UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2016
Or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 000-49799
OVERSTOCK.COM, INC.
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification Number)
Delaware
87-0634302
799 West Coliseum Way, Midvale, UT
(Address of principal executive offices)
84047
(Zip code)
(801) 947-3100
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Common Stock, $0.0001 par value
Securities registered pursuant to Section 12(g) of the Act: None
Name of Each Exchange on Which Registered
Nasdaq Global Market
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was required to file such reports), (2) has been subject to such filing requirements for the past 90
days. Yes
No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to
be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit and post such files). Yes
No
Indicate 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's knowledge, 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.
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
Non-accelerated filer
(Do not check if a smaller reporting company)
Accelerated filer
Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the act). Yes
No
The 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
recently completed second quarter (June 30, 2016), was approximately $211.7 million based upon the last sales price reported by Nasdaq. For purposes of this disclosure,
shares of Common Stock 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 such persons may be deemed to be affiliates. This determination is not necessarily conclusive.
There were 24,895,038 shares of the Registrant’s common stock, par value $0.0001, outstanding on February 24, 2017.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information required by Part III of Form 10-K is incorporated by reference to the Registrant's proxy statement for the 2017 Annual Stockholders
Meeting, 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 CONTENTS
Special Cautionary Note Regarding Forward-Looking Statements
Item 1.
Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2.
Item 3.
Properties
Legal Proceedings
Item 4. Mine Safety Disclosures
Part I
Part II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Item 6.
Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Item 9.
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
Part III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11.
Executive Compensation
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14.
Principal Accounting Fees and Services
Item 15.
Exhibits, Financial Statement Schedules
Part IV
Signatures
Financial Statements
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O, Overstock.com, O.com, O.co, Club O, Main Street Revolution, Worldstock and OVillage are registered trademarks
of Overstock.com, Inc. O.biz and Space Shift are also trademarks 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 their respective owners.
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SPECIAL CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K and the documents incorporated herein by reference, as well as our other public
documents and statements our officers and representatives may make from time to time, contain forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of
1934, as amended. These statements are therefore entitled to the protection of the safe harbor provisions of these laws. These
forward-looking statements involve risks and uncertainties, and relate to future events or our future financial or operating
performance. The forward-looking statements include all statements other than statements of historical fact, including, without
limitation, all statements regarding:
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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, profits or losses,
contribution, technology expense, general and administrative expense, cash flow, capital expenditures or
other financial measures or amounts or non-GAAP financial measures or amounts or anticipated changes in
any of them;
our expectations regarding our new corporate headquarters and the risks relating to our new corporate
headquarters;
our beliefs and expectations regarding the adequacy of our new corporate headquarters and our leased
warehouse facilities;
our expectations regarding the benefits and risks of the credit facility we entered into for the purpose of,
among other things, financing a portion of the costs of our new 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;
the competition we currently face and will face in our business as the ecommerce business continues to evolve
and to become more competitive, and as additional competitors, including Amazon and competitors based in
China or elsewhere, continue to increase their efforts in our primary markets;
the effects of government regulation;
our plans for international markets, our expectations for our international sales efforts and the anticipated
results of our international operations;
our plans and expectations regarding Supplier Oasis and our efforts to provide multi-channel fulfillment
services;
our plans and expectations regarding our insurance product offerings and consumer finance offerings;
our plans for further changes to our business;
our beliefs regarding current or future litigation or regulatory actions;
our beliefs regarding the costs and benefits of our “spend and defend” policy under which we generally
refuse to settle abusive patent suits brought against us;
our beliefs and expectations regarding existing and future tax laws and related laws and the application of
those laws to our business including any tax assessments we may receive;
our beliefs regarding the adequacy of our insurance coverage;
our beliefs regarding the adequacy and anticipated functionality of our infrastructure, including our backup
facilities and beliefs regarding the adequacy of our disaster planning and our ability to recover from a
disaster or other interruption of our ability to operate our website;
our beliefs regarding our cybersecurity efforts and measures and our efforts to prevent data breaches and the
costs we will incur in our ongoing efforts to avoid interruptions to our product offerings and other business
processes from cyberattacks and from data breaches;
our belief regarding our ability to meet our published product shipping standards;
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, innovations and projects including
our car listing service, our Worldstock Fair Trade offerings, our Main Street Revolution offerings and our
ecommerce marketplace channel offerings;
our expectations regarding the costs, benefits and risks of our efforts to develop blockchain and financial
technology and of the costs, benefits and risks of our acquisitions of the assets and operations of a financial
technology company and two registered broker dealers affiliated with the financial technology business;
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our expectations regarding the benefits of our recent rights offering of shares of our Blockchain Voting Series
A Preferred Stock and our Voting Series B Preferred Stock;
our expectations regarding the costs and benefits of various programs we offer, including Club O and
programs pursuant to which we may offer free or discounted participation in Club O or other programs we
offer to members of the United States Armed Forces and/or to full-time, post-secondary students or others,
and including our community site and our public service pet adoption program;
our expectations regarding the costs and benefits of modifying our marketing efforts to deemphasize coupons;
our belief that we and our partners will be able to maintain inventory levels at appropriate levels despite the
seasonal nature of our business;
our expectations regarding our emphasis on home and garden product offerings and our attempts to brand
ourselves as a home and garden shopping destination;
our belief that our sales through other ecommerce marketplace channels will be successful and will become
an important part of our business; 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 comparable terminology. These statements are only predictions. Actual events or results may
differ materially from those contemplated by forward-looking statements for a variety of reasons, including among others:
changes in U.S. and global economic conditions and consumer spending;
any downturn in the U.S. housing industry;
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the rate of growth of the Internet and online commerce, and the occurrence of any event that would
discourage or prevent consumers from shopping online or via mobile apps;
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 interest in our product offerings;
any difficulties we may have with the quality or safety of the products we offer;
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mix and the mix of direct/partner sourcing of the products we offer;
the mix of products purchased by our customers;
any problems we may have with cyber security or data breaches or Internet or other infrastructure or
communications impairment problems or the costs of preventing or responding to any such problems;
any problems with or affecting our 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 or any difficulties we may have maintaining compliance with the rules of the credit
card processors;
any problems we may encounter as a result of the implementation in the U.S. of the EMV (Europay,
MasterCard and Visa) standards for credit cards, which generally became effective in the U.S. in 2015,
including any problems that may result from any increase in online fraud as a result of the implementation of
the EMV standards;
problems with or affecting the facility where substantially all of our computer and communications hardware
is located or other problems that result in the unavailability of our Website or reduced performance of our
transaction systems;
difficulties we may have in responding to technological changes;
problems with the volume of fraudulent purchase orders we receive;
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 of financing;
any environmental or other difficulties we may encounter relating to the real estate we recently purchased or
with our new corporate headquarters, or with our financing of a substantial portion of the costs of our new
corporate headquarters or the interest rate swaps we entered into in connection with the financing;
any difficulties we may encounter in connection with Supplier Oasis or our efforts to provide multi-channel
fulfillment services, our Farmers Market offerings, our insurance product offerings, our consumer finance
offerings or other businesses or product or service offerings outside of our main shopping website offerings;
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any difficulties we may encounter as a result of our reliance on third parties that we do not control for the
performance of critical functions material to our business;
any difficulties we may encounter in connection with the rapid shift of ecommerce and online payments to
mobile and multi-channel commerce and payments;
the extent to which we owe income or sales taxes or are required to collect sales taxes or report sales or to
modify our business model in order to avoid being required to collect sales taxes or report sales or avoid the
application of other types of taxes;
any difficulties we may encounter as a consequence of accepting or holding bitcoins or other
cryptocurrencies, whether as a result of regulatory, tax or other legal issues, technological issues, value
fluctuations, lack of widespread adoption of bitcoins or other cryptocurrencies as an acceptable medium of
exchange or otherwise;
increasing competition, including competition from well-established competitors including Amazon.com,
competition from competitors based in China or elsewhere, competition from companies willing to incur
substantial losses in order to build market share, and from others including competitors with business models
that may include delivery capabilities that we may be unable to match;
difficulties with the management of our growth and any periods in which we fail to grow in accordance with
our plans;
difficulties we may encounter in connection with our efforts to emphasize our home and garden product
offerings and to brand ourselves as a home and garden shopping destination;
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 insurance products and consumer financing;
difficulties, including expense and any operational or regulatory issues we may encounter in connection with
the integration or operation of the assets and operations of a financial technology company and two
registered broker dealers affiliated with the financial technology business that we acquired;
technical, operational, regulatory or other difficulties we may encounter in connection with our efforts to
develop blockchain and financial technology, or with the operation of tØ.com's system for the trading of
securities, including our Blockchain Voting Series A Preferred Stock;
difficulties we may encounter with our Medici blockchain and financial technology initiatives due to lack of
market acceptance or as a result of competition from any of the numerous other competitors seeking to
develop competing technologies or systems or as a result of patents that may be granted to other companies
or persons;
any impairment we may recognize with respect to assets or businesses that we have acquired or may acquire,
including with respect to our investments in companies that are in the startup or development stages;
any liability or expense we may incur as a result of our investments in other companies, whether as a result of
regulatory issues or otherwise;
the outcomes of legal proceedings, investigations and claims;
any difficulties we have optimizing 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-term changes in the traditional advertising business, and the results of our various
brand building and marketing campaigns;
risks that the amount of deferred tax assets we consider realizable could be reduced if estimates of future
taxable income during the carryforward period are reduced; 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 in Item 1 - Business; Item 1A - Risk Factors; Item 3 - Legal Proceedings; Item 7 - Management’s
Discussion and Analysis of Financial Condition and Results 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 any assurance of
future results, levels of activity, performance or achievements or other future events.
Our forward-looking statements contained in this report speak only as of the date of this report and, except as required
by law, we undertake no obligation to update forward-looking statements to reflect events or circumstances occurring after the
date of this report or any changes in our expectations or any change in any events, conditions or circumstances on which any of
our forward-looking statements are based.
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ITEM 1. BUSINESS
PART I
The following description of our business contains forward-looking statements relating to future events or our future
financial or operating performance that involve risks and uncertainties, as set forth above under "Special Note Regarding
Forward-Looking Statements." Our actual results could differ 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.
Introduction
We are an online retailer and incubator of blockchain technology. Through our online retail business we offer a broad
range of price-competitive brand name, non-brand name and closeout products, including furniture, home decor, bedding and
bath, housewares, jewelry and watches, apparel and designer accessories, health and beauty products, electronics and
computers, and sporting goods, among other products. We also sell hundreds of thousands of best seller and current run books,
magazines, CDs, DVDs and video games (“BMMG”). We sell these products and services through our Internet websites located
at www.overstock.com, www.o.co and www.o.biz (referred to collectively as the “Website”). Although our three websites are
located at different domain addresses, the technology and equipment and processes supporting the Website and the process of
order fulfillment described herein are the same for all three websites.
In late 2014, we began working on initiatives to develop and advance blockchain technology, which we refer to
collectively as Medici, and which includes our majority-owned subsidiary tØ.com, Inc. (formerly Medici, Inc.). As part of our
Medici initiatives, we have formed a wholly-owned subsidiary Medici Ventures, Inc. and acquired a majority interest in a
financial technology company and two related registered broker-dealers. We have also made minority investments in several
blockchain technology companies. In 2015, we were the first public company to issue a private security using blockchain
technology and in December 2016, as a successful demonstration of our technology, we issued publicly traded blockchain
preferred shares of Overstock.com, Inc.
Our company, based near Salt Lake City, Utah, was founded in 1997. We launched our initial website in March 1999
and were re-incorporated in Delaware in 2002. As used herein, “Overstock,” “Overstock.com,”, “O.co,” “we,” “our” and
similar terms include Overstock.com, Inc. and our majority-owned subsidiaries, unless the context indicates otherwise.
Our Business
In our retail business, we deal primarily in price-competitive, new and replenishable merchandise and use the Internet
to aggregate both supply and demand to create an efficient marketplace for selling these products. We provide our customers an
opportunity to conveniently shop for a broad range of price-competitive products. We continually add new, and sometimes
limited, inventory to our Website in order to create an atmosphere that encourages customers to visit frequently and purchase
products before our inventory sells out. We provide suppliers with access to a large customer base and convenient services for
order fulfillment, customer service, returns handling, and other services. The merchandise offered on our Website is from a
variety of sources including well-known, brand-name manufacturers. We have organized our retail business (sales of product
offered through the Shopping Section of our Website) into two principal segments-a "direct" business and a "partner" business.
We currently offer approximately 1.9 million non-BMMG products and approximately 742,000 BMMG products. Consumers
and businesses are able to access and purchase our products 24 hours a day from the convenience of a computer, Internet-
enabled mobile telephone or other Internet-enabled device. Our team of customer service representatives assists customers by
telephone, instant online chat and e-mail. We also derive revenue from other businesses advertising products or services on our
Website. Our sales are primarily to customers located in the United States. During the years ended December 31, 2016, 2015
and 2014 no single customer accounted for more than 1% of our total net revenue.
Retail direct business
Our direct business includes sales made to individual consumers and businesses from our owned inventory and that are
fulfilled primarily from our warehouse in Salt Lake City, Utah. During the year ended December 31, 2016, approximately 6%
of our order volume was generated through our direct business. Our warehouses primarily fulfill orders from our direct
business, but also fulfill orders on behalf of our partners through our Supplier Oasis offering described below. Our warehouses
generally ship between 2,000 and 5,000 packages per day and up to approximately 10,000 packages per day during peak
periods.
Retail partner business
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For our partner business, we sell merchandise from manufacturers, distributors and other suppliers ("partners")
primarily through our Website. We are considered to be the primary obligor for the majority of these sales transactions and we
record revenue from the majority of these sales transactions on a gross basis. Our use of the term "partner" does not mean that
we have formed any legal partnerships with any of our partners. We currently have relationships with approximately 4,100 third
parties who supply approximately 1.9 million non-BMMG products, as well as most of the BMMG products, on our Website.
These third party partners generally perform the same fulfillment operations as our warehouses, such as order picking and
shipping; however, we handle returns and customer service related to substantially all orders placed through our Website.
Revenue generated from sales on our Shopping site from both the direct and partner businesses is recorded net of returns,
coupons and other discounts.
Both direct and partner revenues are seasonal, with revenues historically being the highest in the fourth quarter, which
ends December 31, reflecting higher consumer holiday spending. We anticipate this will continue for the foreseeable future. To
the extent possible we maintain supplier relationships, and seek new supplier relationships, for both our direct and partner
businesses, and also use our working capital, to ensure a continuous allotment of product offerings for our customers. Because a
portion of our product offerings are closeout merchandise, some of our suppliers cannot supply products to us on a continuous
basis.
Generally, we require verification of receipt of payment, or authorization from credit card or other payment vendors
whose services we offer to our customers (such as PayPal), before we ship products to consumers or business purchasers. From
time to time we grant credit to our business purchasers with normal credit terms (typically 30 days). For sales in our partner
business, we generally receive payments from our customers before our payments to our suppliers are due.
Medici business
Our Medici business initiatives leverage the security, transparency and immutability of cryptographically protected,
distributed ledgers, such as the Blockchain, and are focused on solving important problems, including financial transaction
issues, particularly in the area of securities settlement. Through our wholly-owned subsidiary, Medici Ventures Inc., we hold
minority investments in several technology companies which, at December 31, 2016, included Peer Nova, Bitt, IdentityMind
and Factom, whose focus include commercial blockchain applications, digital currency solutions, Know Your Customer and
Anti Money Laundering compliance, voting and land titling. Medici Ventures also holds a majority interest in tØ.com, Inc.,
which includes a financial technology company and two related registered broker-dealers.
As described further in Item 15 of Part IV, "Financial Statements"—Note 21. Business Segments, contained in the
"Notes to Consolidated Financial Statements" of this Annual Report on Form 10-K, we determined our segments based on how
we manage our business, which, in our view, consists primarily of our Retail and Medici businesses. As described above, our
Retail business consists of our Direct and Partner reportable segments. We use gross profit as the measure to determine our
reportable segments because there is not discrete financial information available below gross profit for our Direct and Partner
segments. As a result, our Medici business is not significant as compared to our Direct and Partner segments and is included in
Other. Our Other segment consists of Medici.
Other offerings
We offer additional products or services that may 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
to help improve the lives of people in emerging economies;
• Main Street Revolution, a store within our Website that features products from small businesses who offer their
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Farmers Market, a tab within our Website where our customers, in certain locations, can order locally grown fresh
produce and other food products;
Pet Adoptions, a free service and tab within our Website that leverages our technology to display pets available for
adoption from shelters across the United States;
Insurance, a tab within our Website where our customers can shop for insurance from major carriers for both personal
and business insurance policies; and
Supplier Oasis, a single integration point through which our partners can manage their products, inventory and sales
channels, while tapping into our distribution network; and
our international business where we offer products to customers outside the United States using third party logistics
providers.
Manufacturer, Supplier and Distribution Relationships
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Generally, we do not enter into contracts with manufacturers or other suppliers that guarantee the availability of
merchandise for a set duration. Our manufacturer and supplier relationships are based on historical experience with
manufacturers and other suppliers and do not obligate or entitle us to receive merchandise on a long-term or short-term basis. In
our direct business, we purchase the products from manufacturers or other suppliers using standard purchase orders. Generally,
suppliers do not control the terms under which products are sold through our Website.
Products
Our Website Shopping section is organized into product and service lines or featured categories, including: Furniture,
Rugs, Decor, Bed & Bath, Home Improvement, Kitchen, Outdoor, Jewelry, Watches, Women, Men, Kids & Baby, Worldstock,
Main Street, Farmers Market, Pet Adoptions, o.info and Insurance. We frequently reorganize our departments and/or categories
to better reflect our current product offerings.
For the years ended December 31, 2016, 2015 and 2014, the percentages of sales contributed by similar classes of
products were as follows:
Product Lines
Home and garden(1)
Furniture
Home decor
Other
Total home and garden
Jewelry, watches, clothing and accessories
BMMG, electronics and computers
Other
Total
2016
2015
2014
34%
22%
23%
79%
10%
3%
8%
100%
33%
19%
25%
77%
11%
3%
9%
100%
32%
18%
24%
74%
12%
4%
10%
100%
(1) Home and garden includes furniture, home decor, garden and patio, kitchen and dining, bedding, home
improvement, housewares and other related products.
Sales and Marketing
We use a variety of methods to target our retail consumer audience, including online campaigns, such as advertising
through keywords, product listing ads, display ads, search engines, affiliate marketing programs, social coupon websites,
portals, banners, e-mail, direct mail and viral and social media campaigns. We also do brand advertising through television,
radio, print ads, and event sponsorships.
Customer Service
We are committed to providing superior customer service. We staff our customer service department with dedicated in-
house and outsourced professionals who respond to phone, instant online chat and e-mail inquiries on products, ordering,
shipping status, returns and other areas of customer inquiry.
Technology
We use our internally developed Website and a combination of proprietary technologies and commercially available
licensed technologies and solutions to support our retail operations. We use the services of multiple telecommunications
companies to obtain connectivity to the Internet. Currently, our primary computer infrastructure is located in a co-location
facility in Utah. We also have other data centers which we use for backups, redundancy, development, testing, disaster recovery,
and our corporate systems infrastructure.
Competition
Internet retail is intensely competitive and has relatively low barriers to entry. We believe that competition in this
industry is based predominantly on:
price;
product quality and assortment;
shopping convenience;
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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 target our customers. We currently or potentially compete with a variety of companies that can be
divided into several broad categories:
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online discount general retailers;
online private sale sites;
online specialty retailers;
liquidation e-tailers;
traditional general merchandise and specialty retailers and liquidators, many of which have a significant online
presence; and
online retailers who are developing significant "brick and mortar" capabilities.
Many of our current and potential competitors have greater brand recognition, longer operating histories, larger
customer bases and significantly greater financial, marketing and other resources than we do. Further, any of them may enter
into strategic or commercial relationships with larger, more established and well-financed companies, including exclusive
distribution arrangements with our vendors or service suppliers that could deny us access to key products or needed services, or
acquisitions of our suppliers or service providers, having the same effect. Many of them do or could devote greater resources to
marketing and promotional campaigns and devote substantially more resources to their website and systems development than
we do. Many have supply chain operations that decrease product shipping times to their customers, or have options for in-store
product pick-up options or allow in-store returns and offer other delivery and returns options that we do not have. New
technologies and the continued enhancement of existing technologies and developments in related areas, such as same-day
product deliveries and the development of proprietary delivery systems, are also increasing competitive pressures on us. Our
competitors include Amazon.com, Inc and Wayfair, Inc. We cannot ensure that we will be able to compete successfully against
current or future competitors or address increased competitive pressures (see Item 1A—"Risk Factors").
Seasonality
Our retail business is affected by seasonality because of the holiday season, which historically has resulted in higher
sales volume during our fourth quarter, which ends December 31. We recognized 29.2%, 29.0% and 31.4% of our annual
revenue during the fourth quarter of 2016, 2015, and 2014, respectively.
Financial Information about Business Segments and Geographic Areas
See Item 15 of Part IV, "Financial Statements"—Note 21. Business Segments for information regarding our business
segments and geographical areas.
Intellectual Property and Trade Secrets
We regard our domain names and other intellectual property as critical to our success. Included in our intellectual
property is some of the financial technology we have developed as part of our Medici initiatives. We rely on a combination of
laws and contractual restrictions with our employees, customers, suppliers, affiliates and others to establish and protect our
proprietary rights, including the law pertaining to trade secrets. Despite these precautions, it may be possible for a third party to
copy or otherwise obtain and use our intellectual property or trade secrets without authorization. In addition, we cannot ensure
that others will not independently develop similar intellectual property. Although we have registered and are pursuing the
registration of our key trademarks in the United States and some other countries, some of our trade names may not be eligible to
receive registered trademark protection. In addition, effective trademark protection may not be available or we may not seek
protection in every country in which we market 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, processes and operations. These recruiting efforts expose us to the risk that such employees and those
hiring them will misappropriate and exploit our intellectual property and trade secrets.
Legal and Regulatory Matters
From time to time, we receive claims and become subject to regulatory investigations or actions, consumer protection,
employment, intellectual property and other commercial litigation related to the conduct of our business. We also prosecute
lawsuits to enforce our legal rights. Such litigation is costly and time consuming and can divert our management and key
9
personnel from our business operations. The uncertainty of litigation increases these risks. In connection with such litigation,
we may be subject to significant damages, associated costs, or equitable remedies relating to the operation of our business and
the sale of products on our Website. Any such litigation may materially harm our business, prospects, results of operations,
financial condition or 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 or require us to change our business practices in expensive and significant ways. In addition, litigation
could result in interpretations of the law that may limit our 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 the validity and scope of the proprietary rights of others. Any litigation, regardless of outcome or merit,
could result in substantial costs and diversion of management and technical resources, any of which could materially harm our
business (see Item 1A—"Risk Factors").
For further information, see the information set forth under Item 15 of Part IV, "Financial Statements"—Note 12.
Commitments and Contingencies, Legal Proceedings, contained in the "Notes to Consolidated Financial Statements" of this
Annual Report on Form 10-K.
Government Regulation
Our main business is subject to general business regulations and laws, as well as regulations and laws specifically
governing the Internet, e-commerce and other services. Existing and future laws and regulations may result in increasing
expense and may adversely affect our business. These regulations and laws may cover taxation, privacy, data protection,
pricing, content, copyrights, distribution, supply chain monitoring and transparency, mobile communications, electronic device
certification, electronic waste, energy consumption, environmental regulation, electronic contracts and other communications,
competition, consumer protection, information reporting requirements, the design and operation of websites, and the
characteristics and quality of products and services. New state tax regulations in states where we do not now collect state and
local taxes may subject us to the obligation to collect and remit state and local taxes, or subject us to additional state and local
sales and income taxes, or to requirements intended to assist states with their tax collection efforts. New legislation or
regulations, the application of laws and regulations from jurisdictions whose laws do not currently apply to our business or the
application of existing laws and regulations to the Internet and commercial online services could result in significant additional
taxes on our business. These taxes or tax collection obligations could have an adverse effect on us. Further, there is a possibility
that we may be subject to significant fines or other payments for any past failures to comply with these requirements. In
addition, it is not clear how existing laws governing issues such as property ownership, libel, and personal privacy apply to the
Internet, e-commerce and digital content. Laws and regulations may diminish the demand for our products and services and
increase our cost of doing business. Certain of our services are subject to federal and state consumer protection laws, including
laws protecting the privacy of consumer information and regulations prohibiting unfair and deceptive trade practices. In
particular, under federal and state financial privacy laws and regulations, we must provide notice to consumers of our policies
on sharing non-public information with third parties, advance notice of any changes to our policies and, with limited
exceptions, we must give consumers the right to prevent sharing of their non-public personal information with unaffiliated third
parties. Further, the growth and demand for online commerce could result in more stringent consumer protection laws that
could impose additional compliance burdens on us. These consumer protection laws could result in substantial compliance
costs.
In addition, the broker-dealers in which we hold a majority interest are subject to additional extensive regulatory
requirements under federal and state laws and regulations and self-regulatory organization (“SRO”) rules. Broker-dealers are
subject to regulation, examination and disciplinary action by the SEC, FINRA and state securities regulators, as well as other
governmental authorities and SROs with which they are registered or licensed or of which they are members. See Item 1A -
“Risk Factors - Medici has acquired registered broker-dealers, which are subject to extensive regulation.”
Our efforts to expand our sales outside of the U.S. expose us to additional U.S. and foreign laws and regulations,
including but not limited to, laws and regulations relating to taxation, business licensing or certification requirements,
advertising practices, online services, the use of cryptocurrency, the importation of specified or proscribed items, importation
quotas, consumer protection, intellectual property rights, consumer and data protection, data transfer across borders, privacy,
encryption, restrictions on pricing or discounts, and the U.S. Foreign Corrupt Practices Act and other applicable U.S. and
foreign laws prohibiting corrupt payments to government officials and other third parties.
Employees
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At December 31, 2016, we had approximately 1,800 full-time employees. We seasonally augment our workforce with
temporary employees during our fourth quarter to handle increased workload in both our warehouse and customer service
operations. We have never had a work stoppage, and none of our employees are represented by a labor union. We consider our
employee relationships to be good. Competition for qualified personnel in our industry is intense, particularly for software
engineers and other technical staff.
Executive Officers of the Registrant
The following persons were executive officers of Overstock as of February 24, 2017:
Executive Officers
Patrick M. Byrne
Saum Noursalehi
Jonathan E. Johnson III
Amit Goyal
Robert P. Hughes
Vidya R. Jwala
John Paul "J.P." Knab
Carter P. Lee
Seth A. Moore
Brian L. Popelka
Vikram R. Raghavan
Age
54
37
50
38
57
44
37
47
34
50
35
Position
Chief Executive Officer and Director
President, Retail
President, Medici
Senior Vice President, Software Engineering
Senior Vice President, Finance and Risk Management
Senior Vice President, Demand Fulfillment
Senior Vice President, Marketing
Senior Vice President, Technology and People Care
Senior Vice President, Analytics and OLabs
Senior Vice President, Customer and Partner Care
Senior Vice President, Product Development
Dr. Patrick M. Byrne has served as our Chief Executive Officer (principal executive officer) and as a Director since
1999, and as Chairman of the board of directors from 2001 through 2005 and 2006 through 2014. Dr. Byrne founded Overstock
in 1999. From 1994 to the present, Dr. Byrne has served as a Manager of the Haverford Group, an investment company and an
affiliate of Overstock. Dr. Byrne holds a bachelor's degree in Chinese studies from Dartmouth College, a master's degree from
Cambridge University as a Marshall Scholar, and a doctorate in philosophy from Stanford University.
Mr. Saum Noursalehi has served as our President, Retail since August 2016. He previously served as Chief Revenue
Officer and Senior Vice President. Prior to his appointment as Senior Vice President in 2015, Mr. Noursalehi served as Vice
President of OLabs, Vice President Product Development, and held roles in website, mobile and search engine optimization.
Mr. Noursalehi joined Overstock in 2005 and holds a bachelor's degree in Computer Science from the University of Utah.
Mr. Jonathan E. Johnson III has served as President, Medici since August 2016 and as a Director since 2013. Mr
Johnson also serves as our Chairman of the Board of Directors. Mr. Johnson previously served as our President, as a Senior
Vice President and as our General Counsel since joining Overstock in 2002. Mr. Johnson holds a bachelor's degree in Japanese
from Brigham Young University and received his law degree from the J. Reuben Clark, Jr. Law School at Brigham Young
University.
Mr. Amit Goyal was appointed as our Senior Vice President of Software Engineering in February 2017. He had
previously served as Vice President of Product Development. Since joining Overstock in 2006, Mr. Goyal has held roles
including Senior Director of Software Development and Software Development Lead. Mr. Goyal holds a bachelor's degree in
Engineering from Punjab Technical University.
Mr. Robert P. Hughes (principal financial and accounting officer) has served as our Senior Vice President, Finance and
Risk Management since 2013. He had previously served as Vice President and Controller since joining Overstock in 2008. Mr.
Hughes holds a bachelor's degree in Business Administration with an emphasis in Accounting and Finance from the University
of California Berkeley, Haas School of Business, and is a certified public accountant (CA - inactive status).
Mr. Vidya R. Jwala has served as our Senior Vice President of Demand Fulfillment since joining Overstock in August
2016. Prior to joining Overstock, Mr. Jwala served as Vice President, Merchandising / Operations at Walmart from 2009 to
2016 and previously held similar roles at Tractor Supply Company, Lowe's, and Jo-Ann Stores. Mr. Jwala holds a master's
degree in Industrial and Systems Engineering from Virginia Polytechnic Institute and State University.
Mr. John Paul "J.P." Knab has served as our Senior Vice President of Marketing since March 2016, having returned to
Overstock after serving for one-year as the Senior Vice President of Marketing, Merchandising and Business Development for
U.S. Water Filters in St. Paul, Minnesota. Prior to this, Mr. Knab had served as our Vice President of Marketing and held other
roles including Director of Merchandising and Director of Analytics. Mr Knab joined Overstock in 2005 and holds an MBA
with a Marketing emphasis and a bachelor's degree in Finance from Brigham Young University.
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Mr. Carter P. Lee has served as our Senior Vice President, Technology and People Care since 2015. Mr. Lee previously
served as Vice President, Technology Operations and held other roles including Director of Internal Systems. Prior to joining
Overstock in 2001, Mr. Lee was a Systems Engineer for Hospice of the Valley and Vice President of Technology for
Motherboard Discount Center in Phoenix, AZ.
Mr. Seth A. Moore was appointed as our Senior Vice President of Analytics and OLabs in February 2017. He had
previously served in roles including Vice President of OLabs, Vice President of Analytics and Vice President of Website
Marketing. Mr. Moore joined Overstock in 2006 and holds a bachelor's degree in Political Science from Brigham Young
University.
Mr. Brian L. Popelka has served as a Senior Vice President of Customer and Partner Care since 2013. Mr. Popelka
previously served as Vice President of Customer Care. Since joining Overstock in 2002, Mr. Popelka has held roles including
Director of Books, Media, Movies and Games Department, and 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.
Mr. Vikram R. Raghavan was appointed as our Senior Vice President of Product Development in February 2017. He
had previously served in roles including Vice President of Product Development and Vice President of Marketing since
returning to Overstock in 2015. Mr. Raghavan originally joined Overstock in 2008 and held roles including Senior Director of
Marketing. From 2011 through 2015 Mr. Raghavan served as the co-founder of Rental Roost, an online apartment listing
service. Mr. Raghavan holds an MBA with a Finance and Marketing emphasis from Temple University.
Available Information
Our 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 to Section 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 main website, www.overstock.com, as soon as reasonably practicable after
we electronically file such material with, or furnish it to, the Securities and Exchange Commission. Our Internet Website and
the information contained therein 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 effect on our business, prospects, financial condition and results of operations, and the market price of
our securities could decrease significantly. Statements below to the effect that an event could or would harm our business (or
have an adverse effect on our business or similar statements) mean that the event could or would have a material adverse effect
on our business, prospects, financial condition and results of operations, which in turn could or would have a material adverse
effect on the market price of our securities. Although we have organized the risk factors below under headings to make them
easier to read, many of the risks we face involve more than one type of risk. Consequently you should read all of the risk factors
below carefully before making any decision to acquire or hold our securities.
Any investment in our securities involves a high degree of risk. Investors should consider carefully the risks and
uncertainties described below, and all other information in this Form 10-K and in any reports we file with the SEC after we file
this Form 10-K, before deciding whether to purchase or hold our securities. Additional risks and uncertainties not currently
known to us or that we currently deem immaterial may also become important factors that may harm our business. The
occurrence of any of the risks described in this Form 10-K could harm our business. The trading price of our securities could
decline due to any of these risks and uncertainties, and investors may lose part or all of their investment.
Risks Related to Our Infrastructure, Cyber Security, Data Breach and Related Matters
Our business depends on our Website, our mobile app, our network infrastructure and transaction-processing systems.
As an e-commerce company, we are completely dependent on our infrastructure and on the availability and reliability
of the Internet and related systems. Any system interruption that results in the unavailability of our Website or our mobile app
or reduced performance of our transaction systems could interrupt or substantially reduce our ability to conduct our business.
We have experienced periodic systems interruptions due to server failure, power failure and intentional cyberattacks in the past,
which we expect will continue to occur from time to time. Any failure or impairment of our infrastructure or of the availability
of the Internet and related systems could have a material adverse effect on our business.
12
If the facility where substantially all of our computer and communications hardware is located fails, our business, prospects,
financial condition and results of operations could be harmed.
Substantially all of our computer and communications hardware is located at a single facility. Our systems and
operations are vulnerable to damage or interruption from fire, flood, power loss, telecommunications failure, terrorist attacks,
cyber-attacks, acts of war, break-ins, earthquake and similar events. Our back-up facility is not adequate to support sales at a
high level. Our servers are vulnerable to computer viruses, physical or electronic break-ins and similar disruptions, the
occurrence of any of which could lead to interruptions, delays, loss of critical data or the inability to accept and fulfill customer
orders. The occurrence of any of the foregoing risks could have a material adverse effect on our business.
Natural disasters, pandemics, and geo-political events could adversely affect our business.
Natural disasters, weather conditions, pandemics, and geo-political events, including civil unrest or terrorist attacks,
that affect us or our delivery services, suppliers, credit card processors or other service providers could have a material adverse
effect on our business.
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 risks and 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 business involves the storage and transmission of users’ proprietary information, and security breaches
could expose us to a risk of loss or misuse of this information, and to resulting claims, fines, and litigation. We have been
subjected to a variety of cyberattacks. We may not have the resources or technical sophistication to defend against 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 communication infrastructure on which we depend. Actual or anticipated
attacks and risks may cause us to incur substantial and increasing costs, including costs to deploy additional personnel and
protection technologies, train employees, and engage third party experts and consultants. Any compromise of our security could
result in a violation of applicable privacy and other laws, significant legal and financial exposure, damage to our reputation, and
a loss of confidence in our security measures, which could have a material adverse effect on our business. The occurrence of
any of the foregoing could have a material adverse effect on our business.
Our dependence on credit or debit card payments increases our risks.
Most of our customers use credit cards to pay for their purchases. Under payment card rules and our contracts with our
card processors, if we experience a breach of payment card information or fail to follow payment card industry security
standards, even if there is no compromise of customer information, we could incur significant fines, higher transaction costs or
lose our ability to give customers the option of using payment cards. If we were unable to accept payment cards, it would have
a material adverse effect on our business.
Our expansion into financial technology businesses and our acquisitions of registered broker dealers and related businesses
increases our infrastructure, cyber security, data breach and related risks.
As we have expanded into financial technology businesses and have acquired registered broker dealers and related
businesses, our infrastructure, cyber security, data breach and related risks have increased. See “Risks Relating to Certain
Specific Businesses, Investments in Businesses and Recent or Planned Changes to Our Business.”
Risks Related to Competition
We face intense competition and may not be able to compete successfully against existing or future competitors.
The online retail market is evolving rapidly and intensely competitive. Barriers to entry are minimal, and current and
new competitors can launch new websites at a relatively low cost. We currently compete with numerous competitors, including:
• online retailers with or without discount departments, including AliExpress (part of the Alibaba Group),
Amazon.com, eBay, and Rakuten.com (formerly Buy.com);
• online specialty retailers such as Blue Nile, Bluefly, Houzz, Jet.com, Wayfair, Zappos.com, and Zulily;
• private sale sites such as Groupon, Living Social and Rue La La;
•
furniture specialists including Ashley Furniture, Bob’s Discount Furniture, Havertys, Raymour & Flanigan
and Rooms To Go;
13
•
•
traditional general merchandise and specialty retailers and liquidators including Barnes and Noble, Bed,
Bath & Beyond, Best Buy, Costco Wholesale Corporation, Crate and Barrel, Ethan Allen, Gilt, Home Depot,
HomeGoods, Hudson's Bay Company, IKEA, J.C. Penny Company, Kirkland's, Kohl's, Lands' End, Lowe's,
Macy’s, Nordstrom, Pier 1 Imports, Pottery Barn, Restoration Hardware, Ross Stores, Saks Fifth Avenue,
Sears Holding Corporation, T.J. Maxx, Target Corporation, Wal-Mart and Williams-Sonoma, all of which
also have an online presence; and
liquidation e-tailers such as SmartBargains.
The intense and increasing competition we face from a wide variety of competitors, many of which have substantially
greater resources than we do, and some of which are willing to incur losses in order to increase revenues, may result in our
pricing of products or services below prices at which we can make a profit, may cause us to lose sales entirely, and may have a
material adverse effect on our business.
Our competitors are rapidly developing a wide variety of services and other offerings, and we may be unable to provide more
competitive offerings.
The online retail market has become far more competitive as traditional and online retailers continue to develop and
improve services that compete with our services. Many traditional manufacturers and retailers have added or improved their e-
commerce offerings, and we expect that more will do so and that they will all continue to improve their offerings. Traditional
and predominantly online retailers may create proprietary, store-based distribution and returns channels that we may be unable
to match, and may also be able to create their own traditional distribution and delivery services. Amazon continues to open
additional fulfillment centers and to increase its same-day delivery capabilities in an increasing number of metro areas as well
as one and two-hour delivery capability on certain items in an increasing number of metro areas, and staffed pickup locations in
certain high-density locations. Competitive pressures, including same-day and one and two-hour delivery capabilities, from
Amazon and from any of our other competitors, many of whom have longer operating histories, larger customer bases, greater
brand recognition and significantly greater financial, marketing and other resources than we do, affect us and could have a
material adverse effect on our business.
In addition to the types of retailers described above, we are competing with specialty firms in several areas, many of which
focus exclusively or primarily on the business in which we are competing.
In addition to the types of retailers described above, in many areas we face competition from numerous other
businesses, many of which may specialize in the type of business in which we are competing. Our furniture offerings compete
with more than 100 online retail furniture websites, in addition to many more traditional furniture retail specialists. We face the
risk that potential furniture and other customers will choose traditional retailers where they can physically examine products
prior to purchase. Our Supplier Oasis service faces substantial competition from third party logistics providers as well as from
Amazon and eBay and other e-commerce service providers having substantially greater experience and resources than we have.
We are currently offering insurance products, and as such face competition from small and large established businesses with
substantially more experience. An inability to compete in these areas could have a material adverse effect on our business.
Our tØ.com subsidiary is competing with a rapidly-growing group of companies in the financial industry as well as new
entrants with significant resources from venture capital firms and other funding sources.
Our majority-owned subsidiary tØ.com, Inc. (formerly Medici, Inc.) is competing against a variety of companies with
substantially greater financial resources and experience in financial technology. The number of competitors in this area and the
resources being devoted to the area by competitors are growing rapidly. We may be unable to compete successfully against
these competitors or others that may not yet have publicly announced their business plans in this area, which could have a
material adverse effect on our business. See “Risks relating to Certain Specific Businesses, Investments in Businesses and
Recent or Planned Changes to our Business,” below.
Risks Related to Our Dependence on Third Parties
As an e-commerce company, we depend on a large number of other companies to perform functions critical to our ability to
deliver products to our customers and to perform many of the related functions.
We depend on a large number of other companies, including a large number of independent partners whose products
we offer for sale on our Website, to perform functions critical to our ability to deliver products to our customers and to perform
many of the related functions. We depend on these partners to perform a number of traditional retail operations such as
maintaining inventory, preparing merchandise for shipment to our customers and delivering purchased merchandise on a timely
14
basis, and also on the delivery services that we and they utilize. Difficulties with our significant partners or with any of the
delivery services, regardless of the reason, could have a material adverse effect on our business.
We depend upon our payment card processors and payment card associations.
Our customers primarily use credit cards to buy from us. We are completely dependent upon our payment card
processors to process the sales transactions and remit the proceeds to us. The payment card processors have the right to
withhold funds otherwise payable to us to establish or increase reserves based on their assessment of the inherent risks of
payment card processing and their assessment of the risks of processing our customers’ payment cards at any time, and have
done so from time to time in the past. We are also subject to payment card associations’ operating rules, certification
requirements and rules governing electronic funds transfers. If we fail to comply with these rules or requirements, we may be
subject to fines and higher transaction fees and lose our ability to accept credit and debit card payments from our customers,
process electronic funds transfers, or facilitate other types of online payments. In addition, events affecting our payment card
processors, including cyber-attacks, Internet or other infrastructure or communications impairment or other events that could
interrupt the normal operation of the payment card processors, could have a material adverse effect on our business.
Implementation of the EMV credit card standards in the U.S. may increase fraud efforts against U.S. online retailers,
including us.
Credit card issuers in the United States began replacing traditional credit cards with credit cards meeting the EMV
(Europay, MasterCard and Visa) standards during 2015. Cards meeting the EMV standards contain a chip which makes the
cards more difficult to counterfeit than the traditional magnetic stripe-only cards widely used in the U.S. However, to the extent
that the EMV standards make physical card-duplication fraud more difficult, the new standards may drive more fraud efforts
against online retailers, including us. Consequently, as an online retailer, we may be subject to increasing levels of fraudulent
orders and other types of criminal activities. Increased levels of fraud and other criminal activities could have a material
adverse effect on our business.
Risks associated with the suppliers from whom we or our fulfillment partners source products and the safety of those
products could adversely affect our financial performance.
We depend on our ability to access products from qualified suppliers in a timely and efficient manner. We rely
primarily on our suppliers’ representations of product content and quality. Concerns regarding product content or quality, or the
safety of products that we offer, 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 indemnity agreement we
may have with the supplier may be inadequate or inapplicable, and any insurance coverage we may carry may not be adequate
to cover claims that could be asserted. Even unsuccessful claims could result in the expenditure of funds and management time
and could have a negative impact on our business. The occurrence of any of the foregoing could have a material adverse effect
on our business.
We and many of our suppliers and fulfillment partners depend upon products manufactured internationally, and tariffs or
other measures that increase the effective price of products imported into the United States could have a material adverse
effect on our business.
We and many of our suppliers and fulfillment partners source a portion of the products we offer on our website from
China and other countries. If the United States imposes tariffs or other measures that increase the price of products we or they
import and that we offer on our website, the increased prices could have a material adverse effect on our business.
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 third parties for all or substantially all of the services we offer, including our insurance offerings,
our consumer financing offerings, our car listings and our car-related services. Services offerings are inherently different from
product offerings, and we may encounter difficulties with our services offerings that may be different from the types of issues
we face with our product offerings. Any such difficulties could have a material adverse effect on our business.
Risks Related to Marketing
Our business depends on effective marketing.
15
We depend on effective marketing and high customer traffic. From time to time, competitors may bid up the cost of
certain marketing channels, such as paid keywords. At such times, we may reduce the amounts we spend in those marketing
channels, which may lead to decreased visitors to our site, or we may pay the increased rates, which increases our expenses. If
we are unable to develop, implement and maintain effective and efficient advertising and marketing programs, it 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 search engines change their ranking algorithms and our product offerings are ranked lower,
and we may at times be subject to ranking penalties if the operators of search engines believe we are not in compliance with
their guidelines.
We rely on paid and natural search engines to attract consumer interest in our product offerings. Potential and existing
customers use search engines provided by search engine companies, including, but not limited to, Google, Bing, and Yahoo!,
which use algorithms and other devices to provide users a natural ranked listing of relevant Internet sites matching a user’s
search criteria and specifications. Search engine companies change their natural search engine algorithms periodically, and our
ranking in natural searches may be adversely affected by those changes, as has occurred from time to time. In addition, large
marketplace websites and sites which aggregate marketplace sellers with a large product selection are becoming increasingly
popular, and we may not be able to place our products on these sites to take advantage of their internal search platforms.
Further, some shoppers may begin their searches at a competitor's website, and may not utilize traditional search engines at all.
Our inability to place products on or access these sites may have a material adverse effect on our business.
Our business relies heavily on email, and reduced utilization of email in general and any restrictions on the sending of
commercial email could have a material adverse effect our business.
We depend on email to promote our site and offerings. We provide daily emails to potential customers about our
offerings, and email promotions are an important part of our marketing and help generate a substantial portion of our net
revenue. If a significant portion of our target customers no longer utilize email, or if we are unable to effectively deliver email
to our potential customers, our business, financial condition and operating results would be harmed. Anything, including legal
or regulatory restrictions, that blocks, imposes restrictions on or imposes charges for the delivery of email could also harm our
business. We also rely on social networking messaging services to send communications and to encourage customers to send
communications, and anything that limits our ability or our customers’ ability to utilize social networking services could have a
material adverse effect on our business.
We are experimenting with various ways to reduce the number of coupons we offer to our customers, which may have
adversely affected our revenue growth and may continue to do so.
Although our business has historically relied heavily on coupons to generate sales, we are experimenting with
modifications to our coupon marketing. We believe that changes we have made to our coupon marketing in the past adversely
affected our revenue growth, and that these and other changes we may make may continue to adversely affect our revenue
growth. We have not yet achieved the results we are seeking, and there can be no assurance that we will be able to do so. If we
are unable to generate sales using other marketing approaches at rates equal to or better than the rates we were generating
through our coupon marketing, our revenue growth could be adversely affected or reversed, and our business, financial
condition and operating results could be materially adversely affected.
Fraud Related Risks
Credit card fraud and our response to it could adversely affect our business.
We routinely receive orders placed with fraudulent credit card data. If we fail to adequately control fraudulent credit
card transactions it could reduce our net revenues and our gross profit or cause credit card or payment system companies to
disallow their cards’ use for customer payments on our website. We may suffer losses as a result of orders placed with
fraudulent credit card data even if the associated financial institution approved payment of the orders. Under current credit card
practices, we may be liable for fraudulent credit card 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 these transactions could harm our business, prospects,
financial condition and results of operation. Further, to the extent that our efforts to prevent fraudulent orders result in our
inadvertent refusal to fill legitimate orders, we would lose the benefit of legitimate potential sales and risk the alienation of
legitimate customers. The occurrence of any of the foregoing could have a material adverse effect on our business.
16
Tax and Regulatory Risks
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 that we 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 decisions construing applicable constitutional law. Certain jurisdictions are seeking payment of sales tax for
sales we have made to customers in such jurisdictions or for payment of similar taxes or to impose sales tax collection
obligations on us. To date we have been able to settle these claims without incurring material expenses. However, if any
jurisdiction where we do not or did not collect sales or other taxes successfully asserts that we should do so or should have done
so, or should otherwise have collected or paid other types of taxes, it could have a material adverse effect on our business.
In 2013 the United States Senate passed the Marketplace Fairness Act of 2013 (“MFA”), but it failed to pass in the
House of Representatives. Efforts continue to enact similar legislation, which would permit qualifying states to force remote
sellers like us to collect taxes in states where we have no physical presence. The enactment of legislation similar to the MFA
could have a material adverse effect on our business.
Several states have enacted laws requiring remote vendors to notify resident purchasers in those states of their
obligation to pay a use tax on their purchases and, in some instances, to report untaxed purchases to the state tax authorities.
Other states have enacted legislation to require retailers without a physical presence in the state to collect and remit state sales
taxes if they engage in any activity in connection with the selling, leasing or delivery of tangible personal property or taxable
services within the state. Additional states have recently introduced legislation, and we anticipate that additional states may
enact similar laws, or other laws to force or encourage through economic pressures remote retailers to collect and remit sales
tax. Such laws could harm our business by imposing notice burdens upon us, by requiring transaction notices that would
adversely affect sales, or by discouraging customer purchases by requiring detailed purchase reporting. The occurrence of any
of the foregoing could have a material adverse effect on our business.
Existing or future government regulation could harm our business.
We are subject to regulation at the federal, state, local and international levels, including regulation relating to privacy,
security, retention, transfer and use of personal user information and telemarketing laws. Increasing regulation may increase the
cost of our business and may further restrict our marketing efforts. Existing laws, including those governing advertising,
product labeling, product content requirements and product safety, may cause us to incur expenses. We may be subject to claims
related to personal injury, death, environmental or property damage. We are periodically required to participate in product
recalls. We may incur expense in connection with any of the foregoing or other matters or actions which may not be covered by
any liability insurance we may carry. These current and future laws and regulations could have a material adverse effect on our
business.
See “Risks relating to Certain Specific Businesses, Investments in Businesses and Recent or Planned Changes to our
Business,” and “Risks Related to our Preferred Stock,” below.
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, Dr. Patrick M. Byrne, have from time to time made public statements regarding
our or his beliefs about matters of public interest, including statements regarding naked short selling and regulatory capture.
Some of those public statements have been critical of the Securities and Exchange Commission and other regulatory agencies.
These public statements may have consequences for us, whether as a result of increased regulatory scrutiny or otherwise.
Additionally, other officers may make public statements that could have adverse consequences and these statements could have
a material adverse effect on our business.
Macroeconomic Risks
Economic factors, including our increasing exposure to the U.S. housing industry, may adversely affect our financial
performance.
Economic conditions, particularly any weakness in the United States housing market, may adversely affect our
financial performance. Over the last few years the percentage of our sales from home and garden products has increased
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substantially. We believe that our sales of home and garden products are affected by the strength of the U.S. housing industry,
and that downturns in the U.S. housing industry would have a material adverse effect on our business.
Decreases in discretionary consumer spending may have an adverse effect on us.
A substantial portion of the products and services we offer are products or services that consumers may view as
discretionary items rather than necessities. As a result, our results of operations are sensitive to changes in macro-economic
conditions that impact consumer spending, including discretionary spending. Difficult macro-economic conditions, particularly
high levels of unemployment or underemployment, also impact our customers’ ability to obtain consumer credit. Other factors,
including consumer confidence, employment levels, interest rates, tax rates, consumer debt levels, and fuel and energy costs
could reduce consumer spending or change consumer purchasing habits. Slowdowns in the U.S. or global economy, or an
uncertain economic outlook, could materially adversely affect consumer spending habits and could have a material adverse
effect on our business.
Risks of Changes and Unpredictability in the Industry and in Our Business
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 the functionality and features of our e-commerce businesses. If we fail to do so, or if we fail to remain
competitive when our competitors develop new technologies or new industry standards and practices emerge, our Website, our
mobile app and our proprietary technology and systems could become obsolete. Our failure to respond to technological change
and to remain competitive would have a material adverse effect on 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 offerings and in some cases we have modified or discontinued those offerings. We intend to continue to try
to offer additional types of products or services, and we do not know whether any of them will be successful. From time to time
we have also modified aspects of our business model relating to our product mix and the mix of direct/partner sourcing of the
products we offer. We do not know whether these or any other modifications will be successful. The additions and
modifications to our business have increased the complexity of our business and placed significant strain on our management,
personnel, operations, systems, technical performance, financial resources, and internal financial control and reporting
functions. Future additions to or modifications of our business are likely to have similar effects. Further, any new business or
website we launch that is not favorably received by consumers could damage our reputation or our brand. The occurrence of
any of the foregoing could have a material adverse effect on our business.
Any acquisitions we make will increase costs and regulatory and integration risks.
From time to time we may acquire other businesses. Integrating an acquired business involves a number of risks and
financial, managerial and operational challenges. We have incurred significant expenses in connection with acquisitions we
have made in the past, and may incur additional expenses in connection with those acquisitions or in connection with other
acquisitions we may make in the future. Our overall profitability would be adversely affected if our investments and expenses
associated with any investments we have made or may make in the future are not justified by the revenues and profits, if any,
that are derived from such investments. Further, acquisitions may also create a need for additional accounting, tax, compliance,
documentation, risk management and internal control procedures, and may require us to hire additional personnel to implement,
perform and/or monitor such procedures. To the extent our procedures are not adequate to appropriately implement, perform
and/or monitor all necessary procedures relating to any new or expanded business, we could be exposed to a material loss or
regulatory sanction.
International Risks
We are attempting to expand our international business, which may cause our business to become increasingly susceptible
to numerous risks and challenges that could affect our profitability.
We sell products in international markets, and are attempting to expand into some of these markets. International sales
and transactions, and our efforts to expand them, are subject to inherent risks and challenges that could adversely affect our
profitability, including:
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•
•
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, restrictions on advertising practices, regulations governing online services, regulations
governing or prohibiting the use of cryptocurrency such as bitcoin, restrictions on importation of specified or
proscribed items, importation quotas, consumer protection laws, laws regarding intellectual 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 date, most of our international sales have been denominated in U.S. dollars, and we have not had significant foreign
currency risk on those sales. However, in the future, gains and losses on the conversion of foreign payments into U.S. dollars
may contribute to fluctuations in our results of operations and fluctuating exchange rates could cause reduced gross revenues
and/or gross profit percentages from non-dollar-denominated international sales. Additionally, penalties for non-compliance
with laws applicable to international business and trade, including the U.S. Foreign Corrupt Practices Act, could have a material
adverse effect on our business.
Foreign data protection, privacy and other laws and regulations are different and often more restrictive than those in
the United States. Our risk of non-compliance with applicable foreign data protection laws and regulations increases as we
continue our international expansion. We may need to change and limit the way we use consumer information in operating our
business and may have difficulty maintaining a single operating model that is compliant. Compliance with such laws and
regulations will result in additional costs and may necessitate changes to our business practices and divergent operating models,
which may adversely affect our business and financial condition.
In July 2016, the European Commission adopted the EU-US Privacy Shield, which provides a new compliance
framework for US organizations that import personal data from Europe. We have complied with the Privacy Shield self-
certification procedures. Among other things, Privacy Shield certification requires that we amend our existing contracts with
third parties involved with the transfer of personal data to bring them into compliance within a nine-month grace period after
our certification date. If we are unable to do so or are otherwise unable to comply with the Privacy Shield requirements, we
could incur additional costs and operational difficulties relating to our efforts in Europe.
Our foreign brand domain name may cause confusion.
In 2010, we attempted to associate our brand globally with the domain address: www.O.co. Following a period of
testing for the O.co brand and domain address, we returned to the Overstock.com name as our primary brand domestically
because domestic consumer acceptance did not occur as quickly as we had hoped. We continue to use the O.co address and
brand outside of the United States and plan to use it or another domain address and brand domestically as well. The use of
Overstock.com or O.co may not gain acceptance or have success in foreign markets, and other domain addresses or brands we
may use domestically may not be successful. Any such difficulties with any of our brands could have a material adverse effect
on our business.
Risks Related to Our Headquarters
We own the land on which we built our new headquarters, and consequently have environmental and other risks, and may
incur environmental expense and liabilities under the environmental indemnity agreement we entered into in connection
with our credit facility.
In 2014 our wholly-owned subsidiary O.com Land, LLC purchased land near Salt Lake City, Utah on which we have
built our new headquarters. The land is part of the Midvale SLAG Superfund Site (“Site”), a former Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA") superfund site that was remediated pursuant to
CERCLA prior to O.com Land’s purchase. O.com Land, LLC is required to follow certain requirements of CERCLA and the
consent decree governing remediation of the Site, and its failure to do so could expose us to material environmental liabilities.
Further, in connection with the credit facility we entered into with U.S. Bank and other banks, we entered into a broad
environmental indemnity agreement pursuant to which we agreed to indemnify U.S. Bank and other banks and other persons
against a broad array of potential environmental claims, liabilities and exposures relating to the property. Any such
environmental liabilities, and any liabilities under the environmental indemnity agreement, could be material and could have a
material adverse effect on our business.
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Risks Related to Indebtedness and Potential Stock Repurchases
In connection with the construction of our new headquarters, we have entered into a syndicated senior secured credit
facility, which requires us to maintain compliance with financial and other covenants.
In connection with the construction of our new headquarters we entered into a syndicated senior secured credit facility
with U.S. Bank and other banks that provided us with construction financing of $45.8 million. The facility converted to an
approximately 6.75-year term loan on January 1, 2017. 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. We have pledged substantially all of our assets to secure our obligations under the credit facility. If we fail to comply
with the terms of the credit facility, the failure could have a material adverse effect on our liquidity and business.
We have entered into long-term interest rate swaps that expire in October 2023.
In connection with the syndicated senior secured credit facility described above, we entered into interest rate swaps
with U.S. Bank and Compass Bank. The interest rate swaps are intended to manage the interest rate risk on the indebtedness we
incurred under the credit agreement. Regardless of the status of that indebtedness, we will remain liable for payments due under
the swaps unless we settle them. If we were to settle the swaps at a time when interest rates have fallen (relative to the swaps'
inception), the price to settle the swaps could be material. Any such adverse developments could result in material liabilities and
expense and could have a material adverse effect on our business.
We have incurred substantial indebtedness.
At December 31, 2016, we had incurred secured indebtedness of approximately $45.8 million under our syndicated
senior secured credit facility, and we had total liabilities of $312.1 million. This indebtedness increases our business risks
substantially, including our vulnerability to industry downturns and competitive pressures. Further, the loan agreement and
related agreements governing the credit facility contain numerous requirements, including financial and other covenants. If we
are unable to maintain compliance with all of them, we will be in default, the consequences of which could materially harm our
business. Further, to the extent that we incur additional indebtedness, we may be subject to additional requirements. The degree
to which we are ultimately leveraged could materially and adversely affect our ability to obtain additional financing for working
capital, acquisitions or other purposes. Our ability to meet our debt service obligations will be dependent upon our future
performance, which will be subject to financial, business and other factors affecting our operations, many of which are beyond
our control.
Our Board has authorized a stock repurchase program and repurchases under the program would reduce our liquidity and
increase our risks.
In May 2015, our Board authorized a stock repurchase program. In January 2017, we repurchased approximately
604,000 shares of our common stock for $10 million. We may repurchase additional shares of our outstanding common stock
for up to $15 million at any time through December 31, 2017 under our existing repurchase program. Further, our Board could
authorize additional repurchases. Any such repurchases would reduce our liquidity and could increase our vulnerability to
industry downturns and competitive pressures. A material decrease in our liquidity could have a material adverse effect on our
business.
We may be unable to generate sufficient cash flow to satisfy our debt service obligations.
Our ability to generate cash flow from operations to make interest and principal payments on our debt obligations will
depend on our future performance, which will be affected by a range of economic, competitive and business factors. We cannot
control many of these factors, including general economic conditions and the health of the Internet retail industry. If our
operations do not generate sufficient cash flow from operations to satisfy our debt service obligations and all of our other
obligations, we may need to borrow additional funds to make these payments or undertake alternative financing plans, such as
refinancing or restructuring our debt, or reducing or delaying capital investments and other expenses. Additional funds or
alternative financing may not be available to us on favorable terms, or at all. Our inability to generate sufficient cash flow from
operations or obtain additional funds or alternative financing on acceptable terms could have a material adverse effect on our
business.
Risks Related to our Finance and Accounting Systems and Estimates
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We may need to implement additional finance and accounting systems, procedures and controls as we grow our business
and organization and to satisfy new reporting requirements.
We are required to comply with a variety of reporting, accounting and other rules and regulations. Compliance with
existing requirements is expensive. We will have to ensure that the reporting, accounting, records maintenance and other
systems in place at the financial technology company and broker dealers we acquired are compliant and adequate. These and
future requirements may increase our costs and require additional management time and resources. We may need to implement
additional finance and accounting systems, procedures and controls to satisfy our reporting requirements. If our internal control
over financial reporting is determined to be ineffective, such failure could cause investors to lose confidence in our reported
financial information, negatively affect the market price of our common stock, subject us to regulatory investigations and
penalties, and could have a material adverse effect on our business.
Changes in accounting standards and subjective assumptions, estimates and judgments by management related to complex
accounting matters could significantly affect our financial results.
Generally accepted accounting principles and related accounting pronouncements, implementation guidelines and
interpretations with regard to a wide range of matters that are relevant to our business, including but not limited to revenue
recognition, estimating valuation allowances and accrued liabilities (including allowances for returns, credit card chargebacks,
doubtful accounts and obsolete and damaged inventory), internal-use software and website development (acquired and
developed internally), accounting for income taxes, valuation of intangible assets and goodwill, stock-based compensation and
loss contingencies, are 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 change our reported or expected financial performance, and could have a material adverse effect on our
business.
Our income tax provisions and the amounts we reserve for tax contingencies are estimates and are subject to variations and
adjustments. The amounts we ultimately pay may exceed the amounts estimated or accrued.
Our quarterly tax provision, and our quarterly estimate of our annual effective tax rate, 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 do business, 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. We are subject to audits by a
number of tax authorities. The timing of the resolution of income, sales and other tax examinations is highly uncertain, and the
amounts ultimately paid, if any, upon resolution of the issues raised by the taxing authorities may differ from the amounts we
have accrued. It is possible that within the next 12 months we will receive assessments by various tax authorities or possibly
reach resolution of income tax examinations in one or more jurisdictions. These assessments or settlements may result in
changes to our contingencies related to positions on prior years’ tax filings. The volatility of our quarterly tax provision or the
resolution of matters related to our tax contingencies could have a material adverse effect on our financial 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 assets may also be subject to additional valuation allowances, which could adversely affect our
operating results.
From our inception to December 31, 2013, we established a valuation allowance for our deferred tax assets, primarily
due to realized losses and uncertainty regarding our future taxable income. Determining whether a valuation allowance for
deferred tax assets is appropriate requires significant judgment and an evaluation of all positive and negative evidence. At each
reporting period, we assess the need for, or the sufficiency of, a valuation allowance against deferred tax assets. At December
31, 2013, based on the weight of all the positive and negative evidence (primarily our estimate of future taxable income), we
concluded that it was more likely than not that we would realize our net deferred tax assets based upon future taxable income,
and we reversed the valuation allowance at December 31, 2013. Our estimates of future taxable income are based primarily on
historical performance, but also include estimates and assumptions and external data, some of which are subject to significant
judgment. If our actual taxable income differs significantly from our estimates, we may need to reestablish a valuation
allowance for some or all of our deferred tax assets, which could have a material adverse effect on our financial condition and
operating results.
Risks Related to our Holdings of Precious Metals, Cryptocurrencies, Cash and Short-Term Investments
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We may be adversely affected by fluctuations in precious metal prices.
At December 31, 2016 our investment in precious metals was $9.9 million. Our financial results may be adversely
affected by declines in the price of precious metals. 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 also subject to the risks of
physical storage with a third party that we do not control. Any loss of these assets or substantial decline in their value could
have a material adverse effect on our business.
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 not
considered legal tender or backed by any government, and it has experienced price volatility, technological glitches and various
law enforcement and regulatory interventions. In September 2014, we began accepting bitcoin internationally. The use of
cryptocurrency such as bitcoin has been prohibited or effectively prohibited in some countries. If we fail to comply with
regulations or prohibitions applicable to us, we could face regulatory or other enforcement actions and potential fines and other
consequences. From time to time we also hold bitcoin and other cryptocurrencies directly, and we have exchange rate risk on
the amounts we hold as well as the risks that regulatory or other developments may adversely affect the value of the
cryptocurrencies we hold. The uncertainties regarding legal and regulatory requirements relating to cryptocurrencies or
transactions utilizing cryptocurrencies, as well as potential accounting and tax issues, or other requirements relating to
cryptocurrencies could have a material adverse effect on our business.
Our cash, cash equivalents and short-term investments are subject to a risk of loss based upon the solvency of the financial
institutions in which they are maintained.
We maintain the majority of our cash, cash equivalents and short-term investments in accounts with a small number of
major financial institutions within the United States, in the form of demand deposits, money market accounts, time deposits,
U.S. Treasury Bills and other short-term investments. Our deposits in these institutions are generally substantially in excess of
the amounts of insurance provided by the FDIC, and some deposits may not be covered by insurance at all. If any of these
institutions were to become insolvent or subject to regulatory action, we could lose some, or all, of such deposits, which would
have a material adverse effect on our business.
Risks Related to Intellectual Property Rights and Disputes
We may be unable to protect our proprietary technology and to obtain trademark protection for our marks.
Our success depends to a significant degree upon the protection of our software and other proprietary intellectual
property rights. We may be unable to protect it, which could have a material adverse effect on our business. Further, we may not
be able to secure protection for our service marks or trademarks in the United States or elsewhere as we expand internationally.
Our competitors might adopt product or service marks similar to our marks, or might try to prevent us from using our marks.
Any claim by another party against us or customer confusion related to our trademarks, or our failure to obtain trademark
registration, could have a material adverse effect on our 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, including
uncertainty regarding liability for the listings and other content provided by our users, and differing intellectual property laws,
which may provide insufficient protection for our intellectual property. Any such difficulties could have a material adverse
effect on our business.
We may be accused of infringing intellectual property rights of third parties.
We have been and will continue to be subject to claims that we have infringement the intellectual property rights of
others. Any such claims may result in significant expenditure of financial and managerial resources, and the payment of
damages or settlement amounts. Additionally, we may be prohibited from using software or business processes we currently use
or may need to use in the future, or required to obtain licenses from third parties, even though such licenses may not be
available on terms acceptable to us or at all. Any such difficulties could have a material adverse effect on our business.
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Our business and reputation may be harmed by the offering or sale of pirated, counterfeit or illegal items by third parties,
and by intellectual property litigation.
We routinely receive allegations that items we offer or sell infringe third party intellectual property rights. Further, we
may be unable to prevent third parties from offering and selling unlawful goods or goods that are improperly labelled or
otherwise not compliant with applicable regulations, and we may be subject to allegations of civil or criminal liability for
unlawful or noncompliant offerings by third parties through our Website. Costs we incur relating to allegations of infringement
or the sale of unlawful goods could harm our business and could require us to change our methods of doing business or require
us to enter into costly royalty or licensing agreements, if available. Any of the foregoing could damage our reputation, diminish
the value of our brand name, and have a material adverse effect on our business.
Risks Related to Certain Specific Businesses, Investments in Businesses and Recent or Planned Changes to our Business
We have acquired the assets and business of a financial technology company and two registered broker-dealers; we have
limited experience with the operation of a fintech company or of a registered broker-dealer, and the businesses that we are
pursuing through our Medici initiatives are novel and could result in material write-offs.
In August 2015, we acquired the assets and business of a financial technology ("fintech") company and in January
2016, after receiving FINRA approval, we acquired two registered broker-dealers (our “broker-dealer subsidiaries”) that were
affiliated with the fintech company. We subsequently hired all or substantially all of the employees of the fintech company.
However, we have limited experience with the operation of a fintech company or of registered broker-dealers, and are
dependent upon the employees for the expertise necessary to operate the fintech company and the broker-dealer subsidiaries.
Further, we have recently issued publicly-traded securities traded exclusively on a registered alternative trading system operated
by one of our majority-owned subsidiaries, the ownership of which is tracked on a distributed ledger. See “Risks Related to our
Preferred Stock,” below. We are also working on other potential financial applications of distributed ledger, or blockchain,
technology. All of these are areas in which we do not have substantial experience, and all of them are subject to the risks of new
and novel businesses, including technical and operational risk, financial risk, regulatory and legal risk, and reputational risk. In
addition, we face the risk that we may be unable to market, license or sell our technology successfully or profitably. Any
significant problems we encounter with these projects could have a material adverse effect on our business. Further, we review
our acquired assets for impairment whenever events or changes in circumstances indicate that their carrying amount may not be
recoverable. As described further in Item 15 of Part IV, "Financial Statements"—Note 2. Accounting Policies, contained in the
"Notes to Consolidated Financial Statements," we will write off these amounts as necessary. Any such write-offs could be
material.
We have acquired registered broker-dealers, which are subject to extensive regulation.
The broker-dealers we acquired in January 2016 are subject to regulation, examination and disciplinary action by the
SEC, the Financial Industry Regulatory Authority (“FINRA”) and state securities regulators, as well as other governmental
authorities and self-regulatory organizations (“SROs”) with which they are registered or licensed or of which they are members.
The broker-dealers are also subject to rules and regulations relating to the prevention and detection of money laundering,
privacy and data protection laws and regulations, and substantial other regulatory requirements. Any failure to comply with all
applicable regulations, and any regulatory proceeding or civil or criminal action against any of the broker-dealers that we have
acquired, or any of their associated persons, could have a material adverse effect on our business. Further, any failure to identify
and successfully manage conflicts of interest or to implement appropriate policies or procedures could subject the broker-
dealers or us to disciplinary sanctions or litigation or could harm our reputation. Any of the foregoing could have a material
adverse effect on our business.
Our investment in Bitt Inc. may expose us to risks under laws and regulations with which we do not have significant
experience.
In 2016, we acquired an approximately 11% equity interest in Bitt, Inc., a startup company based in Barbados, that is
pursuing a variety of digital currency transfer and payment businesses in the Caribbean. Virtually every state in the U.S.
regulates money transmitters and money services businesses. In some states the licensing requirements and regulations
expressly cover companies engaged in digital currency activities; in other states it is not clear whether or how the existing laws
and regulations apply to digital currency activities. Further, U.S. federal law requires registration of most such businesses with
the Financial Crimes Enforcement Network ("FinCEN"). These licenses and registrations subject companies to various anti-
money laundering, know-your-customer, record-keeping, reporting and capital and bonding requirements, limitations on the
investment of customer funds, and inspection by state and federal regulatory agencies. Under U.S. federal law, it is a crime for a
person, entity or business that is required to be registered with FinCEN or licensed in any state to fail to do so, even if the
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person, entity or business was unaware of the licensing requirement. Further, under U.S. federal law, anyone who owns all or
part of an unlicensed money transmitting business is subject to civil and criminal penalties. The business in which we have
invested has represented to us that it has not taken any action that could subject it to registration with FinCEN or to the
licensing requirements in any state and has agreed that it will not do so until it has become properly licensed in all required
states and registered with FinCEN. However, if the business makes an error, even inadvertently, we could be subject to potential
civil and criminal penalties as a result. Any such penalties, or even the allegation of criminal activities, could have a material
adverse effect on us and our business. Further, as described under Governmental Regulation, all of our foreign business
activities expose us to a variety of risks, including risks under the Foreign Corrupt Practices Act.
We may be required to write off amounts relating to our investments in startup businesses.
At December 31, 2016, we had invested approximately $14.6 million in several companies that are in the startup or
development stages. During 2016, we recognized a $2.9 million impairment loss on one of these investments, which decreased
the carrying amount of our cost method investments to $11.8 million. These investments are inherently risky because the
markets for the technologies or products these companies are developing are typically in the early stages and may never
materialize. Additionally, since several of our investments are in the early startup or development stages, even if their
technology or products are viable, they may not be able to obtain the capital or resources necessary to successfully bring their
technology or products to market. Furthermore, we have no assurance that the technology or products of our investees would be
successful, even if they were brought to market. We will write off additional amounts related to these investments as necessary,
and any such write-offs could be material.
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 public advertising for car sales. Generally, these regulations apply to the sellers rather than to a company through
which the advertising is done. Sellers are often subject to “truth in advertising” laws. We have no ability to know whether the
information sellers provide is correct. While our site terms and conditions of usage prohibit unlawful acts, we cannot assure that
sellers will comply with all laws and regulations applicable to them and their transactions. Further, like our shopping business,
our car listing service is subject to most of the same laws and regulations that apply to other companies conducting business on
and off the Internet. Any negative publicity we receive regarding any allegations of unlawful or deceptive conduct may damage
our reputation, our ability to attract new customers to our main shopping site, and our brand name generally. The occurrence of
any of the foregoing could have a material adverse effect on our business.
Our Supplier Oasis offering, including its fulfillment services, faces competition from other distribution networks and will
require substantial resources.
We offer Supplier Oasis, a single integration point through which partners can manage their products, inventory and
sales channels, which includes multi-channel fulfillment services to sellers, suppliers, and partners. The marketplace for these
services 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.
Our continued development of Supplier Oasis 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. If we are unable to
generate sufficient revenues and gross profits from Supplier Oasis, it could have a material adverse effect on our business.
Our Farmers Market offering faces competition from a variety of competitors.
We offer Farmers Market, a tab within our Website from which our customers, in certain locations, can order locally
grown fresh produce and other food products. 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 may involve delivery and other
issues that may be different from those we face in connection with the sale and delivery of non-perishable products. The sale of
food products is highly regulated, both by health and safety regulations and by regulations governing labeling. Further, most of
the risks applicable to our business generally are also applicable to our Farmers Market business. Any significant difficulties we
encounter with our Farmers Market offering could have a material adverse effect on our business.
Our insurance offerings face competition from traditional insurance brokers and direct insurance marketing organizations.
We offer a tab within our website that connects our customers to live quotes for insurance for vehicle, residential and
small businesses on our Website. The insurance business is highly competitive, and many of our current and potential
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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 business generally are
also applicable to our insurance offerings business. Any significant difficulties we encounter with our insurance offerings could
have a material adverse effect on our business.
Risks Related to Litigation
We are routinely involved in substantial litigation.
From time to time we receive claims and become subject to lawsuits involving consumer protection, employment,
intellectual property and other matters related to the conduct and operation of our business and the sale of products on our
Website, including claims by regulators and by customers. In addition, we have in the past been and in the future may be,
involved in substantial litigation, including litigation regarding the constitutionality of certain state tax laws, in which we are
the plaintiff. Any such litigation, whether as plaintiff or defendant, may be costly and time consuming and could divert
management and key personnel from our regular business operations. An unfavorable resolution of any such matter could have
a material adverse effect on our business.
Risks Related to our Common Stock
The issuance of our Series A Preferred Stock and our Series B Preferred Stock could adversely affect the holders of our
common stock in some circumstances.
Our issuance in December 2016 of our Series A Preferred Stock and our Series B Preferred Stock (collectively
sometimes called the “Preferred Stock”) could adversely affect the holders of our common stock in some circumstances. See
“Risks Related to our Preferred Stock - The issuance of our Series A Preferred Stock and our Series B Preferred Stock could
adversely affect the holders of our common stock in some circumstances,” below.
The price of our common stock and any other 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 that in future periods our results of operations may be below the expectations of investors and any
analysts. If this occurs, the market price of our securities may decline substantially. Any of the foregoing could have a material
adverse effect on our business and particularly on our ability to raise capital.
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 of factors, 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 operating results 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 the other risk factors described in
this report, additional factors that have caused and/or could cause our quarterly operating results to fluctuate and in turn affect
the market price of our securities include:
increases in the cost of advertising and changes in our sales and marketing expenditures;
•
• our inability to retain existing customers or encourage repeat purchases;
•
• price competition that results in losses or lower profit margins;
•
the extent to which our existing and future marketing campaigns are successful;
the amount and timing of operating costs and capital expenditures relating to the expansion of our business
operations and infrastructure;
the amount and timing of our purchases of inventory;
•
• our inability to manage distribution operations or provide adequate levels of customer service;
•
• our ability to successfully implement technology changes or to integrate operations and technologies from
increases in the cost of fuel and transportation;
acquisitions or other business combinations;
• our efforts to offer new lines of products and services; and
• our ability to attract users to our shopping and other sites.
Any of the foregoing could have a material adverse effect on our business.
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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 significant fluctuations in our operating results because of
seasonal fluctuations in traditional retail patterns. Our gross revenues have historically been significantly higher in the fourth
calendar quarter of each year than in the following quarters due primarily to increased shopping activity during the holiday
season. Further, we generally increase our inventories substantially in anticipation of holiday season shopping activity, which
has a negative effect on our cash flow. Securities analysts and investors may inaccurately estimate the effects of seasonality on
our results of operations in one or more future quarters and, consequently, our operating results may fall below expectations,
causing the market price of our securities to decline. Any of the foregoing could have a material adverse effect on our business.
Sales by our significant stockholders could have an adverse effect on the market price of our stock.
Several of our stockholders own significant percentages of our common stock. If one or more of our large stockholders
were to sell all or a portion of their holdings of our common stock, the market price of our common stock could be negatively
impacted. The effect of such sales, or of significant percentages of our stock being offered or made available for sale, could
result in strong downward pressure on our stock price. Investors should be aware that they could experience significant
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 our
common 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. Any of the foregoing could have a material adverse effect on our business.
We do not intend to pay dividends on our common stock and you may lose the entire amount of your investment in our
common stock.
We have never declared or paid any cash dividends on our common stock and do not intend to pay dividends on our
common stock for the foreseeable future. We intend to invest our future earnings, if any, to fund our growth. Therefore, 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 your investment.
Provisions in our amended and restated certificate of incorporation and bylaws and Delaware law might discourage, delay
or prevent a change of control of our company or changes in our management.
Our amended and restated certificate of incorporation and bylaws contain provisions that could discourage, delay or
prevent a change in control of our company or changes in our management that the stockholders of our company may deem
advantageous. These provisions among other things:
• permit the board of directors to establish the number of directors;
• provide that only one-third of our board of directors is elected at each of our annual meetings of stockholders
(and our amended and restated certificate of incorporation prohibits cumulative voting in the election of
directors);
• mean that directors may be removed by the affirmative vote of the holders of the outstanding shares of
common stock only “for cause;”
• authorize the issuance of “blank check” preferred stock that our board could use to implement a stockholder
rights plan (also known as a “poison pill”);
• eliminate the ability of our stockholders to call special meetings of stockholders;
• prohibit stockholder action by written consent, which requires all stockholder actions to be taken at a meeting
of our stockholders;
• provide that the board of directors is expressly authorized to make, alter or repeal our bylaws;
• establish advance notice requirements, including specific requirements as to the timing, form and content of a
stockholder’s notice, for nominations for election to our board or for proposing matters that can be acted upon
by stockholders at annual stockholder meetings;
• provide that special meetings of our stockholders may be called only by the board of directors, the chairman
of the board, the chief executive officer or the president; and
• provide that stockholders are permitted to amend the bylaws only with the approval of the holders of sixty-six
and two-thirds percent (66-2/3%) of the voting power of outstanding capital stock entitled to vote at an
election of directors.
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In addition, Section 203 of the Delaware General Corporation Law may discourage, delay or prevent a change in
control of our company. In general, Section 203 prohibits a publicly held Delaware corporation from engaging in a “business
combination” with an “interested stockholder” for a period of three years following the date the person became an interested
stockholder, subject to certain exceptions.
Our board of directors could accelerate the vesting of outstanding restricted stock units upon a sale of the company or
otherwise, which could result in an increase in the number of shares outstanding.
Our board has granted, and in the future expects to make additional grants, of restricted stock units (“RSUs”) to certain
of our employees and directors. Upon vesting, one share of our common stock is issued for every RSU held. Under the terms of
these grants, the board could determine to accelerate the vesting of RSUs in the event of a sale of our company or otherwise,
which would result in an increase in the number of shares outstanding, and would dilute shareholders’ ownership of our
company. Although the number of RSUs outstanding changes frequently, the aggregate amount outstanding as of December 31,
2016 was 2.2% of the number of shares of common stock outstanding.
We have issued and in the future may again issue preferred stock as authorized by our amended and restated certificate of
incorporation without further stockholder approval for purposes unrelated to any stockholder rights plan, and any such
preferred stock could entitle the holders to rights superior to those of the holders of our common stock.
Our amended and restated certificate of incorporation authorizes our Board to designate and issue preferred stock on
such terms as may be approved by the Board without further stockholder approval. In addition to the possibility that the Board
could do so in connection with the adoption of a stockholder rights plan as described above, the Board has done so and could do
so again for a variety of other purposes. See “Risks Related to our Preferred Stock,” below.
The price of our stock may be vulnerable to manipulation.
The practice of “abusive naked short selling” places our stock at risk for manipulative attacks by large investment
pools and prime 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 obligated by
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 a depressive effect on share prices when it is allowed to persist because the economic effect of abusive
naked short selling is the oversupply of counterfeit stock to 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 manipulations achieved through
abusive naked short selling are likely to continue. We believe that our stock has been subject to these abusive practices by those
attempting 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 it might 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. It also requires mandatory close-outs for open fail-to-deliver positions in threshold securities
persisting for over 13 days. In the past our common stock frequently appeared on the Regulation SHO threshold list for
extended and continuous periods and in the past our stock has been on the list for more trading days than any other company.
We generally have not received significant coverage by securities analysts, and the lack of coverage may adversely affect our
share price and trading volume.
We generally have not received significant coverage by securities analysts, and the lack of coverage may adversely
affect our share price and trading volume. The lack of coverage may cause our share price or trading volume to be lower than
they might be if more analysts covered us.
Risks Related to our Preferred Stock
The issuance of our Series A Preferred Stock and our Series B Preferred Stock could adversely affect the holders of our
common stock in some circumstances.
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In December 2016, we issued shares of our Blockchain Voting Series A Preferred Stock (the “Series A Preferred”) and
our Voting Series B Preferred Stock (the “Series B Preferred,” and together with the Series A Preferred, collectively sometimes
called the “Preferred Stock”) in a registered rights offering (the “rights offering”). The Preferred Stock could adversely affect
the holders of our common stock in some circumstances. Except as required by law, the Preferred Stock will vote with the
common stock on all matters submitted to a vote of the common stock, with holders of the Preferred Stock having one vote for
each share of Preferred Stock held. As of February 2, 2017, the 695,898 issued shares of Preferred Stock constituted
approximately 2.7% of the total number of shares of the Preferred Stock and the common stock, taken together. The Preferred
Stock ranks senior to the common stock with respect to dividends. Holders of the Preferred Stock will be entitled to an annual
cash dividend equal to $0.16 per share of Preferred Stock, in preference to any dividend payment to the holders of the common
stock. Holders of the Preferred Stock are also entitled to participate in any cash dividends we pay to the holders of the common
stock and are also entitled to participate in any non-cash dividends we pay to holders of the common stock, subject to different
treatment if we effect a stock dividend, stock split or combination of the common stock. The Preferred Stock will rank on a
parity with the common stock with respect to rights upon our liquidation, winding up or dissolution. If we are a party to any
merger or consolidation in which the common stock is changed into or exchanged for stock or other securities of any other
person (or the Company) or cash or any other property (or a right to receive the foregoing), we will be required to use all
commercially reasonable efforts to cause each outstanding share of the Preferred Stock to be treated as if such share were an
additional outstanding share of common stock in connection with any such transaction.
The Series A Preferred and the tØ Platform are novel, and the use of the PRO Securities ATS utilizing the tØ Platform for
trading public digital securities was untested prior to the December 2016 closing of the offering of the Series A Preferred.
Trades in non-digital publicly traded securities currently take place through the continuous net settlement system
operated by The Depositary Trust Company (“DTC”) and generally settle on the third day following the day on which the
purchase and sale commitments are made. This delayed settlement model is the current standard in the United States for the sale
and settlement of publicly traded securities, all of which are currently non-digital. The Series A Preferred does not trade or settle
through the traditional system; rather, shares of Series A Preferred trade exclusively on a registered alternative trading system
(the “PRO Securities ATS”) operated by our indirect majority-owned subsidiary PRO Securities LLC (“PRO Securities”)
utilizing technology known as the tØ Issuance and Trading Platform (the “tØ Platform”). Unlike trades through the traditional
system, trades of the Series A Preferred settle on the trade date. The tØ Platform is a recent development, licensed by PRO
Securities from our majority-owned subsidiary tØ.com, Inc., formerly named Medici, Inc. (“tØ.com”), and the tØ Platform had
not been tested with public trading of digital securities prior to the closing of the offering of the Series A Preferred in December
2016. Consequently, investors in the Series A Preferred bear the risks of investing in a novel type of security that trades
exclusively on a novel type of trading platform and that is subject to a number of unusual restrictions, as well as the risks of
investing in our business. Any failure of the PRO Securities ATS or of the tØ Platform to perform as expected could have a
material adverse effect on holders’ ability to sell the Series A Preferred.
The technology on which the tØ Platform depends has been developed by our majority-owned subsidiary, tØ.com, and is
licensed by its subsidiary, PRO Securities, and the Series A Preferred depends on both tØ.com and on PRO Securities,
neither of which has substantial resources.
tØ.com is a majority-owned subsidiary of ours and owns 100% of the equity interest in PRO Securities. tØ.com
licenses the tØ Platform to PRO Securities, and PRO Securities operates the PRO Securities ATS. tØ.com also licenses the tØ
Platform to the Company for the Company’s use in connection with the Series A Preferred. Neither tØ.com nor PRO Securities
has substantial resources. PRO Securities had net capital of approximately $24,141 at December 31, 2016. Neither tØ.com nor
PRO Securities has any legally binding commitment from any person, including the Company, to contribute additional capital
or to make any loan to either of them. If any one or more of the Company, tØ.com or PRO Securities were to be unable to fund
its operations in the future, or if any one or more of the Company, tØ.com or PRO Securities were to become the subject of a
bankruptcy or other insolvency proceeding, PRO Securities might be unable to continue to operate the tØ Platform, and the
Series A Preferred could be materially adversely affected. In any such event, holders of our capital stock, including the Series A
Preferred, could lose their entire investment in our capital stock, including all amounts invested in the Series A Preferred.
The requirement that each prospective purchaser of Series A Preferred open and maintain an online brokerage account with
Keystone may initially limit the number of potential trading market purchasers of Series A Preferred to the purchasers of
Series A Preferred in the rights offering.
In order to trade in the Series A Preferred, a prospective purchaser is required to open an online brokerage account
with Keystone Capital Corporation (“Keystone”) and holders of Series A Preferred will be unable to access their shares of
Series A Preferred except through that account. We anticipate that it will take time for persons who were not investors in the
rights offering to make the decision to open the required account with Keystone in anticipation of trading in the Series A
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Preferred, and it is possible that very few will ever do so. Consequently, we expect liquidity in the Series A Preferred to be very
limited, which could have a material adverse effect on holders’ ability to trade the Series A Preferred.
Prior to the rights offering there was no trading market for the Series A Preferred or the Series B Preferred, and active
trading markets may not develop.
The Series A Preferred is a new issue of securities that may be traded only on an unprecedented trading platform. Prior
to the rights offering there was no established trading market for the Series A Preferred, and no digital security had ever been
publicly traded on the PRO Securities ATS or utilizing the tØ Platform. As of February 1, 2017 only 140 persons had opened
online brokerage account with Keystone for the purpose of acquiring and holding shares of Series A Preferred, including
persons who opened accounts in order to participate in the rights offering, and a very small number of trades in the Series A
Preferred had taken place since the closing of the rights offering in December 2016. The Series A Preferred is not and will not
be listed on any securities exchange or any other market of any kind, other than the PRO Securities ATS utilizing the tØ
Platform. Even if a trading market for the Series A Preferred does develop on the PRO Securities ATS utilizing the tØ Platform,
the depth and liquidity of that market and the ability of the holders to sell the Series A Preferred may nevertheless be very
limited, which may have a material adverse effect on holders of the Series A Preferred.
The Series B Preferred is a new issue of securities, and prior to the rights offering there was no trading market for the
Series B Preferred. The Series B Preferred is not and will not be listed on any securities exchange. The Series B Preferred is
traded in the over-the-counter market and we expect it to be quoted on the OTCQB market operated by OTC Markets Group.
We have encountered an unexpected delay in the quotation of the Series B Preferred on the OTCQB. OTC Markets is unable to
publicly provide quotation or trade data until FINRA clears a Form 211 filed by a broker dealer. We understand that one or
more broker dealers have made Form 211 filings with FINRA, but to date FINRA has not cleared any of them. In any case, we
continue to expect that the depth and liquidity of trading and the ability of the holders to sell Series B Preferred may be very
limited, which may have a material adverse effect on holders of Series B Preferred.
We do not intend to issue any additional shares of either Series A Preferred or Series B Preferred, which is expected to result
in very limited trading in each series.
Although we have the right to convert the outstanding shares of Series A Preferred into Series B Preferred, we do not
intend to issue any additional shares of Series A Preferred or any additional shares of Series B Preferred. Consequently, we
expect trading of the Series A Preferred and the Series B Preferred to be limited to the shares we issued in the rights offering. As
a result, trading in the Series A Preferred and the Series B Preferred may be very limited.
We do not expect there to be any market makers to develop a trading market in the Series A Preferred.
Most securities that are publicly traded in the United States have one or more broker-dealers acting as “market
makers” for the security. A market maker is a firm that stands ready to buy and sell the security on a regular and continuous
basis at publicly quoted prices. We do not believe that the Series A Preferred will have any market makers, which could
contribute to a lack of liquidity in the Series A Preferred, and could have a material adverse effect on holders’ ability to trade the
Series A Preferred.
Accounts for the Series A Preferred will be held directly in the customer’s name, rather than in “street name.”
Each investor in the Series A Preferred is required to open an online brokerage account in his, her or its name with
Keystone. Investors are not permitted to hold their Series A Preferred in “street name.” The Series A Preferred shares are not
held at a central securities depository. Instead, the shares are directly recorded on our stockholder books and records maintained
by Computershare Trust Company, N.A. (“Computershare”). As a very substantial portion of U.S. publicly traded securities
currently are held in “street name,” we expect that many potential investors in the Series A Preferred may not be interested in
holding securities in their own names and therefore will not invest in the Series A Preferred. In addition, as a result of this
requirement, individual retirement accounts and other fiduciary or nominee accounts including 401(k) accounts are unable to
acquire shares of Series A Preferred (although custodial accounts for minors are permitted if the custodian would qualify to
purchase shares of Series A Preferred on its own behalf, subject to certain restrictions). We expect that these limitations will
further limit liquidity in the Series A Preferred, and the limitations may have a material adverse effect on the development of
any trading market in the Series A Preferred.
The complete trading history of each digital wallet will be available to the general public and it may be possible for members
of the public to determine the identity of the holders of wallets.
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The tØ Platform makes trade data publicly available shortly after each trade. Although the trade data that the tØ
Platform makes publicly available is anonymous, the publicly available information includes the digital wallet address (the
location where records of transactions and balances involving the series A Preferred are stored) of each holder transacting in
Series A Preferred, and the entire trading history of each digital wallet (including the number of securities traded by each digital
wallet, the price of each trade and the balance of the securities held in each digital wallet). As a result, the trading history of
each digital wallet is available to the general public. It may be possible for members of the public to determine the identity of
the holders of certain wallets based on the information that the tØ Platform makes publicly available and other publicly
available information, including any ownership reports required to be filed with the SEC regarding the Series A Preferred.
In addition, Delaware law provides that any stockholder of the Company has the right upon written demand under oath
stating the purpose of the demand to inspect and copy the Company’s stock ledger and a list of its stockholders for any proper
purpose. Delaware law also requires the Company to make lists of its stockholders, including the number of shares held,
available for inspection by stockholders of the Company in connection with stockholder meetings. These lists disclose the
identity of stockholders of record, but not stockholders who hold their shares in “street name.” Because all holders of the
Series A Preferred will be holders of record, all of them will be subject to the risk of loss of their anonymity.
Potential investors who desire to execute their trades in relative anonymity may find these aspects of the tØ Platform
unattractive, which may further limit liquidity in the Series A Preferred, and may have a material adverse effect on the
development of any trading market in the Series A Preferred.
Only certain persons and entities are able to acquire Series A Preferred.
Only certain persons and entities may purchase Series A Preferred. We expect that these limitations will limit liquidity
in the Series A Preferred, and the limitations may have a material adverse effect on the development of any trading market in
the Series A Preferred.
The Series A Preferred and the development of a trading market for the Series A Preferred will depend on both Keystone and
its clearing broker, ETC.
The Series A Preferred will depend on the continuing business operations of both Keystone and Electronic Transaction
Clearing, Inc. (“ETC”). Keystone is the only broker-dealer authorized to provide the accounts required to acquire, hold and
trade shares of Series A Preferred, and ETC is the clearing broker for Keystone with respect to the Series A Preferred. Any
failure of either Keystone or ETC to continue operating its business in the ordinary course or to satisfactorily perform their
respective obligations could require PRO Securities to engage a substitute broker-dealer to perform the functions we expect
Keystone to perform, and Keystone or such substitute broker-dealer might need to engage a substitute clearing broker. PRO
Securities or Keystone may not be able to do so on a timely basis or at all. A transition from Keystone to a replacement broker-
dealer or from ETC to a replacement clearing broker would be a lengthy process, during which time it would be impossible to
trade Series A Preferred.
A violation of privacy or data protection laws could have a material adverse effect on PRO Securities, tØ.com or other
entities, the tØ Platform and the Series A Preferred.
PRO Securities, tØ.com and other entities relevant to the operation of the PRO Securities ATS utilizing the tØ
Platform, including Keystone, ETC and Computershare, are subject to applicable privacy and data protection laws and
regulations. Any violations of laws and regulations relating to the safeguarding of private information could subject us or any of
them to fines, penalties or other regulatory actions, as well as to civil actions by affected parties. Any such violations could
adversely affect the ability of PRO Securities to operate the PRO Securities ATS or to use the tØ Platform, either of which
could have a material adverse effect on holders’ ability to trade Series A Preferred.
PRO Securities, tØ.com, the PRO Securities ATS, the tØ Platform and the other entities relevant to the operation of the PRO
Securities ATS are subject to cyberattacks, security risks and risks of security breaches.
PRO Securities, tØ.com, the PRO Securities ATS, the tØ Platform and the other entities relevant to the operation of the
PRO Securities ATS utilizing the tØ Platform, including Keystone, ETC and Computershare, are all subject to cyberattacks,
security risks and risks of security breaches. An attack on any of them or a breach of security of any of them could result in a
loss of private data, unauthorized trades, and an interruption of trading for an extended period of time. Any such attack or
breach could adversely affect the ability of PRO Securities to operate the PRO Securities ATS or to utilize the tØ Platform, or
both, any of which could have a material adverse effect on holders’ ability to trade the Series A Preferred. Any breach of data
security that exposes or compromises the security of any of the private digital keys used to authorize or validate transaction
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orders, or that enables any unauthorized person to generate any of the private digital keys, could result in unauthorized trades
and would have a material adverse effect on the Series A Preferred. Because trades on the PRO Securities ATS utilizing the tØ
Platform settle on the trade date, it could be impossible to correct unauthorized trades.
In the event of the insolvency of Keystone or ETC, the Securities Investor Protection Corporation would be unable to cause
the return of shares of Series A Preferred until a substitute for Keystone or ETC, as applicable, was in place.
The Securities Investor Protection Corporation (“SIPC”) oversees the liquidation of member broker-dealers that close
when the broker-dealer is bankrupt or in financial trouble, and customer assets are missing. In a liquidation under the Securities
Investor Protection Act, SIPC and a court-appointed trustee typically work to return customers’ securities and cash. Within
limits, SIPC expedites the return of missing customer property by protecting each customer up to $500,000 for securities and
cash (including a $250,000 limit for cash only). If Keystone or ETC were to become insolvent, the structure of the trading
system for the Series A Preferred could cause delays in the return of Series A Preferred until a substitute for Keystone or ETC,
as applicable, was in place, which could have a material adverse effect on holders of Series A Preferred.
Certain transactions involving the Series A Preferred will require manual intervention, which could result in errors.
All ordinary course Series A Preferred purchase and sale transactions initiated by purchasers and sellers through their
Keystone accounts are executed on the PRO Securities ATS utilizing the automated processes of the tØ Platform, without
separate manual intervention by any of the relevant parties. Extraordinary transactions, however, may require manual
intervention, which would be initiated by employees of ETC through the tØ Platform. For example, a unilateral transfer to a
specific transferee, such as gift to a family member or charity, or an involuntary transfer pursuant to a court order, will require
such manual intervention. In any situation involving manual intervention, there is a risk of human error. The same-day
settlement of trades on the PRO Securities ATS utilizing the tØ Platform also means that any error not detected promptly on the
trade date may be impossible to correct. See “The same-day settlement of trades on the PRO Securities ATS utilizing the tØ
Platform may make it impossible to correct trading errors in the Series A Preferred” below.
The same-day settlement of trades on the PRO Securities ATS utilizing the tØ Platform may make it impossible to correct
trading errors in the Series A Preferred.
Trades on the PRO Securities ATS utilizing the tØ Platform settle on the trade date rather than on a three-day (or T+3)
basis. This may make it impossible to correct trading errors that might have been corrected prior to settlement under a T+3
system. Consequently, persons acquiring shares of Series A Preferred must accept the risk that correction of any trading errors
may be impossible. The occurrence of any such trading error could have a material adverse effect on any affected holder of
Series A Preferred. Further, in the future ETC’s custody and settlement systems may be able to move funds between customer
accounts in near real-time after order executions are recorded by the PRO Securities ATS on the electronic data store in which
the ownership and transfer of the Series A Preferred are recorded (the “Proprietary Ledger”), which would result in near-real
time settlement, which would further increase the risk that correction of trading errors may be impossible.
The technology on which the tØ Platform depends is in an area in which tØ.com and PRO Securities have limited
experience.
Neither tØ.com nor PRO Securities has significant experience with the technology on which the tØ Platform depends
or the operation of the tØ Platform. The creation and operation of a digital system for the public trading of securities utilizing a
distributed ledger to enable members of the public to confirm that the public copies of the Proprietary Ledger have not been
altered are subject to technical, legal and regulatory constraints. Portions of the technology utilized by the tØ Platform have
been developed by tØ.com very recently. Any problems tØ.com or PRO Securities encounters with the operation of the tØ
Platform, including technical, legal and regulatory problems, could have a material adverse effect on the Series A Preferred.
The tØ Platform has been developed by key technology employees of tØ.com and its affiliates, and its operation and further
development depend on the continued availability of those key employees.
The tØ Platform, including the technology and intellectual property involved in its creation and operation, has been
developed primarily by a small number of key technology employees of tØ.com and its affiliates. The loss of the services of
any of those key employees could have a material adverse effect on the ability of tØ.com to maintain the tØ Platform, which
could have a material adverse effect on PRO Securities’ ability to use the tØ Platform. If tØ.com were to lose the services of
any such key employees, it could be difficult or impossible to replace them, and the loss of any of them could have a material
adverse effect on the Series A Preferred.
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tØ.com may continue to modify the tØ Platform, and any such modifications could require periods of downtime during
which trading on the PRO Securities ATS might be suspended.
tØ.com developed the tØ Platform recently and intends to continue to work on enhancements to the tØ Platform. The
continued development of enhancements to the tØ Platform or other modifications of the tØ Platform could cause service
interruptions and interruptions in trading on the PRO Securities ATS, which could make it impossible to trade the Series A
Preferred from time to time. Any such interruptions could occur with little or no notice.
Our use of the Bitcoin blockchain to enable members of the public to confirm that the public copies of the Proprietary
Ledger have not been altered depends on the continued availability and functioning of the Bitcoin blockchain.
The Series A Preferred trade exclusively on the PRO Securities ATS utilizing the tØ Platform. The tØ Platform embeds
a digital fingerprint in the Bitcoin blockchain that may be used to confirm that the public copies of the Proprietary Ledger have
not been altered. No person, business, governmental authority or other entity or authority of any kind has any obligation to
provide any financial, technical or other support to the continued operation or development of blockchain technology. If the
Bitcoin blockchain were to become unavailable to us in its current form and functionality for any reason, we would need to use
a different publicly distributed ledger, which could make it more difficult for members of the public to confirm that the public
copies of the Proprietary Ledger have not been altered, which could have a material adverse effect on the Series A Preferred.
Investors may not have the skills necessary to confirm that the public copies of the Proprietary Ledger have not been altered.
In order to confirm that the public copies of the Proprietary Ledger have not been altered, a person must have the
technical skills required to do so. If an investor does not have those technical skills, the investor will be unable to personally
confirm that the public copies of the Proprietary Ledger have not been altered.
Trading in the Series A Preferred depends on the operation and functionality of the PRO Securities ATS, on tØ.com’s
proprietary tØ Platform and on the Proprietary Ledger.
The Series A Preferred trades exclusively on the PRO Securities ATS utilizing the tØ Platform. The ATS is operated
and maintained by PRO Securities, and the tØ Platform is maintained by tØ.com. Each of PRO Securities and tØ.com is a direct
or indirect majority-owned subsidiary of the Company, and neither of them has substantial resources. If the PRO Securities ATS
or the tØ Platform were to fail to operate as intended for any reason, trading in the Series A Preferred could be impossible until
the failure were corrected and full functionality of the affected system or systems were restored and tested. Further, if the
Proprietary Ledger were to fail to operate as intended, or were to become unavailable to us in its current form and functionality
for any reason, the tØ Platform might be unable to publish trade data or to provide trade data to ETC and to the transfer agent.
Any of the foregoing could have a material adverse effect on our ability to execute or settle trades of Series A Preferred, to
maintain accurate records of the ownership of the Series A Preferred and to comply with our obligations relating to records of
the ownership of the Series A Preferred and a material adverse effect on the holders of the Series A Preferred.
The Series A Preferred depends on Computershare as the transfer agent for the Series A Preferred.
Computershare serves as the transfer agent for both the Series A Preferred and the Series B Preferred. If
Computershare were unable or unwilling for any reason to serve as the transfer agent for the Series A Preferred, trading in the
Series A Preferred would be impossible unless we were able to locate another transfer agent able and willing to serve as a
replacement transfer agent for the Series A Preferred. We estimate that a transition from Computershare to a replacement
transfer agent would take approximately three months; however, any such transition could take longer, during which time it
would be impossible to trade in the Series A Preferred.
The tØ Platform relies on technology and intellectual property rights licensed from tØ.com to PRO Securities.
The ability of PRO Securities to operate the PRO Securities ATS utilizing the tØ Platform depends on technology and
intellectual property rights that PRO Securities licenses from our majority-owned subsidiary tØ.com. Keystone, ETC and
Computershare, in the performance of their respective obligations, also depend on the technology and intellectual property
rights that they license (or have licensed on their behalf) from tØ.com. If for any reason tØ.com were to fail to comply with its
obligations under the applicable license agreement, or were unable to provide or were to fail to provide the technology and
intellectual property that PRO Securities requires, PRO Securities would be unable to operate the PRO Securities ATS utilizing
the tØ Platform, which would have a material adverse effect on the Series A Preferred.
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If the rights of tØ.com to the technology or intellectual property it licenses to PRO Securities were invalidated or limited,
PRO Securities might not be able to operate the PRO Securities ATS utilizing the tØ Platform.
tØ.com has filed both provisional and non-provisional patent applications covering numerous aspects of the
technology relating to the tØ Platform, none of which have been granted. If third parties obtain patents covering any or all of
the technology relating to the tØ Platform, or if the rights of tØ.com to the technology or intellectual property necessary for the
operation of the tØ Platform were otherwise invalidated or limited, PRO Securities could become unable to operate the PRO
Securities ATS utilizing the tØ Platform, which would have a material adverse effect on the Series A Preferred and could have a
material adverse effect on the Company.
The tØ Platform may face substantial competition from a number of known and unknown competitors as well as the risk
that one or more of them may obtain patents covering technology critical to the operation of the tØ Platform.
We believe that a number of organizations are or may be working to develop trading systems utilizing distributed
ledger or blockchain technologies that may be competitive with the tØ Platform. Some or all of such organizations and/or their
respective investors have substantially greater resources than tØ.com or we have, and many of them appear to be attempting to
patent technologies that may be competitive with or similar to the technology tØ.com has developed. We do not have access to
detailed information about the technologies these organizations and/or their respective investors may be attempting to patent. If
one or more other persons, companies or organizations obtains a valid patent covering technology critical to the tØ Platform,
tØ.com and we and the other entities that need the relevant technology in order to enable the tØ Platform to operate as intended
might be unable or unwilling to license the technology, and it could become impossible for the tØ Platform to operate, which
would have a material adverse effect on the Series A Preferred and could have a material adverse effect on the Company.
Some market participants may oppose the development of distributed ledger or blockchain-based systems like the
tØ Platform.
Many participants in the system currently used for trading public securities in the United States may oppose the
development of alternative systems such as the tØ Platform. The market participants who may oppose such a system may
include market participants with significantly greater resources, including financial resources and political influence, than we
have. The ability of PRO Securities to operate the tØ Platform could be adversely affected by any actions of any such market
participants that result in additional regulatory requirements or other activities that make it more difficult for PRO Securities to
operate the tØ Platform, which could have a material adverse effect on the Series A Preferred.
Current regulations could require the PRO Securities ATS to be registered as an exchange under the Securities Exchange
Act of 1934 and may effectively limit trading on the PRO Securities ATS utilizing the tØ Platform.
Under current law, an organization, including an alternative trading system, generally is exempt from the definition of
an “exchange” under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), if it is in compliance with
Regulation ATS. However, an organization, including a registered ATS, can lose the exemption if it fails to maintain compliance
with Regulation ATS or if (1) during three of the preceding four calendar quarters such an organization had (A) 50% or more of
the average daily dollar trading volume in any security and 5% or more of the average daily dollar trading volume in any class
of securities or (B) 40% or more of the average daily dollar trading volume in any class of securities; and (2) the SEC
determines, after notice to the organization and an opportunity for the organization to respond, that such an exemption would
not be necessary or appropriate in the public interest or consistent with the protection of investors taking into account the
requirements for exchange registration under section 6 of the Exchange Act and the objectives of the national market system
under the Exchange Act. Consequently, even if PRO Securities and the PRO Securities ATS are in compliance with Regulation
ATS, the SEC could determine that the PRO Securities ATS should not be exempt from the requirements to register as an
exchange. Any such determination, and the process leading up to any such determination, would result in substantial costs and
would have an adverse effect on PRO Securities, the PRO Securities ATS and the Company. PRO Securities may not have the
resources, ability or willingness to register the PRO Securities ATS as an exchange. This potential limitation may effectively
limit trading on the PRO Securities ATS and the tØ Platform, which could have a material adverse effect on the Series A
Preferred.
The potential application of U.S. laws regarding investment securities to the Series A Preferred is unclear.
The commercial law regarding investment securities in the United States is well-developed. Article 8 of the Uniform
Commercial Code as adopted in most states, including Delaware, provides a set of rules that governs common aspects of
securities transfers and related matters. Because of the differences between the Series A Preferred and traditional investment
securities, there is a risk that issues that might easily be resolved by existing law if traditional securities were involved may not
33
be easily resolved for the Series A Preferred. The occurrence of any such issue or dispute could have a material adverse effect
on the holders of Series A Preferred.
The potential application of U.S. laws regarding virtual currencies and money transmission to PRO Securities’ use of the
Bitcoin blockchain is unclear.
Existing state and federal laws applicable to various activities of persons exchanging or otherwise using virtual
currencies, in some cases expressly including Bitcoin, impose prohibitions and require licensing or registration requirements
and impose substantive regulations on such persons. Many more states impose licensing and substantive regulation on persons
engaging in various activities relating to money transmission, some of which do or may apply to the transmission of virtual
currencies such as Bitcoin. The failure to be properly licensed and registered if required under any of these state or federal laws
can be a criminal offense. The tØ Platform will use the Bitcoin blockchain for the purpose of enabling members of the public to
confirm that the public copies of the Proprietary Ledger have not been altered. The tØ Platform will not use the Bitcoin
blockchain for any purpose of transmitting value; the tØ Platform will simply transmit nominal amounts of Bitcoin to itself in
order to embed data relating to Series A Preferred transactions into the Bitcoin blockchain. We estimate that the value of the
Bitcoin to be transmitted will total approximately $5.00 or less per trading day. The tØ Platform is not licensed under the virtual
currency or money transmission regulations of any state in the United States, and is not registered with the Financial Crimes
Enforcement Network (“FinCEN”) of the U.S. Department of the Treasury. Although we do not believe that the tØ Platform’s
proposed use of the Bitcoin blockchain requires licensing or registration by any state or registration with FinCEN, if any
regulatory authority were to assert otherwise, it could have a material adverse effect on the ability of the tØ Platform to publish
Series A Preferred trade data to the Bitcoin blockchain.
The potential application of foreign laws to the tØ Platform is unclear.
Any person opening an account with Keystone will be required to represent that doing so and acquiring shares of
Series A Preferred will not cause a violation of any law, rule or regulation of any jurisdiction outside of the United States and
will not subject us or PRO Securities or the tØ Platform to regulation by any authority in any jurisdiction outside of the United
States. We are also limiting purchasers of Series A Preferred to certain U.S. residents, entities and trusts. If we became subject
to any law, rule or regulation of any jurisdiction outside of the United States, it could have a material adverse effect on the
ability of PRO Securities to operate the tØ Platform and on the Series A Preferred.
Regulatory or factual developments may adversely affect the tØ Platform, its future development, or both.
Neither PRO Securities nor tØ.com is registered as a transfer agent under the Exchange Act. If PRO Securities or
tØ.com were required to register as a transfer agent, the process would be expensive and one or both entities might be unable to
do so. Further, future regulatory developments could otherwise affect the tØ Platform or the ability of PRO Securities to operate
the tØ Platform. To the extent that any current or future regulatory requirements adversely affect the ability of PRO Securities
to operate the tØ Platform or its ability to utilize the Bitcoin blockchain, such regulatory requirements would have a material
adverse effect on the Series A Preferred.
PRO Securities and SpeedRoute are registered broker-dealers and are subject to extensive regulation.
Broker-dealers are subject to extensive regulatory requirements under federal and state laws and regulations and self-
regulatory organization (“SRO”) rules. PRO Securities and SpeedRoute are registered with the SEC as broker-dealers under the
Exchange Act and in the states in which they conduct securities business and are members of the Financial Industry Regulatory
Authority (“FINRA”) and other SROs. PRO Securities and SpeedRoute are subject to regulation, examination and disciplinary
action by the SEC, FINRA and state securities regulators, as well as other governmental authorities and SROs with which it is
registered or licensed or of which it is a member. Any failure of PRO Securities or SpeedRoute to comply with all applicable
rules and regulations could have a material adverse effect on the Series A Preferred.
PRO Securities is involved in an ongoing dialog with regulatory authorities.
PRO Securities has been and remains involved in ongoing discussions with regulatory authorities about the operation
of the PRO Securities ATS utilizing the tØ Platform and various matters relating to the regulated entities involved. While many
of the discussions have been relatively informal, PRO Securities has also received and responded to written inquiries, and most
recently received and responded to additional written inquiries from FINRA. While we consider these continuing inquiries to be
ordinary course in light of the non-traditional nature of the registered alternative trading system operated by PRO Securities
utilizing the tØ Platform, any failure of PRO Securities to satisfy FINRA or any other regulatory authority that PRO Securities
is in compliance with all applicable rules and regulations could have a material adverse effect on the Series A Preferred.
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PRO Securities and Computershare may experience operational or other difficulties with the role Computershare is
expected to perform, and our strategic interests and objectives and those of Computershare may not be completely aligned
and may diverge over time.
The Company has engaged Computershare to serve as transfer agent for the Series A Preferred. Computershare uses
the tØ software to receive new and updated shareholder personal identifying information from Keystone and transaction
information recorded on the Proprietary Ledger in order to update and maintain the share register. To our knowledge, our
relationship with Computershare is the first of its kind, and there are risks of difficulties with both the operational aspects of the
relationship and the strategic aspects of the relationship. Even if the operational aspects of the relationship work as anticipated,
our strategic interests and objectives and those of Computershare are different, and they may diverge further over time. Any
difficulties we encounter with either the operational aspects of our relationship with Computershare or with the alignment of
our respective strategic interests and objectives, or any other difficulties we may encounter in our business relationship with
Computershare, could have a material adverse effect on the ability of PRO Securities to operate the PRO Securities ATS
utilizing the tØ Platform and have a material adverse effect on holders’ ability to trade the Series A Preferred.
The requirement that each prospective purchaser of our Series A Preferred open and maintain an online brokerage account
with Keystone may subject customers to the risk of fee and commission increases by Keystone.
At present the tØ Platform does not allow more than a single broker-dealer to provide access to the system. The lack of
an alternative broker-dealer to provide access to the tØ Platform may subject customers to the risk of fee and commission
increases by Keystone. Keystone has agreed to limits on the fees and commissions it will charge to customers who trade shares
of the Series A Preferred; however, if PRO Securities and tØ.com agree to amend the relevant agreements to permit increases to
those limits, or if such agreements or the provisions regarding such matters were ineffective for any reason, it could have a
material adverse effect on holders of the Series A Preferred.
Due to the unavailability of Rule 144 for resales of Series A Preferred and anticipated low volume restrictions for sales by
affiliates of the Company of Series B Preferred under Rule 144, Company affiliates may elect not to acquire Series A
Preferred or Series B Preferred.
Rule 144 is not available for resales of Series A Preferred. In addition, because the number of shares of Series B
Preferred outstanding may be very small, Rule 144 may permit public resales of Series B Preferred by our affiliates only in very
small amounts. As a result, affiliates of the Company may have difficulty reselling Series A Preferred and Series B Preferred
unless we register their sales. To make it easier for affiliates of the Company to publicly resell Series A Preferred and Series B
Preferred, we intend to register their resales. We have entered into a registration rights agreement pursuant to which we have
agreed to file a registration statement for resales of Series A Preferred and Series B Preferred by our affiliates; however, such
registration statement may not become or remain effective. Further, a seller under a registration statement may have liabilities
that a seller under Rule 144 does not have. Very few of our affiliates subscribed for shares of Preferred Stock in the rights
offering, and any or all of these matters may cause affiliates of the Company to elect not to acquire shares of Series A Preferred
or Series B Preferred after the rights offering, which could limit liquidity in the Series A Preferred or Series B Preferred or
depress the trading prices of the Series A Preferred or Series B Preferred.
Affiliates of the Company may incur substantially greater risks in selling shares of Series A Preferred or Series B Preferred
under a registration statement than they would if they were able to sell under Rule 144.
Because Rule 144 is not available for public resales of Series A Preferred, and because Rule 144 likely will permit
resales of Series B Preferred by affiliates only in very small amounts, affiliates may be unable to sell Series A Preferred or
Series B Preferred except pursuant to a registration statement that we expect to file for their resales. However, a seller under a
registration statement may have liabilities that a seller under Rule 144 does not have. Consequently, affiliates of the Company
who acquire shares of Series A Preferred or Series B Preferred and subsequently sell them under any such registration statement
could incur material liabilities that they would not have risked incurring in sales under Rule 144.
Rule 144 also will not be available for resales of “restricted shares” of Series A Preferred.
Persons, including non-affiliates of a public company such as the Company, who acquire shares directly or indirectly
from the public company, or from an affiliate of the public company, in a transaction or chain of transactions not involving any
public offering, acquire “restricted shares” for purposes of Rule 144. Although Rule 144 permits public sales of “restricted
shares” subject to certain conditions, we do not expect Rule 144 ever to be available for any sales of Series A Preferred.
Because all of the shares of Series A Preferred and Series B Preferred were issued in a registered public offering, and because
we expect to register the resale of shares of Series A Preferred and Series B Preferred by our affiliates, we do not anticipate that
35
any outstanding shares of Series A Preferred or Series B Preferred will be “restricted” for purposes of Rule 144. However, any
person who acquires any shares of Series A Preferred or Series B Preferred directly or indirectly from us, or directly or
indirectly from any person who is then an affiliate of ours, in either case in a transaction or chain of transactions not involving
any public offering (which term generally means registered offerings and sales under Rule 144), or who acquires shares of
Series A Preferred or Series B Preferred in any other manner described in the definition of “restricted securities” in Rule 144,
will acquire “restricted” shares. We do not expect Rule 144 ever to be available for public resales of any such shares of Series A
Preferred, and the sale of any such shares may be difficult or impossible.
We will have an economic incentive to repurchase Series A Preferred and Series B Preferred at prices below the redemption
price, and our doing so could cause the trading prices of Series A Preferred and Series B Preferred, as applicable, to
decrease further.
We do not currently intend to repurchase any of the Series A Preferred or Series B Preferred. However, we could do so,
subject to applicable laws and regulations regarding issuer repurchases of their capital stock. If we repurchase any shares, we
would do so only at prices lower than the prices at which we might be entitled to redeem the shares. Because our right to
redeem the Series A Preferred and the Series B Preferred will be at prices that will vary with the price of our common stock as
well as the prices of the Series A Preferred and the Series B Preferred, respectively, and in any case would be no less than the
Subscription Price, we will have an economic incentive to repurchase the shares at their trading prices from time to time if
those prices are lower than the prices at which we would be entitled to redeem the shares. If we repurchase (or redeem) shares
of either Series A Preferred or Series B Preferred, the trading market for the shares would become less liquid, which could
cause the trading prices to decrease further, giving us an economic incentive to repurchase additional shares. The occurrence of
the foregoing could have a material adverse effect on holders of Series A Preferred, the holders of Series B Preferred, or holders
of both series, and on the liquidity in and trading prices of the Series A Preferred, the Series B Preferred or both.
We do not expect to register either the Series A Preferred or the Series B Preferred as a class of securities under the
Exchange Act. Consequently investors may be unaware of holders of significant percentages of the Series A Preferred, the
Series B Preferred, or both.
We do not expect to register either the Series A Preferred or the Series B Preferred under the Exchange Act.
Consequently, the provisions of the Exchange Act requiring beneficial holders of more than 5% of a registered class of
securities to report such beneficial holdings are unlikely to apply, and investors may be unaware of holders who may hold
significant percentages of either the Series A Preferred or the Series B Preferred or both. Although the tØ Platform makes the
holdings and trading histories of all digital wallets public, the information so provided is not a substitute for the types of
information required by these securities laws.
In certain circumstances, we may be required to register the Series A Preferred or the Series B Preferred under Section 12
(g) of the Exchange Act, which would subject significant stockholders to the reporting requirements of Regulation 13D-G.
Although we do not expect to register either the Series A Preferred or the Series B Preferred under the Exchange Act,
we could be required to register one or both series in the future, including as a result of factors outside of our control, such as
the number of record holders of the Series A Preferred or the Series B Preferred. Registration would mean, among other things,
that a holder of shares of the applicable series could be required to file beneficial ownership reports with the SEC, generally to
the extent such holder beneficially owns more than 5% of the shares of such series. Such holders therefore would become
subject to additional obligations and liabilities under the Exchange Act, which could include monetary penalties for failure to
file the required reports.
Decreases in the trading prices of our common stock could adversely affect the Series A Preferred, the Series B Preferred or
both.
Decreases in the trading price of our common stock, which could occur as the result of developments in our business
or from future sales of common stock by us or by holders of the common stock or for other reasons, may cause decreases in the
trading prices of the Series A Preferred, the Series B Preferred, or both. For example, in the future, we may sell shares of our
common stock to raise capital or to acquire interests in other companies. Any of these events may dilute an investor’s
ownership interest in the Company and adversely affect the trading price of our common stock and, in turn, the trading prices of
the Series A Preferred, the Series B Preferred, or both.
In addition, we have reserved shares of our common stock for issuance upon the exercise of stock options and upon
vesting of restricted stock units granted under our equity incentive plan. We also intend to grant additional restricted stock units,
and may grant other types of equity awards, under our equity incentive plans in the future. Any of these events, and any other
36
event that results in sales of a substantial amount of our common stock in the public market, or the perception that any such
sales may occur, could reduce the trading price of our common stock and, in turn, the trading prices of the Series A Preferred,
the Series B Preferred, or both. This could also impair our ability to raise additional capital through the sale of our securities.
Decreases in the trading price of the Series A Preferred or Series B Preferred could also adversely affect the price of the other
series. Any of the foregoing events could have a material adverse effect on holders of the Series A Preferred and holders of the
Series B Preferred and on the trading prices of the Series A Preferred, the Series B Preferred, or both.
Although the Series A Preferred and the Series B Preferred have characteristics similar to those of our common stock, the
differences may adversely affect the trading prices of the Series A Preferred and of the Series B Preferred.
Each share of Series A Preferred and each share of Series B Preferred is intended to have voting and dividend rights
and rights upon liquidation substantially similar to those of one share of our common stock, except that the Series A Preferred
and the Series B Preferred will have a dividend preference over the common stock, the ownership of the Series A Preferred will
be tracked on a publicly distributed ledger and we will have the right to redeem shares of Series A Preferred and/or Series B
Preferred and to convert the Series A Preferred into Series B Preferred. The Series A Preferred will also be subject to other
restrictions, particularly restrictions on ownership. These provisions may have a material adverse effect on the trading price of
the Series A Preferred.
We will have the right to convert the outstanding shares of Series A Preferred into shares of Series B Preferred at any time,
and the Series B Preferred might be trading for substantially less than the Series A Preferred at the time.
We will have the right to cause the conversion of all outstanding shares of Series A Preferred into shares of Series B
Preferred at any time. If we were to do so at a time when the Series B Preferred were trading at a price lower than the trading
price of the Series A Preferred, holders of Series A Preferred would likely experience an immediate and potentially material
decrease in the market value of the Series A Preferred they hold and of the Series B Preferred they would receive upon the
conversion. Investors should not purchase shares of Series A Preferred unless they are willing to hold shares of Series B
Preferred in lieu of shares of Series A Preferred.
The terms of the Series B Preferred could be amended after the issuance of the Series B Preferred without the consent of the
holders of the Series A Preferred.
The terms of the Series B Preferred may be amended without the consent of the holders of the Series A Preferred.
Nevertheless, we will have the right to cause the conversion of all outstanding shares of Series A Preferred into shares of
Series B Preferred at any time. Consequently, holders of Series A Preferred will be subject to the risk that their shares could be
converted into shares of Series B Preferred having terms different from those of the Series B Preferred at the date of issuance or
at the date of a holder's acquisition. Investors should not purchase shares of Series A Preferred unless they are willing to hold
shares of the Series B Preferred in lieu of the Series A Preferred and are willing to accept the risk that the terms of the Series B
Preferred could be amended prior to conversion without the consent of the holders of the Series A Preferred.
Even if the Series A Preferred and the Series B Preferred were to have characteristics identical to those of our common
stock, a share of Series A Preferred and/or Series B Preferred might nevertheless have a substantially lower market value
than a share of our common stock.
The trading prices of the Series A Preferred and the Series B Preferred may be substantially lower than the trading
price of our common stock at any time. The market for the Series B Preferred is expected to have substantially less liquidity
than the market for our common stock, which is traded on the Nasdaq Global Market, and the market for the Series A Preferred
may be even more limited. The Series B Preferred trades in the over-the-counter market rather than on any securities exchange,
and the Series A Preferred trades exclusively on the PRO Securities ATS utilizing the tØ Platform, which is a closed trading
platform that had not experienced public trading in any security prior to the issuance of the Series A Preferred. Consequently,
the trading prices of the Series A Preferred and the Series B Preferred may both be substantially lower than the trading price of
our common stock, which could have a material adverse effect on holders of Series A Preferred and holders of Series B
Preferred.
Holders of Preferred Stock have no rights with respect to our common stock, but they may be adversely affected by certain
events or changes made with respect to our common stock.
Holders of Preferred Stock have no rights with respect to our common stock, and no right to convert their Series A
Preferred or Series B Preferred into shares of common stock or to exchange their Series A Preferred or Series B Preferred for
shares of common stock, except that such holders have the right to vote with the common stock (together with the holders of the
37
other series of Preferred Stock) on any matter submitted to a vote of the holders of the common stock, the right to receive
payments upon liquidation pari passu with the holders of the common stock (together with the holders of the other series of
Preferred Stock) and the right to receive dividends (together with the holders of the other series of Preferred Stock) in
preference to the holders of the common stock and to participate in cash dividends, if any, paid on the common stock. Holders
of Preferred Stock do not have other rights of the holders of the common stock, including the right to respond to common stock
tender offers, if any, and their investment in the Series A Preferred and/or the Series B Preferred may be materially negatively
affected by any such event. Holders’ lack of any such rights, or the occurrence of any such event, could have a material adverse
effect on holders of Series A Preferred and holders of Series B Preferred and on the trading prices of the Series A Preferred and
the Series B Preferred.
Voting rights of holders of Preferred Stock generally will be limited to voting together with the holders of the common stock
as a single class, and the holders of the Series A Preferred and the holders of the Series B Preferred collectively will have
only a small percentage of the voting power on any matter submitted to the holders of the common stock and the Series A
Preferred and Series B Preferred, voting together as a single class.
Voting rights of holders of Preferred Stock generally will be limited to voting together with the holders of the common
stock as a single class. As of February 2, 2017, the 695,898 shares of Preferred Stock outstanding represented approximately
2.7% of the combined voting power of the Series A Preferred, the Series B Preferred and the common stock, voting together as
a single class. If an amendment requiring stockholder approval is proposed to our Amended and Restated Certificate of
Incorporation or our Amended and Restated Bylaws, the holders of the Series A Preferred and the holders of the Series B
Preferred will vote together with the holders of the common stock as a single class, but neither the holders of the Series A
Preferred nor the holders of the Series B Preferred will be entitled to a class vote on the amendment, unless the proposed
amendment would adversely affect the special rights, preferences, privileges and voting powers of the Series A Preferred or
Series B Preferred, respectively. Holders’ limited voting rights and any of the foregoing events could have a material adverse
effect on holders of Series A Preferred and holders of Series B Preferred and on the trading prices of the Series A Preferred and
the Series B Preferred.
Neither the holders of the Series A Preferred nor the holders of the Series B Preferred have any right, either together or as
separate classes, to elect any members of our board of directors.
Neither the holders of the Series A Preferred nor the holders of the Series B Preferred have any right by themselves,
either together or as separate classes, to elect any members of our board of directors. The holders of the Series A Preferred and
the holders of the Series B Preferred are entitled only to vote with the holders of the common stock (and with the holders of the
other class of preferred stock) as a single class in the election of directors and on any other matter coming before a vote of the
holders of the common stock. Holders’ lack of such rights could have a material adverse effect on holders of the Series A
Preferred and the holders of the Series B Preferred and the trading prices of the Series A Preferred and the Series B Preferred.
The Series A Preferred and the Series B Preferred rank junior to all of our and our subsidiaries’ liabilities, as well as the
capital stock of our subsidiaries held by third parties, in the event of a bankruptcy, liquidation or winding up of our or our
subsidiaries’ business.
In the event of our bankruptcy, liquidation or winding up, our assets will be available to make payments to holders of
Series A Preferred and to holders of Series B Preferred only after all of our liabilities have been paid, and neither the Series A
Preferred nor the Series B Preferred will have any preference over the common stock in the event of our bankruptcy, liquidation
or winding up. In addition, the Series A Preferred and Series B Preferred will rank structurally junior to all existing and future
liabilities of our subsidiaries, as well as the capital stock of our subsidiaries held by third parties, including employees holding
shares of our majority-owned subsidiary tØ.com and employees holding shares of any other direct or indirect subsidiary of
ours, whether now existing or created in the future, which issues shares or other equity interests to employees. We intend to
adopt an employee equity incentive plan pursuant to which tØ.com or a subsidiary of tØ.com would issue shares or other equity
interests or awards having the economic effects of equity interests to employees. The rights of holders of Preferred Stock to
participate in the assets of our subsidiaries upon any liquidation or reorganization of any subsidiary will rank junior to the
claims of creditors and third party equity holders of tØ.com and our other subsidiaries, whether now existing or created in the
future, including our employees holding shares of any of them. In the event of our bankruptcy, liquidation or winding up, there
may not be sufficient assets remaining, after paying our and our subsidiaries’ liabilities, to pay any amounts to the holders of
Series A Preferred or Series B Preferred then outstanding. As of December 31, 2016, we had liabilities of approximately $312.1
million. We may incur significant additional debt or other liabilities in the future. Any bankruptcy, liquidation or winding up of
the Company or any of its wholly or partially owned subsidiaries would have a material adverse effect on holders of Series A
Preferred and holders of Series B Preferred and the trading prices of the Series A Preferred and the Series B Preferred.
38
Our obligation to pay dividends on the Series A Preferred or on the Series B Preferred is limited, and our ability to pay
dividends on the Series A Preferred and on the Series B Preferred may be limited.
Our obligation to pay preferential dividends on the Series A Preferred and the Series B Preferred is subject to our
board of directors declaring such dividend payments. Further, although we will be contractually restricted from paying a
dividend on the common stock unless we have paid preferential cumulative 1.0% annual dividends on the Series A Preferred
and the Series B Preferred, we have never paid a dividend on the common stock and we have no intention of doing so.
Consequently, our failure to pay preferential dividends on the Series A Preferred and on the Series B Preferred might have no
legal effect on us at all, although it could adversely affect the trading prices of the Series A Preferred and of the Series B
Preferred. Further, our payment of any dividends will be subject to contractual and legal restrictions and other factors the board
deems relevant. Our current credit agreement contains financial covenants that could limit our ability to pay dividends. The
calculations that go into the financial covenants cannot necessarily be estimated in advance, and we are unable to give any
assurance that we would be able to pay dividends on the Series A Preferred, the Series B Preferred or both without violating our
current credit agreement. Further, we may elect not to pay dividends on the Series A Preferred, the Series B Preferred or both
rather than limiting other proposed expenditures, including expenditures that may not be contractually required, to avoid
violating, or avoid the risk of violating, our current credit agreement. Moreover, agreements governing any future indebtedness
of ours may further limit our ability to pay dividends on our capital stock, including the Series A Preferred and the Series B
Preferred. In addition, our ability to pay dividends is limited by applicable law. Any of the foregoing facts or events could have
a material adverse effect on the holders of the Series A Preferred and the holders of the Series B Preferred and on the trading
prices of the Series A Preferred and the Series B Preferred.
Purchasers of the Series A Preferred and of the Series B Preferred may be adversely affected by our issuance of any
subsequent series of preferred stock.
Neither the terms of the Series A Preferred nor the terms of the Series B Preferred restrict our ability to issue one or
more additional new series of preferred stock, any or all of which may rank equally with or have preferences over the Series A
Preferred and the Series B Preferred as to dividend payments, voting rights, rights upon liquidation or other types of rights. We
will have no obligation to consider the specific interests of the holders of Series A Preferred or the specific interests of the
holders of Series B Preferred in creating any such new series of preferred stock or engaging in any such offering or transaction.
Our creation of any such new series of preferred stock or our engaging in any such offering or transaction could have a material
adverse effect on the holders of Series A Preferred and the holders of Series B Preferred and the trading prices of the Series A
Preferred and the Series B Preferred.
It is uncertain whether the IRS will treat the Series A Preferred and Series B Preferred as common stock or preferred stock
for U.S. federal income tax purposes.
We intend to treat the Series A Preferred and Series B Preferred as common stock for U.S. federal income tax
purposes. Nevertheless, it is unclear whether the IRS will treat the Series A Preferred and Series B Preferred as common stock
for U.S. federal income tax purposes. If the IRS were not to treat either the Series A Preferred or the Series B Preferred as
common stock for U.S. federal income tax purposes, it could have a material adverse effect on the holders of Series A Preferred
and the holders of Series B Preferred, respectively, and on the trading prices of the Series A Preferred and the Series B
Preferred, respectively.
No guidance has been issued with respect to the effect of the PRO Securities ATS or the tØ Platform on the U.S. federal
income tax treatment of the Series A Preferred.
The PRO Securities ATS and the tØ Platform are novel and no guidance has been issued regarding the effect of the tØ
Platform (or, to our knowledge, any other similar platform) on the U.S. federal income tax treatment of any shares traded
utilizing it. Therefore, the effect of the tØ Platform, if any, on the U.S. federal income tax treatment of the Series A Preferred is
still unclear.
The restrictions on the tax reporting of holder’s cost basis in shares of Series A Preferred will not allow normal tax planning
in the sale of shares of Series A Preferred, and may result in disadvantageous tax consequences to a seller of Series A
Preferred.
Taxpayers must report gains and losses on sales of securities, and related cost basis information when they file their
income tax returns. Brokers, including Keystone, also have a requirement to report sales information to the IRS on Form 1099-
B. Taxpayers typically can elect one of several methods permitted by the IRS for their reporting of their cost basis in securities.
However, only one method of cost basis reporting (the first-in, first-out, or FIFO, method) will be available for the Series A
39
Preferred. Depending on an investor’s circumstances, FIFO may not be the best method for holders of Preferred Stock. In some
cases, it might be more beneficial for holders of Series A Preferred to report average cost or use another permitted method of
cost basis reporting. However, holders of Series A Preferred will not be able to elect any method other than FIFO to report their
sales information to the IRS. As a result, sellers of Series A Preferred may be required to pay more tax on their sales or to pay
taxes earlier than might have been required if other methods of cost basis reporting had been available.
Additional Specific Risks We Face
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,
2016, 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 net income in recent years, we incurred a net loss for 2011, and
interim net losses during 2015 and 2016. We may be unable to maintain profitability in the future. If our revenues grow more
slowly than we anticipate or decline, or if our expenses exceed our expectations, our financial results would be harmed and our
business, prospects, financial condition and results of operations could fall below the expectations of public market analysts and
investors. The occurrence of any of the foregoing could have a material adverse effect on our business.
If we fail to accurately forecast our expenses and revenues, our business, prospects, financial condition and results of
operations may suffer and the price of our securities may decline.
The rapidly evolving nature of our industry and the constantly evolving nature of our business make forecasting
operating results difficult. We periodically implement large, complex and expensive infrastructure upgrades in order to increase
our ability to handle larger volumes of sales and to develop or increase our ability to perform a variety of analytical procedures
relating to our business. We are continuing to upgrade and further expand these and other components of our infrastructure, and
are in the process of integrating infrastructure relating to the fintech company and broker-dealers we recently acquired. In the
past, we have experienced difficulties with upgrades of our infrastructure, and have incurred increased expenses as a result of
these difficulties. As a result of expenditures on our infrastructure and headquarters, our ability to reduce our expenditures is
and will be limited. Therefore, any significant shortfall in the revenues for which we have built and are continuing to build our
business could have a material adverse effect on our business.
Our insurance coverage and indemnity rights may not adequately protect us against loss.
The types, coverage, or the amounts of any insurance coverage we may carry from time to time may not be adequate to
compensate us for any losses we may actually incur in the operation of our business. Further, any insurance we may desire to
purchase may not be available to us on terms we find acceptable or at all. We are not indemnified by all of our suppliers, and
any indemnification rights we may have may not be enforceable or adequate to cover actual losses we may incur as a result of
our sales of their products. Actual losses for which we are not insured or indemnified, or which exceed our insurance coverage
or the capacity of our indemnitors or our ability to enforce our indemnity agreements, could have a material adverse effect on
our business.
We 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 and obsolescence, as well as risks of price erosion for these products. These risks are especially
significant because some of the merchandise we sell is characterized by seasonal trends, fashion trends, rapid technological
change, obsolescence and price erosion, and because we sometimes make large purchases of particular types of inventory.
Demand for our products is generally highly sensitive to price. If we fail to meet our customers’ price expectations, or if we are
unable to compete effectively with our competitors when they engage in aggressive pricing strategies or other competitive
activities, it could have a material adverse effect on our business.
Subject to our returns policies, we accept returns of products sold through our partners as well as products we sell in
our direct business, and we have the risk of reselling the returned products. In the past we have recorded charges for obsolete
inventory and have had to sell certain merchandise 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, the ability 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. If we 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
foreign suppliers and pay for inventory with U.S. dollars. If the dollar weakens with respect to foreign currencies, foreign
40
suppliers may require us to pay higher prices for products, which could negatively affect our profit margins. The occurrence of
any of the foregoing could have a material adverse effect on our business.
If we do not successfully optimize and operate our warehouse and customer service operations, our business could be
harmed.
We have expanded, contracted and otherwise modified our warehouse and customer service operations from time to
time in the past, and expect that we will continue to do so. We also contract with third parties to receive returns and process
orders. If we or our third party providers do not successfully optimize and operate our warehouse and customer service
operations, it could significantly limit our ability to meet customer demand, customer shipping or return time expectations, or
result in excessive costs and expenses for the size of our business. Because it is difficult to predict demand, we may not manage
our facilities in an optimal way, which may result in excess or insufficient inventory or warehousing capacity. We may also fail
to staff our fulfillment and customer service centers at optimal levels. Our failure to do so could negatively impact our
operating results and customer experience, and could have a material adverse effect on 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 products sufficient to meet customer demand, our business would be adversely affected. We may experience an
increase in our net shipping cost due to complimentary upgrades, split-shipments, and additional long-zone shipments necessary
to ensure timely delivery for the holiday season. In addition, we may be unable to adequately staff our fulfillment and customer
service centers during peak periods, and delivery services and other fulfillment companies and customer service providers may
be unable to meet the seasonal demand. The occurrence of any of the foregoing could have a material adverse effect on our
business.
Significant 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
anticipate, 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 to reduce the number of product returns may result in
customer dissatisfaction and/or fewer repeat customers. The occurrence of any of the foregoing could have a material adverse
effect on our business.
Changes in management roles and responsibilities, the loss of key personnel, or any inability to attract and retain additional
personnel could affect our ability to successfully grow our business.
Our performance is substantially dependent on the continued services and on the performance of our senior
management and other key personnel. Our performance also depends on our ability to retain and motivate our officers and key
employees. Changes in the roles and responsibilities of certain members of management or the loss of the services of any of our
executive officers or other key employees for any reason could harm our business. Occasionally, members of senior
management or key employees may find it necessary to take a leave 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, and in April 2016 he took a three-month personal leave of absence for medical reasons. We do not have
employment agreements with any of our key personnel and we do not maintain “key person” life insurance policies. Our future
success also depends on our ability to identify, attract, hire, train, retain and motivate other highly-skilled technical, managerial,
editorial, merchandising, marketing and customer service personnel. Competition for such personnel is intense. Our failure to
attract and retain the necessary personnel could have a material adverse effect on our business.
In order to obtain future revenue growth and sustain profitability, we must 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, search engines, affiliate marketing websites, directories and other website and e-commerce businesses to
provide content, advertising and other links that direct 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 we have terminated affiliate marketing websites as a
result of efforts by certain states to require us to collect sales taxes based on the presence of those third party Internet
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 these relationships, or develop and maintain new relationships for newly developed and necessary marketing services
on acceptable terms, our ability to attract new customers and our financial condition would suffer. In addition, certain of our
41
online marketing agreements may require us to pay upfront fees and make other payments prior to the realization of the sales, if
any, associated with those payments. Current or future relationships or agreements may fail to produce the sales that we
anticipate. We periodically conduct television and radio branding and advertising campaigns. Such campaigns are expensive
and may not result in the cost-effective acquisition of customers. Other means of utilizing social media campaigns to attract or
retain customers are expensive and may not result in cost-effective acquisition or retention of customers. The occurrence of any
of the foregoing risks or our inability to attract and retain customers on cost-effective terms could have a material adverse effect
on our business.
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 join Club 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, it could have a material adverse effect on our business.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
As of December 31, 2016, we operated the following facilities:
Corporate office space
• We own approximately 232,000 square feet of office space in Midvale, Utah, which consists of our corporate
headquarters.
• We lease approximately 12,000 square feet of additional office space in the United States for our Medici initiatives.
Warehouse, fulfillment and customer service space
• We lease approximately 1.2 million square feet in the United States for warehouse, fulfillment, customer service, and
other operations.
Data centers
• We lease approximately 9,700 square feet in the United States for various data centers.
Unless otherwise indicated, we use the above facilities in our direct and partner business segments and we believe that
these facilities will be sufficient for our needs for at least the next twelve months.
ITEM 3. LEGAL PROCEEDINGS
The information set forth under Item 15 of Part IV, "Financial Statements—Note 12. Commitments and Contingencies,
subheading Legal Proceedings," contained in the "Notes to Consolidated Financial Statements" of this Annual Report on
Form 10-K is incorporated by reference in answer to this Item.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
42
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
PART II
Market information
Our common stock is traded on the Nasdaq Global Market under the symbol "OSTK." The following table sets forth,
for the periods indicated, the high and low close prices per share for our common stock as reported by Nasdaq.
Year Ended December 31, 2015
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Year Ended December 31, 2016
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Stock Performance Graph
Common
Stock Price
High
Low
24.22
25.79
23.24
17.66
15.25
17.68
17.18
19.10
21.33
20.68
17.16
12.04
10.36
14.30
14.48
13.10
The stock performance graph is included in Part III, Item 12.
Securities Authorized for Issuance under Equity Compensation Plans
Disclosure relating to our equity compensation plans will be incorporated by reference into Part III, Item 12 from our
Proxy Statement for the 2017 annual meeting of stockholders.
Holders
As of February 24, 2017, there were 143 holders of record of our common stock. Many of our shares of common stock
are held by brokers and other institutions on behalf of the beneficial owners.
Dividends
We have never declared or paid any cash dividends on our common stock. We currently intend to retain any earnings
for future growth and do not anticipate paying any cash dividends on our common stock in the foreseeable future. Any future
determination to pay dividends on our common stock will be at the discretion of our board of directors and will depend on our
results of operations, financial conditions, contractual and legal restrictions and other factors the board of directors deems
relevant. Our loan agreement with U.S. Bank and other banks contains financial covenants that may restrict our ability to pay
dividends.
Recent sales of unregistered securities
During 2016, we maintained a Non-Qualified Deferred Compensation plan for senior management. The plan allows
eligible members of senior management to defer their receipt of compensation, subject to the restrictions contained in the plan.
To the extent that interests in the plan constitute securities, we believe that any issuance of interests was exempt from the
registration requirements of the Securities Act of 1933, as amended, pursuant to Section 4(a)(2) thereof and/or Rule 506 of
Regulation D thereunder as a transaction not involving a public offering. Any interests issued were not sold for cash or other
consideration, and there were no proceeds to us.
Issuer purchases of equity securities
43
We 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 of 1934, as amended, of shares of our common stock during the fourth quarter of 2016.
On January 27, 2017 we entered into and consummated an agreement to purchase 604,229 shares of our common
stock from Fairfax Financial Holdings Limited (“Fairfax”) at $16.55 per share, for an aggregate purchase price of $10
million. Prior to the sale of the shares, Fairfax was the beneficial owner of approximately 12.5% of the Company’s common
stock. After the sale Fairfax was the beneficial owner of approximately 10.4% of our common stock.
Preferred Stock
In December 2016, we issued 695,898 shares of our preferred stock, consisting of 126,565 shares of our Blockchain
Voting Series A Preferred Stock (the “Series A Preferred”) and 569,333 shares of our Voting Series B Preferred Stock (the
“Series B Preferred” and together with the Series A Preferred, the “Preferred Stock”). Neither the Series A Preferred Stock nor
the Series B Preferred Stock is registered under the Securities Exchange Act of 1934, as amended. The Series A Preferred are
digital securities that trade exclusively on a registered alternative trading system (“ATS”) operated by our majority-owned
subsidiary, PRO Securities, LLC (the “PRO Securities ATS”), utilizing software technology known as the tØ® Issuance and
Trading Platform (the “tØ Platform”). Keystone Capital Corporation (“Keystone”) is the sole broker-dealer authorized to
provide investors with access to the Series A Preferred through the PRO Securities ATS utilizing the tØ Platform. The Series B
Preferred are non-digital securities that trade in the over-the-counter market and we expect the securities to be quoted on the
OTCQB market operated by OTC Markets Group. We have encountered an unexpected delay in the quotation of the Series B
Preferred on the OTCQB. OTC Markets is unable to publicly provide quotation or trade data until FINRA clears a Form 211
filed by a broker dealer. We understand that one or more broker dealers have made Form 211 filings with FINRA, but to date
FINRA has not cleared any of them.
Except as required by law, the Preferred Stock vote with the common stock on all matters. Holders of the Preferred
Stock have one vote for each share held. As of February 2, 2017, the 695,898 shares of Preferred Stock constituted
approximately 2.7% of the total number of shares of the Preferred Stock and the common stock, taken together. The Preferred
Stock ranks senior to the common stock with respect to dividends. Holders of the Preferred Stock will be entitled to an annual
cash dividend equal to 1.0% of the subscription price for the Preferred Stock, rounded to the nearest $0.01, in preference to any
dividend payment to the holders of the common stock, out of funds legally available for payment of dividends and subject to
declaration by our board of directors. Holders of the Preferred Stock are also entitled to participate in any cash dividends we
pay to the holders of the common stock and are also entitled to participate in non-cash dividends we pay to holders of the
common stock, subject to different treatment if we effect a stock dividend, stock split or combination of the common stock. The
Preferred Stock ranks on a parity with the common stock with respect to rights upon the liquidation, winding up or dissolution
of the Company. If we are party to any merger or consolidation in which our common stock is changed into or exchanged for
stock or other securities of any other person (or the Company) or cash or any other property (or a right to receive the
foregoing), we will use all commercially reasonable efforts to cause each outstanding share of the Preferred Stock to be treated
as if such share were an additional outstanding share of common stock in connection with any such transaction.
Stock based compensation
Stock options
Our board of directors adopted the 2005 Equity Incentive Plan and it was most recently amended and restated and re-
approved by the stockholders on May 3, 2012 (as so amended and restated, the "Plan"). Under the Plan, the board of directors
may issue incentive stock options to our employees and directors and non-qualified stock options to consultants, as well as
restricted stock units and other types of equity awards of the Company. 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. We did not grant any options during the years ended December 31, 2016, 2015 and 2014. At December 31,
2016, 2.1 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):
44
Outstanding—beginning of year
Exercised
Expired/Forfeited
Outstanding—end of year
Options exercisable at year-end
2016
2015
2014
Weighted
Average
Exercise
Price
Weighted
Average
Exercise
Price
Shares
Weighted
Average
Exercise
Price
Shares
Shares
204
$
(42)
(6)
156
156
$
$
17.27
17.08
17.08
17.33
17.33
224
(16)
(4)
204
204
$
$
$
17.27
16.94
18.26
17.27
17.27
273
(30)
(19)
224
224
$
$
$
17.30
17.08
18.00
17.27
17.27
Stock options vest over four years at 28% at the end of the first year and 2% each month thereafter. The most recent
stock options were granted in May 2008 and have fully vested. There was no stock based compensation related to stock options
recorded during the years ended December 31, 2016, 2015 and 2014.
Restricted stock units activity
During the years ended December 31, 2016, 2015 and 2014, we granted 541,000, 239,000 and 242,000 restricted stock
units, respectively, under the Plan. 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 either recognized on a straight line basis over the vesting schedule or on an
accelerated schedule when vesting of restricted stock awards exceeds a straight line basis. The weighted average grant date fair
value of restricted stock units granted during the years ended December 31, 2016, 2015 and 2014 was $14.52, $24.60 and
$28.24, respectively.
The following is a summary of restricted stock unit activity (amounts in thousands, except per share data):
Outstanding—beginning of year
Granted at fair value
Vested
Forfeited
Outstanding—end of year
2016
2015
2014
Weighted
Average
Grant Date
Fair Value
Units
Weighted
Average
Grant Date
Fair Value
Units
Weighted
Average
Grant Date
Fair Value
Units
$
349
541
(219)
(111)
560
$
24.80
14.52
22.57
16.52
17.46
578
$
239
(377)
(91)
349
$
16.70
24.60
12.34
24.35
24.80
704
$
242
(302)
(66)
578
$
10.79
28.24
11.87
17.70
16.70
Restricted stock units granted in 2016, 2015 and 2014 vest over three years at 33.3% at the end of each of the first,
second and third year. Each restricted stock unit represents the right to one share of common stock upon vesting. During the
years ended December 31, 2016, 2015 and 2014, we recorded stock based compensation expense related to restricted stock
units of $4.9 million, $3.5 million and $4.0 million, respectively.
45
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data presented below should be read in conjunction with the consolidated financial
statements of Overstock.com, Inc. and related footnotes included elsewhere in this Annual Report on Form 10-K and the
discussion under Item 7—"Management's Discussion and Analysis of Financial Condition and Results of Operations." The
selected consolidated financial data has been derived from our audited consolidated financial statements included elsewhere in
this Annual Report on Form 10-K. The historical financial and operating information may not be indicative of our future
performance.
Consolidated Statement of Income Data:
Revenue, net
Direct
Partner and other
Total net revenue
Cost of goods sold
Direct
Partner and other
Total cost of goods sold
Gross profit
Operating expenses:
Sales and marketing
Technology
General and administrative
Litigation settlement
Restructuring (2)
Total operating expenses
Operating income (loss)
Interest income
Interest expense
Other income (expense), net
Income before income taxes
Provision (benefit) for income taxes
Consolidated net income
Less: Net loss attributable to noncontrolling interests
Net income attributable to stockholders of Overstock.com,
Inc.
Net income per common share—basic:
Net income attributable to common shares—basic
Weighted average common shares outstanding—basic
Net income per common share—diluted:
Net income attributable to common shares—diluted
Weighted average common shares outstanding—diluted
Year ended December 31,
2016
2015
2014
2013 (1)
2012
(in thousands, except per share data)
$ 101,578
1,698,385
1,799,963
$ 137,783
1,520,055
1,657,838
$ 147,460
1,349,643
1,497,103
$ 156,032
1,148,185
1,304,217
$ 155,516
943,773
1,099,289
96,271
1,372,343
1,468,614
331,349
128,077
1,225,107
1,353,184
304,654
129,253
1,088,791
1,218,044
279,059
136,282
920,275
1,056,557
247,660
147,896
106,760
89,298
(19,520)
—
324,434
6,915
326
(877)
14,181
20,545
9,297
11,248
(1,274)
12,522
0.49
25,342
0.49
25,426
$
$
$
$
124,468
98,533
82,187
—
—
305,188
(534)
155
(140)
3,634
3,115
1,895
1,220
(1,226)
2,446
0.10
24,612
0.10
24,703
109,461
86,258
71,777
—
(360)
267,136
11,923
152
(39)
1,169
13,205
4,404
8,801
(53)
8,854
0.37
23,999
0.36
24,317
$
$
$
$
91,609
71,788
68,169
—
(471)
231,095
16,565
127
(113)
(235)
16,344
(68,034)
84,378
—
84,378
3.56
23,714
3.47
24,294
$
$
$
$
$
$
$
$
$
$
$
$
140,536
760,323
900,859
198,430
63,467
65,467
57,259
—
76
186,269
12,161
116
(809)
3,686
15,154
485
14,669
—
14,669
0.63
23,387
0.62
23,672
See the footnotes beneath the balance sheet data on the following page.
46
Balance Sheet Data:
Cash and cash equivalents
Restricted cash
Working capital
Total assets
Total liabilities
Stockholders' equity
As of December 31,
2016
2015
2014
2013 (1)
2012
(in thousands)
$ 183,098
$ 170,262
$ 181,641
$ 148,665
$
93,547
430
11,425
485,076
312,116
172,960
430
(10,308)
428,389
279,028
149,361
580
15,260
376,865
247,645
129,220
1,580
25,425
315,636
196,876
118,760
1,905
7,497
181,985
151,023
30,962
(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 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 tax assets 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. We evaluated these changes in accordance with Staff Accounting
Bulletin No. 99, Materiality ("SAB 99"), and Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements 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 expense structure in an effort to improve future operating performance.
Redeemable preferred stock
In December 2016, we issued 695,898 shares of our preferred stock, consisting of 126,565 shares of our Blockchain
Voting Series A Preferred Stock (the “Series A Preferred”) and 569,333 shares of our Voting Series B Preferred Stock (the
“Series B Preferred” and together with the Series A Preferred, the “Preferred Stock”).
Neither the Series A Preferred or Series B Preferred is convertible into or exchangeable for shares of our common
stock or any other entity, however, at our sole discretion, we may convert the Series A Preferred shares into Series B Preferred
shares at any time on a one-to-one basis. Until the third anniversary of the Original Issuance Date, we may redeem, at our
discretion, both the Series A and Series B Preferred shares for an amount equal to the highest of the following: (1) the
subscription price plus any accrued but unpaid dividends, (2) 105% of the average trading price of our common stock during a
five-trading-day period and (3) 105% of the average trading price of the series of preferred shares during the same five-day-
trading period. In the event of any liquidation, any amount available for distribution to stockholders after payment of all
liabilities will be distributed proportionately, with each share of Series A Preferred and each share of Series B Preferred being
treated as though it were a share of our common stock.
47
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion and analysis contains forward-looking statement relating to future events or our future
financial or operating performance that involve risks and uncertainties, as set forth above under "Special Cautionary Note
Regarding Forward-Looking Statements." Our actual results could differ 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" or
elsewhere in this Annual Report on Form 10-K.
Introduction
We are an online retailer and incubator of blockchain technology. Through our online retail business we offer a broad
range of price-competitive brand name, non-brand name and closeout products, including furniture, home decor, bedding and
bath, housewares, jewelry and watches, apparel and designer accessories, health and beauty products, electronics and
computers, and sporting goods, among other products. We also sell hundreds of thousands of best seller and current run books,
magazines, CDs, DVDs and video games (“BMMG”). We sell these products and services through our Internet websites located
at www.overstock.com, www.o.co and www.o.biz (referred to collectively as the “Website”). Although our three websites are
located at different domain addresses, the technology and equipment and processes supporting the Website and the process of
order fulfillment described herein are the same for all three websites.
In late 2014, we began working on initiatives to develop and advance blockchain technology, which we refer to
collectively as Medici, and which includes our majority-owned subsidiary tØ.com, Inc. (formerly Medici, Inc.). As part of our
Medici initiatives, we have formed a wholly-owned subsidiary Medici Ventures, Inc. and acquired a majority interest in a
financial technology company and two related registered broker-dealers. We have also made minority investments in several
blockchain technology companies. In 2015, we were the first public company to issue a private security using blockchain
technology and in December 2016, as a successful demonstration of our technology, we issued publicly traded blockchain
preferred shares of Overstock.com, Inc.
Our company, based near Salt Lake City, Utah, was founded in 1997. We launched our initial website in March 1999
and were re-incorporated in Delaware in 2002. As used herein, “Overstock,” “Overstock.com,”, “O.co,” “we,” “our” and
similar terms include Overstock.com, Inc. and our majority-owned subsidiaries, unless the context indicates otherwise.
Our Business
In our retail business, we deal primarily in price-competitive, new and replenishable merchandise and use the Internet
to aggregate both supply and demand to create an efficient marketplace for selling these products. We provide our customers an
opportunity to conveniently shop for a broad range of price-competitive products. We continually add new, and sometimes
limited, inventory to our Website in order to create an atmosphere that encourages customers to visit frequently and purchase
products before our inventory sells out. We provide suppliers with access to a large customer base and convenient services for
order fulfillment, customer service, returns handling, and other services. The merchandise offered on our Website is from a
variety of sources including well-known, brand-name manufacturers. We have organized our retail business (sales of product
offered through the Shopping Section of our Website) into two principal segments-a "direct" business and a "partner" business.
We currently offer approximately 1.9 million non-BMMG products and approximately 742,000 BMMG products. Consumers
and businesses are able to access and purchase our products 24 hours a day from the convenience of a computer, Internet-
enabled mobile telephone or other Internet-enabled device. Our team of customer service representatives assists customers by
telephone, instant online chat and e-mail. We also derive revenue from other businesses advertising products or services on our
Website. Our sales are primarily to customers located in the United States. During the years ended December 31, 2016, 2015
and 2014 no single customer accounted for more than 1% of our total net revenue.
Retail direct business
Our direct business includes sales made to individual consumers and businesses from our owned inventory and that are
fulfilled primarily from our warehouse in Salt Lake City, Utah. During the year ended December 31, 2016, approximately 6%
of our order volume was generated through our direct business. Our warehouses primarily fulfill orders from our direct
business, but also fulfill orders on behalf of our partners through our Supplier Oasis offering described below. Our warehouses
generally ship between 2,000 and 5,000 packages per day and up to approximately 10,000 packages per day during peak
periods.
Retail partner business
48
For our partner business, we sell merchandise from manufacturers, distributors and other suppliers ("partners")
primarily through our Website. We are considered to be the primary obligor for the majority of these sales transactions and we
record revenue from the majority of these sales transactions on a gross basis. Our use of the term "partner" does not mean that
we have formed any legal partnerships with any of our partners. We currently have relationships with approximately 4,100 third
parties who supply approximately $1.9 million non-BMMG products, as well as most of the BMMG products, on our Website.
These third party partners generally perform the same fulfillment operations as our warehouses, such as order picking and
shipping; however, we handle returns and customer service related to substantially all orders placed through our Website.
Revenue generated from sales on our Shopping site from both the direct and partner businesses is recorded net of returns,
coupons and other discounts.
Both direct and partner revenues are seasonal, with revenues historically being the highest in the fourth quarter, which
ends December 31, reflecting higher consumer holiday spending. We anticipate this will continue for the foreseeable future. To
the extent possible we maintain supplier relationships, and seek new supplier relationships, for both our direct and partner
businesses, and also use our working capital, to ensure a continuous allotment of product offerings for our customers. Because a
portion of our product offerings are closeout merchandise, some of our suppliers cannot supply products to us on a continuous
basis.
Generally, we require verification of receipt of payment, or authorization from credit card or other payment vendors
whose services we offer to our customers (such as PayPal), before we ship products to consumers or business purchasers. From
time to time we grant credit to our business purchasers with normal credit terms (typically 30 days). For sales in our partner
business, we generally receive payments from our customers before our payments to our suppliers are due.
Medici business
Our Medici business initiatives leverage the security, transparency and immutability of cryptographically protected,
distributed ledgers, such as the Blockchain, and are focused on solving important problems, including financial transaction
issues, particularly in the area of securities settlement. Through our wholly-owned subsidiary, Medici Ventures Inc., we hold
minority investments in several technology companies which, at December 31, 2016, included Peer Nova, Bitt, IdentityMind
and Factom, whose focus include commercial blockchain applications, digital currency solutions, Know Your Customer and
Anti Money Laundering compliance, voting and land titling. Medici Ventures also holds a majority interest in tØ.com, Inc.,
which includes a financial technology company and two related registered broker-dealers.
As described further in Item 15 of Part IV, "Financial Statements"-Note 21. Business Segments, contained in the
"Notes to Consolidated Financial Statements" of this Annual Report on Form 10-K, we determined our segments based on how
we manage our business, which, in our view, consists primarily of our Retail and Medici businesses. As described above, our
Retail business consists of our Direct and Partner reportable segments. We use gross profit as the measure to determine our
reportable segments because there is not discrete financial information available below gross profit for our Direct and Partner
segments. As a result, our Medici business is not significant as compared to our Direct and Partner segments and is included in
Other. Our Other segment consists of Medici.
Other offerings
We offer additional products or services that may 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
to help improve the lives of people in emerging economies;
• Main Street Revolution, a store within our Website that features products from small businesses who offer their
•
•
•
•
•
products using our national marketing and distribution channels;
Farmers Market, a tab within our Website where our customers, in certain locations, can order locally grown fresh
produce and other food products;
Pet Adoptions, a free service and tab within our Website that leverages our technology to display pets available for
adoption from shelters across the United States;
Insurance, a tab within our Website where our customers can shop for insurance from major carriers for both personal
and business insurance policies; and
Supplier Oasis, a single integration point through which our partners can manage their products, inventory and sales
channels, while tapping into our distribution network; and
our international business where we offer products to customers outside the United States using third party logistics
providers.
49
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles ("GAAP")
requires estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and related
disclosures of contingent assets and liabilities in the consolidated financial statements and accompanying notes. The Securities
and Exchange Commission ("SEC") has defined a company's critical accounting policies 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 to make its most
difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Based
on this definition, we have identified the critical accounting policies, estimates and judgments addressed below. We also have
other key accounting policies, which involve 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 based upon 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;
the valuation and impairment evaluation of long-lived assets including goodwill, intangible assets other than goodwill
and cost method investments; and
loss contingencies.
Revenue recognition
We derive our revenue primarily from retail merchandise sales on our Website. We also earn revenue from advertising
on our Website and from other sources. We have organized our retail operations into two principal reporting segments based on
the primary source of revenue: direct revenue and partner and other revenue (see Item 15 of Part IV, "Financial Statements"—
Note 21. Business Segments).
Revenue is recognized when the following revenue recognition criteria are met: (1) persuasive evidence of an
arrangement exists; (2) delivery has occurred or the service has been provided; (3) the selling price or fee revenue earned is
fixed or determinable; and (4) collection of the resulting receivable is reasonably assured. Revenue related to merchandise sales
is recognized upon delivery to our customers. As we ship high volumes of packages through multiple carriers, it is not practical
for us to track the actual delivery date of each shipment. Therefore, we use estimates to determine which shipments are
delivered and, therefore, recognized as revenue at the end of the period. Our delivery date estimates are based on average
shipping transit times, which are calculated using the following factors: (i) the type of shipping carrier (as carriers have
different in-transit times); (ii) the fulfillment source (either our warehouses, those warehouses we control, or those of our
partners); (iii) the delivery destination; and (iv) actual transit time experience, which shows that delivery date is typically one to
eight business days from the date of shipment. We review and update our estimates on a quarterly basis based on our actual
transit time experience. However, actual shipping times may differ from our estimates.
Based upon our historical experience, revenue typically increases during the fourth quarter because of the holiday
retail season and decreases in the following quarter(s).
50
The following table shows the effect that hypothetical changes in the estimate of average shipping transit times would
have had on the reported amount of revenue and income before taxes for the year ended December 31, 2016 (in thousands):
Change in the Estimate of Average Transit Times (Days)
2
1
As reported
(1)
(2)
Year Ended
December 31, 2016
Increase (Decrease)
Revenue
Increase (Decrease)
Income Before Tax
$
$
$
$
(14,068) $
(10,692) $
As reported
6,280
11,162
$
$
(1,830)
(1,396)
As reported
822
1,461
When we are the primary obligor in a transaction, are subject to inventory risk, have latitude in establishing prices and
selecting suppliers, or have several but not all of these indicators, revenue is recorded gross. If we are not the primary obligor in
the transaction and amounts earned are determined using a fixed percentage, revenue is recorded on a net basis. Currently, the
majority of both direct revenue and partner revenue is recorded on a gross basis, as we are the primary obligor. In our
statements of income, we present revenue net of sales taxes.
We periodically provide incentive offers to our customers to encourage purchases. Such offers include current discount
offers, such as percentage discounts off current purchases and other similar offers, which, when used by our customers, are
treated as a reduction of revenue.
Deferred revenue
Customer orders are recorded as deferred revenue prior to delivery of products or services ordered. We record amounts
received for Club O Gold membership fees as deferred revenue and we recognize it ratably over the membership period. We
record Club O Reward dollars earned from purchases as deferred revenue at the time they are earned and we recognize it as
revenue upon redemption. If reward dollars are not redeemed, we recognize other income upon expiration. In addition, we sell
gift cards and record related deferred revenue at the time of the sale. We sell gift cards without expiration dates and we
recognize revenue from a gift card upon redemption of the gift card. If a gift card is not redeemed, we recognize other income
when the likelihood of its redemption becomes remote based on our historical redemption experience. We consider the
likelihood of redemption to be remote after 36 months.
We periodically enter into agreements with other parties to jointly market ancillary products or services on our
website. As a result of those agreements, we sometimes receive payments in advance of performing our obligations under those
agreements. Such payments received before we perform our obligations are initially recorded as deferred revenue and then
recognized over our service period.
Sales returns allowance
We inspect returned items when they arrive at our processing facility. We refund the full cost of the merchandise
returned and all original shipping charges if the returned item is defective or we or our partners have made an error, such as
shipping the wrong product.
If the return is not a result of a product defect or a fulfillment error and the customer initiates a return of an unopened
item within 30 days of delivery, for most products we refund the full cost of the merchandise minus the original shipping charge
and actual return shipping fees. However, we reduce refunds for returns initiated more than 30 days after delivery or that are
received at our returns processing facility more than 45 days after initial delivery.
If our customer returns an item that has been opened or shows signs of wear, we issue a partial refund minus the
original shipping charge and actual return shipping fees.
Revenue is recorded net of estimated returns. We record an allowance for returns based on current period revenues and
historical returns experience. We analyze actual historical returns, current economic trends and changes in order volume and
acceptance of our products when evaluating the adequacy of the sales returns allowance in any accounting period.
51
The allowance for returns was $18.2 million and $17.9 million at December 31, 2016 and 2015, 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 lower of cost or market value based upon assumptions about future demand
and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory
write-downs may be required. Once established, the original cost of the inventory less the related inventory allowance
represents the new cost basis of such products. Reversal of the allowance is recognized only when the related inventory has
been sold or scrapped.
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 enhance our Website and processes supporting our business. We capitalize costs incurred during the
application development stage of internal-use software and amortize these costs over the estimated useful life of two to three
years. Costs incurred related to design or maintenance of internal-use software are expensed as incurred.
Accounting for income taxes
We are subject to taxation from federal, state and international jurisdictions. A significant amount of judgment is
involved in preparing our provision 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 of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the
expected future tax consequences of temporary differences between tax and financial reporting. Deferred tax assets and
liabilities are measured using the currently enacted tax rates that apply to taxable income 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 the period in which tax
benefits for excess share-based deductions are recognized.
We assess the available positive and negative evidence to estimate whether we will generate sufficient future taxable
income to use our existing deferred tax assets. We have concluded based on all available evidence that it is more likely than not
that our deferred tax assets as of December 31, 2016 arising from ordinary income and deductions and tax credits will be
realized in the future, with the exception of operating losses generated by separate tax-filing subsidiaries in domestic and
foreign jurisdictions. We have also concluded that it is unlikely that our deferred tax asset arising from capital losses will be
realized in the future. Therefore, it is appropriate to record a valuation allowance related to the deferred tax assets for net
operating losses and credits generated in domestic and foreign separate filing jurisdictions and capital losses. In reaching these
conclusions we considered, among other things, our recent financial and operating results (three years of cumulative income
and revenue growth during those periods), along with our forecasted growth rates, projected future taxable income, and prudent
and feasible tax planning strategies. We perform sensitivity analyses to address how potential changes in significant
assumptions would impact our ability to generate the minimum amount of taxable income required. We give the most weight to
objective evidence related to our more recent financial results. Based upon the level of historical taxable income and projections
for future taxable income, and planned tax strategies over the periods in which the deferred tax assets are deductible, we believe
it is more likely than not that we will realize the benefits of these deduction differences, net of existing valuation allowances.
However, it is possible that certain state tax credits could ultimately expire unused if estimates of future apportioned taxable
income during the carryforward period are reduced. We will continue to monitor the need for a valuation allowance against our
federal and state 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. ASC 740 prescribes a recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a tax return. This statement also provides
guidance on de-recognition, classification, interest and penalties, accounting in interim periods, and disclosure.
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 other tax jurisdictions based on recognition and measurement criteria
prescribed by ASC 740. The liabilities are periodically reviewed for their adequacy and appropriateness. Changes to our
assumptions could cause us to find a revision of estimates appropriate. Such a change in measurement would result in the
recognition of a tax benefit or an additional charge to the tax provision.
52
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 the largest 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 tax authority.
As of December 31, 2016, we are not under audit by any income tax authorities. As of December 31, 2015, we were
under audit by the Internal Revenue Service for our 2013 federal income tax return. The audit concluded in 2016 with no
changes to the return. Tax periods within the statutory period of limitations not previously audited are potentially open for
examination by the tax authorities. Potential liabilities associated with these years will be resolved when an event occurs to
warrant closure, primarily through the completion of audits by the tax jurisdictions and/or the expiration of the statutes of
limitation. To the extent audits 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 that an 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 consolidated balance sheets. To the extent interest and penalties would be assessed by taxing authorities on any
underpayment of income taxes, such amounts are accrued and classified as a component of income tax expense on our
consolidated statements of income and comprehensive income. Realization of the unrecognized tax benefits results in a
favorable impact to the effective tax rate.
Goodwill
Goodwill represents the excess of the purchase price paid over the fair value of the net assets acquired in business
combinations. Goodwill is not amortized but is tested for impairment at least annually. When evaluating whether goodwill is
impaired, we make a qualitative assessment to determine if it is more likely than not that its fair value is less than its carrying
amount. If the qualitative assessment determines that it is more likely than not that its fair value is less than its carrying amount,
we compare the fair value of the reporting unit to which the goodwill is assigned to its carrying amount. If the carrying amount
exceeds its fair value, then the amount of the impairment loss must be measured. The impairment loss, if any, is calculated by
comparing the implied fair value of the goodwill to its carrying amount. In calculating the implied fair value of goodwill, the
fair value of the reporting unit is allocated to the other assets and liabilities within the reporting unit based on estimated fair
value. The excess of the fair value of a reporting unit over the amount allocated to its other assets and liabilities is the implied
fair value of goodwill. An impairment loss is recognized when the carrying amount of goodwill exceeds its implied fair value.
In accordance with this guidance, we test for impairment of goodwill in the fourth quarter or when we deem that a
triggering event has occurred. Goodwill totaled $14.7 million and $15.4 million at December 31, 2016 and 2015, respectively.
There were no impairments to goodwill recorded during the years ended December 31, 2016, 2015 and 2014.
For the year ended December 31, 2016, we recognized a $689,000 adjustment in goodwill related to a business
combination as described in Item 15 of Part IV, "Financial Statements"—Note 3. Acquisitions, Goodwill, and Acquired
Intangible Assets. The change in goodwill relates to a non-reportable segment, included in Other as described in Note 21—
Business Segments.
Intangible assets other than goodwill
We capitalize and amortize intangible assets other than goodwill over their estimated useful lives unless such lives are
indefinite. Intangible assets other than goodwill acquired separately from third-parties are capitalized at cost while such assets
acquired as part of a business combination are capitalized at their acquisition-date fair value. Intangible assets other than
goodwill are amortized using the straight line method of amortization over their useful lives, with the exception of certain
intangibles (such as acquired technology, customer relationships, and trade names) which are amortized using an accelerated
method of amortization based on cash flows. These assets are reviewed for impairment whenever events or changes in
circumstances indicate that their carrying amount may not be recoverable as described below under Impairment of long-lived
assets.
During the years ended December 31, 2015 and 2016, we acquired $16.0 million of intangible assets other than
goodwill related to a business combination as described in Note 3—Acquisitions, Goodwill, and Acquired Intangible Assets.
Aggregate amortization expense for intangible assets other than goodwill was $4.0 million and $1.6 million for the years ended
December 31, 2016 and 2015, respectively. Aggregate amortization expense for intangible assets other than goodwill was not
significant for the year ended December 31, 2014.
53
Intangible assets consist of the following (in thousands):
Acquired intangible assets
Intangible assets, other
Less: accumulated amortization of intangible assets
Total intangible assets, net
Impairment of long-lived assets
December 31,
2016
2015
16,000
1,356
17,356
(6,443)
10,913
$
$
15,776
1,355
17,131
(2,475)
14,656
$
$
We review property and equipment and other long-lived assets, including intangible assets other than goodwill, for
impairment whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be
recoverable. Recoverability is measured by comparison of the assets’ carrying amount to future undiscounted net cash flows the
asset group is expected to generate. Cash flow forecasts are based on trends of historical performance and management’s
estimate of future performance, giving consideration to existing and anticipated competitive and economic conditions. If such
asset group is considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds their fair values. There were no impairments to long-lived assets recorded during the years ended
December 31, 2016, 2015 and 2014.
Cost method investments
At December 31, 2016, we held minority interests (less than 20%) in six privately held entities, which include
PeerNova, Bitt, IdentityMind, Factom, MarkaVIP and View Glass. The total aggregate amount of these investments (excluding
any adjustments for impairment) was approximately $14.6 million. Based on the nature of one of our investments, we have a
variable interest. However, because we do not have power to direct the investee's activities, and therefore we are not the
investee's primary beneficiary, we do not consolidate the investee in our financial statements. In June 2016, in order to maintain
our proportional interest, we made a $200,000 convertible loan to an investee. The loan will convert to an equity interest no
later than January 2018. In October 2016, we made a $618,000 convertible loan to an investee. The loan will convert to an
equity interest no later than April 2017.
These investments are recognized as cost method investments included in Other long-term assets, net in our
consolidated balance sheets. Earnings from the investments are recognized to the extent of dividends received, and we will
recognize subsequent impairments to the investment if they are other than temporary. We review these investments individually
for impairment by evaluating if events or circumstances have occurred that may have a significant adverse effect on their fair
value. If such events or circumstances have occurred, we will estimate the fair value of the investment and determine if any
decline in the fair value of the investment below its carrying value is other-than-temporary. In such cases, the estimated fair
value of the investment is determined using unobservable inputs including assumptions by the investee's management. These
inputs are classified as Level 3. Because several of our investees are in the early startup or development stages, these entities
are subject to potential changes in cash flows, valuation, and inability to attract new investors which may be necessary for the
liquidity needed to support their operations. We have an investment of approximately $5.6 million that may be at risk of
impairment in the near-term that we expect to continue to monitor closely.
At December 31, 2016, the carrying amount of our cost method investments was $11.8 million. We recognized a $2.9
million impairment loss during the year ended December 31, 2016, which consisted of the entire carrying amount of the related
investment. The impairment loss was recorded in Other income, net on the consolidated statements of income. We
recognized no impairment losses during the years ended December 31, 2015 and 2014.
Loss contingencies
In the normal course of business, we are involved in legal proceedings and other potential loss contingencies. We
accrue a liability for such matters when it is probable that a loss has been incurred and the amount can be reasonably estimated.
When only a range of probable loss can be estimated, the most probable amount in the range is accrued. If no amount within
this range is a better estimate than any other amount within the range, the minimum amount in the range is accrued. We expense
legal fees as incurred (see Item 15 of Part IV, "Financial Statements"—Note 12. Commitments and Contingencies).
54
Recently issued accounting standards
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which requires an entity to
recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers.
The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. In July 2015, the
FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which
deferred the effective date for us of ASU No. 2014-09 to January 1, 2018. Early adoption of ASU No. 2014-09 is permitted, but
not before its original effective date. In March 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with
Customers - Principal versus Agent Considerations. This ASU clarifies the implementation guidance for principal versus agent
considerations in ASU No. 2014-09 and provides indicators that assist in the assessment of control. ASU No. 2016-08 is
effective for us beginning January 1, 2018. In 2016, the FASB issued additional implementation guidance for the new revenue
recognition standards. These standards permit the use of either the retrospective or cumulative effect transition method. We
have initiated an assessment of our revenue streams and a project plan for implementing these standards. We have not yet
selected a transition method nor have we completed our assessment of the effect that ASU No. 2014-09 will have on our
consolidated financial statements and related disclosures. At this stage in our assessment, we have identified gross versus net
revenue recognition (principal versus agent considerations) and the timing of revenue recognition (FOB shipping points versus
FOB destination) as critical issues in our analysis.
In July 2015, the FASB issued ASU No. 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory,
which requires inventory to be measured at the lower of cost and net realizable value. Net realizable value is the estimated
selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.
The new standard becomes effective for us on January 1, 2017. The standard requires entities to apply this change prospectively
to the measurement of inventory after the date of adoption. We do not expect that ASU No. 2015-11 will have a significant
impact on our consolidated financial statements and related disclosures.
In November 2015, the FASB issued ASU No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of
Deferred Taxes, which requires that deferred tax assets and liabilities be classified as noncurrent in a classified balance sheet.
The new standard becomes effective for us on January 1, 2017. The standard requires entities to apply this change on either a
prospective or retrospective basis for the periods presented and we expect to apply the standard retrospectively. The adoption of
this standard will cause us to reclassify our current deferred tax assets and liabilities as noncurrent in our consolidated financial
statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which, among other things, requires lessees
to recognize most leases on their balance sheets related to the rights and obligations created by those leases. The new standard
also requires new disclosures to help financial statement users better understand the amount, timing, and uncertainty of cash
flows arising from leases. The new standard becomes effective for us on January 1, 2019. Early adoption is permitted. The
amendments in this update should be applied under a modified retrospective approach. We are evaluating the effect that ASU
No. 2016-02 will have on our consolidated financial statements and related
In March 2016, the FASB issued ASU No. 2016-04, Liabilities - Extinguishment of Liabilities (Subtopic 405-20):
Recognition of Breakage for Certain Prepaid Stored-Value Products, which specifies how prepaid stored-value product
liabilities, such as gift cards, should be derecognized. The standard, among other things, requires derecognition of such
liabilities through expected breakage in proportion to the pattern of rights expected to be exercised by the holder, but only to the
extent that it is probable that a significant reversal of the recognized breakage amount will not subsequently occur. The new
standard becomes effective for us on January 1, 2018. The amendments in this update should be applied under a modified
retrospective approach or a retrospective approach to each period presented. We are evaluating the effect that ASU No. 2016-04
will have on our consolidated financial statements and related disclosures.
In March 2016, the FASB issued ASU No. 2016-09, Compensation—Stock Compensation (Topic 718): Improvements
to Employee Share-Based Payment Accounting, which simplifies several aspects of the accounting for share-based payment
transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on
the statement of cash flows. The new standard becomes effective for us on January 1, 2017. The standard specifies various
transition methods for the individual amendments in this Update. The adoption of this standard will primarily cause us to
recognize approximately $9.4 million in deferred tax assets related to excess tax benefits through a cumulative effect
adjustment in retained earnings as of January 1, 2017.
In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (a
consensus of the FASB Emerging Issues Task Force), which provides guidance on the presentation of restricted cash or
55
restricted cash equivalents in the statement of cash flows, thereby reducing the diversity in practice. The new standard becomes
effective for us on January 1, 2018. The standard requires entities to apply this standard using the retrospective transition
method to each period presented. The adoption of this standard will require that amounts generally described as restricted cash
and restricted cash equivalents should be included with cash and cash equivalents when reconciling beginning-of-period and
end-of-period total amounts shown in the statement of cash flows. We do not expect that ASU No. 2016-18 will have a material
impact on our consolidated financial statements and related disclosures.
Comparison of Years Ended December 31, 2016 and 2015
Executive Commentary
This executive commentary is intended to provide investors with a view of our business through the eyes of our
management. As an executive commentary, it necessarily focuses on selected aspects of our business. This executive
commentary is intended as a supplement to, but not a substitute for, the more detailed discussion of our business included
elsewhere herein. Investors are cautioned to read our entire “Management’s Discussion and Analysis of Financial Condition
and Results of Operations,” as well as our interim and audited financial statements, and the discussion of our business and risk
factors and other information included elsewhere or incorporated in this report. This executive commentary includes forward-
looking statements, and investors are cautioned to read “Special Cautionary Note Regarding Forward-Looking Statements.”
Revenues in 2016 increased 9% compared to 2015. The growth in revenue was primarily due to a 6% increase in average
order size, coupled with a 4% increase in orders. These increases were partially offset by increased promotional activities, including
coupons and site sales (which we recognize as a reduction of revenue) due to our driving a higher proportion of our sales using
such promotions. Our average order size has increased in recent years due primarily to a sales mix shift into home and garden
products. We are uncertain how long this trend will continue.
Gross profit in 2016 increased 9% compared to 2015 primarily as a result of revenue growth. Gross margin was flat at
18.4% in 2016 compared to 2015. Gross margin increased due to a continued shift in sales mix into higher margin home and garden
products, but that increase was offset by increased promotional activities.
Sales and marketing expenses as a percentage of revenue increased from 7.5% to 8.2% during 2016 as compared to
2015, primarily due to increased spending in the sponsored search marketing channels and increased staff related costs.
As a result of these factors, our Contribution increased 8% in 2016 compared to 2015 (see Non-GAAP Financial
Measures below for a reconciliation of Contribution to Gross Profit). Contribution margin was 11.1% in 2016 compared to
11.2% in 2015.
Technology expenses in 2016 increased $8.2 million compared to 2015, primarily due to an increase in depreciation of
$5.9 million, an increase in staff-related costs of $2.5 million, and an increase of $1.6 million in technology licenses and
maintenance. These increases were partially offset by a $1.3 million decrease in outside consulting services.
General and administrative expenses in 2016 increased $7.1 million compared to 2015, primarily due to an increase of
$7.6 million in staff related costs and $1.1 million in bad debt expense for accounts receivable due from a marketplace in which
we also have a minority investment. These increases were partially offset by a $1.9 million decrease in legal fees and a $1.3
million decrease in consulting and outside services.
During Q3 2016, we recognized an impairment charge of $2.9 million in Other income, net related to an international
marketplace company in which we hold a minority investment that has historically been recorded at cost.
In Q1 2016, we entered into a settlement agreement in our prime broker litigation which concluded the litigation in its
entirety and we recognized settlement proceeds of $19.5 million. Related costs associated with the litigation and settlement of
approximately $1.0 million were included in G&A expenses during Q1 2016.
In December 2016, as a successful demonstration of the platform and technology developed by our majority-owned
subsidiary tØ.com, Inc., we issued publicly traded preferred shares of Overstock.com, Inc. for proceeds of $7.6 million, net of
offering costs. Additionally, as part of our Medici initiatives to develop this technology, in Q1 2016, we completed the
acquisition of two registered broker-dealers. In 2015 we acquired a related financial technology company.
56
We continue to seek opportunities for growth, in our retail business and through our Medici blockchain and financial
technology initiatives and through other means. As a result of these initiatives, we may continue to incur additional expenses or
make investments in, or acquisitions of other technologies and businesses. We also anticipate that our Medici initiatives will
incur losses in the near term. These losses, additional expenses, acquisitions or investments may be material, and, coupled with
the seasonality of our business, may lead to reduced consolidated income in some periods, and to reduced liquidity.
Additionally, we may recognize impairment charges from our investments as we did during Q3 2016. We are also considering
other alternatives for Medici, including a spin-off or raising capital.
During Q3 2016, we completed the construction of our new corporate headquarters near Salt Lake City, Utah and we
began to occupy the building. Total projects costs were approximately $99.2 million. The related financing is discussed in
further detail in the Liquidity and Capital Resources, Borrowings section below.
The balance of our Management’s Discussion and Analysis of Financial Condition and Results of Operations provides
further information about the matters discussed above and other important matters affecting our business.
57
Results 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, 2016, 2015 and 2014:
Revenue, net
Direct
Partner and other
Total net revenue
Cost of goods sold
Direct
Partner and other
Total cost of goods sold
Gross profit
Operating expenses:
Sales and marketing
Technology
General and administrative
Litigation settlement
Total operating expenses
Operating income
Interest income
Interest expense
Other income, net
Income before income taxes
Provision for income taxes
Consolidated net income
Revenue
Year ended December 31
2016
2015
2014
(as a percentage of total revenue)
5.6%
94.4
100.0
8.3%
91.7
100.0
9.8%
90.2
100.0
5.3
76.2
81.5
18.4
8.2
5.9
5.0
(1.1)
18.0
0.4
—
—
0.8
1.2
0.5
7.7
73.9
81.6
18.4
7.5
5.9
5.0
—
18.4
—
—
—
0.2
0.2
0.1
8.6
72.7
81.3
18.7
7.3
5.8
4.8
—
17.9
0.8
—
—
0.1
0.9
0.3
0.7%
0.1%
0.6%
The following table reflects our net revenue for the years ended December 31, 2016 and 2015 (in thousands):
Revenue, net
Direct
Partner and other
Total revenue, net
Year ended
December 31,
2016
2015
$ Change
% Change
$
101,578
1,698,385
$ 1,799,963
$
137,783
1,520,055
$ 1,657,838
$
$
(36,205)
178,330
142,125
(26.3)%
11.7 %
8.6 %
The primary reason for increased total net revenue for the year ended December 31, 2016, as compared to the same period
in 2015, was a 6% increase in average order size, coupled with a 4% increase in orders. These increases were partially offset by
increased promotional activities, including coupons and site sales (which we recognize as a reduction of revenue) due to our driving
a higher proportion of our sales using such promotions. Our average order size has increased in recent years due primarily to a
sales mix shift into home and garden products. We are uncertain how long this trend will continue.
The primary reason for decreased direct revenue for the year ended December 31, 2016, as compared to the same period
in 2015, was a decrease in sales of home and garden products (primarily due to a shift from our direct segment to our partner
segment) in addition to increased promotional activities, including coupons and site sales (which we recognize as a reduction of
58
revenue) due to our driving a higher proportion of our sales using such promotions. Also, the percentage of revenue we defer from
orders taken but not delivered was higher due to the timing of year end.
The increase in partner revenue for the year ended December 31, 2016, as compared to the same period in 2015, was
primarily due to an increase in sales of home and garden products. This increase was partially offset by increased promotional
activities, including coupons and site sales (which we recognize as a reduction of revenue) due to our driving a higher proportion
of our sales using such promotions.
Since mid-2015 through the first half of 2016, we experienced some slowing of our overall revenue growth, which we
believe was due in part to changes that Google made in its natural search engine algorithms. While we worked to adapt to Google’s
changes, we increased our emphasis on other marketing channels, such as sponsored search, which generated revenue growth but
with higher associated marketing expenses than natural search.
We continue to seek increased participation in our Club O loyalty program, including, in certain instances, by
increasing Club O Rewards to our Club O members in lieu of coupons we offer to all customers. For additional information
regarding our Club O loyalty program see Item 15 of Part IV, "Financial Statements"—Note 2. Accounting Policies, Club O
loyalty program.
The shift of business from direct to partner (or vice versa) is an economic result based on the economics of each
particular product offering at the time and we generally do not have particular goals for an “appropriate” mix or percentage for
the size of either. Although we have experienced a trend from direct revenue to partner revenue in recent years, we believe that
the mix of the business between direct and partner remains consistent with our strategic objectives for our business model in the
current economic environment and we do not currently foresee any material shifts in this trend.
The products and product lines we offer, and their respective percentages of our revenue, are based on many factors
including customer demand, our marketing efforts, promotional pricing, joint-marketing offered by our suppliers, the types of
inventory we are able to obtain and the number of SKUs we offer. These factors change frequently and can affect the mix of the
product lines we sell. We have experienced a trend toward our home and garden category in recent years and we have recently
focused our marketing and branding efforts towards our home and garden product line. We are also working to increase the
number of SKUs we offer. While we do not currently expect any material shifts in our product line mix, the relative amounts of
the product lines we sell, and the revenue we earn from those product lines, is generally an economic result of the factors
described above, which may change from time to time.
International sales were less than 2% of total net revenues for 2016 and 2015.
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 of sales; and operational and fulfillment costs.
59
The following table reflects our net revenues, cost of goods sold and gross profit for the years ended December 31,
2016 and 2015 (in thousands):
Revenue, net
Direct
Partner and other
Total net revenue
Cost of goods sold
Direct
Partner and other
Total cost of goods sold
Gross Profit
Direct
Partner and other
Total gross profit
Year ended December 31,
2016
2015
$ Change
% Change
$
101,578
$
137,783
$
1,698,385
1,520,055
1,799,963
1,657,838
96,271
128,077
1,372,343
1,468,614
1,225,107
1,353,184
(36,205)
178,330
142,125
(31,806)
147,236
115,430
5,307
326,042
9,706
294,948
(4,399)
31,094
$
331,349
$
304,654
$
26,695
(26.3)%
11.7 %
8.6 %
(24.8)%
12.0 %
8.5 %
(45.3)%
10.5 %
8.8 %
Gross margins for the past eight quarterly periods and years ending December 31, 2016 and 2015 were:
Direct
Partner and other
Combined
Direct
Partner and other
Combined
Q1 2016
Q2 2016
Q3 2016
Q4 2016
FY 2016
4.7%
19.7%
18.7%
6.2%
19.0%
18.2%
2.8%
19.1%
18.2%
7.3%
19.2%
18.6%
5.2%
19.2%
18.4%
Q1 2015
Q2 2015
Q3 2015
Q4 2015
FY 2015
10.0%
19.8%
18.9%
9.3%
19.9%
19.0%
4.9%
19.8%
18.5%
3.8%
18.3%
17.3%
7.0%
19.4%
18.4%
Gross profit in 2016 increased 9% compared to 2015 primarily as a result of revenue growth. Gross margin was flat at
18.4% in 2016 compared to 2015. Gross margin increased due a continued shift in sales mix into higher margin home and garden
products, but that increase was offset by increased promotional activities, including coupons and site sales (which we recognize
as a reduction of revenue) due to our driving a higher proportion of our sales using such promotions.
The 182 basis point decrease in direct gross margin for the year ended December 31, 2016, as compared to the same
period in 2015, was primarily due to increased promotional activities, including coupons and site sales (which we recognize as a
reduction of revenue) due to our driving a higher proportion of our sales using such promotions, and increased warehousing costs
as a % of revenue due to lower revenue, partially offset by a shift in sales mix into higher margin products.
The 21 basis point decrease in partner gross margin for the year ended December 31, 2016, as compared to the same
period in 2015 was primarily due to increased promotional activities, including coupons and site sales (which we recognize as a
reduction of revenue) due to our driving a higher proportion of our sales using such promotions, 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 $266,000 and $179,000 for the years ended
December 31, 2016 and 2015, respectively.
Fulfillment costs
Fulfillment costs include all warehousing costs, including fixed overhead and variable handling costs (excluding
packaging costs), as well as credit card fees and customer service costs, all of which we include as costs in calculating gross
margin. We believe that some companies in our industry, including some of our competitors, account for fulfillment costs
within operating expenses, and therefore exclude fulfillment costs from gross margin. As a result, our gross margin may not be
directly comparable to others in our industry.
60
The following table has been included to provide investors additional information regarding our classification of
fulfillment costs, gross profit and margin, thus enabling investors to better compare our gross margin with others in our industry
(in thousands):
Total revenue, net
Cost of goods sold
Product costs and other cost of goods sold
Fulfillment and related costs
Total cost of goods sold
Gross profit
Year ended December 31,
2016
$ 1,799,963
2015
100% $ 1,657,838
1,391,736
76,878
1,468,614
331,349
$
77.3%
4.3%
81.6%
18.4% $
1,279,766
73,418
1,353,184
304,654
100%
77.2%
4.4%
81.6%
18.4%
Fulfillment costs as a percentage of sales may vary due to several factors, such as our ability to manage costs at our
warehouses, significant changes in the number of units received and fulfilled, the extent to which we use third party fulfillment
services and warehouses, and our ability to effectively manage customer service costs and credit card fees. Fulfillment and
related costs remained relatively flat during the year ended December 31, 2016 as compared to 2015.
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 listing ads, display ads, search engines, affiliate marketing programs, social coupon websites, portals,
banners, e-mail, direct mail and viral and social media campaigns. We also do brand advertising through television, radio, print
ads, and event sponsorships.
The following table reflects our sales and marketing expenses for the years ended December 31, 2016 and 2015 (in
thousands):
Sales and marketing expenses
Year ended
December 31,
2016
2015
$ Change
% Change
$ 147,896
$ 124,468
$
23,428
18.8%
Sales and marketing expenses as a percent of net revenues
8.2%
7.5%
The 71 basis point increase in sales and marketing expenses as a percentage of revenue for the year ended December
31, 2016, as compared to the same period in 2015, was primarily due to increased spending in the sponsored search marketing
channels and increased staff related costs.
Sales and marketing expenses include stock-based compensation expense of $249,000 and $217,000 for the years
ended December 31, 2016 and 2015, respectively.
Costs associated with our discounted shipping and other promotions, such as coupons, are not included in marketing
expense. Rather, they are accounted for as a reduction of revenue and therefore affect sales and gross margin. We consider
discounted shipping and other promotions, such as our policy of free shipping on orders over $45, as an effective marketing
tool, and intend to continue to offer them as we deem appropriate as part of our overall marketing plan.
We constantly evaluate where we spend our sales and marketing dollars and have experienced a trend of increasing
costs to acquire customers. From time to time, our competitors may bid up the cost of certain marketing channels, such as paid
keywords. At such times, we may reduce the amounts we spend in those marketing channels, which may lead to decreased
visitors to our site for a time. For example, during Q4 2016 and Q4 2015, the number of unique visitors to our site decreased by
approximately 2% and 8%, respectively, as compared to the prior years, in part we believe as a result of such changes.
61
Technology expenses
We seek to invest efficiently in technology, including web services, customer support solutions, website search,
expansion of new and existing product categories, and in investments in technology to enhance the customer experience,
improve our process efficiency and support and expand our logistics infrastructure. We may increase our technology expenses
to support these initiatives and these increases may be material.
The frequency and variety of cyberattacks on our Website, our corporate systems, and on third parties that we use to
support our technology continue to increase, including an attack that took place in October 2016 which interrupted traffic for
several major websites in the United States. The impact of these attacks, their costs, and the costs we incur to protect ourselves
against future attacks have not been material. However, we consider the threat from cyberattacks to be serious and will continue
to incur costs related to protecting ourselves against them.
The following table reflects our technology expenses for the years ended December 31, 2016 and 2015 (in thousands):
Technology expenses
Year ended
December 31,
2016
2015
$ Change
% Change
$ 106,760
$
98,533
$
8,227
8.3%
Technology expenses as a percent of net revenues
5.9%
5.9%
The $8.2 million increase in technology costs for the year ended December 31, 2016, as compared to the same period in
2015, was primarily due to an increase in depreciation and amortization of $5.9 million, an increase in staff-related costs of $2.5
million (net employee and contractor change), and an increase of $1.6 million in technology licenses and maintenance. These
increases were partially offset by a $1.3 million decrease in outside consulting services.
Technology expenses include stock-based compensation expense of $777,000 and $646,000 for the years ended
December 31, 2016 and 2015, respectively.
General and administrative expenses
The following table reflects our general and administrative expenses ("G&A") for the years ended December 31, 2016
and 2015 (in thousands):
General and administrative expenses
Year ended
December 31,
2016
2015
$ Change
% Change
$
89,298
$
82,187
$
7,111
8.7%
General and administrative expenses as a percent of net revenues
5.0%
5.0%
The $7.1 million increase in general and administrative expenses (“G&A”) for the year ended December 31, 2016, as
compared to the same period in 2015, was primarily due to an increase of $7.6 million in staff related costs and $1.1 million in
bad debt expense for accounts receivable due from a marketplace in which also we have a minority investment. These increases
were partially offset by a $1.9 million decrease in legal fees and a $1.3 million decrease in consulting and outside services.
G&A expenses include stock-based compensation expense of approximately $3.6 million and $2.5 million for the
years ended December 31, 2016 and 2015, respectively.
We continue to seek opportunities for growth, in our retail business and through our Medici blockchain and financial
technology initiatives and through other means. As a result of these initiatives, we may continue to incur additional expenses or
make investments in, or acquisitions of other technologies and businesses. We also anticipate that our Medici initiatives will
incur losses in the near term. These losses, additional expenses, acquisitions or investments may be material, and, coupled with
the seasonality of our business, may lead to reduced consolidated income in some periods, and to reduced liquidity.
Additionally, we may recognize impairment charges from our investments as we did during Q3 2016. We are also considering
other alternatives for Medici, including a spin-off or raising capital. During 2016, our Medici-related subsidiaries incurred a
pre-tax loss of approximately $11.8 million, which includes $4.4 million of amortization and depreciation expense. During
2015, our Medici-related subsidiaries incurred a pre-tax loss of approximately $7.0 million, which includes $1.5 million of
amortization and depreciation expense.
62
Litigation settlement
In Q1 2016, we entered into a settlement agreement in our prime broker litigation which concluded the litigation in its
entirety and we recognized settlement proceeds of $19.5 million. Related costs associated with the litigation and settlement of
approximately $1.0 million were included in G&A expenses during Q1 2016.
Depreciation and amortization expense
Depreciation expense is classified within the corresponding operating expense categories on the consolidated
statements of income as follows (in thousands):
Cost of goods sold - direct
Technology
Sales and marketing
General and administrative
Total depreciation, including internal-use software and website development
Year ended
December 31,
2016
2015
$
$
310
$
25,693
124
1,156
27,283
$
283
22,126
—
1,107
23,516
Amortization of intangible assets other than goodwill is classified within the corresponding operating expense
categories on the consolidated statements of income as follows (in thousands):
Technology
Sales and marketing
General and administrative
Total amortization
Non-operating income (expense)
Interest expense
Year ended
December 31,
2016
2015
$
$
2,904
$
1,008
56
605
531
445
3,968
$
1,581
Total interest expense increased $737,000, or 526%, from $140,000 in 2015 to $877,000 in 2016. The increase in
interest expense is primarily due to no longer capitalizing interest on our headquarters loan due to construction completion.
Other income (expense), net
Other income, net for the year ended December 31, 2016 was $14.2 million as compared to $3.6 million in 2015. The
increase is primarily due to increased Club O Rewards breakage of $10.9 million due to growth in the Club O Rewards program,
particularly our Club O Silver program, a $1.2 million decrease in unrealized losses on our precious metals (no losses incurred in
2016), and an $850,000 decrease in costs related to cryptobond transactions (none incurred in 2016). These increases were partially
offset by an impairment charge of $2.9 million related to a company in which we hold a minority investment that has historically
been recorded at cost.
Beginning in 2015, we enrolled a significant number of members in Club O Silver, a newly introduced Club O
membership tier for customers who agree to receive promotional emails. Club O Silver members earned Club O Rewards on
qualifying purchases that expire after 90 days from a qualifying purchase. We discontinued Club O Silver in October 2016, and
as a result we do not expect further Club O Silver rewards breakage in the future.
Income taxes
63
Our effective tax rate for the years ended December 31, 2016 and 2015 was 45.3% and 60.8%, respectively. Our
effective tax rate is affected by recurring items such as research tax credits and non-recurring items such as changes in valuation
allowances. It is also affected to a lesser extent by tax rates in foreign jurisdictions and the relative amount of income we earn in
those jurisdictions, which we expect to be fairly consistent in the near term. The decrease in the 2016 effective tax rate relative
to the 2015 effective tax rate is primarily attributable to our increased pre-tax income in 2016 over 2015 and increased
ownership of our majority-owned subsidiary tØ.com, Inc. (formerly Medici, Inc.). Prior to Q3 2015, we owned 75.1% of
tØ.com. Tax losses incurred while holding less than 80% of the business cannot offset our consolidated taxable income and are
fully valued. The operating losses that tØ.com incurred after we increased our ownership during Q3 2015 do not require a
valuation allowance since the subsidiary now qualifies for tax consolidation. The decrease in the effective tax rate was partially
offset by an increase in our valuation allowance for capital losses due to an impairment loss on a minority investment in an
international marketplace and share-based compensation tax deficiencies due to a decline in our stock price. We expect
volatility in our tax rate in future periods due to share-based compensation deductions that will result from our adoption of ASU
No. 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.
We have indefinitely reinvested foreign earnings of $421,000 at December 31, 2016. We would need to accrue and pay
U.S. income tax on this amount if repatriated. We do not intend 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 margin decreases due to increased sales of certain lower margin products, such as electronics. Revenue
typically decreases in the following quarter(s), as shown in the table below. The actual quarterly results for each quarter could
differ materially depending upon consumer preferences, availability of product and competition, among other risks and
uncertainties. Accordingly, there can be no assurances that seasonal variations will not materially affect our results of operations
in the future.
The following table reflects our total net revenues for each of the quarters in 2016, 2015 and 2014 (in thousands):
2016
2015
2014
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
$
$
$
413,677
398,344
341,207
$
$
$
418,540
388,013
332,545
$
$
$
441,564
391,211
352,991
$
$
$
526,182
480,270
470,360
Comparison of Years Ended December 31, 2015 and 2014
Executive Commentary
This executive commentary is intended to provide investors with a view of our business through the eyes of our
management. As an executive commentary, it necessarily focuses on selected aspects of our business. This executive
commentary is intended as a supplement to, but not a substitute for, the more detailed discussion of our business included
elsewhere herein. Investors are cautioned to read our entire “Management’s Discussion and Analysis of Financial Condition
and Results of Operations,” as well as our interim and audited financial statements, and the discussion of our business and risk
factors and other information included elsewhere or incorporated in this report. This executive commentary includes forward-
looking statements, and investors are cautioned to read “Special Cautionary Note Regarding Forward-Looking Statements.”
Revenues in 2015 increased 11% compared to 2014. The growth in revenue was primarily due to an 8% increase in orders,
coupled with a 4% increase in average order size, from $169 to $175. Although our average order size has increased in recent
years, we expect the rate of increase to lessen as our sales mix shift into home and garden products becomes fully realized. In
addition, the percentage of revenue we defer from orders taken but not delivered was less due to the timing of year end. These
increases were partially offset by increased promotional activities including coupons, site sales, and Club O Rewards (which we
recognize as a reduction of revenue) due to our driving a higher proportion of our sales using such promotions, and by an increase
in returns.
During the second half of 2015, we experienced some slowing of our overall revenue growth which we believe was due
in part to changes that Google made in its natural search engine algorithms. While we worked to adapt to Google’s changes, we
increased our emphasis on other marketing channels, such as sponsored search and display ad marketing, which generated revenue
growth but with higher associated marketing expenses than natural search.
64
In 2015, we transitioned a significant number of customers into our Club O Silver program and began to shift coupon
offers into Club O rewards. We believe that the shift from coupons to rewards will benefit us in the long-term, but we
experienced some difficulties with this transition, and in the short-term we believe it slowed our revenue growth.
Gross profit in 2015 increased 9% compared to 2014 primarily as a result of revenue growth. Gross margin decreased
to 18.4% in 2015 compared to 18.6% in 2014. The decrease in gross margin was primarily due to increased promotional
activities including coupons, site sales, and Club O Rewards (which we recognize as a reduction of revenue) due to our driving
a higher proportion of our sales using such promotions, partially offset by a continued shift in sales mix into higher margin
home and garden products.
Sales and marketing expenses as a percentage of revenue increased from 7.3% to 7.5% during 2015 as compared to
2014, primarily due to increased spending in the display ad and brand marketing channels.
As a result of these factors, we had a 8.2% increase in Contribution in 2015 compared to 2014 (see Non-GAAP
Financial Measures below for a reconciliation of Contribution to Gross Profit). Contribution margin was 11.2% in 2015 and
11.5% in 2014.
Technology expenses in 2015 increased $12.3 million compared to 2014, primarily due to an increase in depreciation
of $6.1 million and an increase in staff-related costs of $4.9 million.
General and administrative expense in 2015 increased $10.4 million compared to 2014, primarily due to an increase of
$5.9 million in staff and travel related costs, an increase in management consulting services of $2.9 million, a $1.0 million
expense for a contract termination fee, and an increase in depreciation and amortization of $932,000 (including amortization of
intangible assets related to our recent acquisition).
The balance of our Management’s Discussion and Analysis of Financial Condition and Results of Operations provides
further information about the matters discussed above and other important matters affecting our business.
65
Results 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, 2015, 2014 and 2013:
Revenue, net
Direct
Partner and other
Total net revenue
Cost of goods sold
Direct
Partner and other
Total cost of goods sold
Gross profit
Operating expenses:
Sales and marketing
Technology
General and administrative
Total operating expenses
Operating income
Interest income
Interest expense
Other income, net
Income before income taxes
Provision (benefit) for income taxes
Consolidated net income
Revenue
Year ended December 31
2015
2014
2013
(as a percentage of total revenue)
8.3%
91.7
100.0
9.8%
90.2
100.0
7.7
73.9
81.6
18.4
7.5
5.9
5.0
18.4
—
—
—
0.2
0.2
0.1
8.6
72.7
81.3
18.7
7.3
5.8
4.8
17.9
0.8
—
—
0.1
0.9
0.3
0.1%
0.6%
12.0%
88.0
100.0
10.4
70.6
81.0
19.0
7.0
5.5
5.2
17.7
1.3
—
—
—
1.3
(5.2)
6.5%
The following table reflects our net revenue for the years ended December 31, 2015 and 2014 (in thousands):
Revenue, net
Direct
Partner and other
Total revenue, net
Year ended
December 31,
2015
2014
$ Change
% Change
$
137,783
1,520,055
$ 1,657,838
$
147,460
1,349,643
$ 1,497,103
$
$
(9,677)
170,412
160,735
(6.6)%
12.6 %
10.7 %
The primary reason for increased total net revenue for the year ended December 31, 2015, as compared to the same
period in 2014, was an 8% increase in orders, coupled with a 4% increase in average order size, from $169 to $175. In addition,
the percentage of revenue we defer from orders taken but not delivered was less due to the timing of quarter end. These
increases were partially offset by increased promotional activities including coupons, site sales, and Club O Rewards (which we
recognize as a reduction of revenue) due to our driving a higher proportion of our sales using such promotions, and by an
increase in returns.
The primary reason for decreased direct revenue for the year ended December 31, 2015, as compared to the same
period in 2014, was a decrease in sales of home and garden products in addition to increased promotional activities including
coupons, site sales, and Club O Rewards (which we recognize as a reduction of revenue) due to our driving a higher proportion
of our sales using such promotions, and by an increase in returns.
66
The increase in partner revenue for the year ended December 31, 2015, as compared to the same period in 2014, was
primarily due to an increase in sales of home and garden products. In addition, the percentage of revenue we defer from orders
taken but not delivered was less due to the timing of quarter end. These increases were partially offset by increased promotional
activities including coupons, site sales, and Club O Rewards (which we recognize as a reduction of revenue) due to our driving
a higher proportion of our sales using such promotions, and by an increase in returns.
Gross profit and gross margin
The following table reflects our net revenues, cost of goods sold and gross profit for the years ended December 31,
2015 and 2014 (in thousands):
Revenue, net
Direct
Partner and other
Total net revenue
Cost of goods sold
Direct
Partner and other
Total cost of goods sold
Gross Profit
Direct
Partner and other
Total gross profit
Year ended December 31,
2015
2014
$ Change
% Change
$
137,783
$
147,460
$
1,520,055
1,349,643
1,657,838
1,497,103
128,077
129,253
1,225,107
1,088,791
1,353,184
1,218,044
(9,677)
170,412
160,735
(1,176)
136,316
135,140
9,706
294,948
18,207
260,852
(8,501)
34,096
$
304,654
$
279,059
$
25,595
(6.6)%
12.6 %
10.7 %
(0.9)%
12.5 %
11.1 %
(46.7)%
13.1 %
9.2 %
Gross margins for the past eight quarterly periods and years ending December 31, 2015 and 2014 were:
Direct
Partner and other
Combined
Direct
Partner and other
Combined
Q1 2015
Q2 2015
Q3 2015
Q4 2015
FY 2015
10.0%
19.8%
18.9%
9.3%
19.9%
19.0%
4.9%
19.8%
18.5%
3.8%
18.3%
17.3%
7.0%
19.4%
18.4%
Q1 2014
Q2 2014
Q3 2014
Q4 2014
FY 2014
13.0%
19.5%
18.8%
11.3%
19.7%
18.8%
12.5%
19.7%
19.0%
12.5%
18.7%
18.2%
12.3%
19.3%
18.6%
The 530 basis point decrease in direct gross margin for the year ended December 31, 2015, as compared to the same
period in 2014, was primarily due to increased warehousing costs due to additional warehouse space and increased promotional
activities including coupons, site sales, and Club O Rewards (which we recognize as a reduction of revenue) due to our driving
a higher proportion of our sales using such promotions.
The 8 basis point increase in partner gross margin for the year ended December 31, 2015, as compared to the same
period in 2014 was primarily due to a continued shift in sales mix into higher margin home and garden products, partially offset
by increased promotional activities including coupons, site sales, and Club O Rewards (which we recognize as a reduction of
revenue) due to our driving a higher proportion of our sales using such promotions.
Cost of goods sold includes stock-based compensation expense of $179,000 and $181,000 for the years ended
December 31, 2015 and 2014, respectively.
67
Fulfillment costs
The following table has been included to provide investors additional information regarding our classification of
fulfillment costs, gross profit and margin, thus enabling investors to better compare our gross margin with others in our industry
(in thousands):
Total revenue, net
Cost of goods sold
Product costs and other cost of goods sold
Fulfillment and related costs
Total cost of goods sold
Gross profit
Year ended December 31,
2015
$ 1,657,838
2014
100% $ 1,497,103
1,279,766
73,418
1,353,184
304,654
$
77.2%
4.4%
81.6%
18.4% $
1,152,489
65,555
1,218,044
279,059
100%
77.0%
4.4%
81.4%
18.6%
Fulfillment and related costs remained relatively flat during the year ended December 31, 2015 as compared to 2014.
See Gross profit and gross margin above for additional discussion.
Operating expenses
Sales and marketing expenses
The following table reflects our sales and marketing expenses for the years ended December 31, 2015 and 2014 (in
thousands):
Sales and marketing expenses
Year ended
December 31,
2015
2014
$ Change
% Change
$ 124,468
$ 109,461
$
15,007
13.7%
Sales and marketing expenses as a percent of net revenues
7.5%
7.3%
The 20 basis point increase in sales and marketing expenses as a percentage of revenue for the year ended December
31, 2015, as compared to the same period in 2014, was primarily due to increased spending in the display ad and brand
marketing channels.
Sales and marketing expenses include stock-based compensation expense of $217,000 and $336,000 for the years
ended December 31, 2015 and 2014, respectively.
Technology expenses
The following table reflects our technology expenses for the years ended December 31, 2015 and 2014 (in thousands):
Technology expenses
Year ended
December 31,
2015
2014
$ Change
% Change
$
98,533
$
86,258
$
12,275
14.2%
Technology expenses as a percent of net revenues
5.9%
5.8%
The $12.3 million increase in technology costs for the year ended December 31, 2015, as compared to the same period
in 2014, was primarily due to an increase in depreciation of $6.1 million and an increase in staff-related costs of $4.9 million.
Technology expenses include stock-based compensation expense of $646,000 and $751,000 for the years ended
December 31, 2015 and 2014, respectively.
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General and administrative expenses
The following table reflects our general and administrative expenses ("G&A") for the years ended December 31, 2015
and 2014 (in thousands):
General and administrative expenses
Year ended
December 31,
2015
2014
$ Change
% Change
$
82,187
$
71,777
$
10,410
14.5%
General and administrative expenses as a percent of net revenues
5.0%
4.8%
The $10.4 million increase in general and administrative expenses (“G&A”) for the year ended December 31, 2015, as
compared to the same period in 2014, was primarily due to an increase of $5.9 million in staff and travel related costs, an
increase in management consulting services of $2.9 million, a $1.0 million expense for a contract termination fee, and an
increase in depreciation and amortization of $932,000 (including amortization of intangible assets related to our recent
acquisition).
G&A expenses include stock-based compensation expense of approximately $2.5 million and $2.8 million for the
years ended December 31, 2015 and 2014, respectively.
Depreciation and amortization expense
Depreciation expense is classified within the corresponding operating expense categories on the consolidated
statements of income as follows (in thousands):
Cost of goods sold - direct
Technology
General and administrative
Total depreciation, including internal-use software and website development
Year ended
December 31,
2015
2014
$
$
283
$
22,126
1,107
23,516
$
282
16,651
1,028
17,961
Amortization of intangible assets other than goodwill is classified within the corresponding operating expense
categories on the consolidated statements of income as follows (in thousands):
Technology
Sales and marketing
General and administrative
Total amortization
Non-operating income (expense)
Interest income
Year ended
December 31,
2015
2014
$
$
$
605
531
445
1,581
$
—
—
103
103
Interest income is primarily derived from the investment of our cash in cash equivalents and short-term investments.
Interest income for the years ended December 31, 2015 and 2014 totaled $155,000 and $152,000, respectively.
Interest expense
Interest expense for the year ended December 31, 2015 is primarily related to our cryptobond transactions. Interest
expense for the years ended December 31, 2015 and 2014 totaled $140,000 and $39,000, respectively.
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Other income (expense), net
Other income, net for the year ended December 31, 2015 was $3.6 million as compared to $1.2 million in 2014. The
increase is primarily due to increased Club O Rewards breakage of $3.9 million due to increased participation in the Club O
Rewards program, including our Club O Silver program, partially offset by costs of $850,000 related to our cryptobond
transactions.
Income taxes
Our effective tax rate for the years ended December 31, 2015 and 2014 was 60.8% and 33.4%, respectively. Our
effective tax rate is affected by recurring items such as research tax credits and non-recurring items such as changes in valuation
allowances. It is also affected to a lesser extent by tax rates in foreign jurisdictions and the relative amount of income we earn in
jurisdictions. The increase in the 2015 effective tax rate relative to the 2014 effective tax rate is primarily attributable to
operating losses generated by separate tax-filing subsidiaries in domestic and foreign jurisdictions for which a valuation
allowance has been established. The valuation allowance is primarily attributable to our majority-owned subsidiary tØ.com,
Inc. (formerly Medici, Inc.). In Q3 2015, we acquired an additional interest in tØ.com for a total ownership of 81%. Tax losses
incurred prior to our acquisition of the additional interest could not be used to offset our consolidated taxable income and were
therefore fully valued. tØ.com's operating losses following the additional interest acquisition do not require a valuation
allowance. The increase in the 2015 effective tax rate is also attributable to an increase in the valuation allowance related to our
deferred tax asset for capital losses. We had indefinitely reinvested foreign earnings of $366,000 at December 31, 2015.
Liquidity and Capital Resources
Current sources of liquidity
We believe that the cash and cash equivalents currently on hand and expected cash flows from future operations will
be sufficient to continue operations for at least the next twelve months. Our failure to generate sufficient revenues or profits or
to obtain additional financing or raise additional capital could have a material adverse effect on our operations and on our
ability to achieve our intended business objectives. Any projections of future cash needs and cash flows are subject to
substantial uncertainty
In December 2016, as a successful demonstration of the platform and technology developed by our majority-owned
subsidiary tØ.com, Inc., we issued preferred shares of Overstock.com, Inc. for proceeds of $7.6 million, net of offering costs.
During 2016, we completed the construction and transition to our new corporate headquarters near Salt Lake City,
Utah. We incurred total project costs, including the cost of the land and related equipment and furniture, of approximately $99.2
million. In 2014, we entered into a credit facility which provided for an aggregate credit amount of approximately $55.8 million
for an approximately 27-month construction loan of $45.8 million (which was designed to convert into an approximately 6.75-
year term loan following completion of the construction of the headquarters), and a three-year $10 million revolving loan. At
December 31, 2016, we had borrowed approximately $45.8 million under the credit facility and no amounts were outstanding
under the revolving loan. At January 1, 2017, the conditions to conversion had been satisfied, and the credit facility converted
into a term loan. For additional information, see Borrowings - U.S. Bank term loan and revolving loan agreement below
In November 2015, we entered into a Master Lease Agreement ("MLA") with U.S. Bank pursuant to which we may
finance certain assets or sell certain assets to U.S. Bank and simultaneously lease them back. The agreement also allows us to
finance software licenses (inclusive of the assets, referred to collectively as the "Leased Assets"). The MLA allows for leases
and financing of up to $20 million. At December 31, 2016, our outstanding liability under the MLA was approximately $15.1
million. For additional information, see Borrowings - U.S. Bank master lease agreement below.
Our principal sources of liquidity are cash flows generated from operations, and our existing cash and cash
equivalents. At December 31, 2016, we had cash and cash equivalents of $183.1 million.
70
Cash flow information is as follows (in thousands):
Cash provided by (used in):
Operating activities
Investing activities
Financing activities
Free cash flow
Year ended
December 31,
2016
2015
$
$
39,564
(79,447)
52,719
54,516
(82,431)
16,536
“Free Cash Flow” (a non-GAAP measure) for the years ended December 31, 2016 and 2015, was $(32.7) million and
$(5.0) million, respectively. See Non-GAAP Financial Measures below for a reconciliation of Free Cash Flow to net cash
provided by (used in) operating activities.
Cash flows from operating activities
For the years ended December 31, 2016 and 2015, our operating activities resulted in net cash inflows of $39.6 million
and $54.5 million, respectively.
Cash received from customers generally corresponds to our net revenues as our customers primarily use credit cards to
buy from us causing our receivables from these sales transactions to settle quickly. We have payment terms with our partners
that generally extend beyond the amount of time necessary to collect proceeds from our customers. As a result, following our
typically seasonally strong fourth quarter sales, at December 31 of each year, our cash, cash equivalents and accounts payable
balances normally reach their highest level (other than as a result of cash flows provided by or used in investing and financing
activities). However, our accounts payable balance normally declines during the first three months following year-end, which
normally results in a decline in our cash and cash equivalents balances from the year-end balance. The seasonality of our
business normally causes payables and accruals to grow significantly in the fourth quarter, and then decrease in the first quarter
when they are typically paid.
The $39.6 million of net cash provided by operating activities during the year ended December 31, 2016 was primarily
from non-cash depreciation of $27.3 million, an increase in accrued expenses of $16.9 million and consolidated net income of
$11.2 million. These were offset by a decrease in accounts payable of $18.8 million, an increase in accounts receivable of $10.0
million, a decrease of deferred revenue of $9.2 million and stock based compensation of $4.9 million. Depreciation expense
increased primarily due to an increase in depreciation of web development projects and our new corporate headquarters. The
change in accounts payable was primarily due to timing of payments to suppliers. In 2016, some holiday sales occurred earlier
than in 2015 (including sales on Black Friday and Cyber Monday) which resulted in earlier payments to our suppliers resulting
in lower operating cash flow than in 2015. Changes in accrued liabilities were also due to timing of invoices.
The $54.5 million of net cash provided by operating activities during the year ended December 31, 2015 was primarily
from non-cash depreciation of $23.5 million, an increase in accounts payable of $10.5 million and a decrease in inventories
of $6.2 million. Depreciation expense increased primarily due to an increase in depreciation of web development projects.
Accounts payable increased primarily due to increased fixed asset accruals related to the construction of our corporate
headquarters. Inventories decreased primarily due in part to our efforts to reduce levels of certain inventory. Other factors
contributing to net cash provided by operating activities were stock based compensation of $3.5 million and the increases in
accounts receivable of $3.5 million and deferred revenue of $2.5 million.
Cash flows from investing activities
For the year ended December 31, 2016, investing activities resulted in net cash outflows of $79.4 million, primarily
from expenditures for fixed assets of $72.3 million, cost method investments of $4.8 million and disbursements for loans made
of $3.7 million. The increase in expenditures for fixed assets was primarily due to increased spending on our new headquarters.
For the year ended December 31, 2015, investing activities resulted in net cash outflows of $82.4 million, primarily
from expenditures for fixed assets of $59.5 million, acquisitions of business of $10.6 million, cost method investments of $7.0
million and disbursements for loans made of $5.0 million. The increase in expenditures for fixed assets was primarily due to
increased spending on our new headquarters.
71
Cash flows from financing activities
For the years ended December 31, 2016 and 2015, financing activities resulted in net cash inflows of $52.7 million and
$16.5 million, respectively.
The $52.7 million provided by financing activities during the year ended December 31, 2016 resulted primarily from
$36.3 million of proceeds from our U.S. Bank term loan, $11.4 million of proceeds from lease finance obligations with U.S.
Bank and $7.6 million of proceeds, net of offering costs, from our preferred stock offering in Q4 2016, partially offset by $1.9
million for payment on finance obligations.
The $16.5 million provided by financing activities during the year ended December 31, 2015 resulted primarily
from $9.5 million of proceeds from our U.S. Bank term loan, $5.7 million of proceeds from lease finance obligations with U.S.
Bank and $5.5 million of proceeds from issuances of privately-placed digital cryptobonds, offset by $2.4 million used for
purchase of shares of our common stock withheld for minimum tax withholdings upon the vesting of a portion of certain
restricted stock award grants.
Contractual Obligations and Commitments
The following table summarizes our contractual obligations as of December 31, 2016 and the effect such obligations
and commitments are expected to have on our liquidity and cash flow in future periods (in thousands):
Payments Due by Period
Contractual Obligations
Operating leases
Purchase obligations
U.S. Bank term loan payments
U.S. Bank master lease agreement
2017
2018
2019
2020
2021
Thereafter
Total
$ 8,670
$ 6,479
$ 5,961
$ 4,038
$ 4,102
$ 20,412
$ 49,662
11,833
1,031
3,256
—
1,124
3,356
—
1,124
3,479
—
1,124
3,502
—
1,124
1,494
— 11,833
40,233
45,760
— 15,087
Total contractual cash obligations
$ 24,790
$ 10,959
$ 10,564
$ 8,664
$ 6,720
$ 60,645
$122,342
Operating leases
From time to time we enter into operating leases for facilities and equipment for use in our operations.
Purchase obligations
The amount of purchase obligations shown above is based on assumptions regarding the legal enforceability against us
of inventory purchase orders we had outstanding at December 31, 2016. Under different assumptions regarding our rights to
cancel our purchase orders or different assumptions regarding the enforceability of the purchase orders under applicable law,
the amount of purchase obligations shown in the table above would be less.
U.S. Bank term loan payments
We are party to a financing agreement related to our corporate headquarters (see Borrowings below). The amounts
presented reflect our related principal and interest payments.
U.S. Bank master lease agreement
We have entered into an agreement to finance or sell and lease back certain assets (see Borrowings below). The
amounts presented reflect our related principal and interest payments.
Tax contingencies
We are involved in various tax matters, the outcomes of which are uncertain. As of December 31, 2016 and 2015, tax
contingencies were $1.5 million and $821,000, respectively, which are included in our reconciliation of unrecognized tax
benefits (see Item 15 of Part IV, "Financial Statements"—Note 18. Income Taxes, contained in the "Notes to Consolidated
72
Financial Statements" of this Annual Report of Form 10-K. We expect the total amount of tax contingencies to increase in the
future. In addition, changes in state, federal, and foreign tax laws may increase our tax contingencies. The timing of the
resolution of income tax contingencies is highly uncertain, and the amounts ultimately paid, if any, upon resolution of issues
raised by the taxing authorities may differ from the amounts accrued. It is reasonably possible that within the next 12 months
we will receive additional assessments by various tax authorities. These assessments may or may not result in changes to our
contingencies related to positions on prior years’ tax filings.
Borrowings
U.S. Bank term loan and revolving loan agreement
In October 2014, we entered into a syndicated senior secured credit facility (the “Facility”) with U.S. Bank National
Association ("U.S. Bank" or the "Administrative Bank") and certain other banks in connection with the construction of our new
corporate headquarters (the "Project"). The Facility is governed by a Loan Agreement dated as of October 24, 2014 which
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 Project and (ii) a three-year $10.0 million senior secured revolving
credit facility (the “Revolving Loan”) for working capital and capital expenditures, but not for the Project. The Real Estate
Loan and the Revolving Loan are both secured by the Project, our inventory and accounts receivable, substantially all of our
deposit accounts and related assets. We began borrowing under the facility in October 2015.
On January 1, 2017, upon completion of the headquarters, the Real Estate Loan converted into an approximately 6.75-
year term loan due October 1, 2023 (the “Term Loan”). Amounts outstanding under the Real Estate Loan and the Term Loan
carry an interest rate based on one-month LIBOR plus 2.00% or an Alternate Base Rate plus 1.00%. However, we have entered
into interest rate swap agreements designed to fix our interest rate on the Real Estate Loan and the Term Loan at approximately
4.6% annually (see Derivative financial instruments in Item 15 of Part IV, "Financial Statements"—Note 2. Accounting
Policies, contained in the "Notes to Consolidated Financial Statements"). We are required to make monthly payments of
principal of approximately $1.1 million annually plus interest, with a balloon payment of all unpaid principal (estimated to be
$38.0 million) and interest on October 1, 2023. Amounts outstanding under the Revolving Loan will carry an interest rate based
on LIBOR plus 2.00% or an Alternate Base Rate plus 1.00%.
We are required to maintain compliance as of the end of each calendar quarter beginning with the quarter ending
December 31, 2014 with the following financial covenants:
a fixed charge coverage ratio on a trailing 12-month basis of no less than 1.15 to 1.00;
a cash flow leverage ratio not greater than 2.50 to 1.00; and
•
•
• minimum liquidity of at least $50.0 million.
At December 31, 2016 we were in compliance with the financial covenants. In addition to the financial covenants
described above, we are required to comply with a number of covenants relating to our business, including covenants limiting
certain indebtedness. Notwithstanding, the Loan Agreement permits us to incur up to $20 million of additional senior-secured
indebtedness for equipment financing (as described under U.S. Bank master lease agreement below), and other senior-secured
indebtedness provided that the aggregate principal amount of such other senior-secured indebtedness does not exceed ten
percent of our consolidated assets. The Loan Agreement includes customary 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.
Unless it terminates earlier or is extended with the consent of the Administrative Bank and all of the Banks, the
Revolving Loan facility will terminate on October 24, 2017.
As of December 31, 2016 we had borrowed $45.8 million under the Real Estate Loan. We have not borrowed any
amounts under the Revolving Loan.
U.S. Bank master lease agreement
In November 2015, we entered into a Master Lease Agreement and a Financial Covenants Rider (collectively, the
“Master Lease Agreement”) with U.S. Bank Equipment Finance, a division of U.S. Bank National Association
(“Lessor”). Under the Master Lease Agreement we are able to sell certain assets (the "Leased Assets") to the Lessor and
simultaneously lease them back for a period of 60 months. We are also able to finance certain software licenses (inclusive in the
73
"Leased Assets") for a period of 60 months. We have the right to repurchase the Leased Assets and terminate the Master Lease
Agreement twelve months following the initial term. We have the right to repurchase the Leased Assets at the end of the term
for $1.00. Payments on the Master Lease Agreement are due monthly. During the year ended December 31, 2016, we received
proceeds under the Master Lease Agreement of $11.4 million. The average interest rate for amounts outstanding under the
Master Lease Agreement was approximately 3.60%.
We have accounted for the Master Lease Agreement as a financing transaction and amounts owed are included in
Finance Obligations, current and non-current in the consolidated balance sheets. We recorded no gain or loss as a result of this
transaction. The Master Lease Agreement allows for lease financing of up to $20 million. Our liability under the Master Lease
Agreement approximates fair value.
In connection with the Master Lease Agreement, and as long as any obligations remain outstanding under the Master
Lease Agreement, we are required to maintain compliance with the same financial covenants as the Term Loan agreement with
U.S. Bank described above. At December 31, 2016, we were in compliance with these financial covenants.
U.S. Bank letters of credit
At December 31, 2016 and 2015, letters of credit totaling $430,000, were issued on our behalf collateralized by
compensating cash balances held at U.S. Bank, which are included in Restricted cash in the accompanying consolidated balance
sheets.
U.S. Bank commercial purchasing card agreement
We have a commercial purchasing card (the “Purchasing Card”) agreement with U.S. Bank. We use the Purchasing
Card for business purpose purchasing and must pay it in full each month. At December 31, 2016, $811,000 was outstanding and
$4.2 million was available under the Purchasing Card. At December 31, 2015, $641,000 was outstanding and $4.4 million was
available under the Purchasing Card.
Other Factors that May Affect Future Results
We 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 might affect our liquidity requirements or cause us to issue
additional debt or equity securities. There can be no assurance that financing arrangements will be available in amounts or on
terms acceptable to us, if at all.
On January 27, 2017, we repurchased approximately $10 million of our common stock under the $25 million stock
repurchase plan authorized by our Board of Directors on May 5, 2015. We are considering additional repurchases of our
common stock, which we may finance through additional debt.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect
on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital
expenditures or capital resources that would be material to investors.
Non-GAAP Financial Measures
Regulation G, Conditions for Use of Non-GAAP Financial Measures, and other SEC regulations regulate the
disclosure of certain non-GAAP financial information.
Contribution and contribution margin
Contribution and contribution margin (non-GAAP financial measures - which we reconcile to "Gross Profit" in our
consolidated statement of income) consist of gross profit less sales and marketing expense plus Club O Rewards and gift card
breakage and reflects an additional way of viewing our results. Contribution margin is contribution as a percentage of total net
revenue. We believe contribution and contribution margin provide management and users of the financial statements
information about our ability to cover our operating costs, such as technology and general and administrative expenses, while
74
reflecting the selling costs we incurred to generate our revenues and adding back the reductions in revenue that we recognized
for Club O Rewards that have subsequently expired and for gift cards whose redemption is remote. Contribution and
contribution margin are used in addition to and in conjunction with results presented in accordance with GAAP and should not
be relied upon to the exclusion of GAAP financial measures. The material limitation associated with the use of contribution is
that it is an incomplete measure of profitability as it does not include all operating expenses or all non-operating income and
expenses. Management compensates for these limitations when using this measure by looking at other GAAP measures, such as
operating income and net income. You should review our financial statements and publicly-filed reports in their entirety and not
rely on any single financial measure. For additional information regarding our segment reporting, please see Item 15 of Part IV,
"Financial Statements"—Note 21. Business Segments, contained in the "Notes to Consolidated Financial Statements" of this
Annual Report on Form 10-K.
Our calculation of our consolidated contribution and contribution margin is set forth below (in thousands):
Total net revenue
Cost of goods sold
Gross profit
Less: Sales and marketing expense
Plus: Club O Rewards and gift card breakage (included in Other
income, net)
Contribution
Contribution margin
$
2016
1,799,963
1,468,614
331,349
147,896
Year ended
December 31,
2015
1,657,838
$
$
1,353,184
304,654
124,468
2014
1,497,103
1,218,044
279,059
109,461
16,808
5,911
2,439
$
200,261
$
186,097
$
172,037
11.1%
11.2%
11.5%
75
Our calculation of our contribution and contribution margin by Retail Total (which consists of Direct and Partner) and
Other (which consists of Medici) is set forth below (in thousands):
Year ended, December 31
2016
Total net revenue
Cost of goods sold
Gross profit
Less: Sales and marketing expense
Plus: Club O Rewards and gift card breakage
(included in Other income, net)
Contribution
Contribution margin
2015
Total net revenue
Cost of goods sold
Gross profit
Less: Sales and marketing expense
Plus: Club O Rewards and gift card breakage
(included in Other income, net)
Contribution
Contribution margin
2014
Total net revenue
Cost of goods sold
Gross profit
Less: Sales and marketing expense
Plus: Club O Rewards and gift card breakage
(included in Other income, net)
Contribution
Contribution margin
OSTK Retail and Medici pre-tax income or loss
Direct
Partner
$
$
101,578
96,271
5,307
$ 1,683,204
1,362,140
321,064
$
$
$
137,783
128,077
9,706
$ 1,518,125
1,225,107
293,018
$
$
$
$
147,460
129,253
18,207
$ 1,349,643
1,088,791
260,852
$
Retail Total
(Direct and
Partner)
$ 1,784,782
1,458,411
326,371
147,368
$
16,808
195,811
$
11.0%
$ 1,655,908
1,353,184
302,724
124,218
$
5,911
184,417
$
11.1%
$ 1,497,103
1,218,044
279,059
109,461
$
2,439
172,037
$
11.5%
$
$
$
$
$
$
$
$
$
Other
Consolidated
15,181
10,203
4,978
528
$ 1,799,963
1,468,614
331,349
147,896
$
—
4,450
29.3%
16,808
200,261
$
11.1%
1,930
—
1,930
250
$ 1,657,838
1,353,184
304,654
124,468
$
—
1,680
87.0%
5,911
186,097
$
11.2%
— $ 1,497,103
1,218,044
—
279,059
— $
109,461
—
—
— $
—%
2,439
172,037
11.5%
OSTK Retail and Medici pre-tax income or loss (non-GAAP financial measures - which we reconcile to Consolidated
pre-tax income or loss) consists of income or loss before taxes of our Retail (which consists of Direct and Partner) and Medici
(which is included in Other) businesses, excluding intercompany transactions eliminated in consolidation. We believe these
measures provide management and users of the financial statements useful information about the results of our separate
businesses. The material limitation associated with these measures is that they are an incomplete measure of our consolidated
operations. These measures should be used in addition to and in conjunction with results presented in accordance with GAAP
and should not be relied upon to the exclusion of GAAP financial measures. You should review our financial statements and
publicly-filed reports in their entirety and not rely on any single financial measure. For additional information regarding our
segment reporting, and a reconciliation of OSTK Retail and Medici pre-tax income or loss, please see Item 15 of Part IV,
"Financial Statements"—Note 21. Business Segments, contained in the "Notes to Consolidated Financial Statements" of this
Annual Report on Form 10-K.
Free cash flow
Free cash flow (a non-GAAP financial measure) reflects an additional way of viewing our cash flows and liquidity
that, when viewed with our GAAP results, provides a more complete understanding of factors and trends affecting our cash
76
flows and liquidity. Free cash flow, which we reconcile below to “Net cash provided by (used in) operating activities,” the
nearest GAAP financial measure, is net cash provided by operating activities reduced by “Expenditures for fixed assets,
including internal-use software and website development.” We believe that net cash provided by operating activities is an
important measure, since it includes both the cash impact of the continuing operations of the business and changes in the
balance sheet that impact cash. However, we believe free cash flow is a useful measure to evaluate our business since purchases
of fixed assets are a necessary component of ongoing operations and free cash flow measures the amount of cash we have
available for mandatory debt service and financing obligations, changes in our capital structure, and future investments after
purchases of fixed assets. Therefore, we believe it is important to view free cash flow as a complement to our entire
consolidated statements of cash flows as reconciled below (in thousands):
Net cash provided by operating activities
Expenditures for fixed assets, including internal-use software and
website development
Free cash flow
2016
Year ended
December 31,
2015
2014
39,564
$
54,516
$
80,834
(72,281)
(59,513)
(32,717) $
(4,997) $
(41,346)
39,488
$
$
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Other than the interest rate swaps described below and elsewhere in this Annual Report on Form 10-K, we do not use
derivative financial instruments in our investment portfolio, and we have no foreign exchange contracts. Our financial
instruments consist of cash and cash equivalents, trade accounts and contracts receivable, accounts payable and long-term
obligations. We consider investments in highly-liquid instruments with a remaining maturity of 90 days or less at the date of
purchase to be cash equivalents.
In connection with the syndicated senior secured credit facility described above, we entered into interest rate swap
transactions. The swaps have an effective date of September 1, 2015 and a maturity date of October 1, 2023. The combined
notional amount changes monthly and began at approximately $3.6 million on September 1, 2015. The notional amount
increased to a maximum of approximately $45.8 million as of December 31, 2016, and will decrease to approximately $38.2
million on October 1, 2023. The swaps effectively fix our effective interest rate on the approximate amounts expected to be
outstanding from time to time on the Term Loan at an annual rate of approximately 4.6%. At December 31, 2016, we had $45.8
million outstanding under the Term Loan, and the notional amount of the swaps was $45.8 million.
We carry our interest rate swaps at fair value on our consolidated balance sheets. At December 31, 2016, we
recognized swap liabilities in the amount of $1.8 million. The change in fair value of our swaps for the year ended
December 31, 2016 was a loss of $581,000. The fair value of the swaps can be impacted by several factors including forward
rates, interest rates and discount rates. Because we have designated our swaps as cash flow hedges for accounting purposes, to
the extent the swaps qualify for this designation and are effective, changes in the fair value of the instruments are recognized
through Other comprehensive income (loss) in our statements of comprehensive income (loss) (see Item 15 of Part IV,
"Financial Statements"—Note 2. Accounting Policies, Fair value of financial instruments and Derivative financial instruments
contained in the "Notes to Consolidated Financial Statements").
Our exposure to market risk for changes in interest rates relates primarily to our short-term investments and short-term
obligations; thus, fluctuations in interest rates would not have a material impact on the fair value of these securities. However,
the fair values of our investments may be subject to fluctuations due to volatility of the stock market in general, investment-
specific circumstances, and changes in general economic conditions.
At December 31, 2016, we had $183.1 million in cash and cash equivalents. Hypothetically, an increase or decrease in
interest rates of one hundred basis points would have an estimated impact of $1.8 million on our earnings or loss, or the cash
flows of these instruments.
At December 31, 2016, we had assets consisting of investments in precious metals totaling $9.9 million.
Hypothetically, an increase or decrease in the market value of one hundred basis points would have an estimated impact of
$99,000 on our earnings or loss, or the recorded value of these instruments. Reported earnings resulting from increases in the
market value of precious metals would be limited to losses incurred in the same fiscal year.
77
At December 31, 2016, letters of credit totaling $430,000 were outstanding under our credit facilities. Hypothetically,
an increase or decrease in interest rates of one hundred basis points would have an estimated impact of $4,300 on our earnings
or loss if the letters of credit were fully drawn.
At December 31, 2016, we had cryptocurrency-denominated assets totaling $307,000. Hypothetically, an increase or
decrease in the market value of one hundred basis points would have an estimated impact of $3,070 on our earnings or loss, or
the recorded value 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 DATA
The 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
DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
(a) Disclosure Controls and Procedures
We 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, as amended (the "Exchange Act"). The term disclosure controls and procedures means
controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in
the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time
periods specified in the Commission's rules and forms.
Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that
information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated
and communicated to the issuer's management, including its principal executive and principal financial officers, or persons
performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Evaluation of Disclosure Controls and Procedures
We carried out an evaluation required by the Exchange Act under the supervision and with the participation of our
principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure
controls and procedures, as defined in Rule 13a-15(e) of the Exchange Act, as of the end of the period covered by this report.
Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls
and procedures were effective to provide reasonable assurance that information required to be disclosed by us in the reports that
we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in
the SEC's rules and forms and to provide reasonable assurance that such information is accumulated and communicated to our
management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions
regarding required disclosure.
Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives as
specified above. Management does not expect, however, that our disclosure controls and procedures will prevent or detect all
error and fraud. Any control system, no matter how well designed and operated, is based upon certain assumptions and can
provide only reasonable, not absolute, assurance that its objectives will be met. Further, no evaluation of controls can provide
absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any,
within the Company have been detected.
(b) Management's Report on Internal Control over Financial Reporting
Management of the Company is responsible for establishing and maintaining adequate internal control over financial
reporting as defined in Rules 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 the preparation 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
78
misstatements. Also, projections of any evaluation of effectiveness of internal control over financial reporting to future periods
are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
Management has assessed the effectiveness of our internal control over financial reporting as of December 31, 2016.
In making our assessment of the effectiveness of internal control over financial reporting, management used the criteria set
forth in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission ("COSO"). Based on this assessment, management has concluded that, as of December 31, 2016, 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. Management does not expect, however, that our internal control over financial reporting will prevent or detect
all error and fraud. Any control system, no matter how well designed and operated, is based upon certain assumptions and can
provide only reasonable, not absolute, assurance that its objectives will be met. Further, no evaluation of controls can provide
absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any,
within the Company have been detected.
We acquired SpeedRoute LLC and Pro Securities, LLC during 2016 and we excluded from our assessment of internal
control over financial reporting as of December 31, 2016, their internal control over financial reporting associated with total
assets of approximately 1% and total revenue of less than 1% included in the consolidated financial statements of
Overstock.com, Inc. and subsidiaries as of and for the year ended December 31, 2016.
The effectiveness of our internal control over financial reporting as of December 31, 2016 has been audited by
KPMG LLP, an independent registered public accounting firm, as stated in their report which is in Item 9A(c).
79
(c) Independent Registered Public Accounting Firm's Report on Internal Control Over Financial Reporting
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Overstock.com, Inc.:
We have audited Overstock.com, Inc.'s internal control over financial reporting as of December 31, 2016, based on
criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of
the Treadway Commission (COSO). Overstock.com, Inc.'s management is responsible for maintaining effective internal control
over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the
accompanying Management's Report on Internal Control over Financial Reporting (Item 9A(b)). Our responsibility is 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 standards require that we plan and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding
of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the
design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such 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 financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company's internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions
and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of 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, 2016, based on criteria established in Internal Control—Integrated Framework (2013) issued by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Overstock.com, Inc. acquired SpeedRoute LLC and Pro Securities, LLC during 2016 and management excluded from
its assessment of the effectiveness of Overstock.com, Inc.'s internal control over financial reporting as of December 31, 2016,
SpeedRoute LLC and Pro Securities, LLC's internal control over financial reporting associated with total assets of
approximately 1% and total revenue of less than 1% included in the consolidated financial statements of Overstock.com, Inc.
and subsidiaries as of and for the year ended December 31, 2016. Our audit of internal control over financial reporting of
Overstock.com, Inc. also excluded an evaluation of the internal control over financial reporting of SpeedRoute LLC and Pro
Securities, LLC.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States), the consolidated balance sheets of Overstock.com, Inc. and subsidiaries as of December 31, 2016 and 2015, and the
related consolidated statements of income, comprehensive income, changes in stockholders' equity, and cash flows for each of
the years in the three-year period ended December 31, 2016, and our report dated March 3, 2017 expressed an unqualified
opinion on those consolidated financial statements.
/s/ KPMG LLP
Salt Lake City, Utah
March 3, 2017
80
(d) Changes in Internal Control Over Financial Reporting
During the fiscal quarter ended December 31, 2016, there has not occurred any change in our internal control over
financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial
reporting.
81
ITEM 9B. OTHER INFORMATION
None.
82
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information 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 directors
and any material changes to the process by which security holders may recommend nominees to the board of directors will be
included in our definitive proxy statement for our 2017 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 our
2017 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 the
Company, including our principal executive officer, principal financial officer, and principal accounting officer. We intend to
disclose any amendments to the Code and any waivers granted to our principal executive officer, principal financial officer or
principal accounting officer or other persons to the extent required by applicable rules or regulations in the Investor Relations
section of our Website, www.overstock.com. We will provide a copy of the Code to any person without any charge upon request
in writing addressed to Overstock.com. Attn: Investor Relations, 799 West Coliseum Way, Midvale, UT 84047.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to our definitive proxy statement for the 2017
annual meeting of stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Except as set forth herein, the information required by this Item is incorporated by reference to our definitive proxy
statement for the 2017 annual meeting of stockholders.
The following graph compares the total cumulative stockholder return, on our common stock with the total cumulative
return of the NASDAQ Market Index—U.S. ("NASDAQ Market Index") and the Morningstar Specialty Retail Index
("Morningstar Group Index") during the period commencing on January 1, 2012 through December 31, 2016. The graph
assumes a $100 investment at the beginning of the period in our common stock, the NASDAQ Market Index and the
Morningstar Group Index, and the reinvestment of any dividends. Historic stock price performance is not necessarily indicative
of future stock price performance.
83
COMPARISON OF YEAR CUMULATIVE TOTAL RETURN
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this Item is incorporated by reference to our definitive proxy statement for the 2017
annual meeting of stockholders.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this Item is incorporated by reference to our definitive proxy statement for the 2017
annual meeting of stockholders.
84
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
1. Financial Statements
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Comprehensive Income
Consolidated Statements of Changes in Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Schedule II Valuation and Qualifying Accounts
2. Financial Statement Schedule
92
93
94
95
96
97
99
130
Schedule II Valuation and Qualifying Accounts listed in (1) above is included herein. Schedules other than those listed
above have been omitted as they are either not required, not applicable, or the information has otherwise been shown in the
consolidated financial statements or notes thereto.
3. Exhibits
Exhibits
2.1
2.2
2.3
2.4
3.1
3.2
3.3
3.4
Asset Purchase Agreement by and between Cirrus Technologies, LLC, as Seller, and Cirrus
Services LLC, as Buyer, dated as of August 26, 2015 (incorporated by reference to Exhibit 2.1 to
our Quarterly Report on Form 10-Q filed on November 9, 2015 (File No. 000-49799)).**
Pro Securities, LLC Membership Interest Purchase Agreement by and among Joseph Cammarata
and John Paul DeVito, as Sellers, and Medici, Inc., as Buyer, dated as of August 26, 2015
(incorporated by reference to Exhibit 2.2 to our Quarterly Report on Form 10-Q filed on
November 9, 2015 (File No. 000-49799)).**
SpeedRoute LLC Membership Interest Purchase Agreement by and among Joseph Cammarata
and John Paul DeVito, as Sellers, and Medici, Inc., as Buyer, dated as of August 26, 2015
(incorporated by reference to Exhibit 2.3 to our Quarterly Report on Form 10-Q filed on
November 9, 2015 (File No. 000-49799)).**
TraderField Securities, Inc. Stock Purchase Agreement by and between Joseph Cammarata, as
Seller, and Medici, Inc., as Buyer, dated as of August 26, 2015 (incorporated by reference to
Exhibit 2.4 to our Quarterly Report on Form 10-Q filed on November 9, 2015 (File No.
000-49799)).**
Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to
our Quarterly Report on Form 10-Q for the quarter ended June 30, 2014 filed on July 29, 2014
(File No. 000-49799)).
Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 to our Quarterly Report
on Form 10-Q filed on November 9, 2015 (File No. 000-49799)).
Certificate of Designation for Blockchain Voting Series A Preferred Stock (incorporated by
reference to Exhibit 3.1 to our Current Report on Form 8-K filed on December 15, 2016 (File
No. 000-49799)).
Certificate of Designation for Voting Series B Preferred Stock (incorporated by reference to
Exhibit 3.2 to our Current Report on Form 8-K filed on December 15, 2016 (File No.
000-49799)).
85
Exhibits
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
4.10
4.11
4.12
4.13
4.14
4.15
10.1
Form of specimen common stock certificate (incorporated by reference to Exhibit 4.1 to our
Registration Statement on Form S-1 (File No. 333-83728), which became effective on May 29,
2002).
Form of Stock Certificate for Voting Series B Preferred Stock (incorporated by reference to
Exhibit 4.2 to our Current Report on Form 8-K filed November 14, 2016 (File No. 000-49799)).
Registration Rights Agreement by and among Overstock.com, Inc., and each of the holders listed
on Schedule I thereto dated August 26, 2015 (incorporated by reference to Exhibit 2.5 to our
registration statement on Form S-3 filed September 25, 2015 (File No. 333-207141), which
became effective on November 24, 2015).
Registration Rights Agreement dated December 15, 2016 by and among Overstock.com, Inc. and
Patrick M. Byrne, individually and as representative of each of the Participating Affiliates (as
defined therein) (incorporated by reference to Exhibit 4.1 to our Current Report on Form 8-K
filed on November 14, 2016 (File No. 000-49799)).
Form of Participating Affiliate Agreement (included in Exhibit 4.4) (incorporated by reference to
Exhibit 4.2 to our Current Report on Form 8-K filed on November 14, 2016 (File No.
000-49799)).
Certificate of Designation for Blockchain Voting Series A Preferred Stock (incorporated by
reference to Exhibit 3.1 to our Current Report on Form 8-K filed on December 15, 2016 (File
No. 000-49799)).
Certificate of Designation for Voting Series B Preferred Stock (incorporated by reference to
Exhibit 3.2 to our Current Report on Form 8-K filed on December 15, 2016 (File No.
000-49799)).
Loan Agreement dated as of October 24, 2014 by and between Overstock.com, Inc., O.com
Land, LLC, U.S. Bank National Association and the other Banks party thereto from time to time
(the “Loan Agreement”) (incorporated by reference to Exhibit 10.1 to our Current Report on
Form 8-K filed on October 28, 2014 (File No. 000-49799)).
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)).
Revolving Note dated October 24, 2014 made by Overstock.com, Inc. to Compass Bank pursuant
to the Loan Agreement (incorporated by reference to Exhibit 10.3 to our Current Report on Form
8-K filed on October 28, 2014 (File No. 000-49799)).
Swing Line Note dated October 24, 2014 made by Overstock.com, Inc. to U.S. Bank National
Association as Swing Line Bank pursuant to the Loan Agreement (incorporated by reference to
Exhibit 10.4 to our Current Report on Form 8-K filed on October 28, 2014 (File No.
000-49799)).
Term Note dated January 1, 2017 made by O.com Land, LLC to U.S. Bank pursuant to the Loan
Agreement (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed
on January 5, 2017 (File No. 000-49799)).
Term Note dated January 1, 2017 made by O.com Land, LLC to Compass Bank pursuant to the
Loan Agreement (incorporated by reference to Exhibit 10.2 to our Current Report on Form 8-K
filed on January 1, 2017 (File No. 000-49799)).
Security Agreement dated October 24, 2014 between Overstock.com, Inc. and 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 10.8 to our Current Report on Form 8-K filed
on October 28, 2014 (File No. 000-49799)).
Deed of Trust, Assignment of Rents, Security Agreement and Financing Statement dated October
24, 2014, made by O.com Land, LLC to First American Title Insurance Company, as trustee, and
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 10.9 to our Current Report on
Form of Indemnification Agreement between Overstock.com, Inc. and each of its directors and
officers (incorporated by reference to Exhibit 10.1 to our Registration Statement on Form S-1
(File No. 333-83728), which became effective on May 29, 2002).
86
Exhibits
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
*10.15(a)
10.16
10.17
2005 Equity Incentive Plan, as amended (incorporated by reference to Exhibit 10.1 to our
Current Report on Form 8-K filed on May 7, 2012 (File No. 000-49799)).
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)).
Industrial Net Lease dated May 1, 2013 between Overstock.com, Inc. and Landmark 4, LLC
(incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed May 17,
2013 (File No. 000-49799)).
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)).
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 to Exhibit 10.1 to our Current Report on
Form 8-K filed on August 6, 2014 (File No. 000-49799)).
Second Amendment dated September 3, 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 to Exhibit 10.1 to our Current
Report on Form 8-K filed on September 8, 2014 (File No. 000-49799)).
Project Management Agreement dated May 5, 2014 between O.Com Land LLC and Gardner
CMS, L.C. (incorporated by reference to Exhibit 10.2 to our Report on Current Form 8-K filed
on May 7, 2014 (File No. 000-49799)).
Purchase and Sale Agreement dated September 17, 2014 by and between the Redevelopment
Agency of Midvale City and O.com Land LLC (incorporated by reference to Exhibit 10.1 to our
Current Report on Form 8-K filed on September 23, 2014 (File No. 000-49799)).
Loan Agreement dated as of October 24, 2014 by and between Overstock.com, Inc., O.com
Land, LLC, U.S. Bank National Association and the other Banks party thereto from time to time
(the “Loan Agreement”) (incorporated by reference to Exhibit 10.1 to our Current Report on
Form 8-K filed on October 28, 2014 (File No. 000-49799)).
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)).
Revolving Note dated October 24, 2014 made by Overstock.com, Inc. to Compass Bank
pursuant to the Loan Agreement (incorporated by reference to Exhibit 10.3 to our Current Report
on Form 8-K filed on October 28, 2014 (File No. 000-49799)).
Swing Line Note dated October 24, 2014 made by Overstock.com, Inc. to U.S. Bank National
Association as Swing Line Bank pursuant to the Loan Agreement (incorporated by reference to
Exhibit 10.4 to our Current Report on Form 8-K filed on October 28, 2014 (File No.
000-49799)).
Term Note dated January 1, 2017 made by O.com Land, LLC to U.S. Bank pursuant to the Loan
Agreement (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed
on January 5, 2017 (File No. 000-49799)).
Summary of unwritten compensation arrangements with Directors.
Term Note dated January 1, 2017 made by O.com Land, LLC to Compass Bank pursuant to the
Loan Agreement (incorporated by reference to Exhibit 10.2 to our Current Report on Form 8-K
filed on January 1, 2017 (File No. 000-49799)).
Security Agreement dated October 24, 2014 between Overstock.com, Inc. and 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 10.8 to our Current Report on Form 8-K filed
on October 28, 2014 (File No. 000-49799)).
87
Exhibits
10.18
10.19
10.20
10.21
10.22
10.23
10.24
10.25
10.26
Deed of Trust, Assignment of Rents, Security Agreement and Financing Statement dated October
24, 2014, made by O.com Land, LLC to First American Title Insurance Company, as trustee, and
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 10.9 to our Current Report on
Assignment of Construction and Development Documents dated October 24, 2014, made by
O.com Land, LLC in favor of 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)).
Assignment of Project Management Agreement dated October 24, 2014, made by O.com Land,
LLC to U.S. Bank National Association, as Administrative Bank for the Banks party to the Loan
Agreement from time to time and acknowledged and consented to by Gardner CMS, L.C., as
project manager (incorporated by reference to Exhibit 10.11 to our Current Report on Form 8-K
filed on October 28, 2014 (File No. 000-49799)).
Repayment and Completion Guaranty dated October 24, 2014, made by Overstock.com, Inc. in
favor of 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 10.12 to our Current Report
on Form 8-K filed on October 28, 2014 (File No. 000-49799)).
Environmental Indemnity Agreement dated October 24, 2014, made by O.com Land, LLC and
Overstock.com, Inc. in favor of 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 10.13
to our Current Report on Form 8-K filed on October 28, 2014 (File No. 000-49799)).
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 Exhibit 10.14 to our Current Report on Form 8-K
filed on October 28, 2014 (File No. 000-49799)).
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 October 28, 2014 (File No. 000-49799)).
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
28, 2014 (File No. 000-49799)).
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)).
10.27
Confirmation of swap transaction dated October 27, 2014 from Compass Bank to O.com Land,
October 28, 2014 (File No. 000-49799)).
10.28
10.29
10.30
Lease Agreement dated October 24, 2014 between O.com Land, LLC and Overstock.com Inc.
(incorporated by reference to Exhibit 10.19 to our Current Report on Form 8-K filed on October
28, 2014 (File No. 000-49799)).
Construction Agreement, dated as of October 13, 2014 by and between O.Com Land, LLC and
Okland Construction Company Inc. but executed on October 14, 2014 (incorporated by reference
to Exhibit 10.1 to our Current Report on Form 8-K filed on October 20, 2014 (File No.
000-49799)).
First Amendment to Construction Agreement dated July 31, 2015, by and between O.com Land,
LLC and Okland Construction Company Inc. (incorporated by reference to exhibit 10.2 to our
report on Form 8-K filed August 4, 2015 (File No. 000-49799)).
88
Exhibits
10.31
10.32
10.33
10.34
10.35
10.36(a)
10.37(a)
10.38
10.39
*21
*23
24
*31.1
*31.2
*32.1
*32.2
101(b)
Cryptodebt and Note Purchase Agreement dated July 31, 2015 among Overstock.com, Inc.,
Medici, Inc. and FNY Managed Accounts LLC (incorporated by reference to exhibit 10.1 to our
report on Form 8-K filed August 5, 2015 (File No. 000-49799)).
Promissory Note dated July 31, 2015, made by FNY Managed Accounts LLC in favor of
Overstock.com, Inc. (incorporated by reference to exhibit 10.2 to our report on Form 8-K filed
August 5, 2015 (File No. 000-49799)).
Master Lease Agreement dated as of November 6, 2015 with U.S. Bank Equipment Finance, a
division of U.S. Bank National Association but delivered and effective November 23, 2015
(incorporated by reference to exhibit 10.1 to our report on Form 8-K filed November 25, 2015
(File No. 000-49799)).
Schedule to Master Lease Agreement dated as of November 16, 2015 but delivered and effective
November 23, 2015 (incorporated by reference to exhibit 10.2 to our report on Form 8-K filed
November 25, 2015 (File No. 000-49799)).
Settlement Agreement dated as of January 26, 2016 with, among other parties, Merrill Lynch,
Pierce, Fenner & Smith Incorporated and Merrill Lynch Professional Clearing Corporation
(incorporated by reference to exhibit 10.1 to our report on Form 8-K filed February 3, 2016 (File
No. 000-49799)).
Restricted Stock Unit Grant Notice and Restricted Stock Unit Agreement between the Company
and Mitch Edwards (incorporated by reference to exhibit 10.1 to our report on Form 8-K filed
May 16, 2016 (File No. 000-49799)).
Executive Retention Plan, adopted July 27, 2016 (incorporated by reference to Exhibit 99.1 of
our Current Report on Form 8-K filed on August 2, 2016 (File No. 000-49799)).
Dealer-Manager Agreement, dated as of November 1, 2016, between Overstock.com, Inc. and
Source Capital Group, Inc. (incorporated by reference to our Current Report on Form 8-K filed
on November 1, 2016 (File No. 000-49799)).
Software Licensing Agreement, dated November 2, 2016 between Overstock and SiteHelix Inc.
(incorporated by reference to our Current Report on Form 8-K filed on November 4, 2016 (File
No. 000-49799)).
Subsidiaries of the Registrant
Consent of Independent Registered Public Accounting Firm
Powers of Attorney (see signature page)
Certification of Principal Executive Officer
Certification of Principal Financial Officer
Section 1350 Certification of Principal Executive Officer
Section 1350 Certification of Principal Financial Officer
Attached as Exhibit 101 to this report are the following documents formatted in XBRL
(Extensible Business Reporting Language): (i) Consolidated Balance Sheets at December 31,
2016 and 2015; (ii) Consolidated Statements of Income for the years ended December 31, 2016,
2015, and 2014; (iii) Consolidated Statements of Comprehensive Income for the years ended
December 31, 2016, 2015, and 2014; (iv) Consolidated Statements of Changes in Stockholder's
Equity for the years ended December 31, 2016, 2015, and 2014; (v) Consolidated Statements of
Cash Flows for the years ended December 31, 2016, 2015, and 2014; 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 for purposes 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 liability under these sections.
89
* Filed herewith.
** Schedules have been omitted pursuant to Item 601(b)(2) of Regulation S-K. A copy of any omitted schedule will be
furnished supplementally to the Securities and Exchange Commission upon request.
90
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 3, 2017.
SIGNATURES
OVERSTOCK.COM, INC.
By:
/s/ PATRICK M. BYRNE
Patrick M. Byrne
Chief 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 on behalf of the registrant and in the capacities and on the dates indicated.
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and
appoints each of Patrick M. Byrne and 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 this Annual Report on Form 10-K and to file the same, with
exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, 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 virtue
hereof.
Signature
Title
Date
March 3, 2017
March 3, 2017
March 3, 2017
March 3, 2017
March 3, 2017
March 3, 2017
March 3, 2017
/s/ PATRICK M. BYRNE
Patrick M. Byrne
Chief Executive Officer and Director
(Principal Executive Officer)
/s/ JONATHAN E. JOHNSON III
Jonathan E. Johnson III
Chairman of the Board and President,
Medici
/s/ ROBERT P. HUGHES
Robert P. Hughes
/s/ ALLISON H. ABRAHAM
Allison H. Abraham
/s/ BARCLAY F. CORBUS
Barclay F. Corbus
/s/ KIRTHI KALYANAM
Kirthi Kalyanam
/s/ JOSEPH J. TABACCO, JR.
Joseph J. Tabacco, Jr.
Senior Vice President, Finance and Risk
Management (Principal Financial Officer
and Principal Accounting Officer)
Director
Director
Director
Director
91
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Overstock.com, Inc.:
We have audited the accompanying consolidated balance sheets of Overstock.com, Inc. and subsidiaries as of
December 31, 2016 and 2015, and the related consolidated statements of income, comprehensive income, changes in
stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2016. In connection with
our audits of the consolidated financial statements, we also have audited financial statement schedule II. These consolidated
financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility 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 standards require that we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that
our 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 of Overstock.com, Inc. and subsidiaries as of December 31, 2016 and 2015, and the results of their operations
and their cash flows for each of the years in the three-year period ended December 31, 2016, in conformity with U.S. generally
accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth
therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States), Overstock.com, Inc.'s internal control over financial reporting as of December 31, 2016, based on criteria established in
Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO), and our report dated March 3, 2017 expressed an unqualified opinion on the effectiveness of the
Company's internal control over financial reporting.
/s/ KPMG LLP
Salt Lake City, Utah
March 3, 2017
92
Overstock.com, Inc.
Consolidated Balance Sheets
(in thousands)
Assets
December 31,
2016
December 31,
2015
Current assets:
Cash and cash equivalents
Restricted cash
Accounts receivable, net
Inventories, net
Prepaid inventories, net
Deferred tax assets, net
Prepaids and other current assets
Total current assets
Fixed assets, net
Precious metals
Deferred tax assets, net
Intangible assets, net
Goodwill
Other long-term assets, net
Total assets
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable
Accrued liabilities
Deferred revenue
Finance obligations, current
Other current liabilities, net
Total current liabilities
Long-term debt, net
Finance obligations, non-current
Other long-term liabilities
Total liabilities
Commitments and contingencies (Note 12)
Stockholders’ equity:
Preferred stock, $0.0001 par value, authorized shares - 5,000
Series A, issued and outstanding - 127 and 0
Series B, issued and outstanding - 569 and 0
Common stock, $0.0001 par value
Authorized shares - 100,000
Issued shares - 27,895 and 27,634
Outstanding shares - 25,432 and 25,234
Additional paid-in capital
Accumulated deficit
Accumulated other comprehensive loss
Treasury stock:
Shares at cost - 2,463 and 2,400
Equity attributable to stockholders of Overstock.com, Inc.
Equity attributable to noncontrolling interests
Total stockholders' equity
Total liabilities and stockholders’ equity
$
$
$
$
$
$
$
183,098
430
28,142
18,937
2,112
16,268
11,654
260,641
134,552
9,946
39,998
10,913
14,698
14,328
485,076
106,337
96,216
41,780
3,256
1,627
249,216
44,179
11,831
6,890
312,116
170,262
430
16,128
20,042
1,311
26,305
13,890
248,368
93,696
9,722
37,891
14,656
15,387
8,669
428,389
122,705
83,387
50,944
1,059
581
258,676
8,843
4,535
6,974
279,028
—
—
—
—
3
383,348
(153,898)
(1,540)
(52,587)
175,326
(2,366)
172,960
485,076
$
3
370,047
(166,420)
(1,430)
(51,747)
150,453
(1,092)
149,361
428,389
See accompanying notes to consolidated financial statements.
93
Overstock.com, Inc.
Consolidated Statements of Income
(in thousands, except per share data)
Revenue, net
Direct
Partner and other
Total net revenue
Cost of goods sold
Direct(1)
Partner and other
Total cost of goods sold
Gross profit
Operating expenses:
Sales and marketing(1)
Technology(1)
General and administrative(1)
Litigation settlement
Restructuring
Total operating expenses
Operating income (loss)
Interest income
Interest expense
Other income, net
Income before income taxes
Provision for income taxes
Consolidated net income
Less: Net loss attributable to noncontrolling interests
Net income attributable to stockholders of Overstock.com, Inc.
Net income per common share—basic:
Net income attributable to common shares—basic
Weighted average common shares outstanding—basic
Net income per common share—diluted:
Net income attributable to common shares—diluted
Weighted average common shares outstanding—diluted
____________________________________________________________
(1) Includes stock-based compensation as follows (Note 15):
Cost of goods sold — direct
Sales and marketing
Technology
General and administrative
Total
Year ended
December 31,
2016
2015
2014
$
101,578
$
137,783
$
147,460
1,698,385
1,799,963
1,520,055
1,657,838
1,349,643
1,497,103
96,271
1,372,343
1,468,614
331,349
128,077
1,225,107
1,353,184
304,654
129,253
1,088,791
1,218,044
279,059
147,896
106,760
89,298
(19,520)
—
324,434
6,915
326
(877)
14,181
20,545
9,297
11,248
(1,274)
12,522
0.49
25,342
$
$
$
124,468
98,533
82,187
—
—
305,188
(534)
155
(140)
3,634
3,115
1,895
1,220
(1,226)
2,446
0.10
24,612
$
$
$
0.49
$
0.10
$
25,426
24,703
109,461
86,258
71,777
—
(360)
267,136
11,923
152
(39)
1,169
13,205
4,404
8,801
(53)
8,854
0.37
23,999
0.36
24,317
$
266
249
777
3,599
$
179
217
646
2,484
4,891
$
3,526
$
181
336
751
2,767
4,035
$
$
$
$
$
$
See accompanying notes to consolidated financial statements.
94
Overstock.com, Inc.
Consolidated Statements of Comprehensive Income
(in thousands)
Consolidated net income
Other comprehensive loss:
Unrealized loss on cash flow hedges, net of benefit (expense) for taxes of
$(211), $513, and $387
Other comprehensive loss
Comprehensive income
Less: Comprehensive loss attributable to noncontrolling interests
Comprehensive income attributable to stockholders of Overstock.com, Inc.
Year ended
December 31,
2016
2015
2014
$
11,248
$
1,220
$
8,801
(110)
(110)
11,138
(1,274)
12,412
$
$
(809)
(809)
411
(1,226)
1,637
$
$
$
$
(621)
(621)
8,180
(53)
8,233
See accompanying notes to consolidated financial statements.
95
Overstock.com, Inc.
Consolidated Statements of Changes in Stockholders’ Equity
(in thousands, except per share data)
Year ended
December 31,
2015
2014
2016
Equity attributable to stockholders of Overstock.com, Inc.
Number of common shares issued
Balance at beginning of year
Common stock issued upon vesting of restricted stock
Exercise of stock options
Balance at end of year
Number of treasury stock shares
Balance at beginning of year
Issuance of treasury stock
Purchases of treasury stock
Balance at end of year
Total number of outstanding shares
Common stock
Number of Series A preferred shares issued and outstanding
Balance at beginning of year
Rights offering
Balance at end of year
Number of Series B preferred shares issued and outstanding
Balance at beginning of year
Rights offering
Balance at end of year
Preferred stock
Additional paid-in capital
Balance at beginning of year
Stock-based compensation to employees and directors
Exercise of stock options
Rights offering
Balance at end of year
Accumulated deficit
Balance at beginning of year
Net income attributable to stockholders of Overstock.com, Inc.
Deficiency in cost of treasury stock issued
Balance at end of year
Accumulated other comprehensive loss
Balance at beginning of year
Net other comprehensive loss
Balance at end of year
Treasury stock
Balance at beginning of year
Issuance of treasury stock
Purchases of treasury stock
Balance at end of year
Total equity attributable to stockholders of Overstock.com, Inc.
Equity attributable to noncontrolling interests
Balance at beginning of year
Net loss attributable to noncontrolling interests
Paid-in capital attributable to noncontrolling interests
Total equity attributable to noncontrolling interests
Total stockholders' equity
27,634
219
42
27,895
2,400
—
63
2,463
25,432
27,241
377
16
27,634
3,204
(908)
104
2,400
25,234
$
3
$
3
$
—
127
127
—
569
569
—
—
—
—
—
—
— $
— $
370,047
4,891
819
7,591
383,348
$
$
366,252
3,526
269
—
370,047
$
$
(166,420) $
12,522
—
(153,898) $
(153,864) $
2,446
(15,002)
(166,420) $
(1,430) $
(110)
(1,540) $
(621) $
(809)
(1,430) $
(51,747) $
—
(840)
(52,587)
175,326
$
(1,092) $
(1,274)
—
(2,366) $
(82,531) $
33,151
(2,367)
(51,747)
150,453
$
(18) $
(1,226)
152
(1,092) $
$
$
$
$
$
$
$
$
$
$
$
$
26,909
302
30
27,241
3,124
—
80
3,204
24,037
2
—
—
—
—
—
—
—
361,706
4,035
511
—
366,252
(162,718)
8,854
—
(153,864)
—
(621)
(621)
(80,230)
—
(2,301)
(82,531)
129,238
—
(53)
35
(18)
See accompanying notes to consolidated financial statements.
96
172,960
$
149,361
$
129,220
Overstock.com, Inc.
Consolidated Statements of Cash Flows
(in thousands)
Year ended December 31,
2015
2014
2016
$
11,248
$
1,220
$
8,801
Cash flows from operating activities:
Consolidated net income
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation of fixed assets
Amortization of intangible assets
Stock-based compensation to employees and directors
Deferred income taxes, net
Amortization of debt issuance costs
(Gain) loss on investment in precious metals
Loss on investment in cryptocurrency
Impairment of cost method investment
Restructuring reversals
Ineffective portion of loss on cash flow hedge
Termination costs of cryptobond financing
Other
Changes in operating assets and liabilities, net of acquisitions:
Restricted cash
Accounts receivable, net
Inventories, net
Prepaid inventories, net
Prepaids and other current assets
Other long-term assets, net
Accounts payable
Accrued liabilities
Deferred revenue
Other long-term liabilities
Net cash provided by operating activities
Cash flows from investing activities:
Proceeds from sale of precious metals
Investment in precious metals
Investment in cryptocurrency
Equity method investment
Disbursements for note receivable
Cost method investments
Acquisitions of businesses, net of cash acquired
Expenditures for fixed assets, including internal-use software and website development
Other
Net cash used in investing activities
Cash flows from financing activities:
Payments on capital lease obligations
Paydown on direct financing arrangement
Payments on finance obligations
Payments on interest swap
Proceeds from finance obligations
Proceeds from short-term debt
Payments on short-term debt
Proceeds from long-term debt
Change in restricted cash
Proceeds from exercise of stock options
Proceeds from rights offering, net of offering costs
Purchase of treasury stock
Payment of debt issuance costs
Net cash provided by (used in) financing activities
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
$
Continued on the following page
97
27,283
3,968
4,891
7,719
—
(201)
—
2,850
—
—
—
356
—
(10,006)
1,105
(801)
2,389
(786)
(18,823)
16,936
(9,164)
600
39,564
1,610
(1,633)
—
—
(3,668)
(4,750)
1,248
(72,281)
27
(79,447)
—
(54)
(1,906)
(563)
11,399
—
—
36,273
—
819
7,591
(840)
—
52,719
12,836
170,262
183,098
$
23,516
1,581
3,526
1,483
21
1,183
152
—
—
124
850
9
—
3,463
6,166
1,903
(1,338)
66
10,482
(4,153)
2,493
1,769
54,516
—
—
—
(152)
(5,000)
(7,000)
(10,601)
(59,513)
(165)
(82,431)
(362)
(308)
(104)
(57)
5,698
5,500
(750)
9,488
150
269
—
(2,367)
(621)
16,536
(11,379)
181,641
170,262
$
17,961
103
4,035
3,741
—
1,269
8
—
(360)
—
—
(16)
1,000
(2,916)
835
(1,410)
(1,455)
26
21,652
15,607
11,130
823
80,834
—
(2,496)
(300)
(250)
—
—
—
(41,346)
(38)
(44,430)
(325)
(282)
—
—
—
—
—
—
—
511
—
(2,301)
(1,031)
(3,428)
32,976
148,665
181,641
Overstock.com, Inc.
Consolidated Statements of Cash Flows
(Continued)
(in thousands)
Supplemental disclosures of cash flow information:
Cash paid during the period:
Interest paid
Taxes paid
Non-cash investing and financing activities:
Fixed assets, including internal-use software and website development, costs financed
through accounts payable and accrued liabilities
Equipment acquired under capital lease obligations
Capitalized interest cost
Acquisition of businesses through stock issuance
Change in value of cash flow hedge
Note receivable converted to cost method investment
Year ended December 31,
2016
2015
2014
$
$
$
$
1,269
1,338
2,219
—
105
—
(659)
2,850
$
$
224
273
6,290
362
157
18,149
1,265
—
47
76
1,410
325
26
—
1,008
—
See accompanying notes to consolidated financial statements.
98
Overstock.com, Inc.
Notes to Consolidated Financial Statements
1. BASIS OF PRESENTATION
Business 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 were reorganized as a C Corporation in the State of Utah and
reincorporated in Delaware in May 2002. On October 25, 1999, we changed our name to Overstock.com, Inc.
We are an online retailer and incubator of blockchain technology. Through our online retail business we offer a broad
range of price-competitive brand name, non-brand name and closeout products, including furniture, home decor, bedding and
bath, housewares, jewelry and watches, apparel and designer accessories, health and beauty products, electronics and
computers, and sporting goods, among other products. We also sell hundreds of thousands of best seller and current run books,
magazines, CDs, DVDs and video games (“BMMG”). We sell these products and services through our Internet websites located
at www.overstock.com, www.o.co and www.o.biz (referred to collectively as the “Website”). Although our three websites are
located at different domain addresses, the technology and equipment and processes supporting the Website and the process of
order fulfillment described herein are the same for all three websites.
Basis of presentation
We 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 financial statements and accompanying disclosures. Although these
estimates are based on our best knowledge of current events and actions that we may undertake in the future, our actual results
may be different from our estimates. The results of operations presented herein are not necessarily indicative of our results for
any future period.
For purposes of comparability, we reclassified certain immaterial amounts in the prior periods presented to conform
with the current year presentation.
2. ACCOUNTING POLICIES
Principles of consolidation
The accompanying consolidated financial statements include our accounts and the accounts of our wholly-owned and
majority-owned subsidiaries. All intercompany account balances and transactions have been eliminated in consolidation.
Use of estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires estimates
and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of
contingent liabilities in the consolidated financial statements and accompanying notes. Estimates are used for, but not limited
to, investment valuation, receivables valuation, valuation of derivative financial instruments, revenue recognition, sales returns,
incentive discount offers, inventory valuation, depreciable lives of fixed assets and internally-developed software, goodwill
valuation, intangible asset valuation, cost method investment valuation, income taxes, stock-based compensation, performance-
based compensation, and contingencies. Actual results could differ materially from these estimates.
Cash equivalents
We classify all highly liquid instruments, including instruments with a remaining maturity of three months or less at
the time of purchase, as cash equivalents. Cash equivalents were $75.2 million and $28.1 million at December 31, 2016 and
2015, respectively.
Restricted cash
99
We consider cash that is legally restricted and cash that is held as a compensating balance for letter of credit
arrangements as restricted cash.
Fair value of financial instruments
We account for our assets and liabilities using a hierarchy of valuation techniques based on whether the inputs to those
valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources,
while unobservable inputs reflect our market assumptions. These two types of inputs have created the fair-value hierarchy
below. This hierarchy requires us to minimize the use of unobservable inputs and to use observable market data, if available,
when determining fair value.
• Level 1—Quoted prices for identical instruments in active markets;
• Level 2—Quoted prices for similar instruments in active markets, quoted prices for identical or similar
instruments in markets that are not active, and model-derived valuations in which all significant inputs and
significant value drivers are observable in active markets; and
• Level 3—Valuations derived from valuation techniques in which one or more significant inputs or significant
value drivers are unobservable.
Under GAAP, certain assets and liabilities are required to be recorded at fair value on a recurring basis. Our assets and
liabilities that are adjusted to fair value on a recurring basis are investments in money market mutual funds, trading securities,
derivative instruments, and deferred compensation liabilities.
The fair values of our investments in money market mutual funds, trading securities, and deferred compensation
liabilities are determined using quoted market prices from daily exchange traded markets on the closing price as of the balance
sheet date and are classified as Level 1.
The fair values of our derivative instruments are determined using standard valuation models. The significant inputs
used in these models are readily available in public markets, or can be derived from observable market transactions, and
therefore have been classified as Level 2. Inputs used in these standard valuation models for derivative instruments include the
applicable forward rates, interest rates and discount rates. Included in the fair value of derivative instruments is an adjustment
for nonperformance risk. The adjustment for nonperformance risk did not have a significant impact on the estimated fair value
of our derivative instruments. For additional disclosures related to our derivative instruments, see Derivative financial
instruments below.
The following tables summarize our assets and liabilities measured at fair value on a recurring basis using the
following levels of inputs as of December 31, 2016 and 2015, as indicated (in thousands):
Assets:
Cash equivalents - Money market mutual funds
Trading securities held in a “rabbi trust” (1)
Total assets
Liabilities:
Derivatives (2)
Deferred compensation accrual “rabbi trust” (3)
Total liabilities
Fair Value Measurements at December 31, 2016:
Total
Level 1
Level 2
Level 3
$
$
$
$
75,177
58
75,235
1,816
61
1,877
$
$
$
$
75,177
58
75,235
$
$
— $
—
— $
— $
61
61
$
1,816
—
1,816
$
$
—
—
—
—
—
—
100
Assets:
Cash equivalents - Money market mutual funds
Trading securities held in a “rabbi trust” (1)
Total assets
Liabilities:
Derivatives (2)
Deferred compensation accrual “rabbi trust” (3)
Total liabilities
___________________________________________
Fair Value Measurements at December 31, 2015:
Total
Level 1
Level 2
Level 3
$
$
$
$
28,102
68
28,170
2,397
70
2,467
$
$
$
$
28,102
68
28,170
$
$
— $
—
— $
— $
70
70
$
2,397
—
2,397
$
$
—
—
—
—
—
—
(1) — Trading securities held in a rabbi trust are included in Prepaids and other current assets and Other long-term
assets, net in the consolidated balance sheets.
(2) — Derivative financial instruments are included in Other current liabilities, net and Other long-term liabilities in
the consolidated balance sheets.
(3) — Non qualified deferred compensation in a rabbi trust is included in Accrued liabilities and Other long-term
liabilities in the consolidated balance sheets.
Our other financial instruments, including cash, restricted cash, accounts receivable, accounts payable, accrued
liabilities, finance obligations and debt are carried at cost, which approximates their fair value.
Accounts receivable
Accounts receivable consist primarily of trade amounts due from customers in the United States and from uncleared
credit card transactions at period end. Accounts receivable are recorded at invoiced amounts and do not bear interest.
Allowance for doubtful accounts
From time to time, we grant credit to some of our business customers on normal credit terms (typically 30 days). We
perform credit evaluations of our business customers’ financial condition and payment history and maintain an allowance for
doubtful accounts receivable based upon our historical collection experience and expected collectability of accounts receivable.
The allowance for doubtful accounts receivable was $2.0 million and $465,000 at December 31, 2016 and 2015, respectively.
The increase in our allowance for doubtful accounts receivable was primarily due to an increase in our allowance for a
marketplace in which we hold a minority investment (and in which we recognized an impairment charge during 2016).
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, 2016 and 2015, two banks held the majority of our cash and cash equivalents. We do not believe that, as
a result of this concentration, we are subject to any unusual financial risk beyond the normal risk associated with commercial
banking relationships.
Financial instruments that potentially subject us to significant concentrations of credit risk consist primarily of cash
equivalents and receivables. We invest our cash primarily in money market securities which are uninsured.
Valuation of inventories
Inventories, consisting of merchandise purchased for resale, are accounted for using a standard costing system which
approximates the first-in-first-out (“FIFO”) method of accounting, and are valued at the lower of cost or market. We write down
our inventory for estimated obsolescence and to lower of cost or market value based upon assumptions about future demand
and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory
write-downs may be required. Once established, the original cost of the inventory less the related inventory allowance
represents the new cost basis of such products. Reversal of the allowance is recognized only when the related inventory has
been sold or scrapped.
Prepaid inventories, net
101
Prepaid inventories, net represent inventories paid for in advance of receipt.
Prepaids and other current assets
Prepaids and other current assets represent expenses paid prior to receipt of the related goods or services, including
advertising, license fees, maintenance, packaging, insurance, and other miscellaneous costs.
Fixed assets, net
During 2016, we substantially completed the construction of a new corporate headquarters and we placed the related
fixed assets in service during the period. These assets include the building, land improvements, building machinery and
equipment, and additional furniture and equipment. Our fixed assets, which also include assets such as technology
infrastructure, internal-use software, website development and leasehold improvements, are recorded at cost and depreciated
using the straight-line method over the estimated useful lives of the related assets or the term of the related capital lease,
whichever is shorter.
During 2016, we changed the estimated useful life of our furniture and equipment from 3-5 years to 5-7 years, due
primarily to our acquisition of longer lived furniture and equipment for our new headquarters. This change in estimate will be
applied prospectively. We do not expect this change in estimate to have a material impact on our financial statements.
Substantially all of the furniture and equipment from our previous headquarters was fully depreciated. The estimated useful
lives of our fixed assets are as follows:
Building
Land improvements
Building machinery and equipment
Furniture and equipment
Computer hardware
Computer software
Life
(years)
40
20
15-20
5-7
3-4
2-4
Leasehold improvements are amortized over the shorter of the term of the related leases or estimated useful lives.
Included in fixed assets is the capitalized cost of internal-use software and website development, including software
used to upgrade and enhance our Website and processes supporting our business. We capitalize costs incurred during the
application development stage of internal-use software and amortize these costs over the estimated useful life of two to three
years. Costs incurred related to design or maintenance of internal-use software are expensed as incurred.
During the years ended December 31, 2016 and 2015, we capitalized $15.9 million and $18.1 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 and website development was $17.1 million and $14.4 million for
those respective periods.
Depreciation expense is classified within the corresponding operating expense categories on the consolidated
statements of income as follows (in thousands):
Cost of goods sold - direct
Technology
Sales and marketing
General and administrative
Year ended
December 31,
2016
2015
2014
$
310
$
283
$
25,693
124
1,156
22,126
—
1,107
282
16,651
—
1,028
Total depreciation, including internal-use software and website development
$
27,283
$
23,516
$
17,961
102
Upon sale or retirement of assets, cost and related accumulated depreciation and amortization are removed from the
balance sheet and the resulting gain or loss is reflected in the consolidated statements of income.
Cost method investments
At December 31, 2016, we held minority interests (less than 20%) in six privately held entities, which include
PeerNova, Bitt, IdentityMind, Factom, MarkaVIP and View Glass. The total aggregate amount of these investments (excluding
any adjustments for impairment) was approximately $14.6 million. Based on the nature of one of our investments, we have a
variable interest. However, because we do not have power to direct the investee's activities, and therefore we are not the
investee's primary beneficiary, we do not consolidate the investee in our financial statements. In June 2016, in order to maintain
our proportional interest, we made a $200,000 convertible loan to an investee. The loan will convert to an equity interest no
later than January 2018. In October 2016, we made a $618,000 convertible loan to an investee. The loan will convert to an
equity interest no later than April 2017.
These investments are recognized as cost method investments included in Other long-term assets, net in our
consolidated balance sheets. Earnings from the investments are recognized to the extent of dividends received, and we will
recognize subsequent impairments to the investment if they are other than temporary. We review these investments individually
for impairment by evaluating if events or circumstances have occurred that may have a significant adverse effect on their fair
value. If such events or circumstances have occurred, we will estimate the fair value of the investment and determine if any
decline in the fair value of the investment below its carrying value is other-than-temporary. In such cases, the estimated fair
value of the investment is determined using unobservable inputs including assumptions by the investee's management. These
inputs are classified as Level 3. See Fair value of financial instruments above. Because several of our investees are in the early
startup or development stages, these entities are subject to potential changes in cash flows, valuation, and inability to attract
new investors which may be necessary for the liquidity needed to support their operations. We have an investment of
approximately $5.6 million that may be at risk of impairment in the near-term that we expect to continue to monitor closely.
At December 31, 2016, the carrying amount of our cost method investments was $11.8 million. We recognized a $2.9
million impairment loss during the year ended December 31, 2016, which consisted of the entire carrying amount of the related
investment. The impairment loss was recorded in Other income, net on the consolidated statements of income. We
recognized no impairment losses during the years ended December 31, 2015 and 2014.
Noncontrolling interests
During 2014, we formed tØ.com, Inc. (formerly Medici, Inc.) to develop blockchain and financial technology as part
of our Medici initiatives. tØ.com is a majority-owned subsidiary of Overstock. During 2016, tØ.com completed the acquisition
of a financial technology firm and two registered broker dealers, each of which was under common control with the firm from
which the financial technology assets were purchased. The former owners of that firm and other individuals hold noncontrolling
interests in tØ.com. These transactions are described further in Note 3-Acquisitions, Goodwill, and Acquired Intangible Assets.
The proceeds for the acquisitions were financed by tØ.com through a note payable to Overstock that bears interest at a rate that
approximates the Federal Funds Rate. tØ.com is included in our consolidated financial statements. Intercompany transactions
have been eliminated and the amounts of contributions and gains or losses that are attributable to the noncontrolling interests
are disclosed in our consolidated financial statements.
Leases
We account for lease agreements as either operating or capital leases depending on certain defined criteria. In certain
of our lease agreements, we receive rent holidays and other incentives. We recognize lease costs on a straight-line basis without
regard to deferred payment terms, such as rent holidays, that defer the commencement date of required payments. Additionally,
tenant improvement allowances are amortized as a reduction in rent expense over the term of the lease. Leasehold
improvements are capitalized at cost and amortized over the lesser of their expected useful life or the life of the lease, without
assuming renewal features, if any, are exercised.
Treasury stock
We account for treasury stock under the cost method and include treasury stock as a component of stockholders’
equity.
Precious metals
103
Our precious metals consisted of $5.9 million in gold and $4.0 million in silver at December 31, 2016 and $5.7 million
in gold and $4.0 million in silver at December 31, 2015. We store our precious metals at an off-site secure facility. Because
these assets consist of actual precious metals, rather than financial instruments, we account for them as an investment initially
recorded at cost (including transaction fees) and then adjusted to the lower of cost or market based on an average unit cost. On
an interim basis, we recognize decreases in the value of these assets caused by market declines. Subsequent increases in the
value of these assets through market price recoveries during the same fiscal year are recognized in the later interim period, but
may not exceed the total previously recognized decreases in value during the same year. Gains or losses resulting from changes
in the value of our precious metal assets are recorded in Other income, net in our consolidated statements of income. Gains
(losses) on investments in precious metals were $201,000, $(1.2) million, and $(1.3) million for the years ended December 31,
2016, 2015 and 2014, respectively.
Goodwill
Goodwill represents the excess of the purchase price paid over the fair value of the net assets acquired in business
combinations. Goodwill is not amortized but is tested for impairment at least annually. When evaluating whether goodwill is
impaired, we make a qualitative assessment to determine if it is more likely than not that its fair value is less than its carrying
amount. If the qualitative assessment determines that it is more likely than not that its fair value is less than its carrying amount,
we compare the fair value of the reporting unit to which the goodwill is assigned to its carrying amount. If the carrying amount
exceeds its fair value, then the amount of the impairment loss must be measured. The impairment loss, if any, is calculated by
comparing the implied fair value of the goodwill to its carrying amount. In calculating the implied fair value of goodwill, the
fair value of the reporting unit is allocated to the other assets and liabilities within the reporting unit based on estimated fair
value. The excess of the fair value of a reporting unit over the amount allocated to its other assets and liabilities is the implied
fair value of goodwill. An impairment loss is recognized when the carrying amount of goodwill exceeds its implied fair value.
In accordance with this guidance, we test for impairment of goodwill in the fourth quarter or when we deem that a
triggering event has occurred. There were no impairments to goodwill recorded during the years ended December 31, 2016,
2015 and 2014.
For the year ended December 31, 2016, we recognized a $689,000 adjustment in goodwill related to a business
combination as described in Note 3—Acquisitions, Goodwill, and Acquired Intangible Assets. The change in goodwill relates to
a non-reportable segment, included in Other as described in Note 21—Business Segments.
Intangible assets other than goodwill
We capitalize and amortize intangible assets other than goodwill over their estimated useful lives unless such lives are
indefinite. Intangible assets other than goodwill acquired separately from third-parties are capitalized at cost while such assets
acquired as part of a business combination are capitalized at their acquisition-date fair value. Intangible assets other than
goodwill are amortized using the straight line method of amortization over their useful lives, with the exception of certain
intangibles (such as acquired technology, customer relationships, and trade names) which are amortized using an accelerated
method of amortization based on cash flows. These assets are reviewed for impairment whenever events or changes in
circumstances indicate that their carrying amount may not be recoverable as described below under Impairment of long-lived
assets.
Intangible assets consist of the following (in thousands):
Acquired intangible assets
Intangible assets, other (1)
Less: accumulated amortization of intangible assets
Total intangible assets, net
___________________________________________
December 31,
2016
2015
$
$
16,000
1,356
17,356
(6,443)
10,913
$
$
15,776
1,355
17,131
(2,475)
14,656
(1) — At December 31, 2016, the weighted average remaining useful life for intangible assets, other, excluding fully amortized
intangible assets, was 3.26 years.
104
During the years ended December 31, 2015 and 2016, we acquired $16.0 million of intangible assets other than
goodwill related to a business combination as described in Note 3—Acquisitions, Goodwill, and Acquired Intangible Assets.
Aggregate amortization expense for intangible assets other than goodwill was $4.0 million and $1.6 million for the years ended
December 31, 2016 and 2015, respectively. Aggregate amortization expense for intangible assets other than goodwill was not
significant for the year ended December 31, 2014. Estimated amortization expense for the next five years is: $3.7 million in
2017, $2.8 million in 2018, $1.9 million in 2019, $1.2 million in 2020, $900,000 in 2021 and $200,000 thereafter.
Amortization of intangible assets other than goodwill is classified within the corresponding operating expense
categories on the consolidated statements of income as follows (in thousands):
Technology
Sales and marketing
General and administrative
Total amortization
Impairment of long-lived assets
Year ended
December 31,
2016
2015
$
$
2,904
$
1,008
56
605
531
445
3,968
$
1,581
We review property and equipment and other long-lived assets, including intangible assets other than goodwill,
for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be
recoverable. Recoverability is measured by comparison of the assets’ carrying amount to future undiscounted net cash flows the
asset group is expected to generate. Cash flow forecasts are based on trends of historical performance and management’s
estimate of future performance, giving consideration to existing and anticipated competitive and economic conditions. If such
asset group is considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds their fair values. There were no impairments to long-lived assets recorded during the years ended
December 31, 2016, 2015 and 2014.
Cryptocurrency holdings
We hold cryptocurrency-denominated assets such as bitcoin and we include them in prepaids and other current assets
in our consolidated balance sheets. Cryptocurrency-denominated assets were $307,000 and $226,000 at December 31, 2016 and
2015, respectively, and are recorded at the lower of cost or market based on an average unit cost. On an interim basis, we
recognize decreases in the value of these assets caused by market declines. Subsequent increases in the value of these assets
through market price recoveries during the same fiscal year are recognized in the later interim period, but may not exceed the
total previously recognized decreases in value during the same year. Gains or losses resulting from changes in the value of our
cryptocurrency assets are recorded in Other income, net in our consolidated statements of income. There were no recorded
gains or losses on cryptocurrency holdings for the year ended December 31, 2016. Losses on cryptocurrency holdings were
$152,000 and $8,000 during the years ended December 31, 2015 and 2014, respectively.
Other long-term assets, net
Other long-term assets, net consist primarily of cost method investments and related convertible notes (see Cost
method investments above) and long-term prepaid expenses.
Derivative financial instruments
In 2014, we entered into a loan agreement in connection with the construction of our new corporate headquarters. We
began borrowing under the facility in October 2015. Because amounts borrowed on the loan will carry a variable LIBOR-based
interest rate, we will be affected by changes in certain market conditions. These changes in market conditions may adversely
impact our financial performance, and as such, we use derivatives as a risk management tool to mitigate the potential impact of
these changes. We do not enter into derivatives for speculative or trading purposes. The primary market risk we manage through
the use of derivative instruments is interest rate risk on the amounts we have borrowed under the loan agreement relating to our
new headquarters. To manage that risk, we use interest rate swap agreements. An interest rate swap agreement is a contract
between two parties to exchange cash flows based on underlying notional amounts and indices. Our interest rate swaps entitle
us to pay amounts based on a fixed rate in exchange for receipt of amounts based on variable rates over the term of the related
105
loan agreement. The notional amounts under our hedges were $45.8 million and $20.5 million at December 31, 2016 and 2015,
respectively.
Our derivatives are carried at fair value in our consolidated balance sheets in Other current liabilities, net and Other
long-term liabilities on a gross basis. The accounting for gains and losses that result from changes in the fair values of
derivative instruments depends on whether the derivatives have been designated and qualify as hedging instruments under
GAAP. Our derivatives have been designated and qualify as cash flow hedges. We formally designated and documented, at
inception, the financial instruments as hedges of specific underlying exposures, the risk management objectives, and the
strategy for undertaking the hedging transactions. In addition, we formally assess, both at the inception and at least quarterly
thereafter, whether the financial instruments used in hedging transactions are effective at offsetting changes in the cash flows of
the related underlying exposures. To the extent that the hedges are effective, the changes in fair values of our cash flow hedges
are recorded in Accumulated other comprehensive loss in the consolidated statements of changes in stockholders' equity. Any
ineffective portion is immediately recognized into earnings. The variable-rate interest on the borrowing for our new corporate
headquarters was capitalized during the construction period. The amounts in Accumulated other comprehensive loss related to
the cash flow hedge of the variability of the interest that was capitalized is reclassified into earnings over the depreciable life of
the asset. For the year ended December 31, 2015, the amount of gains or losses in Accumulated other comprehensive loss that
has been reclassified into earnings was not material and the amounts at December 31, 2016 that we will reclassify into earnings
within the next 12 months is not expected to be material.
We determine the fair values of our derivatives based on quoted market prices or using standard valuation models (see
Fair value of financial instruments above). The notional amounts of the derivative financial instruments do not necessarily
represent amounts exchanged by the parties and, therefore, are not a direct measure of our exposure to the financial risks
described above. The amounts exchanged are calculated by reference to the notional amounts and by other terms of the
derivatives, such as interest rates.
The following table shows the effect of derivative financial instruments that were designated as accounting hedges for
the period indicated (in thousands):
Cash flow hedges (1)
Year ended December 31, 2016
Interest rate swap
Year ended December 31, 2015
Interest rate swap
Amount of gain
(loss) recognized
in OCI on
derivative
(effective portion)
net of tax
Location of gain
(loss) reclassified
from Accumulated
OCI into income
(effective portion)
Amount of gain
(loss) reclassified
from Accumulated
OCI into income
(effective portion)
Location of gain
(loss) recognized
in income on
derivative
(ineffective
portion)
Amount of gain
(loss) recognized in
income on
derivative
(ineffective
portion)
$
$
(110)
Interest expense
$
(809)
Interest expense
$
Other income
(expense)
Other income
(expense)
$
$
5
—
—
(124)
The following table provides the outstanding notional balances and fair values of derivative financial instruments that
were designated as accounting hedges outstanding positions for the dates indicated, and recorded gains/(losses) during the
periods indicated (in thousands):
Cash flow hedges
Year ended December 31, 2016
Interest rate swap
Year ended December 31, 2015
Interest rate swap
Location in
balance
sheet
Current and
Other long-
term
liabilities
Current and
Other long-
term
liabilities
Expiration
date
Outstanding
notional
Fair value
Beginning
gains
(losses)
Gains
(losses)
recorded
during
period (1)
Ending
gains
(losses)
2023
$
45,760
$
(1,816) $
(2,397) $
581
$
(1,816)
2023
$
20,466
$
(2,397) $
(1,008) $
(1,389) $
(2,397)
___________________________________________
106
(1) — Gains (losses) recorded during the period are presented gross of the related tax impact.
Revenue recognition
We derive our revenue primarily from retail merchandise sales on our Website. We also earn revenue from advertising
on our Website and from other sources. We have organized our retail operations into two principal reporting segments based on
the primary source of revenue: direct revenue and partner and other revenue (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 has occurred or the service has been provided; (3) the selling price or fee revenue earned is
fixed or determinable; and (4) collection of the resulting receivable is reasonably assured. Revenue related to merchandise sales
is recognized upon delivery to our customers. As we ship high volumes of packages through multiple carriers, it is not practical
for us to track the actual delivery date of each shipment. Therefore, we use estimates to determine which shipments are
delivered and, therefore, recognized as revenue at the end of the period. Our delivery date estimates are based on average
shipping transit times, which are calculated using the following factors: (i) the type of shipping carrier (as carriers have
different in-transit times); (ii) the fulfillment source (either our warehouses, those warehouses we control, or those of our
partners); (iii) the delivery destination; and (iv) actual transit time experience, which shows that delivery date is typically one to
eight business days from the date of shipment. We review and update our estimates on a quarterly basis based on our actual
transit time experience. However, actual shipping times may differ from our estimates.
We evaluate the criteria outlined in ASC Topic 605-45, Principal Agent Considerations, in determining whether it is
appropriate to record the gross amount of product sales and related costs or the net amount earned as commissions. When we
are the primary obligor in a transaction, are subject to inventory risk, have latitude in establishing prices and selecting suppliers,
or have several but not all of these indicators, revenue is recorded gross. If we are not the primary obligor in the transaction and
amounts earned are determined using a fixed percentage, revenue is recorded on a net basis. Currently, the majority of both
direct revenue and partner and other revenue is recorded on a gross basis, as we are the primary obligor. We present revenue net
of sales taxes.
We periodically provide incentive offers to our customers to encourage purchases. Such offers include current discount
offers, such as percentage discounts off current purchases and other similar offers, which, when used by customers, are treated
as a reduction of revenue.
Based upon our historical experience, revenue typically increases during the fourth quarter because of the holiday
retail season and decreases in the following quarter(s).
We recognize revenue at our broker-dealer subsidiaries (see Note 20—Broker Dealers) for securities transactions (and
the related commission revenue) on the trade date and on a gross basis.
Direct revenue
Direct revenue is derived from merchandise sales of our owned inventory to individual consumers and businesses.
Direct revenue comes from merchandise sales that occur primarily through our Website, but may also occur through offline and
other channels.
Partner and other revenue
Partner and other revenue is derived primarily from merchandise sales of inventory owned by our partners which they
generally ship directly to our consumers and businesses. Partner and other revenue comes from merchandise sales that occur
primarily through our Website, but may also occur through offline and other channels, including through our broker-dealer
subsidiaries in our Other segment.
Club O loyalty program
We have a customer loyalty program called Club O Gold for which we sell annual memberships. For Club O Gold
memberships, we record membership fees as deferred revenue and we recognize revenue ratably over the membership period.
The Club O Gold loyalty program allows members to earn Club O Reward dollars for qualifying purchases made on our
Website. We also have a co-branded credit card program (see Co-branded credit card program below for more information). Co-
branded cardholders are also Club O Gold members and earn additional reward dollars for purchases made on our Website, and
107
from other
Earned Club O Reward dollars may be redeemed on future purchases made through our Website. We recognize
revenue for Club O Reward dollars when customers redeem their reward dollars as part of a purchase on our Website. We
account for these transactions as multiple element arrangements and allocate revenue to the elements using their relative fair
values. We include the value of reward dollars earned in deferred revenue and we record it as a reduction of revenue at the time
the reward dollars are earned. Club O Gold membership reward dollars expire 90 days after the customer’s Club O Gold
membership expires. When Club O Reward dollars expire, we recognize reward dollar breakage as Other income, net in our
consolidated statements of income.
Beginning in 2015, we enrolled a significant number of members in Club O Silver, a newly introduced Club O
membership tier for customers who agree to receive promotional emails. Club O Silver members earned Club O Rewards on
qualifying purchases that expire after 90 days from a qualifying purchase. We discontinued Club O Silver in October 2016, and
as a result we do not expect further Club O Silver rewards breakage in the future.
In instances where customers receive free Club O Reward dollars not associated with any purchases, we account for
these transactions as sales incentives such as coupons and record a reduction of revenue at the time the reward dollars are
redeemed.
Co-branded credit card program
We have a co-branded credit card agreement with a commercial bank for the issuance of credit cards bearing the
Overstock.com brand, under which the bank pays us fees for new accounts and for customer usage of the cards. The agreement
also provides for a customer loyalty program offering reward points that customers will accrue from card usage and can use to
make purchases on our Website (see Club O loyalty program above for more information). New account fees are recognized as
revenue on a straight-line basis over the estimated expected life of co-branded credit card customers. Credit card usage fees are
recognized as revenues as actual credit card usage occurs.
We also have a private label credit card agreement with another commercial bank for the issuance of credit cards
bearing our brand, but that is only available for use on our Website. In connection with the agreement, we received upfront fees
that we recognize as revenue on a straight line basis over the term of the agreement, which runs through February 2022. When
customers make regular revolving purchases using the card, we receive fees, which are recognized as revenue. When we offer
promotional financing for purchases made with the card (for example, 12 months same as cash), we pay a discount fee to the
commercial bank, which we recognize as a reduction of revenue. The commercial bank owns all of the accounts under the
program and performs all account administration, underwriting and servicing. Fees and royalties from new accounts, credit card
usage fees, and fees from both of these cards were less than 1% of total net revenues for all periods presented.
Deferred revenue
Customer orders are recorded as deferred revenue prior to delivery of products or services ordered. We record amounts
received for Club O Gold membership fees as deferred revenue and we recognize it ratably over the membership period. We
record Club O Reward dollars earned from purchases as deferred revenue at the time they are earned and we recognize it as
revenue upon redemption. If reward dollars are not redeemed, we recognize other income upon expiration. In addition, we sell
gift cards and record related deferred revenue at the time of the sale. We sell gift cards without expiration dates and we
recognize revenue from a gift card upon redemption of the gift card. If a gift card is not redeemed, we recognize other income
when the likelihood of its redemption becomes remote based on our historical redemption experience. We consider the
likelihood of redemption to be remote after 36 months.
We periodically enter into agreements with other parties to jointly market ancillary products or services on our
Website. As a result of those agreements, we sometimes receive payments in advance of performing our obligations under those
agreements. Such payments received before we perform our obligations are initially recorded as deferred revenue and then
recognized over our service period.
Sales returns allowance
We inspect returned items when they arrive at our processing facilities. We refund the full cost of the merchandise
returned and all original shipping charges if the returned item is defective or we or our partners have made an error, such as
shipping the wrong product.
108
If the return is not a result of a product defect or a fulfillment error and the customer initiates a return of an unopened
item within 30 days of delivery, for most products we refund the full cost of the merchandise minus the original shipping charge
and actual return shipping fees. However, we reduce refunds for returns initiated more than 30 days after delivery or that are
received at our returns processing facility more than 45 days after initial delivery.
If our customer returns an item that has been opened or shows signs of wear, we issue a partial refund minus the
original shipping charge and actual return shipping fees.
Revenue is recorded net of estimated returns. We record an allowance for returns based on current period revenues and
historical returns experience. We analyze actual historical returns, current economic trends and changes in order volume and
acceptance of our products when evaluating the adequacy of the sales returns allowance in any accounting period.
The allowance for returns was $18.2 million and $17.9 million at December 31, 2016 and 2015, respectively.
Credit card chargeback allowance
Revenue is recorded net of credit card chargebacks. We maintain an allowance for credit card chargebacks based on
current period revenues and historical chargeback experience. The allowance for chargebacks was $431,000 and $240,000 at
December 31, 2016 and 2015, respectively.
Cost of goods sold
Cost of goods sold includes product costs, warehousing costs, outbound shipping costs, handling and fulfillment costs,
customer service costs and credit card fees, and is recorded in the same period in which related revenues have been recorded.
Cost of goods sold, including product cost and other costs and fulfillment and related costs are as follows (in thousands):
Total revenue, net
Cost of goods sold
Product costs and other cost of goods sold
Fulfillment and related costs
Total cost of goods sold
Gross profit
Advertising expense
2016
Year ended
December 31,
2015
2014
$ 1,799,963
100% $ 1,657,838
100% $ 1,497,103
100%
1,391,736
76,878
1,468,614
331,349
$
77%
4%
82%
18%
1,279,766
73,418
1,353,184
304,654
$
77%
4%
82%
18%
1,152,489
65,555
1,218,044
279,059
$
77%
4%
81%
19%
We expense the costs of producing advertisements the first time the advertising takes place and expense the cost of
communicating advertising in the period during which the advertising space or airtime is used. Internet advertising expenses are
recognized as incurred based on the terms of the individual agreements, which are generally: 1) a commission for traffic driven
to the Website that generates a sale or 2) a referral fee based on the number of clicks on keywords or links to our Website
generated during a given period. Advertising expense is included in sales and marketing expenses and totaled $135.1 million,
$115.0 million and $99.6 million during the years ended December 31, 2016, 2015 and 2014, respectively. Prepaid advertising
(included in Prepaids and other current assets in the accompanying consolidated balance sheets) was $843,000 and $1.2 million
at December 31, 2016 and 2015, respectively.
Stock-based compensation
We measure compensation expense for all outstanding unvested share-based awards at fair value on the date of grant
and recognize compensation expense over the service period for awards expected to vest at the greater of a straight line basis or
on an accelerated schedule when vesting of restricted stock awards exceeds a straight line basis. The estimation of stock awards
that will ultimately vest requires judgment, and to the extent actual results differ from estimates, 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 15—Stock-
Based Awards).
109
Loss contingencies
In the normal course of business, we are involved in legal proceedings and other potential loss contingencies. We
accrue a liability for such matters when it is probable that a loss has been incurred and the amount can be reasonably estimated.
When only a range of probable loss can be estimated, the most probable amount in the range is accrued. If no amount within
this range is a better estimate than any other amount within the range, the minimum amount in the range is accrued. We expense
legal fees as incurred (see Note 12—Commitments and Contingencies).
Income taxes
Income taxes are accounted for under the asset and liability method, which requires the recognition of deferred tax
assets and liabilities for the expected future tax consequences of events that have been included in the financial statements.
Under this method, deferred tax assets and liabilities are determined 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 year in which the differences are
expected to reverse.
We 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 recover our deferred tax assets within the jurisdiction from which they arise, we consider all available
positive and negative evidence, including projected future taxable 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 likely than 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 with the related tax authority.
We recognize interest and penalties related to unrecognized tax benefits within the income tax expense line in the
accompanying consolidated income statements. Accrued interest and penalties are included within the related tax liability line
in our consolidated balance sheets.
Net income per share
On December 16, 2016, we issued shares of our Blockchain Voting Series A Preferred Stock and our Voting Series B
Preferred Stock (collectively the “preferred shares”). These shares are considered participating securities, and as a result, net
income per share is calculated using the two-class method. Under this method, we give effect to preferred dividends and then
allocate remaining net income attributable to our stockholders to both common shares and participating securities (based on the
the percentages outstanding) in determining net income per common share.
Basic net income per common share is computed by dividing net income attributable to common shares (after
allocating between common shares and participating securities) by the weighted average number of common shares outstanding
during the period.
Diluted earnings per share is computed by dividing net income attributable to common shares (after allocating between
common shares and participating securities) by the weighted average number of common and potential common shares
outstanding during the period (after allocating total dilutive shares between our common shares outstanding and our preferred
shares outstanding). Potential common shares, comprising incremental common shares issuable upon the exercise of stock
options and restricted stock awards are included in the calculation of diluted earnings per common share to the extent such
shares are dilutive.
Because of the timing of our offering, the effect that has been given to preferred dividends in arriving at net income
attributable to common shares was not significant.
110
The following table sets forth the computation of basic and diluted net income per common share for the periods
indicated (in thousands, except per share data):
Net income attributable to stockholders of Overstock.com, Inc.
Net income per common share—basic:
Net income attributable to common shares—basic
Weighted average common shares outstanding—basic
Effect of dilutive securities:
Stock options and restricted stock awards
Weighted average common shares outstanding—diluted
Net income attributable to common shares—diluted
Year ended December 31,
2016
2015
2014
$
$
12,522
0.49
25,342
84
25,426
$
$
2,446
0.10
24,612
91
24,703
0.49
$
0.10
$
8,854
0.37
23,999
318
24,317
0.36
$
$
$
The following shares were excluded from the calculation of diluted shares outstanding as their effect would have been
anti-dilutive (in thousands):
Stock options and restricted stock units
Stock repurchase program
Year ended December 31,
2016
2015
2014
466
323
291
On May 5, 2015, our Board of Directors authorized a stock repurchase program under which we may repurchase
shares of our outstanding common stock for up to $25 million at any time through December 31, 2017. On January 27, 2017,
we repurchased approximately 604,000 shares of our common stock for an aggregate purchase price of $10 million under the
stock repurchase plan. All common shares repurchased will be recognized as treasury stock.
Recently adopted accounting standards
In April 2015, the FASB issued ASU No. 2015-03, Imputation of Interest (Subtopic 835-30): Simplifying the
Presentation of Debt Issuance Costs, which requires that debt issuance costs related to a recognized debt liability be presented
in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. We
implemented the provisions of ASU 2015-03 on January 1, 2016. The prior period amounts related to this implementation have
been reclassified to conform to the current period presentation and were not significant. The implementation of ASU 2015-03
did not impact our results of operations or cash flows.
Recently issued accounting standards
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which requires an entity to
recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers.
The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. In July 2015, the
FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which
deferred the effective date for us of ASU No. 2014-09 to January 1, 2018. Early adoption of ASU No. 2014-09 is permitted, but
not before its original effective date. In March 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with
Customers - Principal versus Agent Considerations. This ASU clarifies the implementation guidance for principal versus agent
considerations in ASU No. 2014-09 and provides indicators that assist in the assessment of control. ASU No. 2016-08 is
effective for us beginning January 1, 2018. In 2016, the FASB issued additional implementation guidance for the new revenue
recognition standards. These standards permit the use of either the retrospective or cumulative effect transition method. We
have initiated an assessment of our revenue streams and a project plan for implementing these standards. We have not yet
selected a transition method nor have we completed our assessment of the effect that ASU No. 2014-09 will have on our
consolidated financial statements and related disclosures. At this stage in our assessment, we have identified gross versus net
revenue recognition (principal versus agent considerations) and the timing of revenue recognition (FOB shipping points versus
FOB destination) as critical issues in our analysis.
111
In July 2015, the FASB issued ASU No. 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory,
which requires inventory to be measured at the lower of cost and net realizable value. Net realizable value is the estimated
selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.
The new standard becomes effective for us on January 1, 2017. The standard requires entities to apply this change prospectively
to the measurement of inventory after the date of adoption. We do not expect that ASU No. 2015-11 will have a significant
impact on our consolidated financial statements and related disclosures.
In November 2015, the FASB issued ASU No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of
Deferred Taxes, which requires that deferred tax assets and liabilities be classified as noncurrent in a classified balance sheet.
The new standard becomes effective for us on January 1, 2017. The standard requires entities to apply this change on either a
prospective or retrospective basis for the periods presented and we expect to apply the standard retrospectively. The adoption of
this standard will cause us to reclassify our current deferred tax assets and liabilities as noncurrent in our consolidated financial
statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which, among other things, requires lessees
to recognize most leases on their balance sheets related to the rights and obligations created by those leases. The new standard
also requires new disclosures to help financial statement users better understand the amount, timing, and uncertainty of cash
flows arising from leases. The new standard becomes effective for us on January 1, 2019. Early adoption is permitted. The
amendments in this update should be applied under a modified retrospective approach. We are evaluating the effect that ASU
No. 2016-02 will have on our consolidated financial statements and related
In March 2016, the FASB issued ASU No. 2016-04, Liabilities - Extinguishment of Liabilities (Subtopic 405-20):
Recognition of Breakage for Certain Prepaid Stored-Value Products, which specifies how prepaid stored-value product
liabilities, such as gift cards, should be derecognized. The standard, among other things, requires derecognition of such
liabilities through expected breakage in proportion to the pattern of rights expected to be exercised by the holder, but only to the
extent that it is probable that a significant reversal of the recognized breakage amount will not subsequently occur. The new
standard becomes effective for us on January 1, 2018. The amendments in this update should be applied under a modified
retrospective approach or a retrospective approach to each period presented. We are evaluating the effect that ASU No. 2016-04
will have on our consolidated financial statements and related disclosures.
In March 2016, the FASB issued ASU No. 2016-09, Compensation—Stock Compensation (Topic 718): Improvements
to Employee Share-Based Payment Accounting, which simplifies several aspects of the accounting for share-based payment
transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on
the statement of cash flows. The new standard becomes effective for us on January 1, 2017. The standard specifies various
transition methods for the individual amendments in this Update. The adoption of this standard will primarily cause us to
recognize approximately $9.4 million in deferred tax assets related to excess tax benefits through a cumulative effect
adjustment in retained earnings as of January 1, 2017.
In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (a
consensus of the FASB Emerging Issues Task Force), which provides guidance on the presentation of restricted cash or
restricted cash equivalents in the statement of cash flows, thereby reducing the diversity in practice. The new standard becomes
effective for us on January 1, 2018. The standard requires entities to apply this standard using the retrospective transition
method to each period presented. The adoption of this standard will require that amounts generally described as restricted cash
and restricted cash equivalents should be included with cash and cash equivalents when reconciling beginning-of-period and
end-of-period total amounts shown in the statement of cash flows. We do not expect that ASU No. 2016-18 will have a material
impact on our consolidated financial statements and related disclosures.
3. ACQUISITIONS, GOODWILL, AND ACQUIRED INTANGIBLE ASSETS
As part of our Medici blockchain and financial technology initiatives, during 2015, a subsidiary of tØ.com, Inc.
(formerly Medici, Inc.) entered into a purchase agreement to acquire Cirrus Technologies LLC, a financial technology firm. In
connection with the Cirrus Technology acquisition, a subsidiary of tØ.com also entered into an agreement to purchase
SpeedRoute LLC and all of the outstanding membership interests not already owned by tØ.com in Pro Securities, LLC. Both
SpeedRoute and Pro Securities were under common control with Cirrus Technologies by a party that holds a noncontrolling
interest in tØ.com. SpeedRoute and Pro Securities are FINRA-registered broker dealers.
112
This acquisition closed in two parts. The Cirrus Technologies acquisition closed in Q3 2015 and the membership
interests in SpeedRoute and Pro Securities closed in Q1 2016 after receiving approval from FINRA. The total gross purchase
price of this acquisition was $29.7 million, consisting of approximately $11.6 million in cash (which excludes $2.2 million in
cash acquired, primarily during Q1 2016) and 908,364 shares of Overstock’s common stock valued at approximately $18.1
million. The proceeds for the acquisition were financed by tØ.com through a note payable to Overstock that bears interest that
approximates the Federal Funds Rate. The total purchase price has been allocated to the assets acquired and the liabilities
assumed based on their respective fair values at the acquisition dates, with amounts exceeding fair value recorded as goodwill.
We did not record significant deferred taxes related to the acquisition. The goodwill of the acquired business is deductible for
tax purposes.
The acquisition of Cirrus Technologies and the acquisition of the membership interests of SpeedRoute and Pro
Securities were negotiated and contemplated in conjunction with each other. As such, this was recognized as a single
transaction. We estimated the fair value of the acquired assets based on Level 3 inputs, which were unobservable (see Note 2—
Accounting Policies, Fair value of financial instruments). These inputs included our estimate of future revenues, operating
margins, discount rates, royalty rates and assumptions about the relative competitive environment.
The fair values of the assets acquired and liabilities assumed at the acquisition dates are as follows (in thousands):
Purchase Price
Cash paid, net of cash acquired
Common stock issued
Allocation
Goodwill
Intangibles
Accounts receivable and other assets
Other liabilities assumed
Fair Value
9,353
18,149
27,502
11,914
16,000
2,565
(2,977)
27,502
$
$
$
$
The following table details the identifiable intangible assets acquired at their fair value and remaining useful lives
(amounts in thousands):
Intangible Assets
Technology and developed software
Customer relationships
Trade names
Other
Total acquired intangible assets as of the acquisition date
Less: accumulated amortization of acquired intangible assets
Total acquired intangible assets, net as of December 31, 2016
Weighted Average
Useful Life (years)
4.51
—
7.76
Fair Value
13,600
1,900
300
200
16,000
(5,383)
10,617
$
$
The expense for amortizing acquired intangible assets in connection with this acquisition was $5.4 million and $1.5
million for the years ended December 31, 2016 and 2015, respectively.
Acquired intangible assets primarily include technology, customer relationships and trade names. As described above,
we determined the fair value of these assets using an income approach method to determine the present value of expected future
cash flows for each identifiable intangible asset. This method was based on discount rates which incorporate a risk premium to
take into account the risks inherent in those expected cash flows. The expected cash flows were estimated using the
expectations of market participants.
As a result of the closing of the membership interests in SpeedRoute and Pro Securities, and finalizing the valuation of
the acquired assets, during the year ended December 31, 2016, we made a $689,000 adjustment in goodwill consisting
primarily of net cash acquired of $1.2 million, accounts receivable and other assets of $1.9 million and liabilities assumed
of $2.5 million.
113
The acquired assets, liabilities, and associated operating results were consolidated into our financial statements at the
acquisition date. The revenue and operating loss of the combined entities included in our financial statements was $15.2 million
and $5.2 million, respectively, for the year ended December 31, 2016.
The following unaudited pro forma financial information presents our results as if the acquisitions had occurred at the
beginning of 2014 (amounts in thousands):
Net revenues
Operating income
Year Ended December 31,
2016
1,801,139
7,142
$
$
2015
1,661,540
640
$
$
2014
1,499,944
10,185
$
$
The unaudited pro forma financial information is not intended to represent or be indicative of our consolidated results
of operations that would have been reported had the acquisition been completed during the periods indicated, nor should it be
taken as indicative of our future consolidated results of operations.
4. ACCOUNTS RECEIVABLE, NET
Accounts receivable, net consist of the following (in thousands):
December 31,
2016
2015
Credit card receivables
Accounts receivable, trade
Rebate receivable
Other receivables
Less: allowance for doubtful accounts
Accounts receivable, net
5. INVENTORIES, NET
Inventories, net consist of the following (in thousands):
Product inventory
Inventory in-transit
Total inventories, net
6. PREPAIDS AND OTHER CURRENT ASSETS
Prepaids and other current assets consist of the following (in thousands):
Prepaid maintenance
Prepaid other
Prepaid advertising
Total prepaids and other current assets
114
$
10,243
$
9,054
7,106
3,738
30,141
(1,999)
28,142
$
7,570
5,004
1,683
2,336
16,593
(465)
16,128
$
$
$
$
$
December 31,
2016
2015
11,732
7,205
18,937
$
$
12,710
7,332
20,042
December 31,
2016
2015
6,622
4,189
843
11,654
$
$
8,340
4,306
1,244
13,890
7. FIXED ASSETS, NET
Fixed assets, net consist of the following (in thousands):
Computer hardware and software, including internal-use software and website
development
$
196,923
$
175,701
December 31,
2016
2015
Building
Furniture and equipment
Land
Building machinery and equipment
Leasehold improvements
Land improvements
Less: accumulated depreciation
Total fixed assets, net
67,892
15,931
12,781
7,915
7,062
6,356
44,811
11,396
10,861
—
7,753
—
314,860
(180,308)
134,552
$
250,522
(156,826)
93,696
$
Depreciation of fixed assets totaled $27.3 million, $23.5 million, and $18.0 million for the years ended December 31,
2016, 2015 and 2014, respectively. During 2016, we retired $2.0 million of fully depreciated fixed assets that were removed
from service in 2016.
Upon sale or retirement of assets, cost and related accumulated depreciation and amortization are removed from the
balance sheet and the resulting gain or loss, if any, is reflected in the consolidated statements of income.
Fixed assets included assets under capital leases and finance obligations of $21.5 million and $10.0 million at
December 31, 2016 and 2015, respectively. Accumulated depreciation related to assets under capital leases and finance
obligations was $8.7 million and $4.6 million at December 31, 2016 and 2015, respectively.
Depreciation expense of assets recorded under capital leases and finance obligations was $4.1 million, $1.6 million
and $707,000 for the years ended December 31, 2016, 2015 and 2014, respectively.
8. OTHER LONG-TERM ASSETS, NET
Other long-term assets, net consist of the following (in thousands):
Cost method investments
Prepaid expenses, long-term portion
Convertible notes to cost method investees
Other
Total other long-term assets, net
December 31,
2016
2015
11,750
$
7,000
1,275
818
485
778
—
891
14,328
$
8,669
$
$
115
9. ACCRUED LIABILITIES
Accrued liabilities consist of the following (in thousands):
Accrued marketing expenses
Allowance for returns
Accounts payable accruals
Other accrued expenses
Accrued freight
Accrued compensation and other related costs
Inventory received but not invoiced
Accrued taxes
Credit card processing fee accrual
Accrued professional expenses
Facility lease accruals
Total accrued liabilities
10. DEFERRED REVENUE
Deferred revenue consists of the following (in thousands):
Payments owed or received prior to product delivery
Club O membership fees and reward points
In store credits
Unredeemed gift cards
Other
Total deferred revenue
11. BORROWINGS
U.S. Bank term loan and revolving loan agreement
December 31,
2016
2015
$
26,358
$
18,176
17,229
11,108
10,062
8,903
1,598
1,482
666
518
116
13,373
17,896
22,128
13,620
3,868
8,295
828
1,463
607
1,115
194
$
96,216
$
83,387
December 31,
2016
2015
22,943
8,958
4,391
4,304
1,184
41,780
$
$
28,811
13,094
4,451
3,375
1,213
50,944
$
$
In October 2014, we entered into a syndicated senior secured credit facility (the “Facility”) with U.S. Bank National
Association ("U.S. Bank" or the "Administrative Bank") and certain other banks in connection with the construction of our new
corporate headquarters (the "Project"). The Facility is governed by a Loan Agreement dated as of October 24, 2014 which
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 Project and (ii) a three-year $10.0 million senior secured revolving
credit facility (the “Revolving Loan”) for working capital and capital expenditures, but not for the Project. The Real Estate
Loan and the Revolving Loan are both secured by the Project, our inventory and accounts receivable, substantially all of our
deposit accounts and related assets. We began borrowing under the facility in October 2015.
On or about January 1, 2017 (but no later than 90 days thereafter), the Real Estate Loan was designed to convert into
an approximately 6.75-year term loan due October 1, 2023 (the “Term Loan”) subject to certain conditions. As described further
in Note 22. Subsequent Events, at January 1, 2017, the conditions to conversion were satisfied and the Real Estate Loan
converted into the Term Loan. The aggregate principal amount of the Term Loan is $45.8 million.
Amounts outstanding under the Real Estate Loan and the Term Loan carry an interest rate based on one-month LIBOR
plus 2.00% or an Alternate Base Rate plus 1.00%. However, we have entered into interest rate swap agreements designed to fix
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our interest rate on the Real Estate Loan and the Term Loan at approximately 4.6% annually (see Derivative financial
instruments in Note 2. Accounting Policies). Monthly payments of interest only were due 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 $38.0 million) and interest on October 1,
2023. Amounts outstanding under the Revolving Loan will carry an interest rate based on LIBOR plus 2.00% or an Alternate
Base Rate plus 1.00%.
We are required to maintain compliance as of the end of each calendar quarter with the following financial covenants:
•
•
a fixed charge coverage ratio on a trailing 12-month basis of no less than 1.15 to 1.00;
a cash flow leverage ratio on a trailing 12-month basis not greater than 3.00 to 1.00 during the Construction Phase (as
defined in the Loan Agreement);
a cash flow leverage ratio not greater than 2.50 to 1.00 following the Construction Phase, and
•
• minimum liquidity of at least $50.0 million.
At December 31, 2016, we were in compliance with the financial covenants. In addition to the financial covenants
described above, we are required to comply with a number of covenants relating to the Project and our business, including
covenants limiting certain indebtedness. Notwithstanding, the Loan Agreement permits us to incur up to $20 million of
additional senior-secured indebtedness for equipment financing (as described under U.S. Bank master lease agreement below),
and other senior-secured indebtedness provided that the aggregate principal amount of such other senior-secured indebtedness
does not exceed ten percent of our consolidated assets. The Loan Agreement includes customary 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.
Unless it terminates earlier or is extended with the consent of the Administrative Bank and all of the Banks, the Revolving Loan
facility will terminate on October 24, 2017.
As of December 31, 2016 we had borrowed $45.8 million under the Real Estate Loan. We have not borrowed any
amounts under the Revolving Loan. Our liability under the Real Estate Loan approximates fair value. Amounts outstanding
under the Real Estate Loan are presented net of discount and issuance costs in our consolidated balance sheets.
Future principal payments on the Facility as of December 31, 2016, are as follows (in thousands):
Payments due by period:
2017
2018
2019
2020
2021
Thereafter
U.S. Bank master lease agreement
$
$
1,031
1,124
1,124
1,124
1,124
40,233
45,760
In November 2015, we entered into a Master Lease Agreement and a Financial Covenants Rider (collectively, the
“Master Lease Agreement”) with U.S. Bank Equipment Finance, a division of U.S. Bank National Association
(“Lessor”). Under the Master Lease Agreement we are able to sell certain assets (the "Leased Assets") to the Lessor and
simultaneously lease them back for a period of 60 months. We are also able to finance certain software licenses (inclusive in the
"Leased Assets") for a period of 60 months. We have the right to repurchase the Leased Assets and terminate the Master Lease
Agreement twelve months following the initial term. We have the right to repurchase the Leased Assets at the end of the term
for $1.00. Payments on the Master Lease Agreement are due monthly. During the year ended December 31, 2016, we received
proceeds under the Master Lease Agreement of $11.4 million. The average interest rate for amounts outstanding under the
Master Lease Agreement was approximately 3.60%.
We have accounted for the Master Lease Agreement as a financing transaction and amounts owed are included in
Finance Obligations, current and non-current in the consolidated balance sheets. We recorded no gain or loss as a result of this
117
transaction. The Master Lease Agreement allows for lease financing of up to $20 million. Our liability under the Master Lease
Agreement approximates fair value.
In connection with the Master Lease Agreement, and as long as any obligations remain outstanding under the Master
Lease Agreement, we are required to maintain compliance with the same financial covenants as the Term Loan agreement with
U.S. Bank described above. At December 31, 2016, we were in compliance with these financial covenants.
Future principal payments of finance obligations as of December 31, 2016, are as follows (in thousands):
Payments due by period:
2017
2018
2019
2020
2021
Thereafter
U.S. Bank letters of credit
$
3,256
3,356
3,479
3,502
1,494
—
$
15,087
At December 31, 2016 and 2015, letters of credit totaling $430,000, were issued on our behalf collateralized by
compensating cash balances held at U.S. Bank, which are included in Restricted cash in the accompanying consolidated balance
sheets.
U.S. Bank commercial purchasing card agreement
We have a commercial purchasing card (the “Purchasing Card”) agreement with U.S. Bank. We use the Purchasing
Card for business purpose purchasing and must pay it in full each month. At December 31, 2016, $811,000 was outstanding and
$4.2 million was available under the Purchasing Card. At December 31, 2015, $641,000 was outstanding and $4.4 million was
available under the Purchasing Card.
12. COMMITMENTS AND CONTINGENCIES
Summary of future minimum lease payments for all operating leases
Minimum future payments under all operating leases as of December 31, 2016, are as follows (in thousands):
Payments due by period:
2017
2018
2019
2020
2021
Thereafter
$
$
8,670
6,479
5,961
4,038
4,102
20,412
49,662
Rental expense for operating leases totaled $12.6 million, $12.7 million and $11.7 million for the years ended
December 31, 2016, 2015 and 2014, respectively.
Legal proceedings and contingencies
From time to time, we are involved in litigation concerning consumer protection, employment, intellectual property
and other commercial matters related to the conduct and operation of our business and the sale of products on our Website. In
connection with such litigation, we may be subject to significant damages. In some instances other parties may have contractual
118
indemnification obligations to us. However, such contractual obligations may prove unenforceable or non-collectible, and if we
cannot enforce or collect on indemnification obligations, we may bear the full responsibility for damages, fees and costs
resulting from such litigation. We may also be subject to penalties and equitable remedies that could force us to alter important
business practices. Such litigation could be costly and time consuming and could divert or distract our management and key
personnel from our business operations. Due to the uncertainty of litigation and depending on the amount and the timing, an
unfavorable resolution of some or all of these matters could materially affect our business, results of operations, financial
position, or cash flows.
On September 23, 2009, SpeedTrack, Inc. sued us along with 27 other defendants in the United States District Court in
the Northern District of California. We are alleged to have infringed a patent covering search and categorization software. We
believe that certain third party vendors of products and services sold to us are contractually obligated to indemnify us, and we
have tendered defense of the case to an indemnitor who accepted the defense. On April 21, 2016, the court entered an order
partially dismissing the claims against us. On May 4, 2016, the plaintiff filed an amended complaint, and in response, we have
filed a motion requesting the court to dismiss the remaining claims against us. The nature of the loss contingencies relating to
claims that have been asserted against us are described above. However no estimate of the loss or range of loss can be made.
We intend to vigorously defend this action and pursue our indemnification rights with our vendors.
On September 29, 2010, a trustee in bankruptcy filed an adversary proceeding against us in the matter of In re: Petters
Company, Inc., a case filed in United States Bankruptcy Court, in the District of Minnesota. The complaint alleges principal
causes of action against us under various Bankruptcy Code sections and the Minnesota Fraudulent Transfer Act, to recover
damages for alleged transfers of property from the Petters Company occurring prior to the filing of the case initially as a civil
receivership in October 2008. The trustee’s complaint alleges such transfers occurred in at least one note transaction whereby
we transferred at least $2.3 million and received in return transfers totaling at least $2.5 million. We recently have reached an
agreement, the terms of which are confidential, with the trustee which concluded this matter.
On November 17, 2010, we were sued in the Superior Court of California, County of Alameda, by District Attorneys
for the California Counties of Alameda, Marin, Monterey, Napa, Santa Clara, Shasta and Sonoma County, and the County of
Santa Cruz later joined the suit. The district attorneys sought damages and an injunction under claims for violations of
California consumer protection laws, alleging we made untrue or misleading statements concerning our pricing, price
reductions, sources of products and shipping charges. The complaint asked for damages in the amount of not less than $15.0
million. We tried the case in September 2013 before the judge of the court and made final arguments in December 2013. On
January 3, 2014, the court issued a tentative ruling in favor of the District Attorneys, which became a final Statement of
Decision on February 5, 2014. The decision provides for an injunction that prescribes disclosures necessary for certain types of
price advertising and price reductions and imposes civil penalties of $3,500 per day for practices from March 2006 through
September 2008, and $2,000 per day for September 2008 through September 2013, totaling $6.8 million. The court issued a
Final Judgment February 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 have appealed 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 the appeal. 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 us are described above.
We intend to continue to vigorously pursue the appeal and defend this action.
On February 11, 2013, RPost Holdings, Inc., RPost Communications Limited, and RMail Limited, filed suit against us
in the United States District Court in Eastern District of Texas for infringement of patents covering products and services that
verify the delivery and integrity of email messages. We tendered defense of the case to an indemnitor who accepted the defense.
The nature of the loss contingencies relating to claims that have been asserted against us are described above. However, no
estimate of the loss or range of loss can be made. We intend to vigorously defend this action and pursue our indemnification
rights with our vendors.
In June 2013, William French filed suit against us and 46 other defendants under seal in the Superior Court of the State
of Delaware. The filing was unsealed on March 24, 2014. French brought the action on Delaware’s behalf for violations of
Delaware’s unclaimed property laws and for recovery of the unredeemed gift card value allegedly attributable to Delaware
residents. French’s complaint alleges that we, and other defendants, knowingly refused to fulfill obligations under Delaware's
Abandoned Property Law by failing to report and deliver unclaimed gift card funds to the State of Delaware, and knowingly
made, used or caused to be made or used, false statements and records to conceal, avoid or decrease an obligation to pay or
transmit money to Delaware in violation of the Delaware False Claims and Reporting Act. The complaint seeks an injunction,
monetary damages (including treble damages) penalties, and attorney's fees and costs. We, along with others, filed motions to
dismiss the case. The court dismissed one count, but allowed one count to remain. The case is in its discovery stages. We intend
to vigorously defend this action. The nature of the loss contingencies relating to claims that have been asserted against us are
described above.
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On September 18, 2015, we received a Tax Assessment from the Department of Revenue of the State of Washington
asserting that we had nexus with Washington during the period January 1, 2008 to May 31, 2015 and assessing approximately
$31.5 million in taxes, interest, and/or penalties asserted to be due, subject to future field verification by the Department of
Revenue, for the period. Subsequently, we received an additional Tax Assessment for the period of June 2015 through
November 2015 in the amount of approximately $2.5 million in taxes, interest and/or penalties. During Q4 2016, we reached an
agreement, the terms of which are confidential, with the Washington Department of Revenue which concluded this matter.
On April 28, 2016, the State of South Dakota sued us along with three other defendants in the Sixth Judicial Circuit
Court of South Dakota. South Dakota alleges that U.S. constitutional law should be revised to permit South Dakota to require
out-of-state ecommerce websites to withhold and remit sales tax in South Dakota. We removed the case to the United States
District Court which recently remanded the case back to the South Dakota state court. Pursuant to the statute, we would not be
required to withhold and remit sales tax until there was verdict in favor of South Dakota which was then upheld by the highest
applicable appellate court. The statute also would not require us to pay sales tax retroactively if we were to lose.
In September 2016, we received a letter from the District Attorney of Sonoma County, California who is acting as part
of the Consumer Protection Divisions of the following counties in California: Sonoma, Alameda, Monterey, Napa, Solano,
Fresno, Sacramento, Shasta, Santa Cruz, Butte, and Merced. The District Attorney alleges that certain plastic products on our
site which are labeled as biodegradable, degradable, or decomposable constitute false advertising under California law. The
District Attorney has requested documentation from us regarding this claim and we are cooperating. The nature of the loss
contingencies relating to claims that have been asserted against us are described above. However, no estimate of the loss or
range of loss can be made. We intend to vigorously defend this matter and pursue our indemnification rights with our vendors.
We establish liabilities when a particular contingency is probable and estimable. At December 31, 2016, we have
accrued $9.2 million, included in accrued liabilities, in light of probable and estimable liabilities. It is reasonably possible that
the actual losses may exceed our accrued liabilities. We have other contingencies which are reasonably possible; however, the
reasonably possible exposure to losses cannot currently be estimated.
13. INDEMNIFICATIONS AND GUARANTEES
During our normal course of business, we have made certain indemnities, commitments, and guarantees under which
we may be required to make payments in relation to certain transactions. These indemnities include, but are not limited to,
indemnities to various lessors in connection with facility leases for certain claims arising from such facility or lease, the
environmental indemnity we entered into in favor of the lenders under our Loan Agreement with U.S. Bank and other banks,
and indemnities to our directors and officers to the maximum extent permitted under the laws of the State of Delaware. The
duration of these indemnities, commitments, and guarantees varies, and in certain cases, is indefinite. In addition, the majority
of these indemnities, commitments, and guarantees do not provide for any limitation of the maximum potential future payments
we could be obligated to make. As such, we are unable to estimate with any reasonableness our potential exposure under these
items. We have not recorded any liability for these indemnities, commitments, and guarantees in the accompanying
consolidated balance sheets. We do, however, accrue for losses for any known contingent liability, including those that may
arise from indemnification provisions, when future payment is both probable and reasonably estimable.
14. STOCKHOLDERS' EQUITY
Common Stock
Each share of common stock has the right to one vote. The holders of common stock are also entitled to receive
dividends declared by the board of directors out of funds legally available, subject to prior rights of holders of all classes of
stock outstanding having priority rights as to dividends. No dividends have been declared or paid on our common stock through
December 31, 2016.
Preferred Stock
Each share of Series A Preferred and each share of Series B Preferred (collectively the "preferred shares") is intended
to have voting and dividend rights similar to those of one share of common stock. Preferred shares rank senior to common stock
with respect to dividends. Holders of the preferred shares will be entitled to an annual cash dividend equal to 1.0% of the
subscription price ($0.16 per share), in preference to any dividend payment to the holders of the common stock, out of funds of
120
the Company legally available for payment of dividends and subject to declaration by our board of directors. Holders of the
preferred shares are also entitled to participate in any cash dividends we pay to the holders of the common stock and are also
entitled to participate in non-cash dividends we pay to holders of the common stock, subject to potentially different treatment if
we effect a stock dividend, stock split or combination of the common stock. No dividends have been declared or paid on our
preferred stock through December 31, 2016 and there are no arrearages in cumulative preferred dividends.
Neither the Series A Preferred or Series B Preferred is convertible into or exchangeable for shares of our common
stock or any other entity, however, at our sole discretion, we may convert the Series A Preferred shares into Series B Preferred
shares at any time on a one-to-one basis. Until the third anniversary of the Original Issuance Date, we may redeem, at our
discretion, both the Series A and Series B Preferred shares for an amount equal to the highest of the following: (1) the
subscription price plus any accrued but unpaid dividends, (2) 105% of the average trading price of our common stock during a
five-trading-day period and (3) 105% of the average trading price of the series of preferred shares during the same five-day-
trading period. In the event of any liquidation, any amount available for distribution to stockholders after payment of all
liabilities will be distributed proportionately, with each share of Series A Preferred and each share of Series B Preferred being
treated as though it were a share of our common stock.
15. STOCK BASED AWARDS
Stock Option Awards
Our board of directors adopted the 2005 Equity Incentive Plan and it was most recently amended and restated and re-
approved by the stockholders on 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 directors of the Company and non-qualified stock options to consultants, as
well as restricted stock units and other types of equity awards of the Company. Options granted 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, usually over four
years from the grant date. We did not grant any options during the years ended December 31, 2016, 2015 and 2014. At
December 31, 2016, 2.1 million 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):
Outstanding—beginning of year
Exercised
Expired/Forfeited
Outstanding—end of year
Options exercisable at year-end
2016
2015
2014
Weighted
Average
Exercise
Price
17.27
17.08
17.08
17.33
17.33
Shares
204
$
(42)
(6)
156
156
$
$
Weighted
Average
Exercise
Price
Weighted
Average
Exercise Price
Shares
17.27
16.94
18.26
17.27
17.27
273
(30)
(19)
224
224
$
$
$
17.30
17.08
18.00
17.27
17.27
Shares
224
(16)
(4)
204
204
$
$
$
The following table summarizes information about stock options as of December 31, 2016 (in thousands, except per
share data):
Options Outstanding
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contract Life
Shares
Aggregate
Intrinsic
Value
Shares
Options Exercisable
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contract Life
Aggregate
Intrinsic
Value
156
$
17.33
0.15
$
63
156
$
17.33
0.15
$
63
Stock options vest over four years at 28% at the end of the first year and 2% each month thereafter. The most recent
stock options were granted in May 2008 and have fully vested. There was no stock based compensation related to stock options
recorded during the years ended December 31, 2016, 2015 and 2014.
121
The aggregate intrinsic value in the table above represents the total pretax intrinsic value, based on our stock price of
$17.50 as of December 31, 2016, 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, 2016, 2015 and 2014 was $82,000,
$92,000, and $126,000, respectively. The total cash received from employees as a result of employee stock option exercises
during the years ended December 31, 2016, 2015 and 2014 were approximately $819,000, $269,000, and $511,000,
respectively. In connection with these exercises, there was no tax benefit realized due to our net operating loss position.
Restricted Stock Awards
For the years ended December 31, 2016, 2015 and 2014, the Compensation Committee of the Board of Directors
approved grants of 541,000, 239,000 and 242,000 restricted stock awards, respectively, to our officers, board members and
employees. The restricted stock awards vest over three years at 33.3% at the end of the first year, 33.3% at the end of the
second year and 33.3% at the end of the third year and are subject to the employee’s continuing service to us. At December 31,
2016, there were 560,000 unvested restricted stock awards that remained outstanding.
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 either recognized on a straight line basis 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 cumulative amount of
compensation expense recognized at any point in time is at least equal to the portion of the grant date fair value of the award
that is vested at that date. The weighted average grant date fair value of restricted stock awards granted during the years ended
December 31, 2016, 2015 and 2014 was $14.52, $24.60 and $28.24, respectively.
Stock-based compensation expense related to restricted stock awards was $4.9 million, $3.5 million and $4.0 million,
during the years ended December 31, 2016, 2015 and 2014, respectively.
The following table summarizes restricted stock award activity (in thousands):
2016
2015
2014
Weighted
Average
Grant Date
Fair Value
24.80
14.52
22.57
16.52
17.46
Units
$
349
541
(219)
(111)
560
$
Weighted
Average
Grant Date
Fair Value
$
$
16.70
24.60
12.34
24.35
24.80
Units
578
239
(377)
(91)
349
Weighted
Average
Grant Date
Fair Value
$
$
10.79
28.24
11.87
17.70
16.70
Units
704
242
(302)
(66)
578
Outstanding—beginning of year
Granted at fair value
Vested
Forfeited
Outstanding—end of year
16. EMPLOYEE RETIREMENT PLAN
We have a 401(k) defined contribution plan which permits participating employees to defer a portion of their
compensation, subject to limitations established by the Internal Revenue Code. During the years ended December 31, 2016,
2015 and 2014, employees who completed three months of service and are 21 years of age or older are qualified to participate
in the plan which matches 100% of the first 6% of each participant's contributions to the plan subject to IRS limits. Matching
contributions vest immediately. Participant contributions also vest immediately. Our matching contribution totaled $3.8 million,
$3.1 million and $2.4 million for the years ended December 31, 2016, 2015 and 2014, respectively. No discretionary
contributions were made to eligible participants for the years ended December 31, 2016, 2015 and 2014, respectively.
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17. OTHER INCOME, NET
Other income, net consisted of the following (in thousands):
Years ended December 31,
2016
2015
2014
Club O Rewards and gift card breakage
Gain (loss) on precious metals
Other
Ineffective portion loss of cash flow hedge
Termination costs of cryptobond financing
Loss on impairment of cost method investment
Total other income, net
18. INCOME TAXES
$
16,808
$
201
22
—
—
(2,850)
14,181
$
$
5,911
(1,183)
(120)
(124)
(850)
—
2,439
(1,269)
(1)
—
—
—
$
3,634
$
1,169
For financial reporting purposes, income before income taxes includes the following components (in thousands):
United States
Foreign
Total income before income taxes
Years ended December 31,
2016
2015
2014
$
$
20,974
(429)
20,545
$
$
3,358
(243)
3,115
$
$
13,088
117
13,205
The provision (benefit) for income taxes for 2016, 2015 and 2014 consists of the following (in thousands):
Current:
Federal
State
Foreign
Total current
Deferred:
Federal
State
Foreign
Total deferred
Total provision (benefit) for income taxes
Years ended December 31,
2016
2015
2014
$
$
280
1,264
34
1,578
7,311
410
(2)
7,719
9,297
$
$
75
293
44
412
1,808
(324)
(1)
1,483
1,895
$
$
210
385
68
663
3,777
(36)
—
3,741
4,404
The provision (benefit) for income taxes for 2016, 2015 and 2014 differ from the amounts computed by applying the
U.S. federal income tax rate of 35% to income (loss) before income taxes for the following reasons (in thousands):
123
Year ended December 31,
2016
2015
2014
U.S. federal income tax provision (benefit) at statutory rate
$
7,191
$
State income tax expense, net of federal benefit
Change in valuation allowance
Stock based compensation expense
Lobbying expenses
Other
Research and development credit
Income tax provision (benefit)
1,232
1,168
674
179
(69)
(1,078)
9,297
$
$
1,091
(134)
1,832
(32)
243
(150)
(955)
1,895
$
$
4,622
215
1,000
(43)
266
(141)
(1,515)
4,404
We account for income taxes in accordance with ASC Topic 740, Income Taxes (“ASC 740”). ASC 740 requires an
asset and liability approach for measuring deferred taxes based on temporary differences between the financial statement and
tax bases of assets and liabilities existing at each balance sheet date 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, 2016 and 2015 are as follows (in
thousands):
Deferred tax assets:
Net operating loss carryforwards
Accrued expenses
Research and development tax credits
Reserves and other
AMT and other tax credits
Intangible assets
Gross deferred tax assets
Valuation allowance
Total deferred tax assets
Deferred tax liabilities:
Fixed assets
Prepaid expenses
Total deferred tax liabilities
Total deferred tax assets, net
December 31,
2016
2015
$
$
36,486
13,548
9,832
2,893
1,827
1,678
66,264
(4,239)
62,025
(4,351)
(1,408)
(5,759)
56,266
$
$
47,793
12,605
8,574
3,227
1,034
751
73,984
(3,071)
70,913
(5,320)
(1,397)
(6,717)
64,196
At December 31, 2016, we had federal net operating loss carryforwards of approximately $119.1 million and state net
operating loss carryforwards of approximately $115.3 million, which may be used to offset future taxable income. Of the total
federal and state NOLs, $24.5 million was generated from excess stock-based compensation and are not reflected in our
deferred tax assets. The net tax benefit of $9.4 million would be credited to additional paid-in capital in our consolidated
balance sheets under the "with-and-without" method of utilization for tax attributes. We currently utilize the 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. Upon adoption of ASU 2016-09, Compensation-Stock Compensation
(Topic 718): Improvements to Employee Share-Based Payment Accounting, we will recognize these additional deferred tax
assets related to excess tax benefits through a cumulative effect adjustment in retained earnings as of January 1, 2017. Our
NOLs expire at various dates between 2020 and 2036 if unused. In accordance with an Internal Revenue Code section 382
study completed during 2014, the NOL carryforwards indicated above are not limited in future periods.
At December 31, 2016, we had foreign net operating loss carryforwards related to our international operations of
approximately $626,000 which have an indefinite life and approximately $834,000 which begin to expire in 2020 if unused.
124
At December 31, 2016, we had federal capital loss carryforwards of approximately $394,000 which begin to expire in
2020 if unused.
At December 31, 2016, we had federal research credit carryforwards of approximately $10.7 million and state research
credit carryforwards of approximately $5.1 million. These tax credits expire at various dates between 2021 and 2036 if unused.
Each quarter we assess the recoverability of our deferred tax assets under ASC 740. We are required to establish a
valuation allowance for any portion of the assets that we conclude is not more likely than not realizable. Our assessment
considers, among other things, the three year cumulative net income, positive pretax net income and taxable income, forecasts
of our future taxable income, carryforward periods, our utilization experience with operating loss and tax credit carryforwards,
and prudent and feasible tax planning strategies. We have concluded based on all available positive and negative evidence it is
more likely than not that our deferred tax assets as of December 31, 2016 arising from ordinary income and deductions and tax
credits will be realized in the future, with the exception of operating losses and credits generated by separate tax-filing
subsidiaries in domestic and foreign jurisdictions. On the basis of this evaluation, as of December 31, 2016, a valuation
allowance of $1.6 million has been recorded to reduce the portion of the deferred tax assets that are not more likely than not to
be realized. We have also concluded it is unlikely that our deferred tax asset arising from capital losses will be realized in the
future. On the basis of this evaluation, as of December 31, 2016, a valuation allowance of $2.6 million has been recorded to
reduce the portion of the deferred tax asset that is not 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 uncertainties that are expected
to negatively impact the future levels of taxable income. We will continue to monitor the need for a valuation allowance against
our federal and state deferred tax assets on a quarterly basis.
A reconciliation of the beginning and ending unrecognized tax benefits, excluding interest and penalties, as of
December 31, 2016, 2015 and 2014 is as follows (in thousands):
Beginning balance
Additions for tax positions related to the current year
Additions (reductions) for tax positions taken in prior years
Ending balance
Year ended December 31,
2016
2015
2014
$
$
4,753
$
4,128
$
1,112
1,468
7,333
$
751
(126)
4,753
$
2,968
959
201
4,128
Included in the balance of unrecognized tax benefits as of December 31, 2016, December 31, 2015, and December 31,
2014, are approximately $5.9 million, $4.8 million, and $4.1 million, respectively, of tax benefits that, if recognized, would
affect the effective tax rate. Also included in the balance of unrecognized tax benefits as of December 31, 2016, December 31,
2015, and December 31, 2014, are approximately $1.5 million, $0, and $0, respectively, of tax benefits that, if recognized,
would result in adjustments to other tax accounts, primarily deferred taxes. We believe that it is reasonably possible that a
decrease of up to $1.5 million in unrecognized tax benefits related to marketing deductions will occur upon settlement with tax
authorities within the next 12 months.
Accrued interest and penalties on unrecognized tax benefits as of December 31, 2016 and 2015 were $345,000 and
$236,000, respectively.
We are subject to taxation in the United States and various state and foreign jurisdictions. Tax years beginning in 2012
are subject to examination by taxing authorities, although net operating loss and credit carryforwards from all years are subject
to examinations and adjustments for at least three years following the year in which the attributes are used. As of December 31,
2015, we were under audit by the Internal Revenue Service for our 2013 federal income tax return. The audit concluded in 2016
with no changes to the return.
We intend to reinvest the earnings of our non-U.S. subsidiaries in those operations. We have begun expansion of
operations outside of the U.S. and have plans for additional expansion for which we have incurred and will continue to incur
capital requirements. We have considered ongoing capital requirements of the parent company in the U.S. As of December 31,
2016, we had not made a provision for U.S. or additional foreign withholding taxes on approximately $421,000 of indefinitely
reinvested foreign earnings. Generally, such amounts become subject to U.S. taxation upon the remittance of dividends to the
125
U.S. and under certain other circumstances. It is not practicable to estimate the amount of deferred taxes related to investments
in these foreign subsidiaries.
19. RELATED PARTY TRANSACTIONS
On occasion, Haverford-Valley, L.C. (an entity owned by our Chief Executive Officer) and certain affiliated entities
make travel arrangements for our executives and pay the travel related expenses incurred by our executives on company
business. During the years ended December 31, 2016, 2015 and 2014, we reimbursed Haverford-Valley L.C. $703,000,
$423,000, and $270,000, respectively, for these expenses.
On November 2, 2016 we entered into a Software Licensing Agreement with SiteHelix Inc. (the “SiteHelix
Agreement”). Saum Noursalehi, our President, Retail, is the majority owner of SiteHelix. Pursuant to the SiteHelix Agreement,
SiteHelix granted a non-exclusive, non-transferrable license to its proprietary software to us. The software is intended to
improve customer conversion rates on our website. Pursuant to the SiteHelix Agreement, we will pay SiteHelix 20% of an
amount, if any, intended to reflect the economic benefit of the software to us, as calculated by us. Either party may terminate
the SiteHelix Agreement on 30 days’ notice to the other party. In addition to this and other termination rights, we may terminate
the SiteHelix Agreement immediately at any time if we determine that we can obtain substantially the same services from an
unrelated person or entity at a lower cost, or better services from an unrelated person or entity for substantially the same cost.
During 2016 we did not pay or accrue any amount for payment to SiteHelix.
In December 2016, pursuant to the rights offering we made to all of our stockholders, our Chief Executive Officer,
Dr. Patrick M. Byrne purchased 63,775 shares of our Series A Preferred stock from us for $1,000,000. In connection with the
rights offering, we entered into a registration rights agreement with Dr. Byrne for his benefit and the benefit of any other
affiliates of ours who acquired or acquire shares of the Series A Preferred or the Series B Preferred in or after the rights
offering.
20. BROKER DEALERS
As part of our Medici blockchain and financial technology initiatives, we hold a controlling interest in each
of two broker dealers, SpeedRoute LLC ("SpeedRoute") and Pro Securities, LLC ("Pro Securities"), which we acquired in
January 2016 (see Note 3. Acquisitions, Goodwill, and Acquired Intangible
SpeedRoute is an electronic, agency-only FINRA-registered broker dealer that provides connectivity for its customers
to U.S. equity exchanges as well as off-exchange sources of liquidity such as dark pools. All of SpeedRoute's customers are
registered broker dealers. SpeedRoute also does not hold, own or sell
Pro Securities is a FINRA-registered broker dealer that owns and operates the Pro Securities alternative trading system
("ATS"), which is registered with the SEC. An ATS is a trading system that is not regulated as an exchange, but is a licensed
venue for matching buy and sell orders. The Pro Securities ATS is a closed system available only to its broker dealer
subscribers. Pro Securities does not accept orders from non-broker dealers, nor does it hold, own or sell securities.
SpeedRoute and Pro Securities are subject to the SEC’s Uniform Net Capital Rule (SEC Rule 15c3-1), which requires
the maintenance of minimum net capital and requires that the ratio of aggregate indebtedness to net capital, both as defined,
shall not exceed 15 to 1 and that equity capital may not be withdrawn or cash dividends paid if the resulting net capital ratio
would exceed 10 to 1. At December 31, 2016, SpeedRoute had net capital of $430,260, which was $304,536 in excess of its
required net capital of $125,724 and SpeedRoute's net capital ratio was 4.4 to 1. At December 31, 2016, Pro Securities had net
capital of $24,141, which was $19,141 in excess of its required net capital of $5,000 and Pro Securities net capital ratio
was 0.92 to
SpeedRoute and Pro Securities did not have any securities owned or securities sold, not yet purchased at December 31,
2016 and 2015.
126
21. BUSINESS SEGMENTS
Segment information has been prepared in accordance with ASC Topic 280 Segment Reporting. We determined our
segments based on how we manage our business, which, in our view, consists primarily of our Retail and Medici businesses.
Our Retail business consists of our Direct and Partner reportable segments. We use gross profit as the measure to determine our
reportable segments because there is not discrete financial information available below gross profit for our Direct and Partner
segments. As a result, our Medici business is not significant as compared to our Direct and Partner segments and is included in
Other. Our Other segment consists of Medici. Although our Direct and Partner segments both relate to our Retail business, we
do not combine these segments because they have dissimilar economic characteristics, such as gross profit margins. We do not
allocate assets between our segments for our internal management purposes, and as such, they are not presented here. There
were no significant inter-segment sales or transfers during the years ended December 31, 2016, 2015 and 2014.
The following table summarizes information about reportable segments for the years ended December 31, 2016, 2015
and 2014 (in thousands):
Direct
Partner
Retail Total
Other
Total
Year ended
December 31,
2016
Revenue, net
Cost of goods sold
Gross profit
Operating expenses
Interest and other income, net (1)
Pre-tax income (loss)
Provision (benefit) for income taxes
Net income (loss) (2) (3) (4)
2015
Revenue, net
Cost of goods sold
Gross profit
Operating expenses
Interest and other income, net (1)
Pre-tax income (loss)
Provision (benefit) for income taxes
Net income (loss) (2) (3) (4)
2014
Revenue, net
Cost of goods sold
Gross profit
Operating expenses
Interest and other income, net (1)
Pre-tax income
Provision for income taxes
Net income (loss) (2) (3) (4)
$
$
$
$
$
$
101,578
96,271
5,307
$ 1,683,204
1,362,140
321,064
$
137,783
128,077
9,706
$ 1,518,125
1,225,107
293,018
$
147,460
129,253
18,207
$ 1,349,643
1,088,791
260,852
$
$
$ 1,784,782
1,458,411
326,371
307,669
13,630
32,332
13,797
18,535
$
$
$ 1,655,908
1,353,184
302,724
296,281
3,649
10,092
3,448
6,644
$
$
$ 1,497,103
1,218,044
279,059
267,136
1,282
13,205
4,404
8,801
$
$
$
$
$
$
$
$
$
$
$
15,181
10,203
4,978
16,765
—
(11,787)
(4,500)
(7,287) $
$ 1,799,963
1,468,614
331,349
324,434
13,630
20,545
9,297
11,248
$
1,930
—
1,930
8,907
—
(6,977)
(1,553)
(5,424) $
$ 1,657,838
1,353,184
304,654
305,188
3,649
3,115
1,895
1,220
— $ 1,497,103
1,218,044
—
279,059
— $
267,136
—
1,282
—
13,205
—
4,404
—
8,801
— $
___________________________________________
(1) — The above amounts exclude intercompany transactions eliminated in consolidation, which consist primarily of
interest. These amounts were $594,000, $158,000, and $0 for the years ended December 31, 2016, 2015 and 2014,
respectively.
(2) — Net income presented for segment reporting purposes is before any adjustments attributable to noncontrolling
interests.
127
(3) — The above amounts include Retail depreciation and amortization expense of $26.9 million, $23.6 million and
$18.1 million for the years ended December 31, 2016, 2015 and 2014, respectively.
(4) — The above amounts include Other depreciation and amortization expense of $4.4 million, $1.5 million and $0
for the years ended December 31, 2016, 2015 and 2014, respectively.
Our Direct segment includes revenues, direct costs, and cost allocations associated with sales of inventory we own.
Costs for this segment include product costs, freight, warehousing and fulfillment costs, credit card fees and customer service
costs.
Our Partner segment includes revenues, direct costs and cost allocations associated with sales of inventory owned by
our partners. Costs for this segment include product costs, outbound freight and fulfillment costs, credit card fees and customer
service costs.
For the years ended December 31, 2016, 2015 and 2014, substantially all of our sales revenues were attributable to
customers in the United States. At December 31, 2016 and 2015, substantially all of our fixed assets were located in the United
States.
22. SUBSEQUENT EVENTS
Conversion of Loan
As previously disclosed in Note 11. Borrowings, we entered into a syndicated senior secured credit facility in
connection with the construction of our corporate headquarters, which provided for an aggregate credit amount of $55.8 million
consisting of (i) a senior secured real estate loan of $45.8 million to be used to finance the development and construction of our
headquarters and (ii) a $10.0 million senior secured revolving credit facility for working capital and capital expenditures. The
Real Estate Loan was designed to convert into an approximately 6.75-year term loan due October 1, 2023. On January 1, 2017,
the conditions to conversion were satisfied, and the Real Estate Loan converted into the Term Loan.
The aggregate principal amount of the term loan is $45.8 million. Monthly principal payments of $93,695 plus interest
will be due under the term loan beginning February 1, 2017 through September 1, 2023, with a balloon payment due October 2,
2023 in the aggregate principal amount of $38.3 million plus all then accrued unpaid interest and any other monetary
obligations that may be due under the agreement.
Repurchase of Common Stock
On January 27, 2017, we repurchased approximately 604,000 shares of our common stock for an aggregate purchase
price of $10 million under the stock repurchase plan authorized by our Board of Directors on May 5, 2015. All common shares
repurchased will be recognized as treasury stock.
23. QUARTERLY RESULTS OF OPERATIONS (unaudited)
The following tables set forth our unaudited quarterly results of operations data for the eight most recent quarters for
the period ended December 31, 2016. We have prepared this information on the same basis as the consolidated statements of
operations and the information includes all adjustments that we consider necessary for a fair statement of its financial position
and operating results for the quarters presented.
128
Consolidated Statement of Income (Loss) Data:
Revenue, net
Direct
Partner and other
Total net revenue
Cost of goods sold
Direct
Partner and other
Total cost of goods sold
Gross profit
Operating expenses:
Sales and marketing
Technology
General and administrative
Litigation settlement
Total operating expenses
Operating income (loss)
Interest income
Interest expense
Other income, net
Net income (loss) before income taxes
Provision (benefit) for income taxes
Consolidated net income (loss)
Less: Net loss attributable to noncontrolling interests
Net income (loss) attributable to stockholders of Overstock.com,
Inc.
Net income (loss) per common share—basic:
Net income (loss) attributable to common shares—basic
Weighted average common shares outstanding—basic
Net income (loss) per common share—diluted:
Net income (loss) attributable to common shares—diluted
$
$
$
Three Months Ended
March 31,
2016
June 30,
2016
September 30,
2016
December 31,
2016
(in thousands, except per share data)
$
26,651
$
24,630
$
24,620
$
25,677
393,910
418,540
23,098
319,120
342,218
76,322
33,353
25,800
22,678
—
81,831
(5,509)
64
(5)
3,992
(1,458)
(243)
(1,215)
(311)
416,944
441,564
23,955
337,893
361,848
79,716
34,707
26,739
23,317
—
84,763
(5,047)
73
(212)
1,251
(3,935)
(543)
(3,392)
(294)
500,505
526,182
23,812
404,366
428,178
98,004
48,380
28,511
21,455
—
98,346
(342)
98
(658)
4,782
3,880
1,119
2,761
(334)
(904) $
(3,098) $
3,095
387,026
413,677
25,406
310,964
336,370
77,307
31,456
25,710
21,848
(19,520)
59,494
17,813
91
(2)
4,156
22,058
8,964
13,094
(335)
13,429
0.53
25,280
$
$
(0.04) $
(0.12) $
25,341
25,356
0.53
$
(0.04) $
(0.12) $
0.12
25,391
0.12
25,540
Weighted average common shares outstanding—diluted
25,290
25,341
25,356
129
Consolidated Statement of Income (Loss) Data:
Revenue, net
Direct
Partner and other
Total net revenue
Cost of goods sold
Direct
Partner and other
Total cost of goods sold
Gross profit
Operating expenses:
Sales and marketing
Technology
General and administrative
Total operating expenses
Operating income (loss)
Interest income
Interest expense
Other income, net
Net income (loss) before income taxes
Provision (benefit) for income taxes
Consolidated net income (loss)
Less: Net loss attributable to noncontrolling interests
Net income (loss) attributable to stockholders of Overstock.com,
Inc.
Net income (loss) per common share—basic:
Net income (loss) per share—basic
Weighted average common shares outstanding—basic
Net income (loss) per common share—diluted:
Net income (loss) per share—diluted
$
$
$
Three Months Ended
March 31,
2015
June 30,
2015
September 30,
2015
December 31,
2015
(in thousands, except per share data)
$
36,135
$
34,428
$
33,621
$
33,599
362,209
398,344
32,527
290,380
322,907
75,437
27,972
23,087
20,534
71,593
3,844
43
(4)
605
4,488
1,940
2,548
(191)
2,739
0.11
24,213
$
$
353,585
388,013
31,235
283,121
314,356
73,657
28,087
24,059
19,429
71,575
2,082
38
(8)
1,163
3,275
1,849
1,426
(242)
1,668
0.07
24,306
357,590
391,211
31,989
286,771
318,760
72,451
30,062
25,084
20,676
75,822
(3,371)
37
(62)
764
(2,632)
(15)
(2,617)
(546)
446,671
480,270
32,326
364,835
397,161
83,109
38,347
26,303
21,548
86,198
(3,089)
37
(66)
1,102
(2,016)
(1,879)
(137)
(247)
$
$
(2,071) $
110
(0.08) $
24,681
—
25,234
0.11
$
0.07
$
(0.08) $
—
25,266
Weighted average common shares outstanding—diluted
24,390
24,398
24,681
130
Schedule II
Valuation and Qualifying Accounts
(in thousands)
Year ended December 31, 2016
Deferred tax valuation allowance
Allowance for sales returns
Allowance for doubtful accounts
Year ended December 31, 2015
Deferred tax valuation allowance
Allowance for sales returns
Allowance for doubtful accounts
Year ended December 31, 2014
Deferred tax valuation allowance
Allowance for sales returns
Allowance for doubtful accounts
Balance at
Beginning of
Year
Charged to
Expense
Deductions
Balance at
End of Year
$
$
$
3,071
$
1,168
$
— $
17,896
465
163,693
1,608
163,413
74
1,000
$
2,071 (1) $
— $
15,531
511
142,887
217
140,522
263
— $
1,000
$
— $
13,232
152
117,932
359
115,633
—
4,239
18,176
1,999
3,071
17,896
465
1,000
15,531
511
___________________________________________
(1) The amount charged to expense for the year ended December 31, 2015 includes a foreign deferred tax valuation
allowance recognized as part of an acquisition as described in Note 3—Acquisitions, Goodwill and Acquired
Intangible Assets. The allowance was included as an adjustment to goodwill.
131