological change or to adequately maintain, upgrade and develop our computer network and the systems used to process customers’orders and payments could harm our business. We have an evolving business model, which increases the complexity of our business. Our business model has evolved in the past and continues to do so. In prior years we have added additional types of services and product offeringsand 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 wecannot offer any assurance that any of them will be successful. From time to time we have also modified aspects of our business model relating to our productmix and the mix of direct/partner sourcing of the products we offer. We may continue to modify this aspect of our business as well as other significant aspectsof our business. We cannot offer any assurance that these or any other modifications will be successful or will not result in harm to18Table of Contentsthe business. The additions and modifications to our business have increased the complexity of our business and placed significant strain on ourmanagement, personnel, operations, systems, technical performance, financial resources, and internal financial control and reporting functions. Futureadditions to or modifications of our business are likely to have similar effects. We may not be able to manage growth effectively, which could damage ourreputation, limit our growth and negatively affect our operating results. Further, any new business or website we launch that is not favorably received byconsumers could damage our reputation or our brand.We are attempting to expand our international business, which may cause our business to become increasingly susceptible to numerous risks andchallenges that could affect our profitability. We sell products in international markets, and are attempting to expand into these markets more aggressively. International sales and transactions,and our efforts to expand them, are subject to inherent risks and challenges that could adversely affect our profitability, including: •the need to develop new supplier and manufacturer relationships;•the need to comply with additional U.S. and foreign laws and regulations to the extent applicable, including but not limited to, restrictionson advertising practices, regulations governing online services, regulations governing or prohibiting the use of cryptocurrency such asbitcoin, restrictions on importation of specified or proscribed items, importation quotas, consumer protection laws, laws regardingintellectual property rights, laws dealing with consumer and data protection, privacy, encryption, and restrictions on pricing or discounts;•changes in international laws, regulatory requirements, taxes and tariffs;•geopolitical events, such as war and terrorist attacks;•our limited experience with different local cultures and standards;•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. To the extent we generate international sales transactions in the future, any negative impact on our international operations could negatively impactour business. To date, most of our international sales have been denominated in U.S. dollars, and we have not had significant foreign currency risk on thosesales. However, in the future, gains and losses on the conversion of foreign payments into U. S. dollars may contribute to fluctuations in our results ofoperations and fluctuating exchange rates could cause reduced gross revenues and/or gross profit percentages from non-dollar-denominated internationalsales. Additionally, penalties for non-compliance with laws applicable to international business and trade, such as the U.S. Foreign Corrupt Practices Act, orlaws governing or prohibiting the use of cryptocurrency such as bitcoin, could negatively impact our business. Our foreign brand domain name may cause confusion. In 2010, we undertook an effort to associate our brand globally with the domain address: www.O.co. We did this in part because in many foreignmarkets the word “Overstock” lacked a good foreign cognate. Following a period of testing for the O.co brand and domain address, we returned to theOverstock.com name as our primary brand domestically because domestic consumer acceptance did not occur as quickly as we had hoped. While we havereturned domestically to the Overstock.com brand and principal domain address, we continue to use the O.co address and brand outside of the United States.There is no assurance that the use of Overstock.com or O.co will gain acceptance or have success in foreign markets.We have purchased land to build a facility to serve as our future headquarters, and have environmental and other risks, and may incur environmentalexpense and liabilities, in connection with the project, and under the environmental indemnity agreement we entered into in connection with our recentcredit facility.In the third quarter of 2014, we purchased land in Salt Lake City, Utah in preparation for our construction of our future headquarters. In purchasingthe land, we became subject to the risks of owning real estate, including the risks of environmental liabilities and the requirements for compliance withapplicable laws, rules, regulations, ordinances and other requirements. The land we purchased is part of the Midvale Slat Superfund Site (“Site”), a formerComprehensive Environmental Response, Compensation and Liability Act ("CERCLA") superfund site that has been fully remediated pursuant to CERCLA.As purchaser of the property, O.com Land, LLC expects to be protected from CERCLA liability as a bona fide prospective purchaser ("BFPP") so long as inthe construction of the headquarters, O.com Land, LLC follows certain requirements of the CERCLA statute and the consent decree governing Siteremediation and the maintenance of BFPP status. Among other things, the consent decree requires that we not disturb the ground water by drilling new wells,or disturbing existing wells, and requires us to remediate any excavated soil material according to the specifications of the consent decree. We intend tostrictly follow CERCLA and abide by the terms of the consent decree; however, there can be no guarantee that our subsidiary will succeed in19Table of Contentsmaintaining BFPP status. Its failure to do so could expose us to environmental liabilities which could be material. Further, in connection with the creditfacility we recently entered into with U.S. Bank and other banks, we entered into a broad environmental indemnity agreement pursuant to which we madedetailed representations about the environmental status of the land and agreed to indemnify and defend U.S. Bank and other banks and other persons againsta broad array of potential environmental claims, liabilities and exposures relating to the property we purchased and the headquarters we intend to build. Anysuch environmental liabilities, and any liabilities under the environmental indemnity agreement, could be material and could have a material adverse effecton our business, prospects, financial condition and results of operations.We have entered into contracts and plan to spend approximately $95 million to build, equip and furnish a facility to serve as our future headquarters, andexpect to incur risks, expense and debt in connection with the project.As we proceed with the design, development and construction of a facility for our new headquarters, we will incur the risks and expense of doing so.The design and construction of the headquarters we are planning will be complicated. We may encounter unanticipated developments affecting our estimatesregarding the expense of the project. We may also encounter unanticipated delays in the negotiation of definitive agreements and/or the construction of thenew facility. Any such difficulties could result in our default under the Loan Agreement and related agreements we have entered into with U.S. Bank andother banks, and could result in material liabilities and expense and could have a material adverse effect on our business, prospects, financial condition andresults of operations. In connection with our design, development and construction of a facility for our new headquarters, we have entered into a syndicated senior securedcredit facility, and may need to obtain additional financing as well. Our current estimate of the total cost of the development and construction and related equipment and furniture of our new headquarters isapproximately $95 million. We have entered into a syndicated senior secured credit facility with U.S. Bank and other banks that is intended to provide uswith construction and term financing of $45.8 million. The facility is designed to convert to an approximately 6.75 year term loan upon completion ofconstruction. We will need to maintain compliance with the requirements governing the facility, including compliance with financial and other covenants,certain of which may be subject to events outside of our control. If we fail to comply with any of such covenants, we may be unable to obtain or utilize thefinancing contemplated by the facility. If the financing we anticipate under the facility is not fully available to us for any reason, it would have a materialadverse effect on our liquidity and could have a material adverse effect on our business, prospects, financial condition and results of operations. We have pledged the land and our new headquarters and all related assets, as well as our inventory and accounts receivable and related assets, to secureour obligations under the syndicated senior secured credit facility.We have pledged all of our assets relating to the new headquarters and the site on which it is to be located, as well as our inventory, accountsreceivable and related assets, and most of our deposit accounts, to secure our obligations under the syndicated senior secured credit facility. The real estateloan and the revolving loan facilities included within the facility are cross-collateralized and cross-defaulted. If we were to default on either loan or have anEvent of Default under the facility, the lenders would have the right to, among other things, foreclose on the collateral for our obligations under the facility,which would have a material adverse effect on our liquidity and could have a material adverse effect on our business, prospects, financial condition andresults of operations.We have entered into long-term interest rate swaps covering a period of approximately nine years.In connection with the syndicated senior secured credit facility described above, we have entered into interest rate swaps with U.S. Bank andCompass Bank. The interest rate swaps are intended to manage the interest rate risk on the indebtedness we expect to incur in 2015 and 2016 for the RealEstate Loan. However, if for any reason the notional amounts subject to the swaps fail to substantially match our indebtedness for the Real Estate Loan at anytime until the October 2023 maturity of the interest rate swaps, we would be exposed to potential liabilities under the swaps that might not be substantiallyoffset by the interest payments we would owe under the loan agreement. If the lenders under the senior secured credit facility were to fail to fund the RealEstate Loan for any reason, we would remain liable for payments due under the swaps unless we were to settle the swaps. If we were to settle the swaps at atime when interest rates have fallen (relative to the swaps' inception), the price to settle the swaps could be material. Any such adverse developments couldresult in material liabilities and expense and could have a material adverse effect on our business, prospects, financial condition and results of operations.We may fail to qualify for hedge accounting treatment.20Table of ContentsIn connection with the financing we obtained to fund a portion of the construction of our new corporate headquarters, we have entered into interestrate swap transactions with certain of our lenders intended to minimize our exposure to various interest rate risks. At inception in 2014 we designated theseswaps as cash flow hedges in accordance with Accounting Standards Codification (“ASC”) 815, Derivatives and Hedging. However, in the future, we may failto qualify for hedge accounting treatment under these standards for a number of reasons, including if we fail to satisfy hedge documentation and hedgeeffectiveness assessment requirements or if our derivative instruments are not highly effective. If we fail to qualify for hedge accounting treatment, losses onthe swaps caused by the change in their fair value will be recognized as part of net income, rather than being recognized as part of other comprehensiveincome.We have entered into a Construction Agreement relating to the construction of the new headquarters; however, many aspects of the proposed constructionremain subject to future agreement.In October 2014, we entered into a Construction Agreement (the “Construction Agreement”) with Okland Construction Company Inc. (“Okland”)regarding preconstruction and construction services to be provided in connection with the construction of our corporate headquarters, together with relatedfacilities and improvements. Okland has agreed that the work contemplated by the Construction Agreement will be performed for the Guaranteed MaximumPrice (as defined in the Construction Agreement) and in accordance with the Construction Schedule (as defined in the Construction Agreement). However,neither the Guaranteed Maximum Price nor the Construction Schedule had been finalized as of the date of the Construction Agreement or as of March 2,2015, and the Construction Agreement provides that Okland does not warrant or guarantee estimates or schedules except as they are included in the future aspart of the Guaranteed Maximum Price and the final Project schedule and Construction Schedule. Further, both the Guaranteed Maximum Price and theConstruction Schedule are subject to change after they have been determined. Because many aspects of the proposed construction remain subject to futureagreement, there is a risk of difficulties under the Construction Agreement, any of which if not resolved to the satisfaction of us and Okland could causedifficulties with the construction of our headquarters, any of which in turn could cause us to default under the syndicated senior secured credit facility werecently entered into with U.S. Bank and other banks. Any such adverse developments could result in material liabilities and expense and could have amaterial adverse effect on our business, prospects, financial condition and results of operations.We expect to incur substantial indebtedness. At December 31, 2014, we had no indebtedness for borrowed money. However, we expect to incur substantial indebtedness under the syndicatedsenior secured credit facility we recently entered into with U.S. Bank and other banks, and we expect to incur substantial additional indebtedness inconnection with the completion of our headquarters. In addition, we expect to incur up to the full $10 million of indebtedness potentially available to usunder the revolving credit facility included in the senior secured credit facility, and we may also incur additional indebtedness, subject to the limitations setforth in the Loan Agreement governing our senior secured credit facility. All such indebtedness will increase our business risks substantially, including ourvulnerability to industry downturns and competitive pressures. Further, the Loan Agreement and related agreements governing the senior secured creditfacility contain numerous requirements, including affirmative and negative financial and other covenants. If we are unable to maintain compliance with all ofthem, we will be in default, the consequences of which could materially harm our business. Further, to the extent that we incur additional indebtedness, wemay be subject to additional requirements. The degree to which we are ultimately leveraged could materially and adversely affect our ability to obtainadditional financing for working capital, acquisitions or other purposes and could make us more vulnerable to industry downturns and competitive pressures.Our ability to meet our debt service obligations will be dependent upon our future performance, which will be subject to financial, business and other factorsaffecting our operations, many of which are beyond our control. 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 futureperformance, which will be affected by a range of economic, competitive and business factors. We cannot control many of these factors, including generaleconomic conditions and the health of the Internet retail industry. If our operations do not generate sufficient cash flow from operations to satisfy our debtservice obligations and all of our other obligations, we may need to borrow additional funds to make these payments or undertake alternative financingplans, such as refinancing or restructuring our debt, or reducing or delaying capital investments and other expenses. Additional funds or alternative financingmay 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 alternativefinancing on acceptable terms could have a material adverse effect on our business, prospects, financial condition and results of operations.Existing or future government regulation could harm our business.21Table of Contents We are subject to regulation at the federal, state and international levels, including regulation relating to privacy, security, retention, transfer and useof personal user information and telemarketing laws. Increasing regulation, along with increased governmental or private enforcement, may increase the costof our business. Compliance with existing and new privacy and security laws may be difficult and costly and may further restrict our ability to collectdemographic and personal information from users, which could harm our marketing efforts, and could require us to implement new and potentially costlyprocesses, procedures and/or protective measures. The expansion of these and other laws, both in terms of their number and their applicability to the Internetcould also harm our business. Many laws, adopted prior to the advent of the Internet, do not contemplate or address the unique issues raised thereby.Consequently, courts or regulators may apply these laws to Internet commerce in ways that may present difficult or impossible compliance challenges. Lawsthat do reference the Internet generally remain subject to interpretation by the courts and their applicability and reach are therefore not always clear.Moreover, Internet advances and innovations may result in new questions about the applicability and reach of these laws. Additionally, laws governing thepermissible contents of products may adversely affect us, and we are subject to federal and state consumer laws, including those governing advertising,product labeling, product content requirements and product safety. The laws may cause us to incur losses for any non-compliant items in our inventory, orwhich we may previously have sold. We may be subject to claims related to personal injury, death, environmental or property damage. We have in the pastand may from time to time be required to participate in product recalls. We may incur expense in connection with any of the foregoing or other matters oractions which may not be covered, in whole, in part or at all, by our liability insurance. These current and future laws and regulations could harm ourbusiness, prospects, financial condition and results of operation.Economic factors, including our increasing exposure to the U.S. housing industry, may adversely affect our financial performance. Economic conditions may adversely affect our financial performance. In the United States, weakness in the housing market, changes in interest rates,changes in fuel and other energy costs, inflation or deflation or expectations of either inflation or deflation, actual or anticipated levels of unemployment,unavailability or limitations of consumer credit, higher consumer debt levels or efforts by consumers to reduce debt levels, higher tax rates and other changesin tax laws, overall economic slowdown, changes in consumer desires affecting demand for the products and services we sell and other economic factorscould adversely affect consumer demand for the products and services we sell. Any of these factors may change the mix of products we sell to a mix with alower average gross margin and/or result in slower inventory turnover and/or greater markdowns on inventory. Higher interest rates, transportation costs,inflation, higher costs of labor, insurance and healthcare, foreign exchange rates fluctuations, higher tax rates and other changes in tax laws, changes in otherlaws and regulations and other economic factors in the United States may increase our cost of sales and operating, may increase our selling, general andadministrative expenses, and may otherwise adversely affect our operations and operating results. These factors may affect not only our operations, but alsothe operations of suppliers from whom we purchase goods, which may also result in an increase in the cost to us of the goods and services we sell.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 andgarden products are affected by the strength of the U.S. housing industry, and that our business may be adversely affected by downturns in the U.S. housingindustry.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 thannecessities. As a result, our results of operations are sensitive to changes in macro-economic conditions that impact consumer spending, includingdiscretionary spending. Difficult macro-economic conditions, particularly high levels of unemployment, also impact our customers’ ability to obtainconsumer credit. Other factors, including consumer confidence, employment levels, interest rates, tax rates, consumer debt levels, and fuel and energy costscould reduce consumer spending or change consumer purchasing habits. Slowdowns in the U.S. or global economy, or an uncertain economic outlook, couldmaterially adversely affect consumer spending habits and our operating results.We have reversed the valuation allowance for our deferred tax assets, and we may not be able to realize these assets in the future. Our deferred tax assetsmay also be subject to additional valuation allowances, which could adversely affect our operating results.From our inception to December 31, 2013, we established a valuation allowance for our deferred tax assets, primarily due to realized losses anduncertainty regarding our future taxable income. Determining whether a valuation allowance for deferred tax assets is appropriate requires significantjudgment and an evaluation of all positive and negative evidence. At each reporting period, we assess the need for, or the sufficiency of, a valuationallowance against deferred tax assets. At December22Table of Contents31, 2013, based on the weight of all the positive and negative evidence, we concluded that it was more likely than not that we will realize our net deferred taxassets based upon future taxable income. Therefore we reversed the valuation allowance at December 31, 2013.Our conclusion at December 31, 2013 that it is more likely than not that we will realize our net deferred tax assets was based primarily on ourestimate of future taxable income. Our estimate of future taxable income is based on internal projections which primarily consider historical performance, butalso include various internal estimates and assumptions as well as certain external data. We believe all of these inputs to be reasonable, although inherentlysubject to significant judgment. If actual results differ significantly from these estimates of future taxable income, we may need to reestablish a valuationallowance for some or all of our deferred tax assets. Establishing an allowance on our net deferred tax assets could have a material adverse effect on ourfinancial condition and operating results.Our income tax provisions and the amounts we reserve for tax contingencies are estimates and are subject to variations and adjustments. The amounts weultimately pay may exceed the amounts estimated or accrued. Our quarterly tax provision, and our quarterly estimate of our annual effective tax rate, is subject to significant variation 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, changes in how we dobusiness, changes in law, regulations, and administrative practices, and relative changes of expenses or losses for which tax benefits are not recognized.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.Changes in state, federal, and foreign tax laws may increase our tax contingencies. The timing of the resolution of income tax examinations is highlyuncertain, and the amounts ultimately paid, if any, upon resolution of the issues raised by the taxing authorities may differ from the amounts accrued. It isreasonably possible that within the next 12 months we will receive assessments by various tax authorities or possibly reach resolution of income taxexaminations in one or more jurisdictions. These assessments or settlements may result in changes to our contingencies related to positions on prior years’ taxfilings. The volatility of our quarterly tax provision or the resolution of matters related to our tax contingencies could have a material adverse effect on ourfinancial results.We may need to implement additional finance and accounting systems, procedures and controls as we grow our business and organization and to satisfynew reporting requirements. We are required to comply with a variety of reporting, accounting and other rules and regulations. Compliance with existing requirements isexpensive. Further requirements may increase our costs and require additional management time and resources. We may need to implement additionalfinance and accounting systems, procedures and controls to satisfy our reporting requirements. If our internal control over financial reporting is determined tobe ineffective, such failure could cause investors to lose confidence in our reported financial information, negatively affect the market price of our commonstock, subject us to regulatory investigations and penalties, and adversely impact our business and financial condition. Changes in accounting standards and subjective assumptions, estimates and judgments by management related to complex accounting matters couldsignificantly affect our financial results. Generally accepted accounting principles and related accounting pronouncements, implementation guidelines and interpretations with regard to awide range of matters that are relevant to our business, including but not limited to revenue recognition, estimating valuation allowances and accruedliabilities (including allowances for returns, credit card chargebacks, doubtful accounts and obsolete and damaged inventory), internal use software andwebsite development (acquired and developed internally), accounting for income taxes, valuation of long-lived and intangible assets and goodwill, stock-based compensation and loss contingencies, are highly complex and involve many subjective assumptions, estimates and judgments by our management.Changes in these rules or their interpretation or changes in underlying assumptions, estimates or judgments by our management could significantly changeour reported or expected financial performance. We face risks relating to our inventory. In our direct business, we sell merchandise that we have purchased and hold in inventory. We assume the risks of inventory damage, theft andobsolescence, as well as risks of price erosion for these products. These risks are especially significant because some of the merchandise we sell ischaracterized by seasonal trends, fashion trends, rapid technological change, obsolescence and price erosion, and because we sometimes make largepurchases of particular types of inventory. Subject to our returns policies, we accept returns of products sold through our partners as well as products we sellin our direct23Table of Contentsbusiness, and we have the risk of reselling the returned products. In the past we have recorded charges for obsolete inventory and have had to sell certainmerchandise at a discount or loss. To the extent that we rely on purchased inventory, our success will depend on our ability to sell our inventory rapidly, theability of our buying staff to purchase inventory at attractive prices relative to its resale value and our ability to manage customer returns and other costs. Ifwe are unsuccessful in any of these areas, we may be forced to sell our inventory at a discount or loss. Further, we purchase some of our inventory from foreignsuppliers and pay for inventory with U.S. dollars. If the dollar weakens with respect to foreign currencies, foreign suppliers may require us to pay higher pricesfor products, which could negatively affect our profit margins.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 thatwe will continue to do so. We also contract with third parties to receive returns and process orders. If we or our third party providers do not successfullyoptimize and operate our warehouse and customer service operations, it could significantly limit our ability to meet customer demand, customer shipping orreturn 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 manageour facilities in an optimal way, which may result in excess or insufficient inventory or warehousing capacity. We may also fail to staff our fulfillment andcustomer service centers at optimal levels. Our failure to do so could negatively impact our operating results and customer experience.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 aremaintained. We maintain the majority of our cash, cash equivalents and short-term investments in accounts with a small number of major financial institutionswithin the United States, in the form of demand deposits, money market accounts, time deposits, U.S. Treasury Bills and other short-term investments. Ourdeposits in these institutions are generally substantially in excess of the amounts of insurance provided by the FDIC, and some deposits may not be coveredby 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, whichwould have a material adverse effect on our financial condition.Our decision to accept and hold cryptocurrency, such as bitcoins, may subject us to exchange risk and additional tax and regulatory requirements.In January 2014, we began accepting bitcoins as a form of payment for purchases on our website. Bitcoin is a cryptocurrency that uses cryptographyto control the creation and transfer of the currency between individual parties. Bitcoin is not considered legal tender or backed by any government. Sinceinception in 2009, bitcoins have experienced price volatility, technological glitches and various law enforcement and regulatory interventions. At present wedo not accept bitcoin payments directly, but use a third party vendor to accept bitcoin payments on our behalf. That third party vendor then immediatelyconverts the bitcoin payments into U.S. dollars so that we receive payment for the product sold at the sales price in U.S. dollars.In September 2014 we launched an updated international checkout system which allows us to accept bitcoin globally. The use of cryptocurrencysuch as bitcoin has been prohibited or effectively prohibited in some countries. Authorities in other countries have issued statements or regulationsprohibiting financial institutions or others from holding or dealing in cryptocurrency. Authorities in some countries have issued statements or regulations tothe effect that cryptocurrency is not legal tender. Authorities in many other countries have issued warnings about their perceptions of the risks of dealing inbitcoin or other cryptocurrency and/or announcing that cryptocurrency is subject to money laundering or other laws or to taxation, or that the authorities arestudying the legality of cryptocurrency. If we fail to comply with prohibitions applicable to us, we could face regulatory or other enforcement actions andpotential fines and other consequences.We have also begun to hold bitcoin and other cryptocurrency directly. Consequently, we have exchange rate risk on the amounts we hold as well asthe risks that regulatory or other developments may adversely affect the value of the cryptocurrency we hold. In the future, we may transact in cryptocurrencydirectly or increase our cryptocurrency holdings. This will subject us to additional exchange risk and other risks as described above, which may have anadverse effect on our results. There is also uncertainty regarding the future legal and regulatory requirements relating to cryptocurrency or transactionsutilizing cryptocurrency. These uncertainties, as well as future accounting and tax developments, or other requirements relating to cryptocurrency, mayadversely affect us.24Table of ContentsOur effort to develop code for the purposes of facilitating the creation of a decentralized facility for the trading of securities is an area in which we havelimited experience, may be expensive, and is subject to the resolution of significant technical and legal and regulatory constraints.We are working to develop code for the purposes of facilitating the creation of a decentralized facility for the trading of securities. Although we havehired employees with significant experience in the technical workings of Bitcoin and other cryptocurrencies, we do not have significant experience with thetypes of projects we are now pursuing. These projects may be expensive, and are subject to substantial risk that they may ultimately be unsuccessful. Further,the creation of a decentralized facility for the trading of securities would be subject to the future resolution of numerous significant legal and regulatoryconstraints and prohibitions. Consequently, even if all technical challenges to these projects were solved, the legal and regulatory constraints andprohibitions may be insurmountable.We may be adversely affected by fluctuations in precious metal prices. At December 31, 2014 our investment in precious metals was $10.9 million. Our financial results may be adversely affected by declines in the priceof precious metals. The prices of precious metals may fluctuate widely in the future and are affected by numerous factors beyond our control such as interestrates, exchange rates, inflation or deflation, fluctuation in the value of the United States dollar and foreign currencies, global and regional supply anddemand, and the political and economic conditions of mineral producing countries throughout the world. Our investment consists of actual precious metals,rather than financial instruments. We store our precious metals off-site in a third party facility. Consequently, we are subject to the risks of physical storagewith a third party that we do not control.We have a history of significant losses. If we do not maintain profitability, our financial condition and our stock price could suffer. We have a history of losses, and we may incur operating and net losses in the foreseeable future. At December 31, 2014, our accumulated deficit was$153.9 million. We need to generate significant revenues to maintain profitability, and we may not be able to do so. Although we have generated positive netincome in recent years, we incurred a net loss of $19.4 million in 2011. We may be unable to maintain profitability in the future. If our revenues grow moreslowly than we anticipate or decline, or if our expenses exceed our expectations, our financial results would be harmed and our business, prospects, financialcondition and results of operations could fall below the expectations of public market analysts and investors. If we fail to accurately forecast our expenses and revenues, our business, prospects, financial condition and results of operations may suffer and the priceof our securities may decline. The rapidly evolving nature of our industry and the constantly evolving nature of our business make forecasting operating results difficult. Weperiodically implement large, complex and expensive infrastructure upgrades in order to increase our ability to handle larger volumes of sales and to developor increase our ability to perform a variety of analytical procedures relating to our business. We are continuing to upgrade and further expand these and othercomponents of our infrastructure. We are also in the process of designing and constructing a facility to serve as our corporate headquarters. In the past, wehave experienced difficulties with upgrades of our infrastructure, and have incurred increased expenses as a result of these difficulties. As a result ofexpenditures on our infrastructure and headquarters, our ability to reduce our expenditures is and will be limited. Therefore, any significant shortfall in therevenues for which we have built and are continuing to build our business would likely harm our 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 do not stock or are otherwise unable to source productssufficient to meet customer demand, our business would be adversely affected. If we liquidate products, as we have in the past, we may be required to takesignificant inventory markdowns or write-offs, which could reduce gross profits. We may experience an increase in our net shipping cost due tocomplimentary upgrades, split-shipments, and additional long-zone shipments necessary to ensure timely delivery for the holiday season. If too manycustomers access our Website within a short period of time due to increased holiday demand, we may experience system interruptions that make our Websiteunavailable or prevent us from efficiently fulfilling orders, which may reduce the volume of goods we sell and the attractiveness of our products and services.In addition, we may be unable to adequately staff our fulfillment and customer service centers during peak periods, and delivery services and otherfulfillment companies and customer service providers may be unable to meet the seasonal demand. 25Table of ContentsSignificant merchandise returns could harm our business. We allow our customers to return products, subject to our returns policies. If merchandise returns are higher than we expect, our business, prospects,financial condition and results of operations could be harmed. Further, we modify our policies relating to returns from time to time, and policies intended toreduce the number of product returns may result in customer dissatisfaction and/or fewer repeat customers. Our pricing strategy may not meet customers’ price expectations or result in net income. Demand for our products is generally highly sensitive to price. Our pricing strategies have had, and may continue to have, a significant impact onour net sales and net income. We often offer discounted prices, and free or discounted shipping as a means of attracting customers and encouraging repeatpurchases. Such offers and discounts reduce our margins. In addition, our competitors’ pricing and marketing strategies are beyond our control and cansignificantly affect the results of our pricing strategies. If we fail to meet our customers’ price expectations, or if we are unable to compete effectively with ourcompetitors when they engage in aggressive pricing strategies or other competitive activities, our business would suffer.If the products that we offer on our Website do not reflect our customers’ tastes and preferences, our sales and profit margins would decrease. Our success depends in part on our ability to offer products that reflect consumers’ tastes and preferences. Consumers’ tastes are subject to frequent,significant and sometimes unpredictable changes. Because some of the products that we sell consist of manufacturers’ and retailers’ excess inventory, wehave limited control over some of the products that we are able to offer for sale. If our merchandise fails to satisfy customers’ tastes or respond to changes incustomer preferences, our sales could suffer and we could be required to mark down unsold inventory, as we have in the past, which would depress our profitmargins. In addition, any failure to offer products in line with customers’ preferences could allow our competitors to gain market share. This could have anadverse effect on our business.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. The loss of the services of any of our executive officers orother key employees for any reason could harm our business. Occasionally, members of senior management or key employees may find it necessary to take aleave of absence due to medical or other causes. In early 2013 our Chief Executive Officer and then Chairman of the Board, Dr. Patrick M. Byrne, took a two-month personal leave of absence for medical reasons. Leaves of absence for temporary or extended periods may harm our business. We do not haveemployment agreements with any of our key personnel and we do not maintain “key person” life insurance policies. Our future success also depends on ourability to identify, attract, hire, train, retain and motivate other highly-skilled technical, managerial, editorial, merchandising, marketing and customer servicepersonnel. Competition for such personnel is intense. Our failure to retain and attract the necessary technical, managerial, editorial, merchandising,marketing, and customer service personnel could harm our business. In order to obtain future revenue growth and sustain profitability, we will have to attract and retain customers on cost-effective terms. Our success depends on our ability to attract and retain customers on cost-effective terms. We have relationships with online services, searchengines, affiliate marketing websites, directories and other website and e-commerce businesses to provide content, advertising banners and other links thatdirect customers to our Website. We rely on these relationships as significant sources of traffic to our Website and to generate new customers. In the past wehave terminated affiliate marketing websites as a result of efforts by certain states to require us to collect sales taxes based on the presence of those third partyInternet advertising affiliates in those states, and we are likely to do so again in the future if necessary. If we are unable to develop or maintain theserelationships, or develop and maintain new relationships for newly developed and necessary marketing services on acceptable terms, our ability to attractnew customers and our financial condition would suffer. In addition, certain of our online marketing agreements may require us to pay upfront fees and makeother payments prior to the realization of the sales, if any, associated with those payments. Current or future relationships or agreements may fail to producethe sales that we anticipate. We periodically conduct television and radio branding and advertising campaigns. Such campaigns are expensive and may notresult in the cost-effective acquisition of customers. Other means of utilizing social media campaigns to attract or retain customers are expensive and may notresult in cost-effective acquisition or retention of customers.26Table of Contents We may be unable to protect our proprietary technology or keep up with that of our competitors. Our success depends to a significant degree upon the protection of our software and other proprietary intellectual property rights. We may be unableto deter misappropriation of our proprietary information, detect unauthorized use or take appropriate steps to enforce our intellectual property rights. Inaddition, our competitors may now have or may in the future develop technologies that are as good as or better than our technology without violating ourproprietary rights. Our failure to protect our software and other proprietary intellectual property rights or to utilize technologies that are as good as ourcompetitors’ could put us at a disadvantage to our competitors. In addition, the failure of the third parties whose products we offer for sale on our Website toprotect their intellectual property rights, including their domain names, could impair our operations. These failures could harm our business. We may not be able to obtain trademark protection for our marks, which could impede our efforts to build brand identity. We have filed trademark applications with the Patent and Trademark Office seeking registration of certain service marks and trademarks. There canbe no assurance that our applications will be successful or that we will be able to secure significant protection for our service marks or trademarks in theUnited States or elsewhere as we expand internationally. Our competitors or others could adopt product or service marks similar to our marks, or try to preventus from using our marks, thereby impeding our ability to build brand identity and possibly leading to customer confusion. Any claim by another partyagainst us or customer confusion related to our trademarks, or our failure to obtain trademark registration, could harm our business.We may not be able to enforce protection of our intellectual property rights under the laws of other countries. We sell products internationally and consequently we are subject to risks of doing business internationally as related to our intellectual property,including: •legal uncertainty regarding liability for the listings and other content provided by our users, including uncertainty as a result of lessInternet-friendly legal systems, unique local laws, and lack of clear precedent or applicable law; and•differing intellectual property laws, which may provide insufficient protection for our intellectual property. We may be accused of infringing intellectual property rights of third parties. Other parties have claimed and may claim that we infringe their intellectual property rights. We have been and are subject to, and expect to continueto be subject to, legal claims of alleged infringement of the intellectual property rights of third parties. The ready availability of damages, royalties and thepotential for injunctive relief has increased the defense litigation costs of patent infringement claims, especially those asserted by third parties whose sole orprimary business is to assert such claims. Such claims, even if not meritorious, may result in significant expenditure of financial and managerial resources,and the payment of damages or settlement amounts. Additionally, we may become subject to injunctions prohibiting us from using software or businessprocesses we currently use or may need to use in the future, or requiring us to obtain licenses from third parties when such licenses may not be available onfinancially feasible terms or terms acceptable to us or at all. In addition, we may not be able to obtain on favorable terms, or at all, licenses or other rights withrespect to intellectual property we do not own in providing e-commerce services to other businesses and individuals under commercial agreements. Our business and reputation may be harmed by the offering or sale of pirated, counterfeit or illegal items by third parties, and by intellectual propertylitigation. We have received in the past, and we anticipate we will receive in the future, communications alleging that items offered or sold through ourWebsite infringe third party copyrights, trademarks and trade names or other intellectual property rights or that we have otherwise infringed third parties’past, current or future intellectual property rights. We may be unable to prevent third parties from offering and selling unlawful goods, and we may be subjectto allegations of civil or criminal liability for unlawful activities carried out by third parties through our Website. We may implement measures in an effort toprotect against these potential liabilities that could require us to spend substantial resources and/or to reduce revenues by discontinuing certain serviceofferings. Any costs incurred as a result of liability or asserted liability relating to the sale of unlawful goods or the unlawful sale of goods could harm ourbusiness. Resolving litigation or claims regarding patents or other intellectual property, whether meritorious or not, could be costly, time-consuming, causeservice delays, divert our management and key personnel from our business operations, require expensive or unwanted changes in our methods of doingbusiness or require us to enter into costly royalty or licensing agreements, if available. As a result, these claims could harm our business. Negative27Table of Contentspublicity generated as a result of the foregoing could damage our reputation, harm our business and diminish the value of our brand name. Use of social media may adversely impact our reputation. There has been a marked increase in use of social media platforms and similar devices, including weblogs (blogs), social media websites, and otherforms of Internet-based communications which allow individual access to a broad audience of consumers and other interested persons. Consumers valuereadily available information concerning retailers, manufacturers, and their goods and services and often act on such information without furtherinvestigation, authentication and without regard to its accuracy. The availability of information on social media platforms and devices is virtually immediateas is its impact. Social media platforms and devices immediately publish the content their subscribers and participants post, often without filters or checks onaccuracy of the content posted. The opportunity for dissemination of information, including inaccurate information, is virtually limitless. Informationconcerning or affecting us may be posted on such platforms and devices at any time. Information posted may be inaccurate and adverse to us, and it may harmour business. The harm may be immediate without affording us an opportunity for redress or correction. Such platforms also could be used for thedissemination of trade secret information or compromise of other valuable company assets, any of which could harm our business. Our car listing service may be subject to a variety of regulatory requirements and risks. Many states and other jurisdictions, including Utah, where we are located, have regulations governing the conduct of car sellers and publicadvertisement for car sales. Generally, these regulations govern the conduct of those sellers advertising their automobiles for sale and are not directlyapplicable to those providing the medium through which the advertisement is made available to the public. Sellers are often subject to regulations in thenature of “truth in advertising laws.” We have no ability to know whether the information sellers provide is correct. While our site terms and conditions ofusage prohibit unlawful acts, we cannot assure that sellers will comply with all laws and regulations applicable to them and their transactions. Theapplication of these regulations to online car listing service providers is not clear. Although we do not expect these laws to have a significant effect on ourlisting service, we will incur costs in complying with these laws, and we may from time to time be required to make changes in our service that may increaseour costs, reduce our revenues, cause us to prohibit certain listing or advertising practices, or make other changes that may adversely affect our car listingservice. Further, like our shopping business, our car listing service is subject to most of the same laws and regulations that apply to other companiesconducting business on and off the Internet. To the extent that current or future laws or regulations prevent users from selling items on our car listing site,they could harm our business. In addition, any negative publicity we receive regarding any allegations of unlawful or deceptive conduct may damage ourreputation, our ability to attract new customers to our main shopping site, and our brand name generally.Our recently-launched Supplier Oasis Fulfillment Services will face competition from other distribution networks and will require substantial resources.In 2014 we launched Supplier Oasis Fulfillment Services, Inc., a wholly-owned subsidiary of the Company, which provides multi-channelfulfillment services to sellers, suppliers, and partners and a single integration point through which partners can manage their products, inventory and saleschannels. The marketplace in which Supplier Oasis Fulfillment Services competes is highly competitive, and many of our current and potential competitorsin this area have greater brand recognition, longer operating histories, larger customer bases and significantly greater financial, marketing and other resourcesthan we do. Our continued development of Supplier Oasis Fulfillment Services may require substantial investments over a lengthy period of time. Further,most of the risks applicable to our business generally are also applicable to the business of Supplier Oasis Fulfillment Services. If we are unable to generatesufficient revenues and gross profits from Supplier Oasis Fulfillment Services, our business, financial condition and operating results could be materiallyadversely affected.Our recently-launched Farmers Market will face competition from a variety of competitors and may require substantial resources.In late 2014 we launched Farmers Market, a tab within our website from which our customers can order locally grown fresh produce and other foodproducts. Farmers Market competes with a wide variety of businesses nationwide, many of which have greater brand recognition, longer operating histories,larger customer bases and significantly greater financial, marketing and other resources than we do. Our continued development of Farmers Market mayrequire substantial attention from our senior executives and may involve delivery and other issues that may be different from those we face in connectionwith the sale and delivery of non-perishable products. Further, most of the risks applicable to our business generally are also applicable to our Farmers Marketbusiness.28Table of ContentsOur recently-launched insurance offerings will face competition from traditional insurance brokers and direct insurance marketing organizations.In 2014 we launched a tab offering insurance for vehicle, residential and small businesses on our website. The tab allows consumers to compare livequotes for insurance on residential, vehicle, and small business insurance, and to bind (pay for and have go into effect) insurance policies. The insurancebusiness is highly competitive, and many of our current and potential competitors in this area have greater brand recognition, longer operating histories,larger customer bases and significantly greater financial, marketing and other resources than we do. Further, most of the risks applicable to our businessgenerally are also applicable to our insurance offerings business. We are involved in substantial litigation. From time to time we receive claims of and become subject to consumer protection, employment, intellectual property and other commerciallitigation related to the conduct and operation of our business and the sale of products on our Website. In connection with such litigation, we may be subjectto significant damages or equitable remedies. In addition, we have in the past been, are now, and in the future may be, involved in substantial litigation inwhich we are the plaintiff, including litigation regarding the constitutionality of certain state tax laws, and the prime broker litigation described below. Anyof such litigation, whether as plaintiff or defendant, could be costly and time consuming and could divert management and key personnel from our regularbusiness operations. We do not currently believe that any of our outstanding litigation will have a material adverse effect on our business, prospects,financial condition or results of operations. However, due to the uncertainty of litigation and depending on the amount and the timing, an unfavorableresolution of some or all of these matters could materially affect our business, prospects, financial condition and results of operations.Our prime broker litigation may have an adverse effect on our business and financial condition. We remain involved in substantial litigation against Goldman Sachs Group, Inc., Goldman Sachs & Co., Goldman Sachs Execution & Clearing L.P.,Merrill Lynch, Pierce, Fenner & Smith, Inc., and Merrill Lynch Professional Clearing Corporation, and the use of management’s time and attention inconnection with the litigation and related matters may reduce the time management is able to spend on other aspects of our business, which may have adverseeffects on other aspects of our business. To the extent that any such adverse effects exceed any benefits we may realize from the litigation, it could harm ourbusiness, prospects, financial condition and results of operation. Public statements we or our Chief Executive Officer, Patrick M. Byrne, have made or may make in the future may antagonize regulatory officials or others. We and our Chief Executive Officer, Patrick M. Byrne, have from time to time made public statements regarding our or his beliefs about matters ofpublic interest, including statements regarding naked short selling and regulatory capture. Some of those public statements have been critical of theSecurities and Exchange Commission and other regulatory agencies. These public statements may have consequences for us, whether as a result of increasedregulatory scrutiny or otherwise. Additionally, other officers may make public statements that could have adverse consequences and these statements couldmaterially harm our business. The price of our securities may be volatile and you may lose all or a part of your investment. The market price of our common stock historically has been subject to significant fluctuations. These fluctuations could continue. It is possible thatin future periods our results of operations may be below the expectations of public market analysts and investors. If this occurs, the market price of oursecurities may decline.Our quarterly operating results are volatile and may adversely affect the market price of our securities. Our future revenues and operating results have varied in the past and may continue to vary significantly from quarter to quarter due to a number offactors, many of which are outside our control, and any of which could harm our business. As a result, we believe that quarterly comparisons of our operatingresults are not necessarily meaningful and that you should not rely on the results of one quarter as an indication of our future performance. In addition to theother risk factors described in this report, additional factors that have caused and/or could cause our quarterly operating results to fluctuate and in turn affectthe market price of our securities include:•increases in the cost of advertising and changes in our sales and marketing expenditures;•our inability to retain existing customers or encourage repeat purchases;29Table of Contents•the extent to which our existing and future marketing campaigns are successful;•price competition 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 infrastructureincluding those relating to our construction of our new corporate headquarters;•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 and transportation;•our ability to successfully implement technology changes or to integrate operations and technologies from acquisitions or other businesscombinations;•our efforts to offer new lines of products and services; and•our ability to attract users to our shopping and other sites. Our operating results may fluctuate depending on the season, and such fluctuations may affect the market price of our securities. We have experienced and expect to continue to experience fluctuations in our operating results because of seasonal fluctuations in traditional retailpatterns. Sales in the retail and wholesale industry tend to be significantly higher in the fourth calendar quarter of each year than in the preceding threequarters due primarily to increased shopping activity during the holiday season. However, there can be no assurance that our sales in the fourth quarter willexceed those of the preceding quarters or, if the fourth quarter sales do exceed those of the preceding quarters, that we will be able to manage the increasedsales effectively. Further, we generally increase our inventories substantially in anticipation of holiday season shopping activity, which has a negative effecton our cash flow. Securities analysts and investors may inaccurately estimate the effects of seasonality on our results of operations in one or more futurequarters and, consequently, our operating results may fall below expectations, causing the market price of our securities to decline. Sales by our significant stockholders could have an adverse effect on the market price of our stock. Several of our stockholders own significant portions of our common stock. If one or more of our stockholders were to sell all or a portion of theirholdings of our common stock, the market price of our common stock could be negatively impacted. The effect of such sales, or of significant portions of ourstock being offered or made available for sale, could result in strong downward pressure on our stock price. Investors should be aware that they couldexperience significant short-term volatility in our stock if any one or more of such stockholders were to decide to sell all or a portion of their holdings of ourcommon stock at once or within a short period of time. In addition, the transfer of ownership of a significant portion of our outstanding shares within a three-year period could adversely affect our ability to use our net operating losses to offset future taxable net income.We do not intend to pay dividends on our common stock and you may lose the entire amount of your investment in our common stock. We have never declared or paid any cash dividends on our common stock and do not intend to pay dividends on our common stock for theforeseeable future. We intend to invest our future earnings, if any, to fund our growth. Therefore, you will not receive any funds without selling your shares.We cannot assure that you will receive a positive return on your investment when you sell your shares or that you will not lose the entire amount of yourinvestment.Provisions in our amended and restated certificate of incorporation and bylaws and Delaware law might discourage, delay or prevent a change of controlof 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 ofour 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 andrestated 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;30Table of Contents•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, fornominations 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 chiefexecutive 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 threeyears following the date the person became an interested stockholder, subject to certain exceptions.The price of our stock may be vulnerable to manipulation. We filed an unfair business practice lawsuit against Morgan Stanley & Co. Incorporated, Goldman Sachs & Co., Bear Stearns Companies, Inc., Bankof America Securities LLC, Bank of New York, Citigroup Inc., Credit Suisse (USA) Inc., Deutsche Bank Securities, Inc., Merrill Lynch, Pierce, Fenner &Smith, Inc., and UBS Financial Services, Inc., and settled the case with respect to all defendants except Goldman Sachs Group, Inc., Goldman Sachs & Co.,Goldman Sachs Execution & Clearing L.P.; Merrill Lynch, Pierce, Fenner & Smith, Inc., and Merrill Lynch Professional Clearing Corporation. The litigationis ongoing. We believe these remaining defendants engaged in unlawful actions and have caused substantial harm to Overstock, and that the remainingdefendants manipulated downward the market price of Overstock’s common stock. To the extent that the defendants or other persons engage in any suchactions or take any other actions to interfere with or destroy or harm Overstock’s existing and/or prospective business relationships with its suppliers,bankers, customers, lenders, investors, prospective investors or others, our business, prospects, financial condition and results of operation could be harmed,and the price of our common stock may be more volatile than it might otherwise be and/or may trade at prices below those that might prevail in the absenceof any such efforts. The practice of “abusive naked short selling” continues to place our stock at risk for manipulative attacks by large investment pools andprime brokers. Abusive naked short selling is the practice by which short sellers place large short sell orders for shares without first borrowing the shares to be sold,or without having first adequately located such shares and arranged for a firm contract to borrow such shares prior to the delivery date set to close the sale.While selling broker dealers are by rule required to deliver shares to close a transaction by a certain date, and while purchasing broker-dealers are obligatedby rule to purchase the sold quantity of shares when they are not delivered to close the sale, these rules are often ignored. Abusive naked short selling has adepressive effect on share prices when it is allowed to persist because the economic effect of abusive naked short selling is the oversupply of counterfeit stockto the market. We believe the regulations designed to address this abusive practice are both inadequately structured and inadequately enforced.Consequently, we believe that without the enactment of adequate regulations and the enforcement necessary to curb these abuses, the manipulationsachieved through abusive naked short selling are likely to continue. We believe that our stock has been subject to these abusive practices by thoseattempting to manipulate its price downward. To the extent that our stock is subject to these practices in the future, our stock may be more volatile than itmight otherwise be and/or may trade at prices below those that might prevail in the absence of such abuses. In the past, our stock has consistently been on the Regulation SHO threshold list. Regulation SHO requires the stock exchanges to publish daily a list of companies whose stock has failures-to-deliver above a certain threshold. Italso requires mandatory close-outs for open fail-to-deliver positions in threshold securities persisting for over 13 days, with the aim that no security wouldappear on the threshold for any extended period. Despite that aim, our common stock has frequently appeared on the Regulation SHO threshold list forextended and continuous periods and, while we do not currently appear on the Regulation SHO threshold list, in the past our stock has been on the list formore trading days than any other company. 31Table of ContentsAny investment in our securities involves a high degree of risk. Investors should consider carefully the risks and uncertainties described above, andall other information in this Annual Report on Form 10-K and in any reports we file with the SEC after we file this Annual Report on Form 10-K, beforedeciding whether to purchase or hold our securities. Additional risks and uncertainties not currently known to us or that we currently deem immaterial mayalso become important factors that may harm our business. The occurrence of any of the risks described in this Annual Report on Form 10-K could harm ourbusiness. The trading price of our securities could decline due to any of these risks and uncertainties, and investors may lose part or all of their investment. ITEM 1B. UNRESOLVED STAFF COMMENTSNone.ITEM 2. PROPERTIESCorporate office space•We lease approximately 128,000 square feet in the Old Mill Corporate Center III in Salt Lake City, Utah for a term expiring in 2017. We plan torelocate from this corporate facility to our new headquarters under construction in Salt Lake City, Utah.•We lease approximately 10,000 square feet in the Old Mill Corporate Center II in Salt Lake City, Utah beginning in November 2014, for a termexpiring in 2017.•We lease approximately 872 square feet in The Institute of Technology in Sligo, Ireland for a term expiring in 2015.•We lease approximately 3,400 square feet in the Pudong District, Shanghai, China beginning in August 2014, for a term expiring in 2016.Warehouse and customer service space•We lease approximately 687,000 square feet for our warehouse, customer service, and other operations in Salt Lake City, Utah for a term expiring in2026.•We lease approximately 15,000 square feet for customer service operations in Tooele, Utah for a term expiring in 2015.•We lease approximately 76,000 square feet of warehouse space in Hebron, Kentucky for a term expiring in 2016.•We lease approximately 100,000 square feet of warehouse space in Jonestown, Pennsylvania for a term expiring in 2015.•We lease approximately 187,000 square feet of warehouse space in Carlisle, Pennsylvania for a term expiring in 2018.Co-location data centers•We lease approximately 9,000 square feet in Utah for various data centers for terms expiring from 2016 to 2017.We use all of our properties in both our direct and partner businesses. We believe that the above listed facilities will be sufficient for our needs for atleast the next twelve months, subject to potential seasonal requirements for additional warehouse and customer service space during the fourth quarter.ITEM 3. LEGAL PROCEEDINGSThe information set forth under Item 15 of Part IV, "Financial Statements—Note 13. Commitments and Contingencies, subheading LegalProceedings," contained in the "Notes to Consolidated Financial Statements" of this Annual Report on Form 10-K is incorporated by reference in answer tothis Item.ITEM 4. MINE SAFETY DISCLOSURES Not applicable.32Table of ContentsPART IIITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OFEQUITY SECURITIESMarket informationOur common stock is traded on the Nasdaq Global Market under the symbol "OSTK." The following table sets forth, for the periods indicated, thehigh and low sales prices per share for our common stock as reported by Nasdaq. CommonStock Price High LowYear Ended December 31, 2013 First Quarter 16.50 11.29Second Quarter 28.20 11.46Third Quarter 34.97 25.65Fourth Quarter 30.83 23.22Year Ended December 31, 2014 First Quarter 29.80 18.57Second Quarter 20.35 14.69Third Quarter 18.50 13.96Fourth Quarter 27.06 15.35Stock Performance GraphThe stock performance graph is included in Part III, Item 12.Holders As of February 23, 2015 there were 166 holders of record of our common stock. Many of our shares of common stock are held by brokers and otherinstitutions on behalf of the beneficial owners.DividendsWe have never declared or paid any cash dividends on our common stock. We currently intend to retain any earnings for future growth and do notanticipate paying any cash dividends in the foreseeable future. Any future determination to pay dividends will be at the discretion of our board of directorsand will depend on our results of operations, financial conditions, contractual and legal restrictions and other factors the board of directors deems relevant.Recent sales of unregistered securitiesWe maintain a Non-Qualified Deferred Compensation plan for senior management. The plan allows eligible members of senior management to defertheir receipt of compensation, subject to the restrictions contained in the plan. To the extent that interests in the plan constitute securities, we believe that theissuance of the interests was exempt from the registration requirements of the Securities Act of 1933, as amended, pursuant to Section 4(a)(2) thereof andRule 506 of Regulation D thereunder as a transaction not involving a public offering. The interests were not sold for cash or other consideration, and therewere no proceeds to us.Issuer purchases of equity securitiesWe had no purchases made by us or on our behalf or any "affiliated purchaser" as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of1934, as amended, of shares of our common stock during the fourth quarter of 2014.33Table of ContentsStock based compensationStock options Our board of directors adopted the 2005 Equity Incentive Plan in April 2005, and it was most recently amended and restated and re-approved by thestockholders on May 3, 2012 (as so amended and restated, the "Plan"). Under the Plan, the board of directors may issue non-qualified and incentive stockoptions to our employees and directors and non-qualified stock options to our consultants, as well as restricted stock units and other types of equity awards.Options granted under the Plan generally expire at the end of ten years and vest in accordance with a vesting schedule determined by our board of directors,usually over four years from the grant date. At December 31, 2014, 2.7 million shares of stock remained available for future grants under the Plan.The following is a summary of stock option activity (amounts in thousands, except per share data): 2014 2013 2012 Shares WeightedAverageExercisePrice Shares WeightedAverageExercisePrice Shares WeightedAverageExercisePriceOutstanding—beginning of year 273 $17.30 364 $17.34 405 $17.58Exercised (30) 17.08 (89) 17.45 — —Expired/Forfeited (19) 18.00 (2) 17.08 (41) 20.06Outstanding—end of year 224 $17.27 273 $17.30 364 $17.34Options exercisable at year-end 224 $17.27 273 $17.30 364 $17.34Stock options vest over four years at 28% at the end of the first year and 2% each month thereafter. During the years ended December 31, 2014, 2013and 2012, we recorded stock based compensation related to stock options of $0, $0 and $3,000, respectively.Restricted stock units activityDuring the years ended December 31, 2014, 2013 and 2012, we granted 242,000, 275,000 and 795,000 restricted stock units, respectively, under thePlan. The cost of restricted stock units is determined using the fair value of our common stock on the date of the grant and compensation expense is eitherrecognized on a straight line basis over the vesting schedule or on an accelerated schedule when vesting of restricted stock awards exceeds a straight linebasis. The weighted average grant date fair value of restricted stock units granted during the years ended December 31, 2014, 2013 and 2012 was $28.24,$16.12 and $6.75, respectively.The following is a summary of restricted stock unit activity (amounts in thousands, except per share data): 2014 2013 2012 Units WeightedAverageGrant DateFair Value Units WeightedAverageGrant DateFair Value Units WeightedAverageGrant DateFair ValueOutstanding—beginning of year 704 $10.79 1,003 $8.81 522 $13.40Granted at fair value 242 28.24 275 16.12 795 6.75Vested (301) 11.87 (339) 10.23 (240) 12.11Forfeited (67) 17.70 (235) 9.38 (74) 8.25Outstanding—end of year 578 $16.70 704 $10.79 1,003 $8.81 Restricted stock units granted in 2014 vest over three years at 33.3% per year. Restricted stock units granted in 2013 vest over three years at 40% atthe end of the first year, 30% at the end of the second year and 30% at the end of the third year. Restricted stock units granted in or prior to 2012 vest overthree years at 25% at the end of the first year, 25% at the end of the second year and 50% at the end of the third year. Each restricted stock unit represents theright to one share of common stock upon vesting. During the years ended December 31, 2014, 2013 and 2012, we recorded stock based compensation relatedto restricted stock units of $4.0 million, $3.3 million and $3.5 million, respectively.34Table of ContentsITEM 6. SELECTED FINANCIAL DATAThe selected consolidated financial data presented below should be read in conjunction with the consolidated financial statements ofOverstock.com, Inc. and related footnotes included elsewhere in this Annual Report on Form 10-K and the discussion under Item 7—"Management'sDiscussion and Analysis of Financial Condition and Results of Operations." The selected consolidated financial data has been derived from our auditedconsolidated financial statements included elsewhere in this Annual Report on Form 10-K. The historical financial and operating information may not beindicative of our future performance. Year ended December 31, 2014 2013 (1) 2012 2011 2010 (in thousands, except per share data)Consolidated Statement of Operations Data: Revenue, net Direct $147,460 $156,032 $155,516 $163,609 $209,646Partner 1,349,643 1,148,185 943,773 890,668 880,227Total net revenue 1,497,103 1,304,217 1,099,289 1,054,277 1,089,873Cost of goods sold Direct 129,253 136,282 140,536 149,660 187,124Partner 1,088,791 920,275 760,323 725,529 713,109Total cost of goods sold 1,218,044 1,056,557 900,859 875,189 900,233Gross profit 279,059 247,660 198,430 179,088 189,640Operating expenses: Sales and marketing 109,461 91,609 63,467 61,813 61,334Technology 86,258 71,788 65,467 67,043 58,260General and administrative 71,777 68,169 57,259 67,766 55,650Restructuring (2) (360) (471) 76 — (569)Total operating expenses 267,136 231,095 186,269 196,622 174,675Operating income (loss) 11,923 16,565 12,161 (17,534) 14,965Interest income 152 127 116 161 157Interest expense (39) (113) (809) (2,485) (2,962)Other income (expense), net 1,169 (235) 3,686 278 2,088Income (loss) before income taxes 13,205 16,344 15,154 (19,580) 14,248Provision (benefit) for income taxes 4,404 (68,034) 485 (142) 359Consolidated net income (loss) $8,801 $84,378 $14,669 $(19,438) $13,889Less: Net loss attributable to noncontrolling interests (53) — — — —Less: Deemed dividend related to redeemable common stock — — — 12 112Net income (loss) attributable to stockholders of Overstock.com, Inc. $8,854 $84,378 $14,669 $(19,450) $13,777Net income (loss) per common share—basic: Net income (loss) attributable to common shares—basic $0.37 $3.56 $0.63 $(0.84) $0.60Weighted average common shares outstanding—basic 23,999 23,714 23,387 23,259 23,019Net income (loss) per common share—diluted: Net income (loss) attributable to common shares—diluted $0.36 $3.47 $0.62 $(0.84) $0.59Weighted average common shares outstanding—diluted 24,317 24,294 23,672 23,259 23,366See the footnotes beneath the balance sheet data on the following page.35Table of Contents As of December 31, 2014 2013 (1) 2012 2011 2010 (in thousands)Balance Sheet Data: Cash and cash equivalents $181,641 $148,665 $93,547 $96,985 $124,021Restricted cash 580 1,580 1,905 2,036 2,542Working capital 15,260 25,425 7,497 (14,129) 14,746Total assets 376,865 315,636 181,985 179,559 217,959Total indebtedness 4,843 3,155 1,848 18,619 52,845Redeemable common stock — — — — 570Stockholders' equity 129,220 118,760 30,962 13,237 30,658(1) Our consolidated financial statements for the year ended December 31, 2013 include an immaterial revision to current and long-term deferred tax assets and ourprovision (benefit) for income taxes in the fourth quarter of 2013. The effect of the revision was to reduce current and long-term deferred tax assets by $284,000 and $3.8million, respectively, with an offsetting increase of $4.1 million to our provision (benefit) for income taxes in 2013. We evaluated these changes in accordance with StaffAccounting Bulletin No. 99, Materiality ("SAB 99"), and Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when QuantifyingMisstatements in Current Year Financial Statements ("SAB 108"), and determined that the revisions are not material to the prior period.(2) During the fourth quarter of 2006, we commenced implementation of a facilities consolidation and restructuring program designed to reduce the overall expensestructure in an effort to improve future operating performance (see Item 15 of Part IV, "Financial Statements"-Note 3. Restructuring Expense).ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSThe following discussion and analysis contains forward-looking statement relating to future events or our future financial or operating performancethat involve risks and uncertainties, as set forth above under "Special Cautionary Note Regarding Forward-Looking Statements." Our actual results coulddiffer materially from those anticipated in these forward-looking statements as a result of certain factors described in this Annual Report on Form 10-K,including those set forth above under "Special Cautionary Note Regarding Forward-Looking Statements" or in Item 1A under the heading "Risk Factors" orelsewhere in this Annual Report on Form 10-K. IntroductionWe are an online retailer offering price-competitive brand name, non-brand name and closeout merchandise, including furniture, home decor,bedding and bath, housewares, jewelry and watches, apparel and designer accessories, electronics and computers, and sporting goods, among other products.We also sell hundreds of thousands of best seller and current run books, magazines, CDs, DVDs and video games ("BMMG"). We sell these products throughour Internet websites located at www.overstock.com, www.o.co and www.o.biz (referred to collectively as the "Website"). Although our three websites arelocated at different domain addresses, the technology and equipment and processes supporting the Website and the process of order fulfillment describedherein are the same for all three websites.Our company, based in Salt Lake City, Utah, was founded in 1997. We launched our initial website in March 1999. Our Website offers our customersan opportunity to shop for bargains conveniently, while offering our suppliers an alternative inventory liquidation or sales channel. 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 beforeour inventory sells out. We sell products primarily in the United States.As used herein, "Overstock," "Overstock.com," "O.co," "O.com," "we," "our" and similar terms include Overstock.com, Inc. and its subsidiaries, unlessthe context indicates otherwise.Our Business36Table of ContentsWe deal primarily in price-competitive, replenishable and closeout merchandise and use the Internet to aggregate both supply and demand to createan efficient marketplace for selling these products. We provide manufacturers with a one-stop liquidation channel to sell both large and small quantities ofexcess, closeout and replenishable inventory without disrupting sales through traditional channels. The merchandise offered on our Website is from a varietyof sources including well-known, brand-name manufacturers. We have organized our shopping business (sales of product offered through the ShoppingSection of our Website) into two principal segments—a "direct" business and a "partner" business. We currently offer approximately 683,000 non-BMMGproducts and approximately 696,000 BMMG products. Consumers and businesses are able to access and purchase our products 24 hours a day from theconvenience of a computer, Internet-enabled mobile telephone or other Internet-enabled device. Our team of customer service representatives assistscustomers by telephone, instant online chat and e-mail. We also derive revenue from other businesses advertising products or services on our Website. Nearlyall of our sales are to customers located in the United States. During the years ended December 31, 2014, 2013 and 2012 no single customer accounted formore than 1% of our total net revenue.Direct businessOur direct business includes sales made to individual consumers and businesses from our owned inventory and that are fulfilled primarily from ourwarehouse in Salt Lake City, Utah. During the year ended December 31, 2014, we fulfilled approximately 10% of our order volume through our warehouse,which generally ships between 2,000 and 5,000 packages per day and up to approximately 12,000 orders per day during peak periods, using overlappingdaily shifts.Partner businessFor our partner business, we sell merchandise of other retailers, cataloguers or manufacturers ("partners") primarily through our Website. We areconsidered 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 grossbasis. Our use of the term "partner" does not mean that we have formed any legal partnerships with any of our partners. We currently have relationships withapproximately 3,200 third parties who supply approximately 667,000 non-BMMG products, as well as most of the BMMG products, on our Website. Thesethird party partners generally perform the same fulfillment operations as our warehouses, such as order picking and shipping; however, we handle returns andcustomer service related to substantially all orders placed through our Website. Revenue generated from sales on our Shopping site from both the direct andpartner businesses is recorded net of returns, coupons and other discounts.Both direct and partner revenues are seasonal, with revenues historically being the highest in the fourth quarter, which ends December 31, reflectinghigher consumer holiday spending. We anticipate this will continue in the foreseeable future.Generally, we require verification of receipt of payment, or authorization from credit card or other payment vendors whose services we offer to ourcustomers (such as PayPal and BillMeLater), before we ship products to consumers or business purchasers. From time to time we grant credit to our businesspurchasers with normal credit terms (typically 30 days). For sales in our partner business, we generally receive payments from our customers before ourpayments to our suppliers are due.Other offeringsWe offer additional products or services that complement our primary offerings, but are not significant to our revenues. These include:•Worldstock Fair Trade, a store within our Website that offers handcrafted products made by artisans all over the world, which emphasizessustainability, fairness, and transparency, and which we attempt to run at 0% profit by donating net profits to fund philanthropic projects in severalcountries, including Guatemala, Kenya, Malawi, and Nepal;•Main Street Revolution, a store within our Website that features products from small businesses across the United States who offer their productsusing our national marketing and distribution channels;•Supplier Oasis Fulfillment Services ("SOFS"), a single integration point through which our partners can manage their products, inventory and saleschannels, while tapping into a our distribution network;•ecommerce marketplace channels, where some of our products are offered for sale in on-line marketplaces of other Internet retailers' websites;•our international business where we offer products to customers outside the United States using U.S.-based third party logistics providers;•Pet Adoptions, a free service and tab within our Website that leverages our technology to display pets available for adoption from shelters across theUnited States;37Table of Contents•Farmers Market, a tab within our Website where our customers can order locally grown fresh produce and other food products;•Insurance, a tab within our Website where our customers can shop for insurance from major carriers for both personal and business insurancepolicies; and•an online car listing service which allows sellers to list vehicles for sale and allows buyers to review vehicle descriptions and post offers to purchase,and provides the means for prospective purchasers to contact sellers for further information and negotiations on the purchase of an advertisedvehicle.Critical Accounting Policies and EstimatesThe preparation of financial statements in conformity with U.S. generally accepted accounting principles ("GAAP") requires estimates andassumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities in theconsolidated financial statements and accompanying notes. The Securities and Exchange Commission ("SEC") has defined a company's critical accountingpolicies as the ones that are most important to the portrayal of the company's financial condition and results of operations, and which require the company tomake its most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Based on thisdefinition, we have identified the critical accounting policies, estimates and judgments addressed below. We also have other key accounting policies, whichinvolve the use of estimates, judgments, and assumptions that are significant to understanding our results. For additional information, see Item 15 of Part IV,"Financial Statements"—Note 2. Accounting Policies. Although we believe that our estimates, assumptions, and judgments are reasonable, they are basedupon information presently available. Actual results may differ significantly from these estimates. Our critical accounting policies are as follows:•revenue recognition;•estimating valuation allowances and accrued liabilities (specifically, the allowances for returns and obsolete and damaged inventory);•internal use software and website development (acquired and developed internally);•accounting for income taxes;•valuation of long-lived and intangible assets and goodwill; and•loss contingencies. Revenue recognitionWe derive our revenue primarily from direct revenue and partner revenue from merchandise sales. We also earn revenue from advertising on ourshopping and other pages. We have organized our operations into two principal segments based on the primary source of revenue: direct revenue and partnerrevenue (see Note 21. Business Segments). Revenue is recognized when the following revenue recognition criteria are met: (1) persuasive evidence of an arrangement exists; (2) delivery hasoccurred or the service has been provided; (3) the selling price or fee revenue earned is fixed or determinable; and (4) collection of the resulting receivable isreasonably assured. Revenue related to merchandise sales is recognized upon delivery to our customers. As we ship high volumes of packages throughmultiple carriers, it is not practical for us to track the actual delivery date of each shipment. Therefore, we use estimates to determine which shipments aredelivered and, therefore, recognized as revenue at the end of the period. Our delivery date estimates are based on average shipping transit times, which arecalculated using the following factors: (i) the type of shipping carrier (as carriers have different in-transit times); (ii) the fulfillment source (either ourwarehouses or those of our partners); (iii) the delivery destination; and (iv) actual transit time experience, which shows that delivery date is typically one toeight 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.Based upon our historical experience, revenue typically increases during the fourth quarter because of the holiday retail season.38Table of ContentsThe following table shows the effect that hypothetical changes in the estimate of average shipping transit times would have had on the reportedamount of revenue and income before taxes for the year ended December 31, 2014 (in thousands): Year Ended December 31, 2014Change in the Estimate of Average Transit Times (Days) Increase (Decrease)Revenue Increase (Decrease)Income Before Tax2 $(8,418) $(1,077)1 $(2,668) $(348)As reported As reported As reported(1) $3,348 $424(2) $13,652 $1,736When we are the primary obligor in a transaction, are subject to inventory risk, have latitude in establishing prices and selecting suppliers, or haveseveral but not all of these indicators, revenue is recorded gross. If we are not the primary obligor in the transaction and amounts earned are determined usinga fixed percentage, revenue is recorded on a net basis. Currently, the majority of both direct revenue and partner revenue is recorded on a gross basis, as weare the primary obligor. In our statements of operations, 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 percentagediscounts off current purchases and other similar offers, which, when used by our customers, are treated as a reduction of revenue.Sales returns allowance We inspect returned items when they arrive at our processing facility. We refund the full cost of the merchandise returned and all original shippingcharges 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 refundsfor 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 actualreturn 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 ofthe sales returns allowance in any accounting period. The allowance for returns was $15.5 million and $13.2 million at December 31, 2014 and 2013, respectively.Valuation of inventories Inventories, consisting of merchandise purchased for resale, are accounted for using a standard costing system which approximates the first-in-first-out (“FIFO”) method of accounting, and are valued at the lower of cost or market. We write down our inventory for estimated obsolescence and to the lower ofcost or market value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those projectedby management, additional inventory write-downs may be required. Once established, the original cost of the inventory less the related inventory allowancerepresents the new cost basis of such products. Reversal of the allowance is recognized only when the related inventory has been sold or scrapped.Internal-use software and website development Included in fixed assets is the capitalized cost of internal-use software and website development, including software used to upgrade and enhanceour Website and processes supporting our business. We capitalize costs incurred during the39Table of Contentsapplication development stage of internal-use software and amortize these costs over the estimated useful life of two to three years. Costs incurred related todesign or maintenance of internal-use software are expensed as incurred.Accounting for income taxesWe are subject to taxation from federal, state and international jurisdictions. A significant amount of judgment is involved in preparing ourprovision for income taxes and the calculation of resulting deferred tax assets and liabilities.We account for income taxes in accordance with ASC Topic 740, Income Taxes (“ASC 740”), which requires the asset and liability method ofaccounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the expected future tax consequences of temporarydifferences between tax and financial reporting. Deferred tax assets and liabilities are measured using the currently enacted tax rates that apply to taxableincome in effect for the years in which those tax assets are expected to be realized or settled. We use the with-and-without approach for determining theperiod in which tax benefits for excess share-based deductions are recognized.We have concluded based on all available positive and negative evidence it is more likely than not the Company’s deferred tax assets as ofDecember 31, 2014 arising from ordinary income and deductions and tax credits will be realized in the future. We have also concluded it is unlikely theCompany’s deferred tax asset arising from unrealized capital losses will be realized in the future. Hence, it is appropriate to record a valuation allowancerelated to the deferred tax asset for unrealized capital losses. In reaching these conclusions we considered, among other things, our recent financial andoperating results (three years of cumulative income, twelve consecutive quarters of profitability, and strong revenue growth during those periods, along withthe Company’s forecasted growth rates). We performed multiple sensitivity analyses to address how potential changes in significant assumptions wouldimpact our ability to generate the minimum amount of taxable income required. We gave the most weight to objective evidence related to our recent strongfinancial results, particularly our positive levels of pre-tax income. We will continue to monitor the need for a valuation allowance against our federal andstate deferred tax assets on a quarterly basis. ASC 740 clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements in accordance with GAAP. ASC740 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expectedto be taken in a tax return. This statement also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, anddisclosure.The calculation of our tax liabilities is subject to legal and factual interpretation, judgment, and uncertainty in a multitude of jurisdictions.This includes addressing uncertainties in the application of complex tax regulations. We recognize liabilities for uncertain tax positions in the U.S. and othertax jurisdictions based on recognition and measurement criteria prescribed by ASC 740. The liabilities are periodically reviewed for their adequacy andappropriateness. Changes to our assumptions could cause us to find a revision of estimates appropriate. Such a change in measurement would result in therecognition of a tax benefit or an additional charge to the tax provision.Tax laws and regulations themselves are subject to change as a result of changes in fiscal policy, changes in legislation, the evolution of regulations,and court rulings. We recognize potential liabilities for anticipated tax audit issues in the U.S. and other tax jurisdictions based on our estimate of whether,and the extent to which, additional taxes and interest will be due. We record an amount as an estimate of probable additional income tax liability at thelargest amount that we determine is more likely than not, based upon the technical merits of the position, to be sustained upon audit by the relevant taxauthority.As of December 31, 2014, we were not under audit by any income tax authorities. Tax periods within the statutory period of limitations notpreviously audited are potentially open for examination by the tax authorities. Potential liabilities associated with these years will be resolved when an eventoccurs to warrant closure, primarily through the completion of audits by the tax jurisdictions and/or the expiration of the statutes of limitation. To the extentaudits or other events result in a material adjustment to the accrued estimates, the effect would be recognized during the period of the event. We believe thatan appropriate estimated liability has been established for potential exposures.Our uncertain tax positions related to state income taxes represent a cash settlement contingency and are recorded as a liability in our consolidatedbalance sheets. To the extent interest and penalties would be assessed by taxing authorities on any underpayment of income taxes, such amounts are accruedand classified as a component of income tax expense in our consolidated statement of income. Realization of the unrecognized tax benefits results in afavorable impact to the effective tax rate.Impairment of long-lived assets40Table of Contents We review property and equipment and other long-lived assets for impairment whenever events or changes in circumstances indicate that thecarrying amount of an asset group may not be recoverable. Recoverability is measured by comparison of the assets’ carrying amount to future undiscountednet cash flows the asset group is expected to generate. Cash flow forecasts are based on trends of historical performance and management’s estimate of futureperformance, giving consideration to existing and anticipated competitive and economic conditions. If such asset group is considered to be impaired, theimpairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds their fair values. There were no impairments tolong-lived assets recorded during the years ended December 31, 2014, 2013 and 2012.Valuation of goodwillGoodwill represents the excess of the purchase price paid over the fair value of the tangible net assets acquired in business combinations.Goodwill is not amortized but is tested for impairment at least annually. When evaluating whether goodwill is impaired, we make a qualitativeassessment to determine if it is more likely than not that its fair value is less than its carrying amount. If the qualitative assessment determines that it is morelikely 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 itscarrying amount. If the carrying amount exceeds its fair value, then the amount of the impairment loss must be measured. The impairment loss, if any, iscalculated by comparing the implied fair value of the goodwill to its carrying amount. In calculating the implied fair value of goodwill, the fair value of thereporting unit is allocated to the other assets and liabilities within the reporting unit based on estimated fair value. The excess of the fair value of a reportingunit over the amount allocated to its other assets and liabilities is the implied fair value of goodwill. An impairment loss is recognized when the carryingamount of goodwill exceeds its implied fair value.In accordance with this guidance, we test for impairment of goodwill in the fourth quarter or when we deem that a triggering event has occurred.Goodwill totaled $2.8 million at December 31, 2014 and 2013. There were no impairments to goodwill recorded during the years ended December 31, 2014,2013 and 2012.Loss contingenciesIn the normal course of business, we are involved in legal proceedings and other potential loss contingencies. We accrue a liability for such matterswhen it is probable that a loss has been incurred and the amount can be reasonably estimated. When only a range of probable loss can be estimated, the mostprobable 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 inthe range is accrued. We expense legal fees as incurred (see Item 15 of Part IV, "Financial Statements"—Note 13. Commitments and Contingencies).Recently issued accounting standards On May 28, 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount ofrevenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognitionguidance in U.S. GAAP when it becomes effective. The new standard becomes effective for us on January 1, 2017. Early adoption is not permitted. Thestandard permits the use of either the retrospective or cumulative effect transition method. We are evaluating the effect that ASU 2014-09 will have on ourconsolidated financial statements and related disclosures. We have not yet selected a transition method nor have we determined the effect of the standard onour ongoing financial reporting.Comparison of Years Ended December 31, 2014 and 2013Executive CommentaryThis executive commentary is intended to provide investors with a view of our business through the eyes of our management. As an executivecommentary, 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 Analysisof Financial Condition and Results of Operations,” as well as our interim and audited financial statements, and the discussion of our business and riskfactors and other information included elsewhere or incorporated in this report. This executive commentary includes forward-looking statements, andinvestors are cautioned to read “Special Cautionary Note Regarding Forward-Looking Statements.”41Table of ContentsRevenues in 2014 increased 15% compared to 2013. The growth in revenue was primarily due to a 10% increase in orders, coupled with a 7%increase in average order size, from $158 to $169. These increases were partially offset by increased promotional activities including coupons, site sales, andClub O Rewards (which we recognize as a reduction of revenue) due to our driving a higher proportion of our sales using those channels. The increases werealso partially offset by an increase in the revenue we defer from orders taken but not delivered at year end due to higher average daily sales in the last week ofthe quarter. Although our average order size has increased in recent years, we expect the rate of increase to taper in the future.Gross profit in 2014 increased 13% compared to 2013 primarily as a result of revenue growth. Gross margin decreased to 18.6% in 2014 compared to19.0% in 2013. The decrease in gross margin was largely due to increased promotional activities including coupons, site sales, and Club O rewards due to ourdriving a higher proportion of our sales using those channels.Sales and marketing expenses as a percentage of revenue increased from 7.0% to 7.3% during 2014 as compared to the same period in 2013,primarily due to our increased spending in the sponsored search and display ads marketing channels due to our driving a higher proportion of our salesthrough those channels. These trends may continue depending on the proportion of our sales through these channels.As a result of these factors, we had a 9% increase in Contribution in 2014 compared to 2013 (see Non-GAAP Financial Measures below for areconciliation of Contribution to Gross Profit). Contribution margin decreased to 11.3% for 2014 from 12.0% for 2013.Technology expense in 2014 increased $14.5 million compared to 2013, primarily due to increases in staff-related costs, depreciation, and technicalconsulting.General and administrative expense in 2014 increased $3.6 million compared to 2013, primarily due to an increase in staff and travel related costsand professional fees, partially offset by a decrease in legal costs.We continue to seek opportunities for growth by expanding our international sales and distribution footprint, through our crypto-initiatives, andthrough other means. As a result of these initiatives, we expect to continue to incur additional technology and G&A expenses, including possibleinvestments in other technology companies. These expenses or investments may be material, and, coupled with the seasonality of our business, may lead toreduced income as compared to prior periods or to losses in some periods.Provision (benefit) for income taxes in 2014 was $4.4 million compared to ($68.0) million in 2013. The large income tax benefit in 2013 was due toa $75.5 million deferred tax asset valuation release in 2013 after we concluded that it was more likely than not that we will realize our deferred tax assets.We are constructing a new corporate headquarters in Salt Lake City, Utah. We estimate that the total project will cost approximately $95 million. InSeptember 2014, we closed on the purchase of land in connection with the project for approximately $11 million which we funded with cash on hand. InOctober 2014, we entered in to a loan agreement which provides for an aggregate $56 million credit facility consisting of a term loan and revolving loanfacility. This financing is discussed in further detail under Liquidity and capital resources—Borrowings below.The balance of our Management’s Discussion and Analysis of Financial Condition and Results of Operations provides further information about thematters discussed above and other important matters affecting our business.42Table of ContentsResults of Operations The following table sets forth our results of operations expressed as a percentage of total net revenue for the years ended December 31, 2014, 2013and 2012: Year ended December 31 2014 2013 2012 (as a percentage of total revenue)Revenue, net Direct 9.8 % 12.0 % 14.1 %Partner 90.2 88.0 85.9Total net revenue 100.0 100.0 100.0Cost of goods sold Direct 8.6 10.4 12.8Partner 72.7 70.6 69.2Total cost of goods sold 81.3 81.0 81.9Gross profit 18.7 19.0 18.1Operating expenses: Sales and marketing 7.3 7.0 5.8Technology 5.8 5.5 6.0General and administrative 4.8 5.2 5.2Total operating expenses 17.9 17.7 17.0Operating income 0.8 1.3 1.1Interest income — — —Interest expense — — (0.1)Other income, net 0.1 — 0.3Income before income taxes 0.9 1.3 1.3Provision (benefit) for income taxes 0.3 (5.2) —Consolidated net income 0.6 % 6.5 % 1.3 % RevenueThe following table reflects our net revenue for the years ended December 31, 2014 and 2013 (in thousands): Year ended December 31, 2014 2013 $ Change % ChangeRevenue, net Direct $147,460 $156,032 $(8,572) (5.5)%Partner 1,349,643 1,148,185 201,458 17.5 %Total revenue, net $1,497,103 $1,304,217 $192,886 14.8 %The primary reason for increased total net revenue for the year ended December 31, 2014, as compared to the same period in 2013, was a 10%increase in orders, coupled with a 7% increase in average order size, from $158 to $169. These increases were partially offset by increased promotionalactivities including coupons, site sales, and Club O Rewards (which we recognize as a reduction of revenue) due to our driving a higher proportion of oursales using those channels. The increases were also partially offset by an increase in the revenue we defer from orders taken but not delivered at year end dueto higher average daily sales in the last week of the quarter. Although our average order size has increased in recent years, we expect the rate of increase totaper in the future.The primary reason for decreased direct revenue for the year ended December 31, 2014, as compared to 2013, was a decrease in sales of clothing andshoes and a sales mix shift in bedding and bath products from our direct to our partner business.43Table of ContentsThe increase in partner revenue for the year ended December 31, 2014, as compared to 2013, was primarily due to an increase in sales of home andgarden products.The shift of business from direct to partner (or vice versa) is an economic decision based on the economics of each particular product offering at thetime and we generally do not have particular goals for an “appropriate” mix or percentage for the size of either. We believe that the mix of the businessbetween direct and partner is consistent with our strategic objectives for our business model in the current economic environment and we do not currentlyforesee any material shifts in mix. The product lines we offer, and their respective percentages of our revenue, are based on many factors including customer demand, our marketingefforts, promotional pricing and joint-marketing offered by our suppliers, and the types of liquidated inventory we are able to obtain. These factors changefrequently and affect the mix of the product lines we sell. While we have experienced a trend toward our home and garden category in recent years, ourbusiness model is to deal primarily in price-competitive, replenishable and closeout merchandise, which includes a wide variety of product offerings. Whilewe do not currently expect any material shifts in our product line mix, the amount of the product lines we sell is an economic decision based on the factorsdescribed above which may change.We continue to seek increased participation in our Club O loyalty program. We also intend to increase Club O Rewards to our Club O members inlieu of coupons we offer to all customers. This may adversely impact our revenues if the incremental sales from our Club O members as a result of this changeare less than any decrease in the sales from our current coupon program. For additional information regarding our Club O loyalty program see Item 15 ofPart IV, "Financial Statements"—Note 2. Accounting Policies, Club O loyalty program.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, including competitive pricing; inventory management decisions within the direct business; sales coupons and promotions; product mix ofsales; and operational and fulfillment costs.The following table reflects our net revenues, cost of goods sold and gross profit for the years ended December 31, 2014 and 2013 (in thousands): Year ended December 31, 2014 2013 $ Change % ChangeRevenue, net Direct $147,460 $156,032 $(8,572) (5.5)%Partner 1,349,643 1,148,185 201,458 17.5 %Total net revenue 1,497,1031,304,217 192,886 14.8 %Cost of goods sold Direct 129,253 136,282 (7,029) (5.2)%Partner 1,088,791 920,275 168,516 18.3 %Total cost of goods sold 1,218,044 1,056,557 161,487 15.3 %Gross Profit Direct 18,207 19,750 (1,543) (7.8)%Partner 260,852 227,910 32,942 14.5 %Total gross profit $279,059 $247,660 $31,399 12.7 %Gross margins for the past eight quarterly periods and years ending December 31, 2014 and 2013 were: Q1 2014 Q2 2014 Q3 2014 Q4 2014 FY 2014Direct 13.0% 11.3% 12.5% 12.5% 12.3%Partner 19.5% 19.7% 19.7% 18.7% 19.3%Combined 18.8% 18.8% 19.0% 18.2% 18.6%44Table of Contents Q1 2013 Q2 2013 Q3 2013 Q4 2013 FY 2013Direct 11.4% 12.2% 13.7% 13.4% 12.7%Partner 20.0% 20.8% 20.4% 18.6% 19.8%Combined 18.9% 19.7% 19.6% 18.0% 19.0%The 31 basis point decrease in direct gross margin for the year ended December 31, 2014, as compared to 2013, was primarily due to increased netreturns costs and increased promotional activities, which we recognize as a reduction of revenue (including coupons, site sales, and our Club O Rewardsprogram) due to our driving a higher proportion of our sales using those channels. These increases were partially offset by a continued shift in sales mix intohigher margin home and garden products.The 52 basis point decrease in partner gross margin for the year ended December 31, 2014, as compared to 2013, was primarily due to increasedpromotional activities including coupons, site sales, and our Club O Rewards program due to our driving a higher proportion of our sales using thosechannels. This decrease was partially offset by a continued shift in sales mix into higher margin home and garden products.Cost of goods sold includes stock-based compensation expense of $181,000 and $154,000 for the years ended December 31, 2014 and 2013,respectively. Fulfillment costsFulfillment costs include all warehousing costs, including fixed overhead and variable handling costs (excluding packaging costs), as well as creditcard fees and customer service costs, all of which we include as costs in calculating gross margin. We believe that some companies in our industry, includingsome of our competitors, account for fulfillment costs within operating expenses, and therefore exclude fulfillment costs from gross margin. As a result, ourgross margin may not be directly comparable to others in our industry. The following table has been included to provide investors additional information regarding our classification of fulfillment costs, gross profit andmargin, thus enabling investors to better compare our gross margin with others in our industry (in thousands): Year ended December 31, 2014 2013Total revenue, net $1,497,103 100% $1,304,217 100%Cost of goods sold Product costs and other cost of goods sold 1,152,489 77.0% 999,519 76.6%Fulfillment and related costs 65,555 4.4% 57,038 4.4%Total cost of goods sold 1,218,044 81.4% 1,056,557 81.0%Gross profit $279,059 18.6% $247,660 19.0% Fulfillment costs as a percentage of sales may vary due to several factors, such as our ability to manage costs at our warehouses, significant changesin the number of units received and fulfilled, the extent to which we use third party fulfillment services and warehouses, and our ability to effectively managecustomer service costs and credit card fees. Fulfillment and related costs remained relatively flat during the year ended December 31, 2014 as compared to2013. See Gross profit and gross margin 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 listingads, display ads, search engines, affiliate marketing programs, social coupon websites, portals, banners, e-mail, direct mail and viral and social mediacampaigns. We also do brand advertising through television, radio, print ads, and event sponsorships.45Table of ContentsThe following table reflects our sales and marketing expenses for the years ended December 31, 2014 and 2013 (in thousands): Year ended December 31, 2014 2013 $ Change % ChangeSales and marketing expenses $109,461 $91,609 $17,852 19.5%Sales and marketing expenses as a percent of net revenues 7.3% 7.0% The 29 basis point increase in sales and marketing expenses as a percentage of revenue for the year ended December 31, 2014, as compared to 2013,was primarily due to increased spending in the sponsored search and display ad marketing channels due to driving a higher proportion of our sales throughthose channels. These trends may continue depending on the proportion of our sales through these channels.Sales and marketing expenses include stock-based compensation expense of $336,000 and $167,000 for the years ended December 31, 2014 and2013, respectively.Costs associated with our discounted shipping and other promotions, such as coupons, are not included in marketing expense. Rather, they areaccounted for as a reduction of revenue and therefore affect sales and gross margin. We consider discounted shipping and other promotions, such as ourpolicy of free shipping on orders over $50, as an effective marketing tool, and intend to continue to offer them as we deem appropriate as part of our overallmarketing plan.Technology expensesWe seek to invest efficiently in technology, including web services, customer support solutions, website search, expansion of new and existingproduct categories, and in investments in technology to enhance the customer experience, improve our process efficiency and support and expand ourlogistics infrastructure. We expect to continue to increase our technology expenses to support these initiatives and these increases may be material.We have noted an increase in the frequency and variety of cyber attacks on our Website. The impact of these attacks, their costs, and the costsincurred to protect our Website against future attacks have not been material. However, we consider the threat from cyber attacks to be serious and willcontinue to incur costs relating to them.The following table reflects our technology expenses for the years ended December 31, 2014 and 2013 (in thousands): Year ended December 31, 2014 2013 $ Change % ChangeTechnology expenses $86,258 $71,788 $14,470 20.2%Technology expenses as a percent of net revenues 5.8% 5.5% The $14.5 million increase in technology costs for the year ended December 31, 2014, as compared to 2013, was primarily due to an increase instaff-related costs of $7.6 million, increased depreciation of $3.7 million, and a $1.5 million increase in technical consulting.We continue to seek opportunities for growth by expanding our international sales and distribution footprint, through our crypto-initiatives, andthrough other means. As a result of these initiatives, we expect to continue to incur additional technology and G&A expenses, including possibleinvestments in other technology companies. These expenses or investments may be material, and, coupled with the seasonality of our business, may lead toreduced income as compared to prior periods or to losses in some periods.Technology expenses include stock-based compensation expense of $751,000 and $352,000 for the years ended December 31, 2014 and 2013,respectively.46Table of ContentsGeneral and administrative expenses The following table reflects our general and administrative expenses ("G&A") for the years ended December 31, 2014 and 2013 (in thousands): Year ended December 31, 2014 2013 $ Change % ChangeGeneral and administrative expenses $71,777 $68,169 $3,608 5.3%General and administrative expenses as a percent of net revenues 4.8% 5.2% The $3.6 million increase in G&A expenses for the year ended December 31, 2014, as compared to 2013, was primarily due to an increase of $7.2million in staff and travel-related costs and $2.0 million in professional fees, partially offset by a decrease of $7.1 million in legal costs. The decrease in legalcosts is primarily due to defense costs and civil penalties totaling $13.9 million in 2013 related to the California district attorney case, compared to defensecosts and judgment totaling $6.0 million in 2014 related to a patent infringement case.G&A expenses include stock-based compensation expense of approximately $2.8 million and $2.6 million for the years ended December 31, 2014and 2013, respectively. RestructuringWe reversed approximately $360,000 and $471,000 of lease termination costs during the years ended December 31, 2014 and 2013 as a result of ourreoccupation of formerly restructured facility space. At December 31, 2014 our restructuring liability was zero. Depreciation expense Depreciation expense is classified within the corresponding operating expense categories on the consolidated statements of operations as follows (inthousands): Year ended December 31, 2014 2013Cost of goods sold - direct $282 $380Technology 16,651 12,917General and administrative 1,131 1,225Total depreciation and amortization, including internal-use software and website development $18,064 $14,522 Non-operating income (expense) Interest income Interest income is primarily derived from the investment of our cash in cash equivalents and short-term investments. Interest income for the yearsended December 31, 2014 and 2013 totaled $152,000 and $127,000, respectively. Interest expense Interest expense is primarily related to interest incurred on line of credit and our capital leases. Interest expense for the years ended December 31,2014 and 2013 totaled $39,000 and $113,000, respectively. The decreases in interest expense are primarily due to the elimination of the restructuringaccrual.Other income (expense), netOther income (expense), net for the year ended December 31, 2014 was $1.2 million as compared to ($235,000) in 2013. The change is primarily dueto increased Club O Rewards breakage of $947,000 due to increased participation in the Club O Rewards program, including our recently introduced Club OLite program, an increase of $306,000 in gift card47Table of Contentsbreakage, and a decrease in unrealized losses on precious metals of $188,000. Because we recently introduced Club O Lite, and enrolled a significant numberof Club O Lite members, reward dollars earned and resulting breakage may increase as compared to prior periods.Income taxes Our effective tax rate for the years ended December 31, 2014 and 2013 was 33.4% and (416.3%), respectively. Our effective tax rate is affected byrecurring items such as research tax credits and non-recurring items such as a valuation allowance release and a non-recurring civil penalty in 2013. It is alsoaffected to a lesser extent by tax rates in foreign jurisdictions and the relative amount of income we earn in jurisdictions, which we expect to be fairlyconsistent in the near term. The increase in the 2014 effective tax rate relative to the 2013 effective tax rate is primarily due to the release of a valuationallowance for deferred tax assets in the fourth quarter of 2013, which significantly reduced the 2013 provision and effective tax rate. We have indefinitelyreinvested foreign earnings of $142,000 at December 31, 2014. We would need to accrue and pay U.S. income tax on this amount if repatriated. We do notintend to repatriate these earnings.Seasonality Based upon our historical experience, revenue typically increases during the fourth quarter because of the holiday retail season and gross margindecreases due to increased sales of certain lower margin products, such as electronics. The actual quarterly results for each quarter could differ materiallydepending upon consumer preferences, availability of product and competition, among other risks and uncertainties. Accordingly, there can be no assurancesthat 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 2014, 2013 and 2012 (in thousands): FirstQuarter SecondQuarter ThirdQuarter FourthQuarter2014 $341,207 $332,545 $352,991 $470,3602013 $311,994 $293,204 $301,426 $397,5932012 $262,367 $239,536 $255,352 $342,034 Comparison of Years Ended December 31, 2013 and 2012Executive Commentary This executive commentary is intended to provide investors with a view of our business through the eyes of our management. As an executivecommentary, 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 Analysisof Financial Condition and Results of Operations,” as well as our interim and audited financial statements, and the discussion of our business and riskfactors and other information included elsewhere or incorporated in this report. This executive commentary includes forward-looking statements, andinvestors are cautioned to read “Special Cautionary Note Regarding Forward-Looking Statements.” Revenues in 2013 increased 19% compared to 2012. The growth in revenue was primarily due to a 17% increase in average order size, from $135 to$158, coupled with a 2% increase in orders. The increase in average order size is largely due to a sales mix shift into the home and garden category. Althoughthe trend towards our home and garden category has accelerated in recent years, we do not expect the sales mix shift to continue to increase at the same rate. Gross profit in 2013 increased 25% compared to 2012 primarily as a result of that revenue growth and a shift in product sales mix into higher marginhome and garden products. Approximately $37.0 million of the $49.2 million increase in gross profit was due to higher revenue, and $12.2 million due to theimprovement in gross margin percentage. The increase in gross margin was primarily due to the sales mix shift referenced above. Sales and marketing expenses as a percentage of revenue increased from 5.8% in 2012 to 7.0% for 2013, primarily due to increased spending in thesponsored search marketing channel due to a higher proportion of our revenue coming through that channel. In addition, during the last several weeks of2013, we increased our marketing spending as a result of softer sales observed during this period.48Table of ContentsIn late 2012, Google, Inc. (“Google”) discontinued providing its free Google Base product listing service to retailers and instead offered retailers anew fee-based product listing service. In addition, during the third quarter of 2013, Google tested and later implemented changes to its search enginealgorithms, which reduced our ranking in certain Google search results during some periods. While we worked on adapting to Google's changes, weemphasized other marketing channels, such as sponsored search, which generated revenue growth but with higher associated marketing expenses as apercentage of revenue than was the case for revenue coming from Google Base and natural search. Technology expense in 2013 increased $6.3 million compared to 2012, primarily due to an increase in staff-related costs partially offset by adecrease in depreciation.G&A expense in 2013 increased $10.9 million compared to 2012, primarily due to $10.1 million of increased activity on legal matters, includingour defense of a case brought by district attorneys in eight California counties, and for civil penalties assessed in an adverse judgment received in the case.Provision (benefit) for income taxes in 2013 was ($68.0) million compared to $485,000 in 2012. The large income tax benefit in 2013 was due to a$75.5 million deferred tax asset valuation release in 2013 after we concluded that it was more likely than not that we will realize our deferred tax assets. The balance of our Management’s Discussion and Analysis of Financial Condition and Results of Operations provides further information about thematters discussed above and other important matters affecting our business.49Table of ContentsResults of OperationsThe following table sets forth our results of operations expressed as a percentage of total net revenue for the years ended 2013 and 2012: Year ended December 31 2013 2012 (as a percentage of totalrevenue)Revenue, net Direct 12.0% 14.1%Partner 88.0 85.9Total net revenue 100.0 100.0Cost of goods sold Direct 10.4 12.8Partner 70.6 69.2Total cost of goods sold 81.0 81.9Gross profit 19.0 18.1Operating expenses: Sales and marketing 7.0 5.8Technology 5.5 6.0General and administrative 5.2 5.2Restructuring — —Total operating expenses 17.7 17.0Operating income (loss) 1.3 1.1Interest income — —Interest expense — (0.1)Other income (expense), net — 0.3Income (loss) before income taxes 1.3 1.3Provision (benefit) for income taxes (5.2) —Net income (loss) 6.5% 1.3%RevenueThe following table reflects our net revenue for the years ended December 31, 2013 and 2012 (in thousands): Year ended December 31, 2013 2012 $ Change % ChangeRevenue, net Direct $156,032 $155,516 $516 0.3%Partner 1,148,185 943,773 204,412 21.7%Total revenue, net $1,304,217 $1,099,289 $204,928 18.6%The primary reason for increased total net revenue for the year ended December 31, 2013 was an increase of 17% in average order size, from $135 to$158, coupled with a 2% increase in orders. The increase in average order size is largely due to a sales mix shift into home and garden products.The primary reason for increased direct revenue for the year ended December 31, 2013 was a continued shift in sales mix into our home and gardenproducts, partially offset by a decrease in sales of clothing and shoes due to our shift from a direct inventory-based model to a partner-based model to reduceexposure from seasonal inventory and mark downs. The primary reason for the increase in partner revenue for the year ended December 31, 2013 was an increase in sales of home and garden products.50Table of ContentsGross profit and gross marginThe following table reflects our net revenues, cost of goods sold and gross profit for the years ended December 31, 2013 and 2012 (in thousands): Year ended December 31, 2013 2012 $ Change % ChangeRevenue, net Direct $156,032 $155,516 $516 0.3 %Partner 1,148,185 943,773 204,412 21.7 %Total net revenues $1,304,217 $1,099,289 $204,928 18.6 %Cost of goods sold Direct $136,282 $140,536 $(4,254) (3.0)%Partner 920,275 760,323 159,952 21.0 %Total cost of goods sold $1,056,557 $900,859 $155,698 17.3 %Gross Profit Direct $19,750 $14,980 $4,770 31.8 %Partner 227,910 183,450 44,460 24.2 %Total gross profit $247,660 $198,430 $49,230 24.8 %Gross margins for the past eight quarterly periods and years ended December 31, 2013 and 2012 were: Q1 2013 Q2 2013 Q3 2013 Q4 2013 FY 2013Direct 11.4% 12.2% 13.7% 13.4% 12.7%Partner 20.0% 20.8% 20.4% 18.6% 19.8%Combined 18.9% 19.7% 19.6% 18.0% 19.0% Q1 2012 Q2 2012 Q3 2012 Q4 2012 FY 2012Direct 8.0% 8.3% 10.3% 11.5% 9.6%Partner 20.0% 19.6% 19.4% 18.9% 19.4%Combined 18.1% 18.0% 18.2% 17.9% 18.1%The increase in direct gross margin for the year ended December 31, 2013 compared to the same period in 2012 is primarily due to a shift in salesmix into higher margin home and garden products, lower warehousing costs, partially offset by higher freight costs.The increase in partner gross margin for the year ended December 31, 2013 is primarily due to higher revenue and a shift in product sales mix intohigher margin home and garden products.Cost of goods sold includes stock-based compensation expense of $154,000 and $272,000 for the years ended December 31, 2013 and 2012,respectively.Fulfillment costs The following table has been included to provide investors additional information regarding our classification of fulfillment costs, gross profit andmargin, thus enabling investors to better compare our gross margin with others in our industry (in thousands):51Table of Contents Year ended December 31, 2013 2012Total net revenue $1,304,217 100% $1,099,289 100%Cost of goods sold Product costs and other cost of goods sold 999,519 77% 848,842 77%Fulfillment and related costs 57,038 4% 52,017 5%Total cost of goods sold 1,056,557 81% 900,859 82%Gross profit $247,660 19% $198,430 18%Fulfillment costs as a percentage of sales may vary due to several factors, such as our ability to manage costs at our warehouses, significant changesin the number of units received and fulfilled, the extent to which we use third party fulfillment services and warehouses, and our ability to effectively managecustomer service costs and credit card fees. Fulfillment and related costs remained relatively flat during the year ended December 31, 2013 as compared to2012.See Gross profit and gross margin above for additional discussion.Operating expensesSales and marketing expensesThe following table reflects our sales and marketing expenses for the years ended December 31, 2013 and 2012 (in thousands): Year endedDecember 31, 2013 2012 $ Change % ChangeSales and marketing expenses $91,609 $63,467 $28,142 44.3%Sales and marketing expenses as a percent of net revenues 7.0% 5.8% Sales and marketing expenses as a percentage of revenue increased from 5.8% to 7.0% for the year ended December 31, 2013 as compared to thesame period in 2012, primarily due to increased expenditures in the sponsored search marketing channel due to a higher proportion of our revenue comingthrough that channel. In late 2012, Google discontinued providing its free Google Base product listing service to retailers and instead offered retailers a new fee-basedproduct listing service. In addition, during the third quarter of 2013, Google tested and later implemented changes to its search engine algorithms, whichreduced our ranking in certain Google search results during some periods. While we worked on adapting to Google's changes, we emphasized other marketingchannels, such as sponsored search, which generated revenue growth but with higher associated marketing expenses as a percentage of revenue than was thecase for revenue coming from Google Base and natural search. Sales and marketing expenses include stock-based compensation expense of $167,000 and $318,000 for the years ended December 31, 2013 and2012, respectively.Technology expensesThe following table reflects our technology expenses for the years ended December 31, 2013 and 2012 (in thousands): Year endedDecember 31, 2013 2012 $ Change % ChangeTechnology expenses $71,788 $65,467 $6,321 9.7%Technology expenses as a percent of net revenues 5.5% 6.0% The $6.3 million increase for the year ended December 31, 2013 is primarily due to an increase in staff-related costs partially offset by a decrease indepreciation. 52Table of ContentsTechnology expenses include stock-based compensation expense of $352,000 and $799,000 for the years ended December 31, 2013 and 2012,respectively.General and administrative expensesThe following table reflects our G&A expenses for the years ended December 31, 2013 and 2012 (in thousands): Year endedDecember 31, 2013 2012 $ Change % ChangeGeneral and administrative expenses $68,169 $57,259 $10,910 19.1%General and administrative expenses as a percent of net revenues 5.2% 5.2% The $10.9 million increase in G&A expenses for the year ended December 31, 2013 is primarily due to a $10.1 million increase in legal costs due toan increase in activity on legal matters, including our defense of a case brought by district attorneys in eight California counties, and for civil penaltiesassessed in an adverse judgment received in the case.G&A expenses include stock-based compensation expense of approximately $2.6 million and $2.1 million for the years ended December 31, 2013and 2012, respectively.RestructuringDuring the year ended December 31, 2013, we reversed approximately $471,000 of lease termination costs primarily due to changes in ourrestructuring accrual as a result of our reoccupation of a portion of formerly restructured office space. We incurred $76,000 of restructuring charges during theyear ended December 31, 2012 due to changes in the estimate of sublease income as a result of our entering into a new sublease agreement and ceasing theuse of some of our office facilities.Depreciation expenseDepreciation expense is classified within the corresponding operating expense categories on the consolidated statements of operations as follows (inthousands): Year endedDecember 31, 2013 2012Cost of goods sold—direct $380 $470Technology 12,917 14,177General and administrative 1,225 1,362Total depreciation and amortization, including internal-use software and website development $14,522 $16,009Non-operating income (expense)Interest income Interest income is primarily derived from the investment of our cash in cash equivalents and short-term investments. Interest income for the yearsended December 31, 2013 and 2012 totaled $127,000 and $116,000, respectively. Interest expense Interest expense is primarily related to interest incurred on our line of credit and our capital leases. Interest expense for the years ended December 31,2013 and 2012 totaled $113,000 and $809,000, respectively. The decrease is primarily due to our repayment of the $17.0 million in advances under the U.S.Bank Financing Agreement in November 2012. Other income (expense), net Other income (expense), net for the year ended December 31, 2013 decreased to $(235,000) from $3.7 million in 2012 primarily related to $1.7million of decreased Club O rewards breakage due to fewer expiring promotional memberships and $1.5 million of losses on our investment in preciousmetals.53Table of ContentsIncome taxesOur benefit for income taxes for the year ended December 31, 2013 of $68.0 million is primarily due to our decision to release our deferred tax assetvaluation allowance of $75.5 million at December 31, 2013. Our provision for income taxes for the year ended December 31, 2012 of $485,000 was forfederal alternative minimum tax and certain income tax uncertainties, including interest and penalties.Liquidity and Capital Resources Current sources of liquidity Subject to our need for additional financing for a portion of the anticipated costs of completing our new corporate headquarters as described below,we believe that the cash and cash equivalents currently on hand and expected cash flows from future operations will be sufficient to continue operations forat least the next twelve months. However, we may require additional financing for the completion of the new corporate headquarters and related equipmentand furniture. Although we are attempting to obtain additional financing, there can be no assurance that we will be able to do so, or that any financingavailable will be available on satisfactory terms. Our failure to generate sufficient revenues or profits or to obtain additional financing or raise additionalcapital could have a material adverse effect on our operations and on our ability to achieve our intended business objectives. Any projections of future cashneeds and cash flows are subject to substantial uncertainty.As we have previously announced, we plan to build a new corporate headquarters in Salt Lake City, Utah. In September 2014, our wholly owned realestate subsidiary purchased the site for the headquarters for approximately $11 million in cash. In October 2014, the subsidiary entered into a ConstructionAgreement relating to the construction of the future headquarters (see Construction agreement below). We currently estimate the total cost of theheadquarters, including the cost of the land and related equipment and furniture, at approximately $95 million.On October 24, 2014, we entered into a syndicated senior secured credit facility with U.S. Bank National Association, and other banks whichprovides for an approximately 27-month construction loan of $45.8 million (which is designed to subsequently convert into an approximately 6.75-year termloan following completion of the construction of the headquarters), and a three-year $10 million revolving loan facility that terminates on October 24, 2017but may be renewed with the consent of all lenders.The actual amount of financing to be available under the construction loan facility will be limited by a loan-to-value limit of 80% based on periodicappraisals. The loan agreement requires us to fund a substantial portion of the project costs ($37.4 million) prior to any draws on either the term loan facilityor the revolving facility. We have the right to prepay either loan without penalty at any time.If the conditions to the conversion of the construction loan into the term loan are not satisfied in early 2017, both the construction loan and therevolver would become due immediately. This would have a material adverse effect on our liquidity.The $10 million in financing to be available under the revolving loan facility may be used for working capital, capital expenditures and othercorporate purposes, but may not be used for the construction of the headquarters. In order to draw on either the construction loan or the revolving loan we arerequired to satisfy a number of conditions set forth in the loan agreement. Based on these conditions (primarily the requirement to fund a substantial portionof the project costs) we do not expect to draw on the construction loan until the second half of 2015 (see Borrowings - U.S. Bank term loan and revolvingloan agreement below).We expect to continue discussions with the bank regarding additional financing for equipment and furniture for our new corporate headquarters,when we are nearer to completion of construction.Our principal sources of liquidity are cash flows generated from operations, and our existing cash and cash equivalents. At December 31, 2014, wehad cash and cash equivalents of $181.6 million. 54Table of ContentsCash flow information is as follows (in thousands): Year ended December 31, 2014 2013Cash provided by (used in): Operating activities $80,834 $83,645Investing activities (44,430) (26,000)Financing activities (3,428) (2,527)Free cash flow“Free Cash Flow” (a non-GAAP measure) for the years ended December 31, 2014 and 2013, was $39.5 million and $65.6 million, respectively. SeeNon-GAAP Financial Measures below for a reconciliation of Free Cash Flow to net cash provided by (used in) operating activities.Cash flows from operating activitiesFor the years ended December 31, 2014 and 2013, our operating activities resulted in net cash inflows of $80.8 million and $83.6 million,respectively.Cash received from customers generally corresponds to our net revenues as our customers primarily use credit cards to buy from us causing ourreceivables from these sales transactions to settle quickly. We have payment terms with our partners that generally extend beyond the amount of timenecessary to collect proceeds from our customers. As a result, following our typically seasonally strong fourth quarter sales, at December 31 of each year, ourcash, cash equivalents and accounts payable balances normally reach their highest level (other than as a result of cash flows provided by or used in investingand financing activities). However, our accounts payable balance normally declines during the first three months following year-end, which normally resultsin a decline in our cash and cash equivalents balances from the year-end balance. The seasonality of our business causes payables and accruals to growsignificantly in the fourth quarter, and then decrease in the first quarter when they are typically paid.The $80.8 million of net cash provided by operating activities during the year ended December 31, 2014 was primarily from an increase in accountspayable of $21.7 million and accrued liabilities of $15.6 million, and non-cash depreciation and amortization expense of $18.1 million. Accounts payableincreased due to increased holiday sales during the fourth quarter of 2014. Accrued liabilities increased due to increased marketing activities and legalmatters. Depreciation and amortization expense increased primarily due to an increase in depreciation of web development projects. Other factorscontributing to net cash provided by operating activities were the increases in deferred revenue of $11.1 million and consolidated net income of $8.8 million.The $83.6 million of net cash provided by operating activities during the year ended December 31, 2013 was primarily from an increase in accountspayable and accrued liabilities of $28.2 million and $18.0 million, respectively. Accounts payable increased due to increased sales and in part due to achange in the timing of key holiday sales during the fourth quarter. In 2013, the holiday sales season began later than in 2012, and as a result some of ourpayments to our suppliers for holiday sales were due in January rather than in December. Accrued liabilities increased due to the timing of some invoicesoutstanding at year-end 2013 as compared to 2012, in particular, accruals for marketing expenses and legal matters increased. Other reasons for the increasein net cash provided by operating activities during 2013 were income before taxes of $16.3 million and non-cash depreciation and amortization expense of$14.5 million.Cash flows from investing activitiesCash provided by investing activities primarily corresponds with expenditures for fixed assets and investments in precious metals.For the year ended December 31, 2014, investing activities resulted in net cash outflows of $44.4 million, primarily from expenditures for fixedassets of $41.3 million. The increase in expenditures for fixed assets includes $16.7 million for the purchase of land and development costs for our futureheadquarters.55Table of ContentsFor the year ended December 31, 2013, investing activities resulted in net cash outflows of $26.0 million, resulting primarily from expenditures forfixed assets of $18.1 million and investments in precious metals of $8.1 million.Cash flows from financing activities For the years ended December 31, 2014 and 2013, financing activities resulted in net cash outflows of $3.4 million and $2.5 million, respectively.The $3.4 million used in financing activities during the year ended December 31, 2014 resulted primarily from the purchase of shares of ourcommon stock withheld for minimum tax withholdings upon the vesting of a portion of certain restricted stock award grants and debt issuance costs relatedto the financing we obtained in preparation for the construction of our new corporate headquarters.The $2.5 million used in financing activities during the year ended December 31, 2013 resulted primarily from $2.6 million for prepayment ofcapital leases for computer equipment in exchange for discounted pricing and $1.4 million for the purchase of shares of our common stock withheld forminimum tax withholdings upon the vesting of a portion of certain restricted stock award grants, partially offset by $1.6 million in proceeds for the exerciseof stock options.Contractual Obligations and Commitments The following table summarizes our contractual obligations as of December 31, 2014 and the effect such obligations and commitments are expectedto have on our liquidity and cash flow in future periods (in thousands): Payments Due by PeriodContractual Obligations 2015 2016 2017 2018 2019 Thereafter TotalOperating leases $11,546 $9,342 $4,963 $4,585 $3,916 $28,521 $62,873Naming rights 1,351 1,391 — — — — 2,742Purchase obligations 18,774 — — — — — 18,774Marketing, technology and other services 2,655 1,812 — — — — 4,467Headquarters construction costs 46,474 30,869 208 — — — 77,551U.S. Bank term loan payments 199 1,929 3,283 3,322 3,266 50,032 62,031Total contractual cash obligations (1) $80,999 $45,343 $8,454 $7,907 $7,182 $78,553 $228,438 ___________________________________________(1)As described below under "U.S. Bank Term Loan Payments," $45.8 million of the payments shown here is duplicative. See U.S. Bank term loanpayments below. Amounts of Commitment Expiration Per PeriodOther Commercial Commitments 2015 2016 2017 2018 2019 Thereafter TotalLetters of credit $580 $— $— $— $— $— $580Operating leases From time to time we enter into operating leases for facilities and equipment for use in our operations. During 2014, we entered into amendments toextend the leases on our corporate headquarters and a data center space from their previous expiration of June 30, 2016 to January 31, 2017 to better coincidewith the expected timing of completion of our new corporate headquarters. The minimum future payments due under these amended operating leases areincluded in the table above.Naming rights During 2011, we entered into a six-year agreement with the Oakland-Alameda County Coliseum Authority (“OACCA”) for the right to nameOakland Alameda County Coliseum (now known as “O.co Coliseum”). Amounts represent annual payments due OACCA for the naming rights. We have theright to terminate this agreement at our sole option, subject to payment of a termination fee.56Table of ContentsPurchase obligationsThe amount of purchase obligations shown above is based on assumptions regarding the legal enforceability against us of inventory purchase orderswe had outstanding at December 31, 2014. Under different assumptions regarding our rights to cancel our purchase orders or different assumptions regardingthe enforceability of the purchase orders under applicable law, the amount of purchase obligations shown in the table above would be less.Marketing, technology and other servicesFrom time to time we enter into long-term contractual agreements for marketing, technology, or other services.Headquarters construction costsWe have entered into various agreements under which we have incurred obligations relating to our plans to build an approximately 225,000 squarefoot building in Salt Lake City, Utah, to serve as our corporate headquarters, together with related facilities and improvements (collectively, the “Project”).We expect the total Project costs to be approximately $95 million. Under the financing agreement described below we are required to fund the first $37.4million of project costs before we can draw on the loan (of which we had funded $16.7 million at December 31, 2014, including $11 million we paid topurchase the land). Our obligations include payments to become due under the Construction Agreement described below, and under engineering,architectural, project management and consulting agreements, as well as anticipated expenditures for fixed assets and various other anticipated obligationsrelated to the Project. These costs are based on our current estimates; however, the costs we actually incur, the amounts we actually pay and the timing of theactual payments could vary significantly from these estimates.U.S. Bank term loan paymentsWe have entered into a financing agreement related to the Project (see Borrowings below). The amounts presented reflect our estimated payments ofprincipal and interest based on our anticipated draws on the loan. The timing and amount of our draws on the loan could vary significantly from theseestimates. Further, $45.8 million of the amounts shown in the row titled "U.S. Bank term loan payments" reflect the scheduled repayment of the financing of$45.8 million of costs shown in the row titled "Headquarters construction costs."Construction agreementWe estimate the total cost of building our corporate headquarters, including the land and related equipment and furniture, at approximately $95million over approximately the next two years. Our wholly owned subsidiary O.com Land is party to a construction agreement dated October 13, 2014 (the“Construction Agreement”) with Okland Construction Company Inc. (“Okland”) regarding preconstruction and construction services to be provided byOkland in connection with the construction of the Project.In accordance with the Project Milestones as described in the Construction Agreement, Okland is required to Substantially Complete the Work (assuch term is defined in the Construction Agreement) within 100 weeks following the commencement of the Construction Phase (as defined in theConstruction Agreement) subject to modification under certain circumstances. Pursuant to the Construction Agreement, O.Com Land agreed to make progresspayments to Okland for construction services as set forth in the Construction Agreement, and subject to a 5% retention on progress payments for the Work. Tax contingenciesAs of December 31, 2014 and December 31, 2013, tax contingencies were $709,000 and $495,000, respectively. We expect the total amount of taxcontingencies to increase in the future. In addition, changes in state, federal, and foreign tax laws may increase our tax contingencies. The timing of theresolution of income tax contingencies is highly uncertain, and the amounts ultimately paid, if any, upon resolution of issues raised by the taxing authoritiesmay differ from the amounts accrued. It is reasonably possible that within the next 12 months we will receive additional assessments by various taxauthorities. These assessments may or may not result in changes to our contingencies related to positions on prior years’ tax filings.Borrowings57Table of ContentsU.S. Bank term loan and revolving loan agreementOn October 24, 2014, we entered into a syndicated senior secured credit facility (the “Facility”) with U.S. Bank National Association ("U.S. Bank" orthe "Administrative Bank") and certain other banks. The Facility is governed by a Loan Agreement dated as of October 24, 2014 and collateral and otheragreements. The Loan Agreement provides for an aggregate credit amount of $55.8 million, consisting of (i) a senior secured real estate loan of $45.8 million(the “Real Estate Loan”) to be used to finance a portion of the development and construction of the Project described above, and (ii) a three-year $10 millionsenior secured revolving credit facility (the “Revolving Loan”) for working capital and capital expenditures, but not construction of the Project. We mustsatisfy a number of conditions at least 60 days prior to any funding under the Facility, including making cash contributions totaling approximately $37.4million toward the Project. We may also be required to make additional cash contributions if necessary to maintain a loan to value ratio of 80% or less. TheReal Estate Loan and the Revolving Loan are both secured by the Project, our inventory and accounts receivable, substantially all of our deposit accountsand related assets. We expect to satisfy the conditions to funding under the Facility in the second half of 2015.The Real Estate Loan is intended initially to provide financing for a portion of the construction of the Project. On or about January 1, 2017 (subjectto one potential extension of up to three months, and subject to potential additional extensions of up to 30 days for force majeure), upon completion of theProject, the Real Estate Loan is designed to convert into an approximately 6.75-year term loan due October 1, 2023 (the “Term Loan”). The conditions toconversion of the Real Estate Loan to the Term Loan include, among others, requirements that the Project must have been completed in accordance with theapplicable plans, paid for in full, and be generally free of liens; completion must have been certified by the project architect and the inspecting architect;certificates of occupancy must have been issued; we must have paid all amounts then due to the Banks and must be in compliance with the covenants underthe Loan Agreement; the Real Estate Loan must be or must be brought “in balance” as defined in the Loan Agreement, which may require us to contributeadditional cash to the Project; we must have paid the final amount of our cash contribution as required by the Loan Agreement; and if required by theAdministrative Bank, an updated appraisal must show that the Project is in compliance with an 80% loan to value ratio requirement (or we must pay down theprincipal balance and/or agree to reduce the amount of the Term Loan commitment to reach the required ratio). If the conditions to conversion are notsatisfied in early 2017, all amounts outstanding under the Facility will become immediately due and payable.Amounts outstanding under the Real Estate Loan and the Term Loan will carry an interest rate based on LIBOR plus 2.00% or an Alternate BaseRate plus 1.00%. However, we have entered into interest rate swap agreements with U.S. Bank and Compass Bank designed to fix our interest rate on the RealEstate Loan and the Term Loan at approximately 4.6% annually. Monthly payments of interest only will be due and payable on the Real Estate Loan prior toconversion, after which monthly payments of principal in the amount of $1.1 million annually plus interest will be due and payable, with a balloon paymentof all then unpaid principal (estimated to be $38 million), interest and other amounts due and payable on the Term Loan due on October 1, 2023. Amountsoutstanding under the Revolving Loan will carry an interest rate based on LIBOR plus 2.00% or an Alternate Base Rate plus 1.00%.We are required to maintain compliance as of the end of each calendar quarter beginning with the quarter ending December 31, 2014 with thefollowing 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 3.00 to 1.00 during the Construction Phase (as defined in the LoanAgreement);•a cash flow leverage ratio not greater than 2.50 to 1.00 following the Construction Phase, and•minimum liquidity of at least $50 million.At December 31, 2014, we were in compliance with the financial covenants. In addition to the financial covenants described above, we are requiredto comply with a number of covenants relating to the Project and our business, including covenants limiting certain indebtedness, including senior-securedindebtedness consisting of interest-bearing debt for borrowed money or for financed assets. However, the Loan Agreement permits us to incur up to $20million principal amount of additional senior-secured indebtedness for equipment financing, and other senior-secured indebtedness provided that theaggregate principal amount of such other senior-secured indebtedness does not exceed ten percent of our consolidated assets. The Loan Agreement includescustomary events of default in addition to events of default relating specifically to the Project. The Real Estate 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.58Table of ContentsUnless it terminates earlier or is extended with the consent of the Administrative Bank and all of the Banks, the Revolving Loan facility willterminate on October 24, 2017.As of December 31, 2014 and as of March 2, 2015, we had not borrowed any amounts under either the Real Estate Loan or the Revolving Loan.U.S. Bank letters of credit As of December 31, 2014 and 2013, letters of credit totaling $580,000 and $1.6 million, respectively, were issued on our behalf collateralized bycompensating cash balances held at U.S. Bank, which are included in restricted cash in the accompanying consolidated balance sheets.U.S. Bank commercial purchasing card agreement We have a commercial purchasing card (the “Purchasing Card”) agreement with U.S. Bank. We use the Purchasing Card for business purposepurchasing and must pay it in full each month. At December 31, 2014, $803,000 was outstanding and $4.2 million was available under the Purchasing Card.At December 31, 2013, $517,000 was outstanding and $4.5 million was available under the Purchasing Card.Other Factors that May Affect Future ResultsWe periodically evaluate opportunities to repurchase common stock, 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 mightaffect our liquidity requirements or cause us to issue additional debt or equity securities. There can be no assurance that financing arrangements will beavailable in amounts or on terms acceptable to us, if at all.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 toinvestors.Non-GAAP Financial MeasuresRegulation G, Conditions for Use of Non-GAAP Financial Measures, and other SEC regulations regulate the disclosure of certain non-GAAPfinancial information.Contribution and contribution marginContribution (a non-GAAP financial measure which we reconcile to “Gross profit” in our consolidated statements of income and comprehensiveincome) consists of gross profit less sales and marketing expense and reflects an additional way of viewing our results. Contribution Margin is Contributionas a percentage of revenues. When viewed together with our GAAP results, we believe Contribution and Contribution Margin provide management and usersof the financial statements information about our ability to cover our operating costs, such as technology and general and administrative expenses.Contribution and Contribution Margin are used in addition to and in conjunction with results presented in accordance with GAAP and should not be reliedupon to the exclusion of GAAP financial measures. You should review our financial statements and publicly-filed reports in their entirety and not rely on anysingle financial measure. The material limitation associated with the use of Contribution is that it is an incomplete measure of profitability as it does notinclude all operating expenses or non-operating income and expenses. Management compensates for these limitations when using this measure by looking atother GAAP measures, such as operating income and net income.59Table of ContentsFor further details on Contribution and Contribution Margin, see the calculation of these non-GAAP financial measures below (in thousands): Year ended December 31, 2014 2013 2012Total net revenue $1,497,103 $1,304,217 $1,099,289Cost of goods sold 1,218,044 1,056,557 900,859Gross profit 279,059 247,660 198,430Less: Sales and marketing expense 109,461 91,609 63,467Contribution $169,598 $156,051 $134,963Contribution margin 11.3% 12.0% 12.3%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 GAAPresults, provides a more complete understanding of factors and trends affecting our cash flows and liquidity. Free cash flow, which we reconcile to “Net cashprovided by (used in) operating activities,” is net cash provided by operating activities reduced by “Expenditures for fixed assets, including internal-usesoftware and website development.” We believe that net cash provided by operating activities is an important measure, since it includes both the cash impactof 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 toevaluate our business since purchases of fixed assets are a necessary component of ongoing operations and free cash flow measures the amount of cash wehave 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 calculated below (inthousands): Year ended December 31, 2014 2013 2012Net cash provided by operating activities $80,834 $83,645 $28,145Expenditures for fixed assets, including internal-use software and websitedevelopment (41,346) (18,067) (12,489)Free cash flow $39,488 $65,578 $15,656ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKOther than the interest rate swaps described below and elsewhere in this Annual Report on Form 10-K, we do not use derivative financial instrumentsin our investment portfolio, and we have no foreign exchange contracts. Our financial instruments consist of cash and cash equivalents, trade accounts andcontracts receivable, accounts payable and long-term obligations. We consider investments in highly-liquid instruments with a remaining maturity of90 days or less at the date of purchase to be cash equivalents. In connection with the syndicated senior secured credit facility described above, we entered into interest rate swap transactions. The swaps have aneffective date of September 1, 2015 and a maturity date of October 1, 2023. The combined notional amount changes monthly beginning at approximately$3.7 million on September 1, 2015, increasing to a maximum of approximately $45.8 million on October 1, 2016, and decreasing thereafter 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 totime on the Real Estate Loan at an annual rate of approximately 4.6%. At December 31, 2014 we had no amounts outstanding under the Real Estate Loan,and the notional amount of the swaps was zero.We carry our interest rate swaps at fair value on our consolidated balance sheets. At December 31, 2014 our swaps are included as Other long-termliabilities in the amount of $1 million. The change in fair value of our swaps for the year ended December 31, 2014 was a loss of $1 million. The fair value ofthe swaps can be impacted by several factors including forward rates, interest rates and discount rates (see Item 15 of Part IV, "Financial Statements"—Note 2.Accounting Policies, Fair value of financial instruments). Because we have designated our swaps as cash flow hedges for accounting purposes, changes inthe60Table of Contentsfair value of the instruments are recognized through Other comprehensive income in our statements of comprehensive income (see Item 15 of Part IV,"Financial Statements"—Note 2. Accounting Policies, Derivative financial instruments).Our exposure to market risk for changes in interest rates relates primarily to our short-term investments and short-term obligations; thus, fluctuationsin 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 tofluctuations due to volatility of the stock market in general, investment-specific circumstances, and changes in general economic conditions.At December 31, 2014, we had $181.6 million in cash and cash equivalents. Hypothetically, an increase or decrease in interest rates of one hundredbasis points would have an estimated impact of $1.8 million on our earnings or loss, or the fair market value or cash flows of these instruments. At December 31, 2014, we had assets consisting of investments in precious metals totaling $10.9 million. Hypothetically, an increase or decrease inthe market value of one hundred basis points would have an estimated impact of $109,000 on our earnings or loss, or the recorded value or cash flows ofthese instruments. Earnings resulting from increases in the market value of precious metals would be limited to losses incurred in the same fiscal year.At December 31, 2014, letters of credit totaling $580,000 were outstanding under our credit facilities. Hypothetically, an increase or decrease ininterest rates of one hundred basis points would have an estimated impact of $5,800 on our earnings or loss, or the cash flows of these instruments, if theletters of credit were fully drawn.At December 31, 2014, we had cryptocurrency-denominated assets totaling $340,000. Hypothetically, an increase or decrease in the market value ofone hundred basis points would have an estimated impact of $3,400 on our earnings or loss, or the recorded value or cash flows of these instruments.Reported earnings resulting from increases in the market value of cryptocurrency would be limited to their historical cost.ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAThe financial statements and supplementary data required by this item are included in Part IV, Item 15 of this Annual Report on Form 10-K.ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURENone.ITEM 9A. CONTROLS AND PROCEDURES(a) Disclosure Controls and ProceduresWe maintain disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, asamended (the "Exchange Act"). The term disclosure controls and procedures means controls and other procedures of an issuer that are designed to ensure thatinformation required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act is recorded, processed, summarized andreported, 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 disclosedby an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer's management, including itsprincipal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding requireddisclosure.Evaluation of Disclosure Controls and ProceduresWe carried out an evaluation required by the Exchange Act under the supervision and with the participation of our principal executive officer andprincipal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rule 13a-15(e) of theExchange Act, as of the end of the period covered by this report. Based on this evaluation, our principal executive officer and principal financial officerconcluded that our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by us in thereports 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 andforms and to provide reasonable assurance that such information is accumulated and communicated to our61Table of Contentsmanagement, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives as specified above. Managementdoes not expect, however, that our disclosure controls and procedures will prevent or detect all error and fraud. Any control system, no matter how welldesigned and operated, is based upon certain assumptions and can provide only reasonable, not absolute, assurance that its objectives will be met. Further, noevaluation 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, ifany, within the Company have been detected.(b) Management's Report on Internal Control over Financial ReportingManagement of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as defined inRules 13a-15(f) and 15d-15(f) under the Exchange Act.Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and thepreparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations,internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness of internal control overfinancial reporting to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate.Management has assessed the effectiveness of our internal control over financial reporting as of December 31, 2014. In making our assessment of theeffectiveness of internal control over financial reporting, management used the criteria set forth in Internal Control—Integrated Framework (1992) issued bythe Committee of Sponsoring Organizations of the Treadway Commission ("COSO"). Based on this assessment, management has concluded that, as ofDecember 31, 2014, our internal control over financial reporting was effective.Our internal control over financial reporting is designed to provide reasonable assurance of achieving its objectives as specified above. Managementdoes not expect, however, that our internal control over financial reporting will prevent or detect all error and fraud. Any control system, no matter how welldesigned and operated, is based upon certain assumptions and can provide only reasonable, not absolute, assurance that its objectives will be met. Further, noevaluation 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, ifany, within the Company have been detected.The effectiveness of our internal control over financial reporting as of December 31, 2014 has been audited by KPMG LLP, an independentregistered public accounting firm, as stated in their report which is in Item 9A(c).62Table of Contents(c) Independent Registered Public Accounting Firm's Report on Internal Control Over Financial ReportingReport of Independent Registered Public Accounting FirmThe Board of Directors and StockholdersOverstock.com, Inc.:We have audited Overstock.com, Inc.'s internal control over financial reporting as of December 31, 2014, based on criteria established in InternalControl—Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Overstock.com Inc.'smanagement is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal controlover financial reporting, included in the accompanying Management's Report on Internal Control over Financial Reporting (Item 9A(b)). Our responsibilityis to express an opinion on the Company's internal control over financial reporting based on our audit.We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standardsrequire that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained inall material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weaknessexists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performingsuch other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financialreporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internalcontrol over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately andfairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary topermit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the companyare being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regardingprevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financialstatements.Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of anyevaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degreeof compliance with the policies or procedures may deteriorate.In our opinion, Overstock.com, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014,based on criteria established in Internal Control—Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the TreadwayCommission (COSO).We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidatedbalance sheets of Overstock.com, Inc. and subsidiaries as of December 31, 2014 and 2013, and the related consolidated statements of income, comprehensiveincome, changes in stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2014, and our report datedMarch 12, 2015 expressed an unqualified opinion on those consolidated financial statements./s/ KPMG LLPSalt Lake City, UtahMarch 12, 201563Table of Contents(d) Changes in Internal Control Over Financial ReportingDuring the fiscal quarter ended December 31, 2014, there has not occurred any change in our internal control over financial reporting that hasmaterially affected, or is reasonably likely to materially affect, our internal control over financial reporting.64Table of ContentsITEM 9B. OTHER INFORMATION None.65Table of ContentsPART IIIITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCEInformation regarding our Executive Officers required by Item 10 of Part III is set forth in Item 1 of Part I under"Business—Executive Officers of the Registrant." Information required by Item 10 of Part III regarding our board of directorsand any material changes to the process by which security holders may recommend nominees to the board of directors will beincluded in our definitive proxy statement for our 2015 annual meeting of stockholders, and is incorporated herein by reference.Information relating to compliance with Section 16(a) of the 1934 Act will be set forth in our definitive proxy statement for our2015 annual meeting of stockholders and is incorporated herein by reference.We have adopted a Code of Business Conduct and Ethics ("Code"), which is applicable to all employees of theCompany, including the principal executive officer, principal financial officer, and principal accounting officer. The Codeincludes provisions that are specifically applicable to our senior financial officers. We intend to disclose any amendments tothese provisions and any waivers from any of these provisions granted to our principal executive officer, principal financialofficer or principal accounting officer in the Investor Relations section of our Website, www.overstock.com. We will provide acopy of the relevant portion to any person without any charge upon request in writing addressed to Overstock.com. Attn:Investor Relations, 6350 South 3000 East, Salt Lake City, UT 84121.ITEM 11. EXECUTIVE COMPENSATIONThe information required by this Item is incorporated by reference to our definitive proxy statement for the 2015annual meeting of stockholders.66Table of ContentsITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERSExcept as set forth herein, the information required by this Item is incorporated by reference to our definitive proxy statement for the 2015 annualmeeting of stockholders.The following graph compares the total cumulative stockholder return, on our common stock with the total cumulative return of the NASDAQMarket Index—U.S. ("NASDAQ Market Index") and the Morningstar Specialty Retail Index ("Morningstar Group Index") during the period commencing onJanuary 1, 2010 through December 31, 2014. The graph assumes a $100 investment at the beginning of the period in our common stock, the NASDAQMarket Index and the Morningstar Group Index, and the reinvestment of any dividends. Historic stock price performance is not necessarily indicative offuture stock price performance.COMPARISON OF YEAR CUMULATIVE TOTAL RETURNITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCEThe information required by this Item is incorporated by reference to our definitive proxy statement for the 2015annual meeting of stockholders.67Table of ContentsITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICESThe information required by this Item is incorporated by reference to our definitive proxy statement for the 2015annual meeting of stockholders.68Table of ContentsPART IVITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES1. Financial StatementsINDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm75Consolidated Balance Sheets76Consolidated Statements of Income77Consolidated Statements of Comprehensive Income78Consolidated Statements of Changes in Stockholders' Equity79Consolidated Statements of Cash Flows80Notes to Consolidated Financial Statements81Schedule II Valuation and Qualifying Accounts1072. Financial Statement ScheduleSchedule II Valuation and Qualifying Accounts listed in (1) above is included herein. Schedules other than those listed above have been omitted asthey are either not required, not applicable, or the information has otherwise been shown in the consolidated financial statements or notes thereto.3. ExhibitsExhibits 3.1 Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to our Quarterly Report onForm 10-Q for the quarter ended June 30, 2014 filed on July 29, 2014 (File No. 000-49799)). 3.2 Amended and Restated Bylaws (incorporated by reference to Exhibit 3.1 to our Current Report on Form 8-K filed onFebruary 10, 2014 (File No. 000-49799)). 4.1 Form of specimen common stock certificate (incorporated by reference to Exhibit 4.1 to our Registration Statement onForm S-1 (File No. 333-83728), which became effective on May 29, 2002). 10.1 Form of Indemnification Agreement between Overstock.com, Inc. and each of its directors and officers (incorporated byreference to Exhibit 10.1 to our Registration Statement on Form S-1 (File No. 333-83728), which became effective onMay 29, 2002). 10.2 Lease Agreement dated January 23, 2002 between Overstock.com, Inc. and Holladay Building East L.L.C. (incorporatedby reference to Exhibit 10.8 to our Registration Statement on Form S-1 (File No. 333-83728), which became effective onMay 29, 2002). 10.3 Intellectual Property Assignment Agreement with Douglas Greene dated February 28, 2002 (incorporated by reference toExhibit 10.14 to our Registration Statement on Form S-1 (File No. 333-83728), which became effective on May 29,2002). 10.4 Amendment No. 1, dated April 29, 2002, to Intellectual Property Assignment Agreement dated February 28, 2002 byand between Overstock.com, Inc. and Douglas Greene (incorporated by reference to Exhibit 10.18 to our RegistrationStatement on Form S-1 (File No. 333-83728), which became effective on May 29, 2002). 10.5 Sublease Agreement by and between Overstock.com, Inc., Old Mill Technology Center, LLC, and Old Mill BuildingLLC (incorporated by reference to Exhibit 99.1 to our Current Report on Form 8-K/A filed on December 7, 2004 (FileNo. 000-49799)).69Table of ContentsExhibits 10.6 Sublease Agreement by and between Overstock.com, Inc., Document Controls Systems, Inc., and Old Mill Building LLC(incorporated by reference to Exhibit 99.2 to our Current Report on Form 8-K/A filed on December 7, 2004 (File No.000-49799)). 10.7 Sublease Agreement by and between Overstock.com, Inc., Information Technology International, Inc., and Old MillBuilding LLC (incorporated by reference to Exhibit 99.3 to our Current Report on Form 8-K/A filed on December 7,2004 (File No. 000-49799)). 10.8 Old Mill Corporate Center Fourth Amendment to the Lease Agreement dated as of December 1, 2004 by and amongHolladay Building East L.L.C., Overstock.com, Inc. and Old Mill Building LLC (incorporated by reference toExhibit 99.4 to our Current Report on Form 8-K/A filed on December 7, 2004 (File No. 000-49799)). 10.9 Old Mill Corporate Center Fifth Amendment to the Lease Agreement dated March 6, 2014 by and between Old MillCorporate Center III, LLC, other related parties and Overstock.com, Inc. (incorporated by reference to Exhibit 10.1 to ourCurrent Report on Form 8-K filed on March 11, 2014 (File No. 000-49799)). 10.10 Colocation Center Agreement dated as of December 1, 2004 between Old Mill Technology Center, LLC andOverstock.com, Inc. (incorporated by reference to Exhibit 99.5 to our Current Report on Form 8-K/A filed onDecember 7, 2004 (File No. 000-49799)). 10.11 First Amendment to the Colocation Center Agreement dated March 6, 2014 by and between OMTek, LLC andOverstock.com, Inc. (incorporated by reference to Exhibit 10.2 to our Current Report on Form 8-K filed on March 11,2014 (File No. 000-49799)). 10.12 2002 Stock Option Plan, as amended (incorporated by reference to Exhibit 99.6 to our Current Report on Form 8-K filedMay 7, 2004 (File No. 000-49799)). 10.13 2005 Equity Incentive Plan, as amended (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-Kfiled on May 7, 2012 (File No. 000-49799)). 10.14 Form of Restricted Stock Unit Grant Notice and Restricted Stock Agreement under the 2005 Equity Incentive Plan(incorporated by reference to Exhibit 10.12 to our Annual Report on Form 10-K filed on February 21, 2013 (File No.000-49799)). 10.15 Industrial Net Lease dated May 1, 2013 between Overstock.com, Inc. and Landmark 4, LLC (incorporated by referenceto Exhibit 10.1 to our Current Report on Form 8-K filed May 17, 2013 (File No. 000-49799)). *10.16 (a) Summary of unwritten compensation arrangements with Directors. 10.17 (a) Description of unwritten bonus pool plan adopted January 28, 2014 (incorporated by reference to our Current Report onForm 8-K filed on January 29, 2014 (File No. 000‑49799)). 10.18 (a) Description of unwritten bonus pool plan adopted February 5, 2015 (incorporated by reference to our Current Report onForm 8-K filed on February 11, 2015 (File No. 000‑49799)). 10.19 Purchase and Sale Agreement dated May 5, 2014 between O.Com Land LLC, Gardner Bingham Junction Holdings, L.C.and Arbor Bingham Junction Holdings, L.C. (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on May 7, 2014 (File No. 000-49799)). 10.20 First Amendment dated July 29, 2014 to Purchase and Sale Agreement dated May 5, 2014 between O.Com Land LLC,Gardner Bingham Junction Holdings, L.C. and Arbor Bingham Junction Holdings, L.C. (incorporated by reference toExhibit 10.1 to our Current Report on Form 8-K filed on August 6, 2014 (File No. 000-49799)). 10.21 Second Amendment dated September 3, 2014 to Purchase and Sale Agreement dated May 5, 2014 between O.Com LandLLC, Gardner Bingham Junction Holdings, L.C. and Arbor Bingham Junction Holdings, L.C. (incorporated by referenceto Exhibit 10.1 to our Current Report on Form 8-K filed on September 8, 2014 (File No. 000-49799)).70Table of ContentsExhibits 10.22 Project Management Agreement dated May 5, 2014 between O.Com Land LLC and Gardner CMS, L.C. (incorporated byreference to Exhibit 10.2 to our Report on Current Form 8-K filed on May 7, 2014 (File No. 000-49799)). 10.23 Purchase and Sale Agreement dated September 17, 2014 by and between the Redevelopment Agency of Midvale Cityand O.com Land LLC (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on September23, 2014 (File No. 000-49799)). 10.24 Loan Agreement dated as of October 24, 2014 by and between Overstock.com, Inc., O.com Land, LLC, U.S. BankNational Association and the other Banks party thereto from time to time (the “Loan Agreement”) (incorporated byreference to Exhibit 10.1 to our Current Report on Form 8-K filed on October 28, 2014 (File No. 000-49799)). 10.25 Revolving Note dated October 24, 2014 made by Overstock.com, Inc. to U.S. Bank pursuant to the Loan Agreement(incorporated by reference to Exhibit 10.2 to our Current Report on Form 8-K filed on October 28, 2014 (File No. 000-49799)). 10.26 Revolving Note dated October 24, 2014 made by Overstock.com, Inc. to Compass Bank pursuant to the LoanAgreement (incorporated by reference to Exhibit 10.3 to our Current Report on Form 8-K filed on October 28, 2014 (FileNo. 000-49799)). 10.27 Swing Line Note dated October 24, 2014 made by Overstock.com, Inc. to U.S. Bank National Association as Swing LineBank pursuant to the Loan Agreement (incorporated by reference to Exhibit 10.4 to our Current Report on Form 8-Kfiled on October 28, 2014 (File No. 000-49799)). 10.28 Construction Note dated October 24, 2014 made by O.com Land, LLC to U.S. Bank pursuant to the Loan Agreement(incorporated by reference to Exhibit 10.5 to our Current Report on Form 8-K filed on October 28, 2014 (File No. 000-49799)). 10.29 Construction Note dated October 24, 2014 made by O.com Land, LLC to Compass Bank pursuant to the LoanAgreement (incorporated by reference to Exhibit 10.6 to our Current Report on Form 8-K filed on October 28, 2014 (FileNo. 000-49799)). 10.30 Form of Term Note to be made by O.com Land, LLC pursuant to the Loan Agreement (incorporated by reference toExhibit 10.7 to our Current Report on Form 8-K filed on October 28, 2014 (File No. 000-49799)). 10.31 Security Agreement dated October 24, 2014 between Overstock.com, Inc. and U.S. Bank National Association, asAdministrative Bank for the Banks party to the Loan Agreement from time to time (incorporated by reference to Exhibit10.8 to our Current Report on Form 8-K filed on October 28, 2014 (File No. 000-49799)). 10.32 Deed of Trust, Assignment of Rents, Security Agreement and Financing Statement dated October 24, 2014, made byO.com Land, LLC to First American Title Insurance Company, as trustee, and U.S. Bank National Association, asAdministrative Bank for the Banks party to the Loan Agreement from time to time (incorporated by reference to Exhibit10.9 to our Current Report on Form 8-K filed on October 28, 2014 (File No. 000‑49799)). 10.33 Assignment of Construction and Development Documents dated October 24, 2014, made by O.com Land, LLC in favorof U.S. Bank National Association, as Administrative Bank for the Banks party to the Loan Agreement from time to time(incorporated by reference to Exhibit 10.10 to our Current Report on Form 8-K filed on October 28, 2014 (File No. 000-49799)). 10.34 Assignment of Project Management Agreement dated October 24, 2014, made by O.com Land, LLC to U.S. BankNational Association, as Administrative Bank for the Banks party to the Loan Agreement from time to time andacknowledged and consented to by Gardner CMS, L.C., as project manager (incorporated by reference to Exhibit 10.11to our Current Report on Form 8-K filed on October 28, 2014 (File No. 000-49799)).71Table of ContentsExhibits 10.35 Repayment and Completion Guaranty dated October 24, 2014, made by Overstock.com, Inc. in favor of U.S. BankNational Association, as Administrative Bank for the Banks party to the Loan Agreement from time to time(incorporated by reference to Exhibit 10.12 to our Current Report on Form 8-K filed on October 28, 2014 (File No. 000-49799)). 10.36 Environmental Indemnity Agreement dated October 24, 2014, made by O.com Land, LLC and Overstock.com, Inc. infavor of U.S. Bank National Association, as Administrative Bank for the Banks party to the Loan Agreement from timeto time (incorporated by reference to Exhibit 10.13 to our Current Report on Form 8-K filed on October 28, 2014 (FileNo. 000-49799)). 10.37 ISDA Master Agreement and Schedule entered into on October 24, 2014 but dated as of August 26, 2014 between U.S.Bank National Association and O.com Land, LLC (the “Master Agreement”), (incorporated by reference to Exhibit10.14 to our Current Report on Form 8-K filed on October 28, 2014 (File No. 000-49799)). 10.38 ISDA Master Agreement and Schedule dated as of October 27, 2014 between Compass Bank and O.com Land, LLC (the“Master Agreement”), (incorporated by reference to Exhibit 10.15 to our Current Report on Form 8-K filed on October28, 2014 (File No. 000-49799)). 10.39 Unlimited Continuing Guaranty (Swap Transactions) entered into on October 24, 2014 but dated as of October 22,2014 made by Overstock.com, Inc. to U.S. Bank National Association (incorporated by reference to Exhibit 10.16 toour Current Report on Form 8‑K filed on October 28, 2014 (File No. 000-49799)). 10.40 Confirmation of swap transaction dated October 24, 2014 from U.S. Bank National Association to O.com Land, LLC(incorporated by reference to Exhibit 10.17 to our Current Report on Form 8-K filed on October 28, 2014 (File No. 000-49799)). 10.41 Confirmation of swap transaction dated October 27, 2014 from Compass Bank to O.com Land, LLC (incorporated byreference to Exhibit 10.18 to our Current Report on Form 8‑K filed on October 28, 2014 (File No. 000-49799)). 10.42 Lease Agreement dated October 24, 2014 between O.com Land, LLC and Overstock.com Inc. (incorporated by referenceto Exhibit 10.19 to our Current Report on Form 8-K filed on October 28, 2014 (File No. 000-49799)). 10.43 Construction Agreement, dated as of October 13, 2014 by and between O.Com Land, LLC and Okland ConstructionCompany Inc. but executed on October 14, 2014 (incorporated by reference to Exhibit 10.1 to our Current Report onForm 8-K filed on October 20, 2014 (File No. 000-49799)). *21 Subsidiaries of the Registrant *23 Consent of Independent Registered Public Accounting Firm 24 Powers of Attorney (see signature page) *31.1 Exhibit 31 Certification of Principal Executive Officer *31.2 Exhibit 31 Certification of Principal Financial Officer *32.1 Section 1350 Certification of Principal Executive Officer *32.2 Section 1350 Certification of Principal Financial Officer72Table of ContentsExhibits 101(b) Attached as Exhibit 101 to this report are the following documents formatted in XBRL (Extensible Business ReportingLanguage): (i) Consolidated Balance Sheets at December 31, 2014 and 2013; (ii) Consolidated Statements of Incomefor the years ended December 31, 2014, 2013, and 2012; (iii) Consolidated Statements of Comprehensive Income forthe years ended December 31, 2014, 2013, and 2012; (iv) Consolidated Statements of Changes in Stockholder's Equityfor the years ended December 31, 2014, 2013, and 2012; (v) Consolidated Statements of Cash Flows for the years endedDecember 31, 2014, 2013, and 2012; and (vi) Notes to Consolidated Financial Statements.___________________________________________(a)Management contract or compensatory plan or arrangement.(b)Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus forpurposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Act of 1934 and otherwise are not subject to liabilityunder these sections.* Filed herewith.73Table of ContentsSIGNATURESPursuant to the requirements of Section 13 or 15(d) of the Securities Act of 1934, the registrant has duly caused this Annual Report on Form 10-K tobe signed on its behalf by the undersigned, thereunto duly authorized, on March 12, 2015. OVERSTOCK.COM, INC. By: /s/ PATRICK M. BYRNEPatrick M. ByrneChief Executive Officer(Principal Executive Officer)________________________________________________________________________________________________________________________Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons onbehalf of the registrant and in the capacities and on the dates indicated.POWER OF ATTORNEYKNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints each of Patrick M. Byrneand Robert P. Hughes, his or her attorneys-in-fact, each with the power of substitution, for him or her in any and all capacities, to sign any amendments to thisAnnual Report on Form 10-K and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and ExchangeCommission, hereby ratifying and conforming all that said attorney-in-fact, or his or their substitute or substitutes, may do or cause to be done by virtuehereof. Signature Title Date /s/ PATRICK M. BYRNEPatrick M. Byrne Chief Executive Officer (Principal Executive Officer) March 12, 2015/s/ JONATHAN E. JOHNSON IIIJonathan E. Johnson III Chairman of the Board March 12, 2015/s/ STORMY D. SIMONStormy D. Simon President and Director March 12, 2015/s/ ROBERT P. HUGHESRobert P. Hughes Senior Vice President, Finance and Risk Management(Principal Financial Officer and Principal AccountingOfficer) March 12, 2015/s/ ALLISON H. ABRAHAMAllison H. Abraham Director March 12, 2015/s/ BARCLAY F. CORBUSBarclay F. Corbus Director March 12, 2015/s/ KIRTHI KALYANAMKirthi Kalyanam Director March 12, 2015/s/ SAMUEL A. MITCHELLSamuel A. Mitchell Director March 12, 2015/s/ JOSEPH J. TABACCO, JR.Joseph J. Tabacco, Jr. Director March 12, 201574Table of ContentsReport of Independent Registered Public Accounting FirmThe Board of Directors and StockholdersOverstock.com, Inc.:We have audited the accompanying consolidated balance sheets of Overstock.com, Inc. and subsidiaries as of December 31, 2014 and 2013, and therelated consolidated statements of income, comprehensive income, changes in stockholders' equity, and cash flows for each of the years in the three-yearperiod ended December 31, 2014. In connection with our audits of the consolidated financial statements, we also have audited financial statementschedule II. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Ourresponsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standardsrequire that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An auditincludes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing theaccounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe thatour audits provide a reasonable basis for our opinion.In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position ofOverstock.com, Inc. and subsidiaries as of December 31, 2014 and 2013, and the results of their operations and their cash flows for each of the years in thethree-year period ended December 31, 2014, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financialstatement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, theinformation set forth therein.We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Overstock.com, Inc.'sinternal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control—Integrated Framework (1992) issued bythe Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 12, 2015 expressed an unqualified opinion onthe effectiveness of the Company's internal control over financial reporting./s/ KPMG LLPSalt Lake City, UtahMarch 12, 201575Table of ContentsOverstock.com, Inc.Consolidated Balance Sheets(in thousands) December 31, 2014 December 31, 2013Assets Current assets: Cash and cash equivalents$181,641 $148,665Restricted cash580 1,580Accounts receivable, net18,963 16,047Inventories, net26,208 27,043Prepaid inventories, net3,214 1,804Deferred tax assets, net14,835 13,570Prepaids and other assets12,621 10,298Total current assets258,062 219,007Fixed assets, net52,071 27,194Precious metals10,905 9,678Deferred tax assets, net50,331 54,950Goodwill2,784 2,784Other long-term assets, net2,712 2,023Total assets$376,865 $315,636Liabilities and Stockholders’ Equity Current liabilities: Accounts payable$112,787 $90,582Accrued liabilities81,564 65,679Deferred revenue48,451 37,321Total current liabilities242,802 193,582Other long-term liabilities4,843 3,294Total liabilities247,645 196,876Commitments and contingencies (Note 13)— —Stockholders’ equity: Preferred stock, $0.0001 par value: Authorized shares - 5,000 Issued and outstanding shares - none— —Common stock, $0.0001 par value Authorized shares - 100,000 Issued shares - 27,241 and 26,909 Outstanding shares - 24,037 and 23,7852 2Additional paid-in capital366,252 361,706Accumulated deficit(153,864) (162,718)Accumulated other comprehensive loss(621) —Treasury stock: Shares at cost - 3,204 and 3,124(82,531) (80,230)Equity attributable to stockholders of Overstock.com, Inc.129,238 118,760Equity attributable to noncontrolling interests(18) —Total equity129,220 118,760Total liabilities and stockholders’ equity$376,865 $315,636 See accompanying notes to consolidated financial statements.76Table of ContentsOverstock.com, Inc.Consolidated Statements of Income(in thousands, except per share data) Year ended December 31,2014 2013 2012Revenue, net Direct$147,460 $156,032 $155,516Partner1,349,643 1,148,185 943,773Total net revenue1,497,103 1,304,217 1,099,289Cost of goods sold Direct(1)129,253 136,282 140,536Partner1,088,791 920,275 760,323Total cost of goods sold1,218,044 1,056,557 900,859Gross profit279,059 247,660 198,430Operating expenses: Sales and marketing(1)109,461 91,609 63,467Technology(1)86,258 71,788 65,467General and administrative(1)71,777 68,169 57,259Restructuring(360) (471) 76Total operating expenses267,136 231,095 186,269Operating income11,923 16,565 12,161Interest income152 127 116Interest expense(39) (113) (809)Other income (expense), net1,169 (235) 3,686Income before income taxes13,205 16,344 15,154Provision (benefit) for income taxes4,404 (68,034) 485Consolidated net income$8,801 $84,378 $14,669Less: Net loss attributable to noncontrolling interests(53) — —Net income attributable to stockholders of Overstock.com, Inc.$8,854 $84,378 $14,669Net income per common share—basic: Net income attributable to common shares—basic$0.37 $3.56 $0.63Weighted average common shares outstanding—basic23,999 23,714 23,387Net income per common share—diluted: Net income attributable to common shares—diluted$0.36 $3.47 $0.62Weighted average common shares outstanding—diluted24,317 24,294 23,672____________________________________________________________(1) Includes stock-based compensation as follows (Note 16): Cost of goods sold — direct$181 $154 $272 Sales and marketing336 167 318 Technology751 352 799 General and administrative2,767 2,578 2,138 Total$4,035 $3,251 $3,527See accompanying notes to consolidated financial statements.77Table of ContentsOverstock.com, Inc.Consolidated Statements of Comprehensive Income(in thousands) Year ended December 31,2014 2013 2012Consolidated net income$8,801 $84,378 $14,669Other comprehensive loss: Unrealized loss on cash flow hedges, net of benefit for taxes of $387, $0, and $0(621) — —Other comprehensive loss(621) — —Comprehensive income$8,180 $84,378 $14,669Less: Comprehensive loss attributable to noncontrolling interests(53) — —Comprehensive income attributable to stockholders of Overstock.com, Inc.$8,233 $84,378 $14,669See accompanying notes to consolidated financial statements.78Table of ContentsOverstock.com, Inc.Consolidated Statements of Changes in Stockholders’ Equity(in thousands, except per share data) Year ended December 31,2014 2013 2012Equity attributable to stockholders of Overstock.com, Inc. Number of common shares issued Balance at beginning of year26,909 26,481 26,241Common stock issued upon vesting of restricted stock302 339 240Exercise of stock options30 89 —Balance at end of year27,24126,90926,481 Number of treasury stock shares Balance at beginning of year3,124 3,030 2,962Purchases of treasury stock80 94 68Balance at end of year3,204 3,124 3,030Total number of outstanding shares24,037 23,785 23,451 Common stock$2 $2 $2 Additional paid-in capital Balance at beginning of year$361,706 $356,895 $353,368Stock-based compensation to employees and directors4,035 3,251 3,527Exercise of stock options511 1,560 —Balance at end of year$366,252$361,706$356,895 Accumulated deficit Balance at beginning of year$(162,718) $(247,096) $(261,765)Net income attributable to stockholders of Overstock.com, Inc.8,854 84,378 14,669Balance at end of year$(153,864) $(162,718) $(247,096) Accumulated other comprehensive loss Balance at beginning of year$— $— $—Net other comprehensive loss(621) — —Balance at end of year$(621) $— $— Treasury stock Balance at beginning of year$(80,230) $(78,839) $(78,368)Purchases of treasury stock(2,301) (1,391) (471)Balance at end of year(82,531) (80,230) (78,839)Total equity attributable to stockholders of Overstock.com, Inc.$129,238 $118,760 $30,962 Equity attributable to noncontrolling interests Balance at beginning of year$— $— $—Net loss attributable to noncontrolling interests(53) — —Paid-in capital attributable to noncontrolling interests35 — —Total equity attributable to noncontrolling interests$(18)$—$— Total equity$129,220$118,760$30,962See accompanying notes to consolidated financial statements.79Table of ContentsOverstock.com, Inc.Consolidated Statements of Cash Flows(in thousands) Year ended December 31, 2014 2013 2012Cash flows from operating activities: Consolidated net income$8,801 $84,378 $14,669Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization18,064 14,522 16,009Stock-based compensation to employees and directors4,035 3,251 3,527Deferred income taxes3,741 (68,520) —Loss on investment in precious metals1,269 1,457 —Restructuring charges (reversals)(360) (471) 76Other(8) (15) 136Changes in operating assets and liabilities: Restricted cash1,000 200 131Accounts receivable, net(2,916) 3,226 (5,772)Inventories, net835 (579) (3,471)Prepaid inventories, net(1,410) 108 (885)Prepaids and other assets(1,455) (536) 1,294Other long-term assets, net26 2 (267)Accounts payable21,652 28,180 (7,902)Accrued liabilities15,607 17,959 (459)Deferred revenue11,130 (1,090) 10,433Other long-term liabilities823 1,573 626Net cash provided by operating activities80,834 83,645 28,145Cash flows from investing activities: Purchases of marketable securities(23) (132) (82)Sales of marketable securities77 292 154Purchases of intangible assets(135) (13) (6)Investment in precious metals(2,496) (8,080) (1,397)Investment in cryptocurrency(300) — —Equity method investment(250) — —Expenditures for fixed assets, including internal-use software and website development(41,346) (18,067) (12,489)Proceeds from sale of fixed assets43 — 56Net cash used in investing activities(44,430) (26,000) (13,764)Cash flows from financing activities: Payments on capital lease obligations(325) (2,563) (112)Payments on line of credit— — (17,000)Paydown on direct financing arrangement(282) (258) (236)Change in restricted cash— 125 —Proceeds from exercise of stock options511 1,560 —Purchase of treasury stock(2,301) (1,391) (471)Debt issuance costs(1,031) — —Net cash used in financing activities(3,428) (2,527) (17,819)Net increase (decrease) in cash and cash equivalents32,976 55,118 (3,438)Cash and cash equivalents, beginning of period148,665 93,547 96,985Cash and cash equivalents, end of period$181,641 $148,665 $93,547Continued on the following pageOverstock.com, Inc.Consolidated Statements of Cash Flows(Continued)(in thousands) Year ended December 31, 2014 2013 2012Supplemental disclosures of cash flow information: Cash paid during the period: Interest paid$47 $71 $582Taxes paid76 546 299Non-cash investing and financing activities: Fixed assets, including internal-use software and website development, costs financed throughaccounts payable and accrued liabilities$1,410 $219 $502Equipment acquired under capital lease obligations325 2,563 —Capitalized interest cost26 — —Change in value of cash flow hedge1,008 — — See accompanying notes to consolidated financial statements.80Table of ContentsOverstock.com, Inc.Notes to Consolidated Financial Statements1. BASIS OF PRESENTATIONBusiness and organization As used herein, "Overstock," "Overstock.com," "O.co," "we," "our" and similar terms include Overstock.com, Inc. and our majority-owned subsidiaries,unless the context indicates otherwise. We were formed on May 5, 1997 as D2-Discounts Direct, a limited liability company. On December 30, 1998, we werereorganized as a C Corporation in the State of Utah and reincorporated in Delaware in May 2002. On October 25, 1999, we changed our name toOverstock.com, Inc.We are an online retailer offering price-competitive brand name, non-brand name and closeout merchandise, including furniture, home decor,bedding and bath, housewares, jewelry and watches, apparel and designer accessories, electronics and computers, and sporting goods, among other products.We also sell hundreds of thousands of best seller and current run books, magazines, CDs, DVDs and video games ("BMMG"). We sell these products throughour Internet websites located at www.overstock.com, www.o.co and www.o.biz (referred to collectively as the "Website"). Although our three websites arelocated at different domain addresses, the technology and equipment and processes supporting the Website and the process of order fulfillment describedherein are the same for all three websites.Basis of presentationWe have prepared the accompanying consolidated financial statements pursuant to generally accepted accounting principles in the United States("GAAP"). Preparing financial statements requires us to make estimates and assumptions that affect the amounts that are reported in the consolidated financialstatements and accompanying disclosures. Although these estimates are based on our best knowledge of current events and actions that we may undertake inthe future, our actual results may be different from our estimates. The results of operations presented herein are not necessarily indicative of our results for anyfuture period.Our consolidated financial statements for the year ended December 31, 2013 include an immaterial revision to current and long-term deferred taxassets and our provision (benefit) for income taxes in the fourth quarter of 2013. The effect of the revision was to reduce current and long-term deferred taxassets by $284,000 and $3.8 million, respectively, with an offsetting increase of $4.1 million to our provision (benefit) for income taxes in 2013. Weevaluated these changes in accordance with Staff Accounting Bulletin No. 99, Materiality ("SAB 99"), and Staff Accounting Bulletin No. 108, Consideringthe Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements ("SAB 108"), and determined that the revisionsare not material to the prior period.2. ACCOUNTING POLICIES Principles of consolidation The accompanying consolidated financial statements include our accounts and the accounts of our wholly-owned and majority-owned subsidiaries.All intercompany account balances and transactions have been eliminated in consolidation. Use of estimates The preparation of financial statements in conformity with generally accepted accounting principles requires estimates and assumptions that affectthe reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent liabilities in the consolidated financial statementsand accompanying notes. Estimates are used for, but not limited to, investment valuation, receivables valuation, valuation of derivative financialinstruments, revenue recognition, sales returns, incentive discount offers, inventory valuation, depreciable lives of fixed assets and internally-developedsoftware, goodwill valuation, intangible valuation, income taxes, stock-based compensation, performance-based compensation, restructuring liabilities andcontingencies. Actual results could differ materially from those estimates. Cash equivalents 81Table of ContentsWe classify all highly liquid instruments, including money market funds with a remaining maturity of three months or less at the time of purchase, ascash equivalents. Cash equivalents were $135.1 million and $58.1 million at December 31, 2014 and 2013, respectively. Restricted cash We consider cash that is legally restricted and cash that is held as a compensating balance for letter of credit arrangements as restricted cash.Restricted cash was $580,000 and $1.6 million at December 31, 2014 and 2013, respectively. Fair value of financial instrumentsWe account for our assets and liabilities using a hierarchy of valuation techniques based on whether the inputs to those valuation techniques areobservable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our marketassumptions. These two types of inputs have created the fair-value hierarchy below. This hierarchy requires us to minimize the use of unobservable inputsand 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 notactive, 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 areunobservable.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 tofair value on a recurring basis are investments in money market mutual funds, trading securities, derivative instruments, and deferred compensation liabilities.The fair values of our investments in money market mutual funds, trading securities, and deferred compensation liabilities are determined usingquoted market prices from daily exchange traded markets on the closing price as of the balance sheet date and are classified as Level 1. The fair values of ourderivative instruments are determined using standard valuation models. The significant inputs used in these models are readily available in public markets, orcan be derived from observable market transactions, and therefore have been classified as Level 2. Inputs used in these standard valuation models forderivative instruments include the applicable forward rates, interest rates and discount rates. Included in the fair value of derivative instruments is anadjustment for nonperformance risk. The adjustment for nonperformance risk did not have a significant impact on the estimated fair value of our derivativeinstruments. For additional disclosures related to our derivative instruments, see Derivative financial instruments below.The following tables summarize our assets and liabilities measured at fair value on a recurring basis using the following levels of inputs as ofDecember 31, 2014 and December 31, 2013 as indicated (in thousands): Fair Value Measurements at December 31, 2014:Total Level 1 Level 2 Level 3Assets: Cash equivalents - Money market mutual funds$135,092 $135,092 $— $—Trading securities held in a “rabbi trust” (1)90 90 — —Total assets$135,182 $135,182 $— $—Liabilities: Derivatives (2)$1,008 $— $1,008 $—Deferred compensation accrual “rabbi trust” (3)94 94 — —Total liabilities$1,102 $94 $1,008 $— 82Table of ContentsFair Value Measurements at December 31, 2013:Total Level 1 Level 2 Level 3Assets: Cash equivalents - Money market mutual funds$58,081 $58,081 $— $—Trading securities held in a “rabbi trust” (1)138 138 — —Total assets$58,219 $58,219 $— $—Liabilities: Deferred compensation accrual “rabbi trust” (3)$212 $212 $— $—Total liabilities$212 $212 $— $— ___________________________________________(1) — Trading securities held in a rabbi trust are included in Other current and Other long-term assets in the consolidated balance sheets.(2)— Derivative financial instruments are included in Other long-term liabilities in the consolidated balance sheets.(3)— Non qualified deferred compensation in a rabbi trust is included in Accrued liabilities and Other long-term liabilities in the consolidatedbalance sheets.Our other financial instruments, including cash, restricted cash, accounts receivable, accounts payable and accrued liabilities are carried at cost,which approximates their fair value because of the short-term maturity of these instruments. Restricted investments We have a Non-Qualified Deferred Compensation Plan (the “NQDC Plan”) for senior management. Deferred compensation amounts are invested inmutual funds held in a “rabbi trust” and are restricted for payment to the participants of the NQDC Plan. We account for our investments held in the trust inaccordance with Accounting Standards Codification (“ASC”) No. 320 “Investments — Debt and Equity Securities”. The investments held in the trust areclassified as trading securities. The fair value of the investments held in the trust totaled $90,000 at December 31, 2014 and are included in Other current andOther long-term assets in the consolidated balance sheets. Our gains and losses on these investments were immaterial for the years ended December 31, 2014and 2013.Accounts receivable Accounts receivable consist primarily of trade amounts due from customers and from uncleared credit card transactions at period end. Accountsreceivable 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 perform credit evaluations of ourbusiness customers’ financial condition and payment history and maintain an allowance for doubtful accounts receivable based upon our historicalcollection experience and expected collectability of accounts receivable. The allowance for doubtful accounts receivable was $511,000 and $152,000 atDecember 31, 2014 and 2013, 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 December 31, 2014 and2013, two banks held the majority of our cash and cash equivalents. We do not believe that, as a result of this concentration, we are subject to any unusualfinancial 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. Weinvest our cash primarily in money market securities which are uninsured. Our accounts receivable are derived primarily from revenue earned from customers located in the United States. We maintain an allowance fordoubtful accounts based upon the expected collectability of accounts receivable. Valuation of inventories 83Table of ContentsInventories, consisting of merchandise purchased for resale, are accounted for using a standard costing system which approximates the first-in-first-out (“FIFO”) method of accounting, and are valued at the lower of cost or market. We write down our inventory for estimated obsolescence and to lower ofcost or market value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those projectedby management, additional inventory write-downs may be required. Once established, the original cost of the inventory less the related inventory allowancerepresents the new cost basis of such products. Reversal of the allowance is recognized only when the related inventory has been sold or scrapped. Prepaid inventories, net Prepaid inventories, net represent inventories paid for in advance of receipt. Prepaid inventories, net were $3.2 million and $1.8 million atDecember 31, 2014 and 2013, respectively.Prepaids and other assetsPrepaids and other assets represent expenses paid prior to receipt of the related goods or services, including advertising, license fees, maintenance,packaging, insurance, and other miscellaneous costs. Total prepaids and other assets were $12.6 million and $10.3 million at December 31, 2014 and 2013,respectively. Fixed assets Fixed assets, which include assets such as technology infrastructure, internal-use software, website development, furniture and fixtures and leaseholdimprovements, are recorded at cost and depreciated using the straight-line method over the estimated useful lives of the related assets or the term of therelated capital lease, whichever is shorter, as follows: Life(years)Computer software2-4Computer hardware3-4Furniture and equipment3-5 Leasehold improvements are amortized over the shorter of the term of the related leases or estimated useful lives.Depreciation and amortization expense is classified within the corresponding operating expense categories on the consolidated statements ofincome as follows (in thousands): Year ended December 31,2014 2013 2012Cost of goods sold - direct$282 $380 $470Technology16,651 12,917 14,177General and administrative1,131 1,225 1,362Total depreciation and amortization, including internal-use software and website development$18,064 $14,522 $16,009 Internal-use software and website development Included in fixed assets is the capitalized cost of internal-use software and website development, including software used to upgrade and enhanceour Website and processes supporting our business. We capitalize costs incurred during the application development stage of internal-use software andamortize these costs over the estimated useful life of two to three years. Costs incurred related to design or maintenance of internal-use software are expensedas incurred. During the years ended December 31, 2014 and 2013, we capitalized $13.9 million and $11.4 million, respectively, of costs associated with internal-use software and website development, both developed internally and acquired externally. Depreciation of costs associated with internal-use software andwebsite development was $10.8 million and $8.0 million for those respective periods.Equity method investments84Table of ContentsDuring 2014, we acquired a 24.9% interest in a registered broker-dealer as part of our efforts to develop and license software to trade cryptosecuritiesusing the Bitcoin network and its protocols. The purchase price for the investment was $250,000 and is accounted for as an equity method investment whichis included in Other long-term assets in our consolidated balance sheets. The difference between the carrying value of this investment and the amount ofunderlying equity in net assets of the investee is not significant. Our proportionate share of the net income or loss of our equity method investee for the yearended December 31, 2014 is not significant. When we record our proportionate share of net income, it increases income (or decreases loss) in ourconsolidated statements of income and our carrying value in that investment. Conversely, when we record our proportionate share of a net loss, it decreasesincome (or increases loss) in our consolidated statements of income and our carrying value in that investment. As part of the agreement with the registeredbroker-dealer, we formed an entity that is 75.1% owned by us and 24.9% owned by the registered broker-dealer. This entity is included in our consolidatedfinancial statements. Intercompany transactions with the entity have been eliminated and the remaining contributions and gains or losses realized by theentity that are attributable to noncontrolling interests have been disclosed in our consolidated financial statements. Leases We account for lease agreements as either operating or capital leases depending on certain defined criteria. In certain of our lease agreements, wereceive rent holidays and other incentives. We recognize lease costs on a straight-line basis without regard to deferred payment terms, such as rent holidays,that defer the commencement date of required payments. Additionally, tenant improvement allowances are amortized as a reduction in rent expense over theterm of the lease. Leasehold improvements are capitalized at cost and amortized over the lesser of their expected useful life or the life of the lease, withoutassuming renewal features, if any, are exercised. Treasury stock We account for treasury stock under the cost method and include treasury stock as a component of stockholders’ equity. Precious metals Our investments in precious metals were $10.9 million and $9.7 million at December 31, 2014 and 2013, respectively. Our precious metals consistedof $6.3 million in gold and $4.6 million in silver at December 31, 2014 and $4.0 million in gold and $5.7 million in silver at December 31, 2013. We storeour precious metals at an off-site secure facility. Because these assets consist of actual precious metals, rather than financial instruments, we account for themas a cost method investment initially recorded at cost (including transaction fees) and then adjusted to the lower of cost or market based on an average unitcost. On an interim basis, we recognize decreases in the value of these assets caused by market declines. Subsequent increases in the value of these assetsthrough market price recoveries during the same fiscal year are recognized in the later interim period, but may not exceed the total previously recognizeddecreases in value during the same year. Gains or losses resulting from changes in the value of our precious metal assets are recorded in Other income(expense), net in our consolidated statements of income. Losses on investments in precious metals were $1.3 million, $1.5 million, and $0 for the years endedDecember 31, 2014, 2013 and 2012, respectively.GoodwillGoodwill represents the excess of the purchase price paid over the fair value of the tangible net assets acquired in business combinations. Goodwill is not amortized but is tested for impairment at least annually. When evaluating whether goodwill is impaired, we make a qualitativeassessment to determine if it is more likely than not that its fair value is less than its carrying amount. If the qualitative assessment determines that it is morelikely 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 itscarrying amount. If the carrying amount exceeds its fair value, then the amount of the impairment loss must be measured. The impairment loss, if any, iscalculated by comparing the implied fair value of the goodwill to its carrying amount. In calculating the implied fair value of goodwill, the fair value of thereporting unit is allocated to the other assets and liabilities within the reporting unit based on estimated fair value. The excess of the fair value of a reportingunit over the amount allocated to its other assets and liabilities is the implied fair value of goodwill. An impairment loss is recognized when the carryingamount of goodwill exceeds its implied fair value. 85Table of ContentsIn accordance with this guidance, we test for impairment of goodwill in the fourth quarter or when we deem that a triggering event has occurred.Goodwill totaled $2.8 million at December 31, 2014 and 2013. There were no impairments to goodwill recorded during the years ended December 31, 2014,2013 and 2012.Cryptocurrency holdingsWe hold cryptocurrency-denominated assets such as bitcoin and we include them in other current assets in our Consolidated Balance Sheets.Cryptocurrency-denominated assets were $340,000 and zero at December 31, 2014 and 2013, respectively, and are recorded at the lower of cost or marketbased 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 thevalue of these assets through market price recoveries during the same fiscal year are recognized in the later interim period, but may not exceed the totalpreviously recognized decreases in value during the same year. Gains or losses resulting from changes in the value of our cryptocurrency assets are recordedin Other income (expense), net in our consolidated statements of income. Losses on cryptocurrency holdings were $8,000 during the year ended December31, 2014. There were no losses on cryptocurrency holdings for the year ended December 31, 2013.Other long-term assets Other long-term assets consist primarily of long-term prepaid expenses.Impairment of long-lived assets We review property and equipment and other long-lived assets for impairment whenever events or changes in circumstances indicate that thecarrying amount of an asset group may not be recoverable. Recoverability is measured by comparison of the assets’ carrying amount to future undiscountednet cash flows the asset group is expected to generate. Cash flow forecasts are based on trends of historical performance and management’s estimate of futureperformance, giving consideration to existing and anticipated competitive and economic conditions. If such asset group is considered to be impaired, theimpairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds their fair values. There were no impairments tolong-lived assets recorded during the years ended December 31, 2014, 2013 and 2012.Derivative financial instruments In October 2014, we entered into a loan agreement in connection with the construction of our new corporate headquarters. We expect to borrowagainst the loan agreement in the second half of 2015. Because amounts borrowed on the loan will carry a variable LIBOR-based interest rate, we will beaffected by changes in certain market conditions. These changes in market conditions may adversely impact our financial performance, and as such, we usederivatives 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 expect to borrow under the loanagreement relating to our new headquarters. To manage that risk, we use interest rate swap agreements. An interest rate swap agreement is a contract betweentwo 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 ratein exchange for receipt of amounts based on variable rates. Because we have not yet borrowed against the loan agreement related to our cash flow hedges, thenotional amounts under our hedges at December 31, 2014 were zero.Our derivatives are carried at fair value in our consolidated balance sheets in Other long-term liabilities on a gross basis. The accounting for gainsand losses that result from changes in the fair values of derivative instruments depends on whether the derivatives have been designated and qualify ashedging instruments under GAAP. Our derivatives have been designated and qualify as cash flow hedges. We formally designated and documented, atinception, the financial instruments as hedges of specific underlying exposures, the risk management objectives, and the strategy for undertaking the hedgingtransactions. In addition, we formally assess, both at the inception and at least quarterly thereafter, whether the financial instruments used in hedgingtransactions are effective at offsetting changes in the cash flows of the related underlying exposures. To the extent that the hedges are effective, the changesin fair values of our cash flow hedges are recorded in Accumulated other comprehensive income. Any ineffective portion is immediately recognized intoearnings.We determine the fair values of our derivatives based on quoted market prices or using standard valuation models (see Fair value of financialinstruments 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 risks86Table of Contentsdescribed 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 (inthousands): Cash flow hedges (1) Amount of gain (loss)recognized in OCI onderivative (effectiveportion) net of tax Location of gain (loss)reclassified fromAccumulated OCI intoincome (effectiveportion) Amount of gain (loss)reclassified fromAccumulated OCI intoincome (effective portion) Location of gain (loss)recognized in incomeon derivative(ineffective portion) Amount of gain (loss)recognized in income onderivative (ineffectiveportion)Year ended December 31, 2014 Interest rate swap $(621) Interest expense $— Interest expense $— The following table provides the outstanding notional balances and fair values of derivative financial instruments that were designated asaccounting hedges outstanding positions for the dates indicated, and recorded gains/(losses) during the periods indicated (in thousands):Cash flow hedges (1) Location inbalance sheet Expiration date Outstandingnotional Fair value Beginning gains(losses) Gains (losses)recorded duringperiod (2) Ending gains(losses)Year ended December 31, 2014 Interest rate swap Other long-term liabilities 2023 $— $(1,008) $— $(1,008) $(1,008)___________________________________________(1) — There were no outstanding derivative instruments for the years ended December 31, 2013 and 2012.(2) — Gains (losses) recorded during the period are presented gross of the related tax impact.Revenue recognition We derive our revenue primarily from direct revenue and partner revenue from merchandise sales. We also earn revenue from advertising on ourshopping and other pages. We have organized our operations into two principal segments based on the primary source of revenue: direct revenue and partnerrevenue (see Note 21. Business Segments). Revenue is recognized when the following revenue recognition criteria are met: (1) persuasive evidence of an arrangement exists; (2) delivery hasoccurred or the service has been provided; (3) the selling price or fee revenue earned is fixed or determinable; and (4) collection of the resulting receivable isreasonably assured. Revenue related to merchandise sales is recognized upon delivery to our customers. As we ship high volumes of packages throughmultiple carriers, it is not practical for us to track the actual delivery date of each shipment. Therefore, we use estimates to determine which shipments aredelivered and, therefore, recognized as revenue at the end of the period. Our delivery date estimates are based on average shipping transit times, which arecalculated using the following factors: (i) the type of shipping carrier (as carriers have different in-transit times); (ii) the fulfillment source (either ourwarehouses, those warehouses we control, or those of our partners); (iii) the delivery destination; and (iv) actual transit time experience, which shows thatdelivery 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 actualtransit time experience. However, actual shipping times may differ from our estimates. We evaluate the criteria outlined in ASC Topic 605-45, Principal Agent Considerations, in determining whether it is appropriate to record the grossamount of product sales and related costs or the net amount earned as commissions. When we are the primary obligor in a transaction, are subject to inventoryrisk, have latitude in establishing prices and selecting suppliers, or have several but not all of these indicators, revenue is recorded gross. If we are not theprimary obligor in the transaction and amounts earned are determined using a fixed percentage, revenue is recorded on a net basis. Currently, the majority ofboth direct revenue and partner revenue is recorded on a gross basis, as we are the primary obligor. We present revenue net of sales taxes. 87Table of ContentsWe periodically provide incentive offers to our customers to encourage purchases. Such offers include current discount offers, such as percentagediscounts off current purchases and other similar offers, which, when used by customers, are treated as a reduction of revenue. Based upon our historical experience, revenue typically increases during the fourth quarter because of the holiday retail season. Direct revenue Direct revenue is derived from merchandise sales of our owned inventory to individual consumers and businesses. Direct revenue comes frommerchandise sales that occur primarily through our Website, but may also occur through offline and other channels. Partner revenue Partner revenue is derived from merchandise sales of inventory owned by our partners which they generally ship directly to our consumers andbusinesses. Partner revenue comes from merchandise sales that occur primarily through our Website, but may also occur through offline and other channels.Club O loyalty program We have a customer loyalty program called Club O for which we sell annual memberships ("standard Club O"). During the third quarter of 2014, wealso introduced an introductory customer loyalty program called Club O Lite for customers who sign up to receive promotional emails. For standard Club Omemberships, we record membership fees as deferred revenue and we recognize revenue ratably over the membership period. Both the standard Club O andClub O Lite loyalty programs allow members to earn reward dollars for qualifying purchases made on our Website. We also have a co-branded credit cardprogram (see Co-branded credit card revenue below for more information). Co-branded cardholders are also standard Club O members and earn additionalreward dollars for purchases made on our Website, and from other merchants.Club O Reward dollars earned may be redeemed on future purchases made through our Website. Standard Club O membership reward dollars expire90 days after the customer’s Club O membership expires. Club O Lite reward dollars expire 90 days after they are earned if no additional qualifying purchasesare made during that period.We account for these transactions as multiple element arrangements and allocate revenue to the elements using their relative fair values. We includethe 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.We recognize revenue for Club O reward dollars when customers redeem their reward dollars as part of a purchase at our Website. We recognize otherincome when Club O Reward dollars expire or the likelihood of reward dollars being redeemed by a customer is remote (“reward dollar breakage”). Rewarddollar breakage is currently recognized when the reward dollars expire as Other income in our consolidated statements of income. Because we recentlyintroduced Club O Lite, and enrolled a significant number of Club O Lite members, reward dollars and resulting breakage may increase as compared to priorperiods. In instances where customers receive free Club O reward dollars not associated with any purchases, we account for these transactions as salesincentives such as coupons and record a reduction of revenue at the time the reward dollars are redeemed. Co-branded credit card programs We have a co-branded credit card agreement with a commercial bank for the issuance of credit cards bearing the Overstock.com brand, under whichthe bank pays us fees for new accounts and for customer usage of the cards. The agreement also provides for a customer loyalty program offering rewardpoints that customers will accrue from card usage and can use to make purchases on our Website (see Club O loyalty program above for more information).New account fees are recognized as revenue on a straight-line basis over the remaining life of the credit card relationship which runs through April 2015.Credit card usage fees are recognized as revenues as actual credit card usage occurs.88Table of ContentsWe also have a private label credit card agreement with another commercial bank for the issuance of credit cards bearing our brand, but that is onlyavailable 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 theterm of the agreement, which runs through February 2022. When customers make regular revolving purchases using the card, we receive fees, which arerecognized as revenue. When we offer promotional financing for purchases made with the card (for example, 12 months same as cash), we pay a discount feeto the commercial bank, which we recognize as a reduction of revenue. The commercial bank owns all of the accounts under the program and performs allaccount administration, underwriting and servicing. Fees and royalties from new accounts, credit card usage fees, and fees from both of these cards were lessthan 1% of total net revenues for all periods presented.Deferred revenue Customer orders are recorded as deferred revenue prior to delivery of products or services ordered. We record amounts received for Club Omembership fees as deferred revenue and we recognize it ratably over the membership period. We record Club O reward dollars earned from purchases asdeferred revenue at the time they are earned and we recognize it as revenue upon redemption. If reward dollars are not redeemed, we recognize other incomeupon 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 werecognize revenue from a gift card upon redemption of the gift card. If a gift card is not redeemed, we recognize other income when the likelihood of itsredemption becomes remote based on our historical redemption experience. We consider the likelihood of redemption to be remote after 36 months. We periodically enter into agreements with other parties to jointly market ancillary products or services on our website. As a result of thoseagreements, we sometimes receive payments in advance of performing our obligations under those agreements. Such payments received before we performour obligations are recognized over our service period.Sales returns allowance We inspect returned items when they arrive at our processing facility. We refund the full cost of the merchandise returned and all original shippingcharges 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 refundsfor 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 actualreturn 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 ofthe sales returns allowance in any accounting period. The allowance for returns was $15.5 million and $13.2 million at December 31, 2014 and 2013, respectively. Credit card chargeback allowance Revenue is recorded net of credit card chargebacks. We maintain an allowance for credit card chargebacks based on current period revenues andhistorical chargeback experience. The allowance for chargebacks was $129,000 and $94,000 at December 31, 2014 and 2013, respectively. Cost of goods sold Cost of goods sold includes product costs, warehousing costs, outbound shipping costs, handling and fulfillment costs, customer service costs andcredit card fees, and is recorded in the same period in which related revenues have been recorded. Cost of goods sold, including product cost and other costsand fulfillment and related costs are as follows (in thousands):89Table of Contents Year ended December 31,2014 2013 2012Total revenue, net$1,497,103 100% $1,304,217 100% $1,099,289 100%Cost of goods sold Product costs and other cost of goods sold1,152,489 77% 999,519 77% 848,842 77%Fulfillment and related costs65,555 4% 57,038 4% 52,017 5%Total cost of goods sold1,218,044 81% 1,056,557 81% 900,859 82%Gross profit$279,059 19% $247,660 19% $198,430 18% Advertising expense We expense the costs of producing advertisements the first time the advertising takes place and expense the cost of communicating advertising inthe period during which the advertising space or airtime is used. Internet advertising expenses are recognized as incurred based on the terms of the individualagreements, which are generally: 1) a commission for traffic driven to the Website that generates a sale or 2) a referral fee based on the number of clicks onkeywords or links to our Website generated during a given period. Advertising expense is included in sales and marketing expenses and totaled $99.6million, $82.1 million and $55.6 million during the years ended December 31, 2014, 2013 and 2012, respectively. Prepaid advertising (included in Prepaidsand other assets in the accompanying consolidated balance sheets) was $1.5 million and $1.4 million at December 31, 2014 and 2013, 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 compensationexpense over the service period for awards expected to vest at the greater of a straight line basis or on an accelerated schedule when vesting of restricted stockawards exceeds a straight line basis. The estimation of stock awards that will ultimately vest requires judgment, and to the extent actual results differ fromestimates, such amounts are recorded as an adjustment in the period estimates are revised. We consider many factors when estimating expected forfeitures,including types of awards, and historical experience. Actual results may differ substantially from these estimates (see Note 16. Stock-Based Awards). 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 matterswhen it is probable that a loss has been incurred and the amount can be reasonably estimated. When only a range of probable loss can be estimated, the mostprobable 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 inthe range is accrued. We expense legal fees as incurred (see Note 13. Commitments and Contingencies). Restructuring Restructuring expenses are primarily comprised of lease termination costs. ASC Topic 420, Accounting for Costs Associated with Exit or DisposalActivities, requires that when an entity ceases using a property that is leased under an operating lease before the end of the contractual term, the terminationcosts should be recognized and measured at fair value when the entity ceases using the facility. Key assumptions in determining the restructuring expensesinclude the terms that may be negotiated to exit certain contractual obligations (see Note 3. Restructuring Expense). Income taxes Income taxes are accounted for under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for theexpected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities aredetermined on the basis of the differences between the financial statements and tax bases of assets and liabilities using enacted tax rates in effect for the yearin which the differences are expected to reverse.90Table of ContentsWe recognize deferred tax assets to the extent that we believe these assets are more likely than not to be realized. In evaluating our ability to recoverour deferred tax assets within the jurisdiction from which they arise, we consider all available positive and negative evidence, including projected futuretaxable income, scheduled reversals of our deferred tax liabilities, tax planning strategies, and results of recent operations.We record uncertain tax positions in accordance with ASC 740 on the basis of a two-step process whereby (1) we determine whether it is more likelythan not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, we recognize the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement withthe related tax authority. We recognize interest and penalties related to unrecognized tax benefits within the income tax expense line in the accompanyingconsolidated statements of income. Accrued interest and penalties are included within the related tax liability line in our consolidated balance sheets.Earnings per share Basic earnings per share is computed by dividing net income attributable to common shares by the weighted average number of common sharesoutstanding during the period. Diluted earnings per share is computed by dividing net income attributable to common shares for the period by the weightedaverage number of common and potential common shares outstanding during the period. Potential common shares, comprising incremental common sharesissuable upon the exercise of stock options and restricted stock awards are included in the calculation of diluted earnings per common share to the extentsuch shares are dilutive. The following table sets forth the computation of basic and diluted net income per common share for the periods indicated (in thousands, except pershare data):Year ended December 31,2014 2013 2012Net income attributable to stockholders of Overstock.com, Inc.$8,854 $84,378 $14,669Net income per common share—basic: Net income attributable to common shares—basic$0.37 $3.56 $0.63Weighted average common shares outstanding—basic23,999 23,714 23,387Effect of dilutive securities: Stock options and restricted stock awards318 580 285Weighted average common shares outstanding—diluted24,317 24,294 23,672Net income attributable to common shares—diluted$0.36 $3.47 $0.62 The following shares were excluded from the calculation of diluted shares outstanding as their effect would have been anti-dilutive (in thousands):Year ended December 31,2014 2013 2012Stock options and restricted stock units291 154 537Recently issued accounting standards On May 28, 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount ofrevenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognitionguidance in U.S. GAAP when it becomes effective. The new standard becomes effective for us on January 1, 2017. Early adoption is not permitted. Thestandard permits the use of either the retrospective or cumulative effect transition method. We are evaluating the effect that ASU 2014-09 will have on ourconsolidated financial statements and related disclosures. We have not yet selected a transition method nor have we determined the effect of the standard onour ongoing financial reporting.91Table of Contents3. RESTRUCTURING EXPENSE During the fourth quarter of 2006, we began a facilities consolidation and restructuring program designed to reduce the overall expense structure inan effort to improve future operating performance. The facilities consolidation and restructuring program was substantially completed by the end of thesecond quarter of 2007. Restructuring liabilities along with charges (credits) to expense and payments associated with the facilities consolidation and restructuring programare as follows (in thousands): Balance atBeginning of Year AccretionExpense Net CashPayments Adjustments Balance at End ofYearYear ended December 31, 2014$445 $7 $(92) $(360) $—Year ended December 31, 2013$1,197 $71 $(352) $(471) $445 During the years ended December 31, 2014 and 2013, we reversed approximately $360,000 and $471,000, respectively, of lease termination costsprimarily due to changes in our restructuring accrual as a result of our reoccupation of a portion of formerly restructured office space.4. COMPREHENSIVE INCOME (LOSS)Our comprehensive income (loss) is as follows (in thousands): Year ended December 31, 2014 2013 2012Consolidated net income$8,801 $84,378 $14,669Other comprehensive loss: Unrealized loss on cash flow hedges, net of benefit for taxes of $387, $0, and $0(621) — —Other comprehensive loss(621) — —Comprehensive income$8,180 $84,378 $14,6695. ACCOUNTS RECEIVABLEAccounts receivable consist of the following (in thousands): December 31, 2014 2013Accounts receivable, other $11,292 $10,098Credit card receivables 8,182 6,101 19,474 16,199Less: allowance for doubtful accounts (511) (152)Accounts receivable, net $18,963 $16,04792Table of Contents6. INVENTORIESInventories consist of the following (in thousands): December 31, 2014 2013Product inventory $17,117 $18,841Inventory in-transit 9,091 8,202Total inventories, net $26,208 $27,0437. PREPAIDS AND OTHER ASSETSPrepaids and other assets consist of the following (in thousands): December 31, 2014 2013Prepaid maintenance $6,872 $6,949Prepaid other 4,231 1,993Prepaid advertising 1,518 1,356Total prepaids and other assets $12,621 $10,2988. FIXED ASSETSFixed assets consist of the following (in thousands): December 31, 2014 2013Computer hardware and software, including internal-use software and website development $156,700 $170,702Land 10,861 —Furniture and equipment 10,605 14,457Leasehold improvements 7,630 6,539Construction in progress - building 5,810 — 191,606 191,698Less: accumulated depreciation and amortization (139,535) (164,504)Total fixed assets, net $52,071 $27,194Depreciation of property and equipment totaled $18.1 million, $14.5 million, and $16.0 million for the years ended December 31, 2014, 2013 and2012, respectively. Fixed assets included assets under capital leases of $4.7 million and $4.2 million, and accumulated depreciation related to assets undercapital leases of $2.8 million and $2.1 million, at December 31, 2014 and 2013, respectively. Depreciation expense of assets recorded under capital leaseswas $707,000 and $429,000 for the years ended December 31, 2014 and 2013, respectively. During 2014, we retired $43 million of fully depreciated fixedassets that were removed from service in 2014.93Table of Contents9. OTHER LONG-TERM ASSETSOther long-term assets consist of the following (in thousands): December 31, 2014 2013Prepaid expenses, long-term portion $1,156 $1,585Capitalized debt issuance costs 849 —Other long-term assets 707 438Total other long-term assets, net $2,712 $2,02310. ACCRUED LIABILITIESAccrued liabilities consist of the following (in thousands): December 31, 2014 2013Accounts payable accrual $20,682 $10,870Allowance for returns 15,531 13,232Other accrued expenses 13,497 9,934Accrued marketing expenses 12,167 13,715Accrued compensation and other related costs 6,682 8,558Accrued freight 5,115 4,276Inventory received but not invoiced 3,048 864Accrued taxes 2,639 1,833Accrued professional expenses 954 824Credit card processing fee accrual 776 700Facility lease accruals 473 567Short term portion of restructuring accrual (Note 3) — 306Total accrued liabilities $81,564 $65,67911. DEFERRED REVENUEDeferred revenue consists of the following (in thousands): December 31, 2014 2013Payments owed or received prior to product delivery $30,608 $24,402Club O membership fees and reward points 8,008 5,697In store credits 5,389 2,400Unredeemed gift cards 2,872 3,061Other 1,574 1,761Total deferred revenue $48,451 $37,32112. BORROWINGS U.S. Bank term loan and revolving loan agreementOn October 24, 2014, we entered into a syndicated senior secured credit facility (the “Facility”) with U.S. Bank National Association ("U.S. Bank" orthe "Administrative Bank") and certain other banks in connection with the construction of94Table of Contentsour new corporate headquarters (the "Project"). The Facility is governed by a Loan Agreement dated as of October 24, 2014 which provides for an aggregatecredit amount of $55.8 million, consisting of (i) a senior secured real estate loan of $45.8 million (the “Real Estate Loan”) to be used to finance a portion ofthe Project and (ii) a three-year $10 million senior secured revolving credit facility (the “Revolving Loan”) for working capital and capital expenditures, butnot for the Project. We must satisfy a number of conditions at least 60 days prior to any funding under the Facility, including making cash contributions ofapproximately $37.4 million toward the Project. We may also be required to make additional cash contributions if necessary to maintain a loan to value ratioof 80% or less. The Real Estate Loan and the Revolving Loan are both secured by the Project, our inventory and accounts receivable, substantially all of ourdeposit accounts and related assets. We expect to begin borrowing under the Facility in the second half of 2015.On or about January 1, 2017, upon completion of the Project, the Real Estate Loan is designed to convert into an approximately 6.75-year term loandue October 1, 2023 (the “Term Loan”). The conditions to conversion of the Real Estate Loan to the Term Loan include, among others, requirements that theProject must have been completed in accordance with the applicable plans, paid for in full, and generally free of liens; completion must have been certifiedby the project architect and the inspecting architect; certificates of occupancy must have been issued; we must have paid all amounts then due to the lendingbanks and must be in compliance with the covenants under the Loan Agreement; the Real Estate Loan must be brought “in balance” as defined in the LoanAgreement, which may require us to contribute additional cash to the Project; we must have paid the final amount of our cash contribution as required by theLoan Agreement; and if required by the Administrative Bank, an updated appraisal must show that the Project is in compliance with an 80% loan to valueratio requirement. If the conditions to conversion are not satisfied in early 2017, all amounts outstanding under the Facility will become immediately due andpayable.Amounts outstanding under the Real Estate Loan and the Term Loan will carry an interest rate based on one-month LIBOR plus 2.00% or anAlternate Base Rate plus 1.00%. However, we have entered into interest rate swap agreements designed to fix our interest rate on the Real Estate Loan and theTerm Loan at approximately 4.6% annually (see Derivative financial instruments in Note 2. Accounting Policies). Monthly payments of interest only will bedue and payable on the Real Estate Loan prior to conversion. Following conversion, we are required to make monthly payments of principal estimated to be$1.1 million annually plus interest, with a balloon payment of all unpaid principal (estimated to be $38 million) and interest on October 1, 2023. Amountsoutstanding under the Revolving Loan will carry an interest rate based on LIBOR plus 2.00% or an Alternate Base Rate plus 1.00%.We are required to maintain compliance as of the end of each calendar quarter beginning with the quarter ending December 31, 2014 with thefollowing 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 3.00 to 1.00 during the Construction Phase (as defined in the LoanAgreement);•a cash flow leverage ratio not greater than 2.50 to 1.00 following the Construction Phase, and•minimum liquidity of at least $50 million.At December 31, 2014 we were in compliance with the financial covenants. In addition to the financial covenants described above, we are requiredto comply with a number of covenants relating to the Project and our business, including covenants limiting certain indebtedness. Notwithstanding, the LoanAgreement permits us to incur up to $20 million of additional senior-secured indebtedness for equipment financing, and other senior-secured indebtednessprovided that the aggregate principal amount of such other senior-secured indebtedness does not exceed ten percent of our consolidated assets. The LoanAgreement includes customary events of default in addition to events of default relating specifically to the Project. The Real Estate Loan and the RevolvingLoan 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.Unless it terminates earlier or is extended with the consent of the Administrative Bank and all of the Banks, the Revolving Loan facility willterminate on October 24, 2017.As of December 31, 2014 we had not borrowed any amounts under either the Real Estate Loan or the Revolving Loan.U.S. Bank letters of credit 95Table of ContentsAt December 31, 2014 and 2013, letters of credit totaling $580,000 and $1.6 million, respectively, were issued on our behalf collateralized bycompensating cash balances held at U.S. Bank, which are included in Restricted cash in the accompanying consolidated balance sheets. U.S. Bank commercial purchasing card agreement We have a commercial purchasing card (the “Purchasing Card”) agreement with U.S. Bank. We use the Purchasing Card for business purposepurchasing and must pay it in full each month. At December 31, 2014, $803,000 was outstanding and $4.2 million was available under the Purchasing Card.At December 31, 2013, $517,000 was outstanding and $4.5 million was available under the Purchasing Card.Capital leasesIn May 2014 and March 2013, we entered into a capital lease arrangements of computer equipment for $325,000 and $2.6 million respectively.These arrangements will expire in 2017. In order to obtain discounted pricing, we prepaid the entire $325,000 and $2.6 million shortly after entering into theagreement. As such, we have no future payment obligations under capital leases at December 31, 2014.13. COMMITMENTS AND CONTINGENCIESSummary of future minimum lease payments for all operating leasesMinimum future payments under all operating leases as of December 31, 2014, are as follows (in thousands):Payments due by period: 2015 $11,5462016 9,3422017 4,9632018 4,5852019 3,916Thereafter 28,521 $62,873Rental expense for operating leases totaled $11.7 million, $10 million and $8.5 million for the years ended December 31, 2014, 2013 and 2012,respectively. There is no estimated sublease income expected over the next five years.During 2014, we entered into amendments to extend the leases on our corporate headquarters and a data center space from their previous expirationof June 30, 2016 to January 31, 2017 to better coincide with the expected timing of completion of our new corporate headquarters. The minimum futurepayments due under these amended operating leases are included in the table above.Naming rightsDuring 2011, we entered into a six-year agreement with the Oakland-Alameda County Coliseum Authority ("OACCA") for the right to name theOakland Alameda County Coliseum. Amounts shown below represent annual payments due OACCA for the naming rights. We have the right to terminatethis agreement at our sole option, subject to payment of a termination fee.96Table of ContentsMinimum future payments under the naming rights agreement as of December 31, 2014, are as follows (in thousands):Payments due by period 2015 $1,3512016 1,3912017 —Thereafter — $2,742TechnologyFrom time to time we enter into non-cancellable, long-term contractual agreements for technology services. Minimum future payments under theseagreements as of December 31, 2014, are as follows (in thousands):Payments due by period: 2015 2,3242016 1,6832017 —Thereafter — $4,007Legal Proceedings From time to time, we are involved in litigation concerning consumer protection, employment, intellectual property and other commercial mattersrelated to the conduct and operation of our business and the sale of products on our Website. In connection with such litigation, we may be subject tosignificant damages. In some instances other parties may have contractual indemnification obligations to us. However, such contractual obligations mayprove 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 businesspractices. Such litigation could be costly and time consuming and could divert or distract our management and key personnel from our business operations.Due to the uncertainty of litigation and depending on the amount and the timing, an unfavorable resolution of some or all of these matters could materiallyaffect our business, results of operations, financial position, or cash flows. On February 2, 2007, along with five shareholder plaintiffs, we filed a lawsuit in the Superior Court of California, County of San Francisco againstMorgan Stanley & Co. Incorporated, Goldman Sachs & Co., Bear Stearns Companies, Inc., Bank of America Securities LLC, Bank of New York,Citigroup Inc., Credit Suisse (USA) Inc., Deutsche Bank Securities, Inc., Merrill Lynch, Pierce, Fenner & Smith, Inc., and UBS Financial Services, Inc., andlater amended the complaint to add Lehman Brothers Holdings Inc. as a defendant. The suit alleged that the defendants, who controlled over 80% of theprime brokerage market, participated in an illegal stock market manipulation scheme and that the defendants had no intention of covering short sell orderswith borrowed stock, as they are required to do, causing what are referred to as “fails to deliver” and that the defendants’ actions caused and continued tocause dramatic declines in the share price of our stock and that the amount of “fails to deliver” often exceeded our entire supply of outstanding shares. Thesuit accused the defendants of violations of California securities laws and common law and violations of California’s Unfair Business Practices Act. After itfiled for bankruptcy on September 2008, we elected not to pursue our claims against Lehman Brothers Holdings. On July 23, 2009, the court sustaineddefendants’ demurrer to our amended causes of action for conversion and trespass to chattels. On December 15, 2010, we and the other plaintiffs in the caseentered into a settlement agreement with certain of the defendants requiring these defendants to pay in the aggregate $4.5 million to plaintiffs. Other terms ofsettlement are confidential. At that time, remaining defendants in the suit were Goldman Sachs Group, Inc., Goldman Sachs & Co., Goldman SachsExecution & Clearing L.P., (“Goldman Defendants”) Merrill Lynch, Pierce, Fenner & Smith, Inc., Merrill Lynch Professional Clearing Corporation (“MerrillLynch Defendants), and Bank of America Securities LLC. On December 15, 2010, we filed a motion to amend our complaint against the Goldman and MerrillLynch Defendants to add a cause of action based on the New Jersey Racketeer Influenced and Corrupt Organization (RICO) Act. Defendants challenged theRICO claim by demurrer and eventually the court sustained the demurrer. We thereafter entered a settlement agreement with Bank of America Securities LLC,the terms of which are confidential, and have dismissed the action as to that defendant. On August 19, 2011, the remaining defendants filed a motion forsummary judgment. On January 10, 2012, the court granted the motion for summary judgment as to all remaining defendants and the97Table of Contentsjudgment was entered. We have appealed that decision and each side appealed the trial court’s decisions regarding sealing of certain records in the case. Thedefendants applied to the court for reimbursement from us of their allowable court costs, and the court ordered costs in the amount of $689,471. The Court ofAppeal heard oral argument of all appeals on August 15, 2014, and issued its decision on November 13, 2014, reversing the trial court’s dismissal andsummary judgment in favor of Merrill Lynch Professional Clearing Corporation, but the court upheld the decision dismissing the Goldman Defendants. TheCourt of Appeal also upheld the trial court’s decision denying the amendment of the complaint to include RICO claims, and in the matter of the sealing of therecords, ordered that the relevant portions of the records be made public, subject to the trial court’s determination of which documents were relevant and whatthird party, private financial information should be redacted. All parties petitioned the California Supreme Court for review of various parts the decision, andthe court denied the petitions. The case has been remitted to the Court of Appeal. We anticipate the case will return to the trial court for final trial preparationand trial of our claims against Merrill Lynch Professional Clearing Corporation. The nature of the loss contingencies relating to any court costs orderedagainst us are described above. On September 23, 2009, SpeedTrack, Inc. sued us along with 27 other defendants in the United States District Court in the Northern District ofCalifornia. We are alleged to have infringed a patent covering search and categorization software. We believe that certain third party vendors of products andservices sold to us are contractually obligated to indemnify us in this action. On November 11, 2009, the parties stipulated to stay all proceedings in the caseuntil resolution of a reexamination of the patent in question, and also until a previously filed infringement action against Wal-Mart Stores, Inc. and otherretailers resulted either in judgment or dismissal. Subsequently, the parties agreed to extend the time for defendants to answer until 21 days following a courtorder to lift the stay to which the parties stipulated. The United States Patent and Trademark Office resolved the reexamination of the patent in question infavor of SpeedTrack, Inc. The case remains stayed, pending the outcome and appeal of the infringement action against Wal-Mart Stores, Inc. and otherretailers. On February 22, 2012, the court in the Wal-Mart Stores case granted Wal-Mart Stores’ motion for summary judgment of non-infringement. The courtalso granted Speedtrack’s motion for summary judgment on patent validity. Speedtrack appealed, and the ruling was upheld. It is not known whether thesummary judgments granted in the Wal-Mart Stores case will have an effect on the Speedtrack case in which we are named as one of the defendants. Thenature 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 canbe made. We intend to vigorously defend this action and pursue our indemnification rights with our vendors.On September 29, 2010, a trustee in bankruptcy filed against us an adversary proceeding in the matter of In re: Petters Company, Inc., a case filed inUnited States Bankruptcy Court, in the District of Minnesota. The complaint alleges principal causes of action against us under various Bankruptcy Codesections and the Minnesota Fraudulent Transfer Act, to recover damages for alleged transfers of property from the Petters Company occurring prior to thefiling of the case initially as a civil receivership in October 2008. The trustee’s complaint alleges such transfers occurred in at least one note transactionwhereby we transferred at least $2.3 million and received in return transfers totaling at least $2.5 million. The case is in its discovery stages. We filed amotion to dismiss on statute of limitations and other grounds. The court consolidated the issues in our motion with issues raised by motion in similar trustee-filed cases. The court issued legal rulings on these consolidated legal issues, and has allowed portions of the case to proceed to the discovery stage. Thenature 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 canbe made. We intend to vigorously defend this action. On November 17, 2010, we were sued in the Superior Court of California, County of Alameda, by District Attorneys for the California Counties ofAlameda, Marin, Monterey, Napa, Santa Clara, Shasta and Sonoma County, and the County of Santa Cruz later joined the suit. These district attorneys soughtdamages and an injunction under claims for violations of California consumer protection laws, alleging we made untrue or misleading statements concerningour pricing, price reductions, sources of products and shipping charges. The complaint asked for damages in the amount of not less than $15 million. We triedthe case in September 2013 before the judge of the court and made final arguments in December 2013. On January 3, 2014, the court issued a tentative rulingin favor of the District Attorneys, which became a final Statement of Decision on February 5, 2014. The decision provides for an injunction that prescribesdisclosures necessary for certain types of price advertising and price reductions and imposes civil penalties of $3,500 per day for practices from March 2006through September 2008, and $2,000 per day for September 2008 through September 2013, totaling $6.8 million. The court issued a Final JudgmentFebruary 19, 2014 reflecting the Court’s Statement of Decision. We have stipulated to Plaintiff’s reimbursement of costs in the amount of $111,500. We haveappealed the decision and have secured a bond as required in the ruling in the amount of 150% of the penalty imposed in the matter until the ruling on theappeal. The appeal is briefed. No date has been set for oral argument. The nature of the loss contingencies relating to claims that have been asserted against usare described above. We intend to continue to vigorously pursue the appeal and defend this action.On September 11, 2011, Droplets, Inc. filed suit against us and eight other defendants in the United States District Court in the Eastern District ofTexas for infringement of a patent covering strings of programming code downloaded from a98Table of Contentsserver to a client computer. The case was tried and on January 16, 2015 the jury rendered a verdict of infringement assessing damages in the amount of $4.0million. The court may also order injunctive relief, the payment of pro and post-judgment interest, future royalties, attorney fees and costs. We intend toappeal. The nature of the loss contingencies relating to claims that have been asserted against us are described above. We intend to vigorously defend thisaction 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 DistrictCourt in Eastern District of Texas for infringement of patents covering products and services that verify the delivery and integrity of email messages. Wetendered defense of the case to an indemnitor which accepted the defense. We answered the complaint. The case is in its early stages. The nature of the losscontingencies 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. Weintend to vigorously defend this action and pursue our indemnification rights with our vendors.On January 31, 2014, Guardian Media Technologies LTD filed suit against us in the United States District Court in the Eastern District of Texas forinfringement of patents covering parental control features in DVD players and televisions. The suit relates to two prior lawsuits with Guardian filed in 2008,and in 2013, which were previously dismissed. The case was settled for a nominal amount and is now dismissed. On September 30, 2013, Altaf Nazerali filed suit against us in the Supreme Court of British Columbia for vicarious liability for defamation, liableand slander. The suit relates to alleged representations about Nazerali found on the website www.deepcapture.com. The suit alleges that the representationswere made by our Chief Executive Officer, Patrick Byrne, and two other employees. The case is in its discovery stages. A trial is scheduled in April 2015. Thenature 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 canbe made.In June 2013, William French filed suit against us and 46 other defendants under seal in the Superior Court of the State of Delaware. The filing wasunsealed on March 24, 2014. French brought the action on Delaware’s behalf for violations of Delaware’s unclaimed property laws and for recovery of theunredeemed gift card value allegedly attributable to Delaware residents. French’s complaint alleges that we, and other defendants, knowingly refused tofulfill obligations under Delaware's Abandoned Property Law by failing to report and deliver unclaimed gift card funds to the State of Delaware, andknowingly 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 toDelaware in violation of the Delaware False Claims and Reporting Act. The complaint seeks an injunction, monetary damages (including treble damages)penalties, and attorneys' fees and costs. The case is in its discovery stages. The nature of the loss contingencies relating to claims that have been assertedagainst us are described above. However, no estimate of the loss or range of loss can be made.We establish liabilities when a particular contingency is probable and estimable. At December 31, 2014, we have accrued $12.5 million in light ofthese probable and estimable liabilities. It is reasonably possible that the actual losses may exceed our accrued liabilities. We have other contingencies whichare reasonably possible; however, the reasonably possible exposure to losses cannot currently be estimated.14. INDEMNIFICATIONS AND GUARANTEES During our normal course of business, we have made certain indemnities, commitments, and guarantees under which we may be required to makepayments in relation to certain transactions. These indemnities include, but are not limited to, indemnities to various lessors in connection with facility leasesfor certain claims arising from such facility or lease, and indemnities to our directors and officers to the maximum extent permitted under the laws of the Stateof Delaware. The duration of these indemnities, commitments, and guarantees varies, and in certain cases, is indefinite. In addition, the majority of theseindemnities, commitments, and guarantees do not provide for any limitation of the maximum potential future payments we could be obligated to make. Assuch, 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.15. STOCKHOLDERS' EQUITYCommon Stock99Table of ContentsEach share of common stock has the right to one vote. The holders of common stock are also entitled to receive dividends whenever funds arelegally available and when declared by the board of directors, subject to prior rights of holders of all classes of stock outstanding having priority rights as todividends. No dividends have been declared or paid on our common stock through December 31, 2014.16. STOCK BASED AWARDSStock Option AwardsOur board of directors adopted the 2005 Equity Incentive Plan and it was most recently amended and restated and re-approved by the stockholderson May 3, 2012 (as so amended and restated, the "Plan"). Under the Plan, the board of directors may issue incentive stock options to employees and directorsof the Company and non-qualified stock options to consultants, as well as restricted stock units and other types of equity awards of the Company. Optionsgranted under this Plan generally expire at the end of ten years and vest in accordance with a vesting schedule determined by our board of directors, usuallyover four years from the grant date. We did not grant any options during the years ended December 31, 2014, 2013 and 2012. At December 31, 2014, 2.7million shares of stock remained available for future grants under the Plan. We settle stock option exercises with newly issued common shares.The following is a summary of stock option activity (in thousands, except per share data): 2014 2013 2012 Shares WeightedAverageExercisePrice Shares WeightedAverageExercisePrice Shares WeightedAverageExercise PriceOutstanding—beginning of year 273 $17.30 364 $17.34 405 $17.58Exercised (30) 17.08 (89) 17.45 — —Expired/Forfeited (19) 18.00 (2) 17.08 (41) 20.06Outstanding—end of year 224 $17.27 273 $17.30 364 $17.34Options exercisable at year-end 224 $17.27 273 $17.30 364 $17.34The following table summarizes information about stock options as of December 31, 2014 (in thousands, except per share data):Options Outstanding Options ExercisableShares WeightedAverageExercisePrice WeightedAverageRemainingContract Life AggregateIntrinsicValue Shares WeightedAverageExercisePrice WeightedAverageRemainingContract Life AggregateIntrinsicValue224 $17.27 2.15 $1,590 224 $17.27 2.15 $1,590Stock options vest over four years at 28% at the end of the first year and 2% each month thereafter. During the years ended December 31, 2014, 2013and 2012, we recorded stock based compensation related to stock options of $0, $0 and $3,000, respectively. The aggregate intrinsic value in the table above represents the total pretax intrinsic value, based on our stock price of $24.27 as of December 31,2014, which would have been received by the option holders had all option holders exercised their options as of that date.The total intrinsic value of options exercised during the years ended December 31, 2014, 2013 and 2012 was $126,000, $728,000, and $0,respectively. The total cash received from employees as a result of employee stock option exercises during the years ended December 31, 2014, 2013 and2012 were approximately $511,000, $1.6 million, and $0, respectively. In connection with these exercises, there was no tax benefit realized due to our netoperating loss position.Restricted Stock Awards100Table of ContentsFor the years ended December 31, 2014, 2013 and 2012, we granted 242,000, 275,000 and 795,000 restricted stock units, respectively. The cost ofrestricted stock units is determined using the fair value of our common stock on the date of the grant and we recognize compensation expense over the three-year vesting schedule on a straight line basis or on an accelerated schedule when vesting of restricted stock awards exceeds a straight line basis. The weightedaverage grant date fair value of restricted stock units granted during the years ended December 31, 2014, 2013 and 2012 was $28.24, $16.12 and $6.75,respectively.The following table summarizes restricted stock award activity (in thousands): 2014 2013 2012 Units WeightedAverageGrant DateFair Value Units WeightedAverageGrant DateFair Value Units WeightedAverageGrant DateFair ValueOutstanding—beginning of year704 $10.79 1,003 $8.81 522 $13.40Granted at fair value242 28.24 275 16.12 795 6.75Vested(301) 11.87 (339) 10.23 (240) 12.11Forfeited(67) 17.70 (235) 9.38 (74) 8.25Outstanding—end of year578 $16.70 704 $10.79 1,003 $8.81Restricted stock units granted in 2014 vest over three years at 33.3% at the end of each of the first, second and third year. Restricted stock unitsgranted in 2013 vest over three years at 40% at the end of the first year, 30% at the end of the second year and 30% at the end of the third year. Restrictedstock units granted in or prior to 2012 vest over three years at 25% at the end of the first year, 25% at the end of the second year and 50% at the end of thethird year. Each restricted stock unit represents the right to one share of common stock upon vesting. During the years ended December 31, 2014, 2013 and2012, we recorded stock based compensation related to restricted stock units of $4.0 million, $3.3 million and $3.5 million, respectively. Changes to theestimated forfeiture rate are accounted for as a cumulative effect of change in the period of such change.17. EMPLOYEE RETIREMENT PLANWe have a 401(k) defined contribution plan which permits participating employees to defer a portion of their compensation, subject to limitationsestablished by the Internal Revenue Code. During the years ended December 31, 2013 and 2012, employees who had completed six months of service andwere 21 years of age or older were qualified to participate in the plan which provided matches of 50% of the first 6% of each participant's contributions to theplan subject to IRS limits. These contributions will vest based on the participant's years of service at 20% per year over five years. Participant contributionsvest immediately. During the year ended December 31, 2014, we changed the plan to reduce the required service period to three months, to increase ourmatch to 100% of the first 6% of each participant's contributions to the plan subject to IRS limits, and to vest our matching contributions immediately. Ourmatching contribution totaled $2.4 million, $1.0 million and $653,000 for the years ended December 31, 2014, 2013 and 2012, respectively. Nodiscretionary contributions were made to eligible participants for the years ended December 31, 2014, 2013 and 2012, respectively.We have a Non-Qualified Deferred Compensation Plan for senior management. The plan allows eligible members of senior management to defertheir receipt of compensation from us, subject to the restrictions contained in the plan. Participants are 100% vested in their deferred compensation amountsand the associated gains or losses. For our contributions, if any, and the associated gains or losses, the participants shall vest in those deferred compensationamounts according to a vesting schedule that we shall determine at the time our contribution is made. As of December 31, 2014, we have not made anycontributions into the NQDC Plan. Participants are generally eligible to receive distributions from the plan two plan years subsequent to the plan year theirinitial deferral contribution is made. Deferred compensation amounts are held in a "rabbi trust," which invests primarily in mutual funds. The trust assets,which consist primarily of mutual funds, are recorded in our consolidated balance sheets because they are subject to the claims of our creditors. Thecorresponding deferred compensation liability represents the amounts deferred by the plan participants plus or minus any earnings or losses on the trustassets. The trust's assets totaled $90,000 and $138,000 at December 31, 2014 and December 31, 2013, respectively, and are included in Other current andlong-term assets in the consolidated balance sheets. Gains and losses on these investments were immaterial for the years ended December 31, 2014, 2013 and2012.101Table of Contents18. OTHER INCOME (EXPENSE), NETOther income (expense), net consisted of the following (in thousands): Years ended December 31, 2014 2013 2012Gift card and Club-O rewards breakage $2,439 $1,187 $3,308Other (1) 35 23Loss on precious metals (1,269) (1,457) —Sublease income — — 355Total other income (expense), net $1,169 $(235) $3,68619. INCOME TAXES The provision (benefit) for income taxes for 2014, 2013 and 2012 consists of the following (in thousands): Years ended December 31, 2014 2013 2012Current: Federal $210 $196 $416State 385 239 39Foreign 68 51 30Total current 663 486 485Deferred: Federal 3,777 (62,150) —State (36) (6,370) —Total deferred 3,741 (68,520) —Total provision (benefit) for income taxes $4,404 $(68,034) $485The provision (benefit) for income taxes for 2014, 2013 and 2012 differ from the amounts computed by applying the U.S. federal income tax rate of35% to income before income taxes for the following reasons (in thousands): Year ended December 31, 2014 2013 2012U.S. federal income tax provision at statutory rate $4,622 $5,720 $5,303Adjustment to reserves in prior years (1) — 4,418 —Non-deductible fines and penalties (112) 2,387 —Other 336 242 (1,764)Lobbying expenses 266 209 —Stock based compensation expense (43) (176) 1Research and development credit (2,050) (6,069) —State income tax expense, net of federal benefit 385 (4,828) 44Change in valuation allowance 1,000 (69,937) (3,099)Income tax provision (benefit) $4,404 $(68,034) $485 ___________________________________________(1)Adjustments to reserves in prior years includes (1) the effects of reconciling income tax amounts recorded in our Consolidated Statements ofOperations and Consolidated Income (Loss) to amounts reflected on our tax returns, including any adjustments to the Consolidated BalanceSheets; and (2) reductions to the net operating losses ("NOLs") from previous acquisitions.102Table of ContentsWe account for income taxes in accordance with ASC Topic 740, Income Taxes (“ASC 740”). ASC 740 requires an asset and liability approach formeasuring deferred taxes based on temporary differences between the financial statement and tax bases of assets and liabilities existing at each balance sheetdate using enacted tax rates for years in which taxes are expected to be paid or recovered.The components of our deferred tax assets and liabilities as of December 31, 2014 and 2013 are as follows (in thousands): December 31, 2014 2013Deferred tax assets: Net operating loss carryforwards $50,952 $56,859R&D tax credits 7,382 5,332AMT and other tax credits 850 639Accrued expenses 10,924 5,773Reserves and other 3,119 4,565Gross deferred tax assets 73,227 73,168Valuation allowance (1,000) —Total deferred tax assets 72,227 73,168Deferred tax liabilities: Fixed assets (5,786) (3,291)Prepaid expenses (1,275) (1,357)Total deferred tax liabilities (7,061) (4,648)Total deferred tax assets, net $65,166 $68,520At December 31, 2014 and 2013, we had federal NOL carryforwards of approximately $155.0 million and $166.2 million and state NOLcarryforwards of approximately $144.0 million and $154.7 million, respectively, which may be used to offset future taxable income. Of the total federal andstate NOLs, $20.6 million was generated from stock option deductions and are not reflected in our deferred tax assets. The net tax benefit of $7.9 million willbe credited to additional paid-in capital in our consolidated balance sheets under the "with-and-without" method of utilization for tax attributes. We utilizethe with-and-without approach in determining if and when such excess tax benefits are realized. Under this approach excess tax benefits related to stock-based compensation are the last to be realized. Our NOLs begin to expire in 2018 to 2034 if unused. In accordance with an Internal Revenue Code section382 study completed during 2014, the NOL carryforwards indicated above are not limited in future periods.At December 31, 2014 and 2013, we had federal research credit carryforwards of approximately $7.8 million and $6.0 million and state researchcredit carryforwards of approximately $4.2 million and $3.3 million, respectively, which may be used to offset future income tax. These tax credits expire atvarious dates between 2021 and 2034. We do not have any indefinite lived intangibles and the remaining deferred tax assets have no expiration date.Each quarter we assess the recoverability of our deferred tax assets under ASC 740. We are required to establish a valuation allowance for anyportion of the assets that we conclude is not more likely than not realizable. Our assessment considers, among other things, the three year cumulative netincome, positive pretax net income and taxable income, forecasts of our future taxable income, carryforward periods, our utilization experience withoperating loss and tax credit carryforwards, and tax planning strategies. We have concluded based on all available positive and negative evidence it is morelikely than not the Company’s deferred tax assets as of December 31, 2014 arising from ordinary income and deductions and tax credits will be realized in thefuture. We have also concluded it is unlikely the Company’s deferred tax asset arising from unrealized capital losses will be realized in the future. On thebasis of this evaluation, as of December 31, 2014, a valuation allowance of $1.0 million has been recorded to record only the portion of the deferred tax assetthat is more likely than not to be realized. This assessment required 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 uncertaintiesthat are expected to negatively impact the future levels of taxable income. We will continue to monitor the need for a valuation allowance against our federaland state deferred tax assets on a quarterly basis.103Table of ContentsA reconciliation of the beginning and ending tax contingencies, excluding interest and penalties, as of December 31, 2014 and 2013 is as follows(in thousands): Year ended December 31, 2014 2013 2012Beginning balance $2,968 $231 $231Additions for tax positions related to the current year 959 2,737 —Additions for tax positions taken in prior years 201 — —Ending balance $4,128 $2,968 $231Accrued interest and penalties on tax contingencies as of December 31, 2014 and 2013 were $184,000 and $127,000, respectively. Our policy is torecognize interest and penalties accrued on any unrecognized tax positions as a component of income tax expense.The Company is subject to taxation in the United States and several state and foreign jurisdictions. Tax years beginning in 2011 are subject toexamination by taxing authorities, although NOL and credit carryforwards from all years are subject to examinations and adjustments for at least three yearsfollowing the year in which the attributes are used.We operate under an income tax holiday in Ireland, which is effective through December 31, 2015. The impact has been tax savings ofapproximately $15,000 and $3,000 for December 31, 2014 and 2013.The Company intends to reinvest the earnings of its non-U.S. subsidiaries in those operations. As of December 31, 2014, the Company has not madea provision for U.S. or additional foreign withholding taxes on approximately $142,000 of indefinitely reinvested foreign earnings. Generally, such amountsbecome subject to U.S. taxation upon the remittance of dividends to the U.S. and under certain other circumstances. It is not practicable to estimate theamount of deferred taxes related to investments in these foreign subsidiaries. 20. RELATED PARTY TRANSACTIONSOn occasion, Haverford-Valley, L.C. (an entity owned by our Chief Executive Officer) and certain affiliated entities make travel arrangements for ourexecutives and pay the travel related expenses incurred by our executives on company business. During the years ended December 31, 2014, 2013 and 2012we reimbursed Haverford-Valley L.C. $270,000, $170,000, and $93,000, respectively, for these expenses.21. BUSINESS SEGMENTS Segment information has been prepared in accordance with ASC Topic 280 Segment Reporting. Segments were determined based on how wemanage the business. There were no inter-segment sales or transfers during the years ended December 31, 2014 and 2013. We evaluate the performance of oursegments and allocate resources to them based primarily on gross profit. The table below summarizes information about reportable segments for the yearsended December 31, 2014, 2013 and 2012 (in thousands):104Table of ContentsYear ended December 31,Direct Partner Total2014 Revenue, net$147,460 $1,349,643 $1,497,103Cost of goods sold129,253 1,088,791 1,218,044Gross profit$18,207 $260,852 $279,059Operating expenses (267,136)Other income, net 1,282Provision for income taxes 4,404Consolidated net income $8,801 2013 Revenue, net$156,032 $1,148,185 $1,304,217Cost of goods sold136,282 920,275 1,056,557Gross profit$19,750 $227,910 $247,660Operating expenses (231,095)Other loss, net (221)Benefit for income taxes (68,034)Consolidated net income $84,378 2012 Revenue, net$155,516 $943,773 $1,099,289Cost of goods sold140,536 760,323 900,859Gross profit$14,980 $183,450 $198,430Operating expenses (186,269)Other income, net 2,993Provision for income taxes 485Consolidated net income $14,669 The direct segment includes revenues, direct costs, and cost allocations associated with sales of inventory we own. Costs for this segment includeproduct costs, freight, warehousing and fulfillment costs, credit card fees and customer service costs. The partner segment includes revenues, direct costs and cost allocations associated with sales of inventory owned by our partners. Costs for thissegment include product costs, outbound freight and fulfillment costs, credit card fees and customer service costs. Assets have not been allocated between the segments for our internal management purposes and, as such, they are not presented here.For the years ended December 31, 2014, 2013 and 2012, substantially all of our sales revenues were attributable to customers in the United States. AtDecember 31, 2014 and December 31, 2013, substantially all of our fixed assets were located in the United States.22. SUBSEQUENT EVENTSIn conjunction with our crypto-initiatives, in January 2015 we purchased a noncontrolling interest in a privately held entity. The amount of theinvestment totaled $5 million. We will recognize the investment as a cost method investment. Earnings from the investment will be recognized to the extentof dividends received, and we will recognize subsequent impairments to the investment if they are other than temporary.23. QUARTERLY RESULTS OF OPERATIONS (unaudited)105Table of ContentsThe following tables set forth our unaudited quarterly results of operations data for the eight most recent quarters for the period ended December 31,2014. We have prepared this information on the same basis as the consolidated statements of operations and the information includes all adjustments that weconsider necessary for a fair statement of its financial position and operating results for the quarters presented. Three Months Ended March 31,2014 June 30,2014 September 30,2014 December 31,2014 (in thousands, except per share data)Consolidated Statement of Operations Data: Revenue, net Direct $38,047 $33,215 $33,592 $42,606Partner 303,160 299,330 319,399 427,754Total net revenue 341,207 332,545 352,991 470,360Cost of goods sold Direct 33,097 29,473 29,385 37,298Partner 244,114 240,447 256,548 347,682Total cost of goods sold 277,211 269,920 285,933 384,980Gross profit 63,996 62,625 67,058 85,380Operating expenses: Sales and marketing 23,392 23,543 25,428 37,098Technology 19,601 21,408 22,202 23,047General and administrative 15,296 15,881 17,073 23,527Restructuring (360) — — —Total operating expenses 57,929 60,832 64,703 83,672Operating income 6,067 1,793 2,355 1,708Interest income 41 37 36 38Interest expense (7) (12) (11) (9)Other income (expense), net 459 524 (350) 536Net income before income taxes 6,560 2,342 2,030 2,273Provision for income taxes 2,590 433 413 968Consolidated net income 3,970 1,909 1,617 1,305Less: Net loss attributable to noncontrolling interests — — — (53)Net income attributable to stockholders of Overstock.com, Inc. $3,970 $1,909 $1,617 $1,358Net income per common share—basic: Net income attributable to common shares—basic $0.17 $0.08 $0.07 $0.06Weighted average common shares outstanding—basic 23,926 24,009 24,027 24,031Net income per common share—diluted: Net income attributable to common shares—diluted $0.16 $0.08 $0.07 $0.06Weighted average common shares outstanding—diluted 24,339 24,247 24,283 24,399106Table of Contents Three Months Ended March 31,2013 June 30,2013 September 30,2013 December 31,2013 (in thousands, except per share data)Consolidated Statement of Operations Data: Revenue, net Direct $41,942 $36,250 $35,681 $42,159Partner 270,052 256,954 265,745 355,434Total net revenue 311,994 293,204 301,426 397,593Cost of goods sold Direct 37,149 31,842 30,777 36,514Partner 215,909 203,523 211,499 289,344Total cost of goods sold 253,058 235,365 242,276 325,858Gross profit 58,936 57,839 59,150 71,735Operating expenses: Sales and marketing 18,705 19,208 22,463 31,233Technology 18,160 17,920 17,259 18,449General and administrative 15,088 16,585 15,970 20,526Restructuring (432) (39) — —Total operating expenses 51,521 53,674 55,692 70,208Operating income 7,415 4,165 3,458 1,527Interest income 34 32 34 27Interest expense (51) (37) (33) 8Other income (expense), net 345 (150) 165 (595)Net income before income taxes 7,743 4,010 3,624 967Provision (benefit) for income taxes 46 312 91 (68,483)Consolidated net income 7,697 3,698 3,533 69,450Less: Net loss attributable to noncontrolling interests — — — —Net income attributable to stockholders of Overstock.com, Inc. $7,697 $3,698 $3,533 $69,450Net income per common share—basic: Net income per share—basic $0.33 $0.16 $0.15 $2.92Weighted average common shares outstanding—basic 23,594 23,714 23,766 23,780Net income per common share—diluted: Net income per share—diluted $0.32 $0.15 $0.14 $2.84Weighted average common shares outstanding—diluted 24,016 24,283 24,446 24,430107Table of ContentsSchedule IIValuation and Qualifying Accounts(in thousands) Balance atBeginning ofYear Charged toExpense Deductions Balance atEnd of YearYear ended December 31, 2014 Deferred tax valuation allowance $— $1,000 $— $1,000Allowance for sales returns 13,232 117,932 115,633 15,531Allowance for doubtful accounts 152 359 — 511Year ended December 31, 2013 Deferred tax valuation allowance $79,693 $— $79,693 $—Allowance for sales returns 10,618 95,807 93,193 13,232Allowance for doubtful accounts 797 161 806 152Year ended December 31, 2012 Deferred tax valuation allowance $83,617 $— $3,924 $79,693Allowance for sales returns 10,899 79,785 80,066 10,618Allowance for doubtful accounts 574 249 26 797108Exhibit 10.16 Summary of Unwritten Compensation ArrangementsApplicable to Non-Employee Directors of Overstock.com, Inc.During 2014 the Company paid its non-employee directors $60,000. During 2015 the Company intends to pay its non-employee directors $60,000 annually,at the rate of $15,000 per quarter. The Company also grants restricted stock units to directors, generally at the first Board meeting after the director first joinsthe Board, and periodically thereafter. In 2014, the Company granted restricted stock units to non-employee directors as follows:Name (1)Grant Date Number of Restricted Stock UnitsGranted (2)Allison H. AbrahamJanuary 28, 2014 3,500Barclay F. CorbusJanuary 28, 2014 3,500Joseph J. Tabacco, Jr.January 28, 2014 3,500Samuel A. MitchellJanuary 28, 2014 3,500(1) On February 5, 2015 the Board also appointed Kirthi Kalyanam, Ph.D. to the Board. The Board has determined that Dr. Kalyanam is independentunder the applicable independence standard.(2) Each restricted stock unit represents a contingent right to receive one share of Overstock.com, Inc. common stock. The restricted stock units vestin three equal installments at the close of business on January 28, 2015, January 28, 2016, and January 28, 2017. Vested shares will be delivered tothe reporting person promptly after the restricted stock units vest. Amount shown does not include previously granted restricted stock units withdifferent vesting schedules.The Company also reimburses directors for out-of-pocket expenses incurred in connection with attending Board and committee meetings. Haverford Valley,L.C., an affiliate of the Company, and certain affiliated entities which make travel arrangements for the Company's executives, also occasionally make travelarrangements for directors to attend Board meetings. The Company’s policies regarding reimbursement of travel expenses are described in the Annual Reporton Form 10-K.Exhibit 21Subsidiaries of the RegistrantNameJurisdiction of Formation Trade NamesOverstock.com Services, IncUtah Overstock.com ServicesMarket Partner Holdings, Inc.Utah Market Partner Operations, Inc.Utah Market Partner SR, Inc.Utah Market Partner BB, Inc.Utah Market Partner BC, Inc.Utah Market Partner EB, Inc.Utah Market Partner NE, Inc.Utah My Current, Inc.Utah My CurrentSupplier Oasis Fulfillment Services, Inc.Utah SOFSOverstock Ireland LimitedIreland O.co Ireland.ieO Agency Group, Inc.Utah Overstock.com InsuranceExhibit 23Consent of Independent Registered Public Accounting FirmThe Board of DirectorsOverstock.com, Inc.:We consent to the incorporation by reference in the registration statements on Form S-8 (Nos. 333-181422, 333-184344, 333-162674, 333-160512, 333-124441, and 333-123540) and on Form S-3 (No. 333-201035) of Overstock.com, Inc. of our reports dated March 12, 2015, with respect to the consolidatedbalance sheets of Overstock.com, Inc. as of December 31, 2014 and 2013, and the related consolidated statements of income, comprehensive income, changesin stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2014, and the related financial statement schedule,and the effectiveness of internal control over financial reporting as of December 31, 2014, which reports appear in the December 31, 2014 annual report onForm 10-K of Overstock.com, Inc./s/ KPMG LLPSalt Lake City, UtahMarch 12, 2015Exhibit 31.1 CERTIFICATION I, Patrick M. Byrne, certify that: 1. I have reviewed this Annual Report on Form 10-K of Overstock.com, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by thisreport; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, toensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within thoseentities, particularly during the period in which this report is being prepared; b. designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles; c. evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d. disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recentfiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely tomaterially affect, the registrant’s internal control over financial reporting; and 5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, tothe registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonablylikely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controlover financial reporting. Date:March 12, 2015/s/ PATRICK M. BYRNE Patrick M. Byrne Chief Executive Officer (principal executive officer)Exhibit 31.2 CERTIFICATION I, Robert P. Hughes, certify that: 1. I have reviewed this Annual Report on Form 10-K of Overstock.com, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by thisreport; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, toensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within thoseentities, particularly during the period in which this report is being prepared; b. designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles; c. evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d. disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recentfiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely tomaterially affect, the registrant’s internal control over financial reporting; and 5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, tothe registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonablylikely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controlover financial reporting. Date:March 12, 2015/s/ ROBERT P. HUGHES Robert P. Hughes Senior Vice President, Finance and Risk Management (principal financial officer)Exhibit 32.1 CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Patrick M. Byrne, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the AnnualReport of Overstock.com, Inc. on Form 10-K for the year ended December 31, 2014 fully complies with the requirements of Section 13(a) or 15(d) of theSecurities Exchange Act of 1934, as applicable, and that information contained in such Report fairly presents in all material respects the financial conditionand results of operations of Overstock.com, Inc. Date:March 12, 2015/s/ PATRICK M. BYRNE Patrick M. Byrne Chief Executive Officer (principal executive officer)Exhibit 32.2 CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Robert P. Hughes, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the AnnualReport of Overstock.com, Inc. on Form 10-K for the year ended December 31, 2014 fully complies with the requirements of Section 13(a) or 15(d) of theSecurities Exchange Act of 1934, as applicable, and that information contained in such Report fairly presents in all material respects the financial conditionand results of operations of Overstock.com, Inc. Date:March 12, 2015/s/ ROBERT P. HUGHES Robert P. Hughes Senior Vice President, Finance and Risk Management (principal financial officer)

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