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PART IV

Table of Contents


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
(Mark One)ý

ý

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2014

For the fiscal year ended December 31, 2012

OR		Or

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                             to                            

For the transition period from                        to  
Commission file numbernumber: 000-49799

 
OVERSTOCK.COM, INC.
(Exact name of Registrantregistrant as specified in its charter)

Delaware
87-0634302
(State or other jurisdiction of
incorporation or organization)		 87-0634302
(I.R.S. Employer
Identification Number)
6350 South 3000 East Salt Lake City, Utah 84121(801) 947-3100
(Address, including zip code, of Registrant’s principal executive offices)(Registrant’s telephone number, including area code)

6350 South 3000 East
Salt Lake City, Utah 84121
(Address of principal executive offices including 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 ClassName of Each Exchange on Which Registered
Common Stock, $0.0001 par value Nasdaq Global Market

Securities registered pursuant to Section 12(g) of the Act:None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o    No ý

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 o    No ý

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý   No o

     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý    No o

Indicate by check mark 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. oý

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“large accelerated filer", "accelerated filer,"” “accelerated filer,” and "smaller“smaller reporting company"company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o
 
Accelerated filer ýx
 
Non-accelerated filer o
Smaller reporting company o
(Do not check if a
smaller reporting company)		 Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the act). Yes o  No ý

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, 2012)2014), was approximately $59.6$186.9 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.

          As of February 18, 2013 there

There were 23,648,27124,267,099 shares of the registrant's Common Stock outstanding.

Registrant’s common stock, par value $0.0001, outstanding on March 2, 2015.

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 20132015 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.

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OVERSTOCK.COM, INC.
ANNUAL REPORT ON FORM 10-K
INDEX




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Page

 

Special Cautionary Note Regarding Forward-Looking Statements

ii3

Part I


Item 1.

Business

1

Item 1A.

Risk Factors

9

Item 1B.

Unresolved Staff Comments

28

Item 2.

Properties

28

Item 3.

Legal Proceedings

28

Item 4.

Mine Safety Disclosures

28

Part II

   

Part I
Item 5.

1.		Business
6
Item 1A.Risk Factors
12
Item 1B.Unresolved Staff Comments
32
Item 2.Properties
32
Item 3.Legal Proceedings
32
Item 4.Mine Safety Disclosures
32
 

Part II
Item 5.Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

2933

Item 6.

Selected Financial Data

3235

Item 7.

Management's Discussion and Analysis of Financial Condition and Results of Operations

3436

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

6160

Item 8.

Financial Statements and Supplementary Data

61

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

61

Item 9A.

Controls and Procedures

6261

Item 9B.

Other Information

65

Part III

   

Item 10.

Part III 

Item 10.

Directors, Executive Officers and Corporate Governance

66

Item 11.

Executive Compensation

66

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

66

Item 13.

Certain Relationships and Related Transactions, and Director Independence

67

Item 14.

Principal Accounting Fees and Services

67

Part IV

   

Item 15.

Part IV 

Item 15.

Exhibits, Financial Statement Schedules

69
  
68Signatures
74

Signatures


71

Financial Statements

F-276


O, Overstock.com, O.com, O.co, Club O, Main Street Revolution, Worldstock Fair Trade, Worldstock and WorldstockOVillage are registered trademarks, andtrademarks. O.biz, Club O Dollars and O.bizOGlobal are trademarks of Overstock.com, Inc. The Overstock.com, Club O, and Worldstock Fair Trade logos are also registered 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 Private Securities Litigation Reform Act of 1995.1933 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, and involve risks and uncertainties. Allperformance. The forward-looking statements made herein,include all statements other than statements of historical fact, including, without limitation, all statements regarding the matters described below, are forward-looking statements:

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;

•
results, including any projections of revenue, capital expenditures or other financial measures or amounts;
our plans and expectations regarding our design and construction of an office campus in Salt Lake City to serve as our corporate headquarters; our beliefs and expectations regarding the competitionadequacy of our office and warehouse facilities and our anticipated transition from our current facilities to our anticipated new facilities;
our expectations regarding the benefits and risks of the Construction Agreement and related agreements we facerecently entered into in connection with our construction of our planned corporate headquarters and of the credit facility we recently entered into for the purpose of, among other things, financing a portion of the costs of that construction;
our expectations regarding our ability to secure the additional financing that we will face inneed to complete our business;

•
the effects of government regulation;

•
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;

•
have or incur in the future;
our decision to accept bitcoins as payment for the goods and services we sell and our expectations regarding the advantages and risks of doing so, and our expectations that Coinbase.com and any other bitcoin transaction processing agents we utilize will perform in accordance with our expectations regardless of fluctuations in the value of bitcoin or other developments that may affect us or such processing agents;     
our decision to acquire and hold bitcoins and other cryptocurrencies and our expectations regarding the advantages and risks of doing so;
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 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 our recently-announced launch of our Supplier Oasis Fulfillment Services and our efforts to provide multi-channel fulfillment services;
our plans and expectations regarding our recently-announced launch of our Farmers Market offerings;
our plans and expectations regarding our recently-announced launch of insurance product offerings and consumer finance offerings;
our plans for further changes to our business;

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

•
our beliefs regarding the costs and benefits of our “spend and defend” policy under which we generally refuse to settle abusive 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;

•
our beliefs regarding the adequacy of our insurance coverage;

•
our beliefs regarding the adequacy and anticipated functionality of our infrastructure, including our backup facilities cyber-securityand beliefs regarding the adequacy of our disaster planning and our ability to recover from a disaster planning;

•
or other interruption of our ability to operate our website at its highest level of functionality;    
our beliefs regarding our cybersecurity efforts and measures and the costs we will incur in our ongoing efforts to avoid interruptions to our product offerings and other business processes from cyber attacks;    
our belief that we can meet our published product shipping standards even during periods of relatively high sales activity;

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•
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 beliefs and expectations regarding the adequacycosts and benefits of our officeother businesses including our new and warehouse facilities;

•
our expectations regarding ourused car listing service, our Worldstock Fair Trade offerings, our Main Street Revolution offerings, our consignment services, our ecommerce marketplace channel offerings, and our community site,other future businesses and the anticipated functionality and results of operations of them;

•
our expectations regarding the costs and benefits of various programs we offer, including Club O and programs pursuant to which we 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 belief that we and our fulfillment partners will be able to maintain inventory levels at appropriate levels despite the seasonal nature of our business;

•
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.

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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, the matters discussed herein under Item 1A—Risk Factors, as well as the following:

changes in U.S. and global economic conditions and consumer spending;

•
world events;

•
the rate of growth of the Internet and online commerce, and the occurrence of any event that would discourage or prevent consumers from shopping online;

•
any failure to maintain our existing relationships or build new relationships with fulfillment 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;

•
modifications we may make to our business model from time to time, including aspects relating to our product mix and the mix of direct/fulfillment partner sourcing of the products we offer;

•
the mix of products purchased by our customers;

•
problems with cyber security or data breaches or Internet or other infrastructure or communications impairment problems or the costs of preventing or responding to any such problems;

•
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;

•
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 large volume of fraudulent purchases;

•
purchase orders we receive on a daily basis;
problems we may encounter as a result of the listing or sale of pirated, counterfeit or illegal items by third parties;

•
difficulties we may have financing our operations or our expansion with either internally generated funds or external sources of financing;
any difficulties we may encounter relating to the real estate we recently purchased, the design and construction of an office campus on that property to serve as our corporate headquarters, the financing of a substantial portion of the costs of designing and constructing the office campus and headquarters or in financing it after construction, or the transition from our current facilities to new facilities;
any difficulties we may encounter in connection with our Supplier Oasis Fulfillment Services and our efforts to provide multi-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;
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;

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•
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;

•
competition;

•
taxes or report sales;
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;
competition, including competition from well-established competitors including Amazon.com, 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 growth;

•
our growth and any periods in which we fail to grow in accordance with our plans;
fluctuations in our operating results;

•
difficulties we may encounter in connection with our efforts to expand internationally;
difficulties we may encounter in connection with our efforts to offer additional types of services to our customers, including insurance products and consumer financing;
difficulties we may encounter in connection with our efforts to develop

code for the purposes of facilitating the creation of a decentralized facility for the trading of securities, and to create such a decentralized trading facility;    
•
the outcomes of legal proceedings, investigations and claims;

•
optimizationclaims, including the outcome of our appeal of the judgment against us obtained by the District Attorneys of a number of California counties as described in this report;
our inability to optimize our warehouse operations;

•
risks of inventory management and seasonality.

iii

Tableseasonality;

the cost and availability of Contents

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; 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 those described in this Annual Report on Form 10-K in Part I, Item 1A under the caption "Risk Factors."“Risk Factors” in Part II, Item 7 under the caption “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. ExceptAlthough 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 otherwiseof the date of this report and, except as required by law, we expressly disclaim anyundertake no obligation to release publicly any update or revisions to any 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. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, achievements or other events.

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PART I

ITEM 1. BUSINESS

           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 offering discountprice-competitive brand name, non-brand name and closeout merchandise, including furniture, home décor,decor, bedding and bath, housewares, jewelry and watches, apparel and designer accessories, electronics and computers, and sporting goods, among other products. We also sell hundreds of thousands of best seller and current run books, magazines, CDs, DVDs and video games ("BMMG"(“BMMG”). We sell these products and services through our Internet websites located at www.overstock.com, www.o.co and www.o.biz ("Website"(referred to collectively as the “Website”). Although our three websites are located at different domain addresses, the technology and equipment and processes supporting the Website and the process of order fulfillment described herein are the same for all three websites.

Our company, based in Salt Lake City, Utah, was founded in 1997. We launched our initial website in March 1999.1999 and were re-incorporated in Delaware in 2002. Our Website offers our customers an opportunity to shop for bargains conveniently, while offering our suppliers an alternative inventory liquidation or sales channel. We continually add new, and sometimes limited, inventory to our Website in order to create an atmosphere that encourages customers to visit frequently and purchase products before our inventory sells out. We sell products primarily in the United States, with a small amount of products (less than 1% of our total net revenue) sold internationally.

States.

As used herein, "Overstock," "Overstock.com," "O.co," "we," "our"“Overstock,” “Overstock.com,”, “O.co,” “we,” “our” and similar terms include Overstock.com, Inc. and its subsidiaries, unless the context indicates otherwise.

Our Business

We deal primarily in discount,price-competitive, replenishable and closeout merchandise and use the Internet to aggregate both supply and demand to create an efficient marketplace for selling these products. We provide manufacturers with a one-stop liquidation channel to sell both large and small quantities of excess, closeout and replenishable inventory without disrupting sales through traditional channels. The merchandise offered on our Website is from a variety of sources including well-known, brand-name manufacturers. We have organized our shopping business (sales of product offered through the Shopping Section of our Website) into two principal segments—a "direct" business and a "fulfillment partner""partner" business. We currently offer approximately 344,000683,000 non-BMMG products and approximately 641,000696,000 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 devices.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. Nearly all of our sales are to customers located in the United States. During the years ended December 31, 20122014, 2013 and 20112012 no single customer accounted for more than 1% of our total net revenue.


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Direct business

Our direct business includes sales made to individual consumers and businesses, whichfrom our owned inventory and that are fulfilled primarily from our warehouse in Salt Lake City, Utah. During the year ended December 31, 2012,2014, we fulfilled approximately 14%10% of our order volume through our warehouse. Our warehouse, which generally ships between 4,0002,000 and 7,000 orders5,000 packages per day and up to approximately 10,000 orders12,000 packages per day during peak periods, using overlapping daily shifts.

Fulfillment partner

Partner business

For our fulfillment partner business, we sell merchandise of other retailers, cataloguers or manufacturers ("fulfillment 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" or "fulfillment partner" does not mean that we have formed any legal partnerships with any of our fulfillment partners. We currently have relationships with approximately 2,1003,200 third parties who supply approximately 338,000667,000 non-BMMG products, as well as most of the BMMG products, on our Website. These third-party fulfillmentthird party partners generally perform essentially 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

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generated from sales on our Shopping site from both the direct and fulfillment partner businesses is recorded net of returns, coupons and other discounts.

Both direct and fulfillment 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 infor 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 and BillMeLater), 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 fulfillment partner business, we generally receive payments from our customers before our payments to our suppliers are due.

Consignment

        In September 2009, we began offering a consignment service to suppliers where the suppliers' merchandise is stored in and shipped from

Other offerings
We offer additional products or services that complement our warehouses. We pay the consignment supplier upon sale of the consigned merchandiseprimary offerings, but are not significant to our customer. Revenuerevenues. These include:
Worldstock Fair Trade, a store within our Website that offers handcrafted products made by artisans all over the world, which emphasizes sustainability, fairness, and transparency, and which we attempt to run at 0% profit by donating net profits to fund philanthropic projects in several countries, including Guatemala, Kenya, Malawi, and Nepal;
Main Street Revolution, a store within our Website that features products from our consignment service business in 2012, 2011 and 2010 were less than 1% of total net revenues and are included in the fulfillment partner segment.

International business

        As of December 31, 2012, we were offering products to customers in over 100 countries and non-U.S. territories. We do not have sales operations outsidesmall businesses across the United States who offer their products using our national marketing and are usingdistribution channels;

Supplier Oasis Fulfillment Services ("SOFS"), a U.S.-based third party to provide logisticssingle integration point through which our partners can manage their products, inventory and fulfillment for all international orders. Revenue generated fromsales channels, while tapping into our international business is included in either direct or fulfillment partner revenue, depending on whether the product is shipped from our warehouses or from a fulfillment partner. Less than 1% of our 2012, 2011 and 2010 revenues were from international customers.

Ecommercedistribution network;

ecommerce marketplace channels,

        During 2012, we began offering where some of our products are offered for sale in on-line marketplaces of other Internet retailers' websites, which allows uswebsites;

our international business where we offer products to reachcustomers outside the United States using U.S.-based third party logistics providers;
Pet Adoptions, a broader potential customer base. Underfree service and tab within our Website that leverages our technology to display pets available for adoption from shelters across the

United States;

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terms ofFarmers Market, a tab within our agreements with these ecommerce marketplace retailers, the retailers typically earnWebsite where our customers can order locally grown fresh produce and other food products;

Insurance, a fee that is a percentage of the selling price of the orders they send us. Revenue generatedtab within our Website where our customers can shop for insurance from these ecommerce marketplace channels is included in either direct or fulfillment partner revenue, depending on whether the product is shipped from our warehouses or from a fulfillment partner. Ecommerce marketplace channels were approximately 1% of our 2012 total net revenues.

Other businesses

        We operate major carriers for both personal and business insurance policies; and

an online car listing service as part of our Website. The car listing servicewhich allows sellers to list vehicles for sale and allows buyers to review vehicle descriptions and post offers to purchase, and provides the means for prospective purchasers to contact sellers for further information and negotiations on the purchase of an advertised vehicle. We also earn advertisement revenue derived from our cars business. Revenue from the cars businesses is included in the fulfillment partner segment on a net basis. Revenue from our other businesses is less than 1% of total net revenues.

Manufacturer, Supplier and Distribution Relationships

        To date,

Generally, we havedo not enteredenter 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 2128 main product lines:and service lines or featured categories: For the Home, Furniture, BeddingBed & Bath, Women, Men, Jewelry, Watches, Health & Beauty, Electronics, Worldstock, Sports & Outdoors, Baby, Books Movies Music Games, Kids, Luggage & Bags, Toys & Hobbies, Craft & Sewing, Office, Clothing & Shoes, Electronics, Jewelry, Watches, Sports and Outdoors, Books Media Music & Games, Luggage, Worldstock Fair Trade, Health & Beauty, Baby, Crafts & Sewing, Office, Gifts & Flowers, Toys & Hobbies, Pets,Pet Supplies, Liquidations, As Seen on TV, Emergency Preparedness, Farmers Market, Main Street Revolution, Emergency Preparedness,Pet Adoption, and As Seen on TV. Worldstock Fair Trade is our socially-responsible, online marketplace through which artisans in the United States and around the world can sell their products and gain access to a broader market. We have specialty departments, such as Main Street Revolution, which is a marketplace that enables small businesses to offer their products to a mass audience by selling on our websites.Sales. From time to time, as the number of products and services and product or featured categories change, we may reorganize our departments and/or categories to better reflect our current product offerings.


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For the years ended December 31, 2012, 20112014, 2013 and 2010,2012, the percentages of gross revenuessales contributed by similar classes of products were as follows:

Product Lines
 2012 2011 2010 

Home and garden(1)

  66% 58% 55%

Jewelry, watches, clothing and accessories

  16% 20% 23%

BMMG, electronics and computers

  6% 10% 11%

Other

  12% 12% 11%
        

Total

  100% 100% 100%
        
Product Lines 2014 2013 2012
Home and garden(1)      
Furniture 32% 31% 27%
Home decor 18% 17% 15%
Other 24% 24% 24%
Total home and garden 74% 72% 66%
Jewelry, watches, clothing and accessories 12% 13% 16%
BMMG, electronics and computers 4% 4% 6%
Other 10% 11% 12%
Total 100% 100% 100%
(1)
Home and garden includes furniture, home décor,decor, garden and patio, kitchen and dining, bedding, bath, furniture,home improvement, housewares garden, patio and other related products.

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Sales and Marketing

We use a variety of methods to target our consumer audience, including online campaigns, such as advertising through portals, 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 print ads. We generally hire third parties to develop our campaigns and advertising.

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 WebsitesWebsite and a combination of proprietary technologies and commercially available licensed technologies and solutions to support our 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 Salt Lake City. We also have a secondother data center near our corporate headquarterscenters which we use primarily 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 selection;

•
shopping convenience;

•
website organization and load speed;

•
order processing and fulfillment;

•
order delivery time;

•
customer service;
website functionality on mobile devices;
brand recognition; and

•
brand recognition.

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:

liquidation e-tailers;

•
online discount general retailers with discount;

•
retailers;
private sale sites;

•
online specialty retailers; and

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•
traditional general merchandise and specialty retailers and liquidators, many of which also have ana significant online presence.

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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, also may increase competitive pressures on us. Our competitors include Amazon.com, Inc and Wayfair LLC. 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 business is affected by seasonality because of the holiday retail season, which historically has resulted in higher sales volume during our fourth quarter, which ends December 31. We recognized 31.1%31.4%, 29.8%30.5% and 32.0%31.1% of our annual revenue during the fourth quarter of 2014, 2013, and 2012, 2011, and 2010, respectively.

Financial Information about Business Segments and Geographic Areas

See Item 15 of Part IV, "Financial Statements"—Note 22—"21. Business Segments"Segments for information regarding our business segments and geographical areas.

Intellectual Property and Trade Secrets

We regard our domain names and similar intellectual property as critical to our success. 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 personnel from our business operations. The uncertainty of litigation increases these risks. In connection with such litigation, we may be subject


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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 throughin 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").


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For further information, see the information set forth under Item 15 of Part IV, "Financial Statements—Statements"—Note 13—13. Commitments and Contingencies, subheading Legal Proceedings", contained in the "Notes to Consolidated Financial Statements" of this Annual Report on Form 10-K.

Government Regulation

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 privacy policies on sharing non-public information with third parties,and 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 impose additional compliance burdens on online companies. These consumer protection laws could result in substantial compliance costs.

New disclosure and reporting requirements, established under existing or new state or federal laws such as rules regarding requirements to identify the origin and existence of certain "conflict minerals" or regarding the disclosure of abusive labor practices in portions of our supply chain, could increase the cost of doing business, adversely affecting our results of operations.

In many states, there is currently great uncertainty whether or how existing laws governing issues such as property ownership, sales and other taxes, libel and personal privacy apply to the Internet and commercial online services. In addition, new state tax regulations in states where we do not now 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 regulation, 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 our cash flows and results of operations. Further, there is a possibility that we may be subject to significant fines or other payments for any past failures to comply with these requirements.


As with the state and federal law, these same types of regulatory laws in foreign countries where international customers reside, may also apply to us and, in the case of non-compliance, may subject us to penalties and other requirements that could have an adverse effect on our business.
Employees

At December 31, 2012,2014, we had approximately 1,3001,700 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.


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Competition for qualified personnel in our industry has historically been intense, particularly for software engineers computer scientists, and other technical staff.

Executive Officers of the Registrant

The following persons were executive officers of Overstock.comOverstock as of February 18, 2013:

March 2, 2015:

Executive OfficersAgePosition

Patrick M. Byrne

 5052 Chairman of the Board of DirectorsChief Executive Officer and Director

Jonathan E. Johnson III

Stormy D. Simon 46 President Acting Chief Executive Officerand Director
Mark J. Griffin59Senior Vice President, General Counsel and Corporate Secretary

Stephen J. Chesnut

Robert P. Hughes		 5355 Senior Vice President, Finance and Risk Management

Timothy D. Dilworth

37Senior Vice President, Marketing

David J. Nielsen

43Senior Vice President, Merchandising and Supply Chain

Bhargav J. Shah

37Senior Vice President, Technology

Stormy D. Simon

Carter P. Lee 44 Senior Vice President, Customer and Partner Care and DirectorTechnology

Stephen P. Tryon

Seth L. Marks		 5141 Senior Vice President, Human Capital ManagementMerchandising and InternationalStrategic Sourcing
David J. Nielsen45Senior Vice President, Business Development
Sam "Saum" Noursalehi35Senior Vice President, Product Development
Brian L. Popelka48Senior Vice President, Supplier, Customer and People Care

        On February 12, 2013 we announced that our Chief Executive Officer and Chairman of the Board,


Dr. Patrick M. Byrne will be taking a personal leave of absence for medical reasons. Our President, Jonathan E. Johnson III, will serve as Acting Chief Executive Officer during Dr. Byrne's leave of absence. Dr. Byrne will remain Chairman of the Board.

Dr. Patrick M. Byrne has served as our Chief Executive Officer (principal executive officer) and as a Director since October 1999, and as Chairman of the board of directors from February 2001 through October 2005 and since July 2006.2006 through March 2014. From September 1997 to May 1999, Dr. Byrne served as President and Chief Executive Officer of Fechheimer Brothers, Inc., a manufacturer and distributor of uniforms. From 1995 until its sale in September 1999, Dr. Byrne was Chairman, President and Chief Executive Officer of Centricut, LLC, a manufacturer and distributor of industrial torch parts. 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 has a Bachelor of Arts


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Degree in Chinese studies from Dartmouth College, a Master's Degree from Cambridge University as a Marshall Scholar, and a Ph.D.a doctorate in philosophy from Stanford University.

Mr. Jonathan E. Johnson IIIMs. Stormy D. Simon joined Overstock.com in September 2002 and has served as our President and Corporate Secretary since July 2008 and is Acting Chief Executive Officer since February 12, 2013. HeApril 2014. Ms. Simon previously served as Co-President. Ms. Simon has also served as a member of our General Counselboard of directors since 2011. Ms. Simon previously served as our Senior Vice President, Customer and Partner Care; Senior Vice President, Marketing; Vice President, BMMG; Travel and Off-Line Advertising; Chief of Staff and as our Vice President, Strategic ProjectsDirector of B2B. Prior to joining Overstock in 2001, Ms. Simon worked in the media and Legal, andtravel industries.
Mr. Mark J. Griffin has served as Senior Vice President, Corporate Affairs and Legal. From May 1999 to September 2002, Mr. Johnson held various positions with TenFold Corporation, a software company, including General Counsel Executivesince February 2014. He also serves as Corporate Secretary. He began his service as Vice President and Chief Financial Officer. From October 1997General Counsel when he joined Overstock in 2006. Before joining Overstock, Mr. Griffin was a partner at the Salt Lake City law firm, Woodbury & Kesler. Prior to April 1999,that, Mr. Johnson practiced law with Milbank, Tweed, Hadley & McCloyGriffin was Director of the Utah Securities Division, Deputy Secretary of State for the State of Nevada, and from September 1994 to September 1997, he practiced law with Graham & James. From February 1994 to August 1994, Mr. Johnsonalso served as a judicial clerk atan Assistant Utah Attorney General handling securities, antitrust cases and white collar fraud prosecutions. Mr. Griffin served in the leadership of the North American Securities Administrators Association, including serving as its President, and is an active member of the Utah Supreme Court for Justice Leonard H. Russon,State Bar with Juris Doctor and prior to that, from August 1993 to January 1994, Mr. Johnson served as a judicial clerk at the Utah CourtBachelor of Appeals for Judge Leonard H. Russon. Mr. Johnson holds a Bachelor's Degree in JapaneseArts degrees from Brigham Young University, studied for a year at Osaka University of Foreign Studies in Japan, and received his law degree from the J. Reuben Clark, Jr. Law School at Brigham Young University.

Mr. Stephen J. ChesnutRobert P. Hughes (principal financial and accounting officer) currently serveshas served as our Senior Vice President, Finance and Risk Management.Management since February 2013. He previously served as Vice President and Controller. Prior to joining the Company in 2008, Mr. Hughes served as Chief Financial Officer and Chief of Staff of TenFold Corporation. Prior to working for TenFold, Mr. Hughes held a number of senior accounting and internal audit positions with Oracle Corporation. He holds a B.S. 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. Carter P. Lee has served as our Senior Vice President, Finance from January 2009Technology since February 2015. Prior to February 2010. From August 2007 to August 2008,this, Mr. Chesnut served asLee was Vice President, Strategy/Market Development/Sales for HD Supply, Inc., a privately-held wholesale distribution company based in Atlanta, Georgia. From December 1998 to AugustTechnology Operations from 2008 through January 2015, Director, Internal Systems from 2004 through 2007 Mr. Chesnut served in a variety of capacities for The Home Depot or its subsidiaries, including Director, Business


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Development for HD Supply (prior to its sale by Home Depot); Director, Finance and Chief Financial Officer for Home Depot Supply; Director, New Concept Development; and Director, Strategic Planning. Prior to joining The Home Depot from 1986 to 1998, Mr. Chesnut served in a variety of operational, planning and financial positions for Target Stores Inc. Mr. Chesnut holds a Bachelor's of Science Degree in Accounting and Business Management from Southern Utah University and a Master of Business Administration Degree, Finance and Strategic Planning,Systems Engineer from Brigham Young University.

Mr. Timothy D. Dilworth joined Overstock.com in March 2012, and serves as Senior Vice President, Marketing.2001 through 2003. Prior to joining Overstock.com, Mr. Dilworth workedLee was a Systems Engineer for Coldwater Creek, a specialty retailerHospice of women's apparel, accessories, jewelrythe Valley and gift items, since 2000Vice President of Technology for Motherboard Discount Center in various positions within the company's marketing group and last held the position of Coldwater Creek'sPhoenix, AZ.

Mr. Seth L. Marks has served as our Senior Vice President, Merchandising and Strategic Sourcing since April 2014. Prior to this, Mr. Marks was Vice President of Marketing. He holds Bachelor's DegreeSales and Special Acquisitions. Before joining Overstock.com in Business2013, Mr. Marks served as Chief Marketing Officer and Information Technology from Montana TechPresident of the Universityacquisition group of MontanaTuesday Morning Corporation beginning in 2011. Prior to this, Mr. Marks was named as CEO of Talon Merchant Capital in 2008, which later became part of Liquidation World. Additionally, Mr. Marks co-founded Big Lots Capital, the special acquisitions arm of Big Lots, Inc., and a Mastersserved there as the Vice President of Business Administration Degree from the University of Idaho.Merchandising.

Mr. David J. Nielsen currently serveshas served as ourSenior Vice President, Business Development since August 2014. Mr. Nielsen previously served as Co-President and as Senior Vice President, Merchandising & Supply Chain. Mr. Nielsen previously served as the Vice President, Merchandising from August 2009. Prior to joining Overstock.comOverstock in 2009, Mr. Nielsen was with Payless ShoeSource, Inc., a shoe retailer from 2005 through 2009. At Payless he held a variety of positions, most recently serving as the Vice President of Merchandise Distribution. Additionally, Mr. Nielsen worked at Old Town Imports, LLC, a retail company, where he served as President and CEO. Mr. Nielsen holds a Bachelor's Degree in Business Management with an emphasis in Marketing from Brigham Young University.

Mr. Bhargav J. ShahSaum Noursalehi currently serves as our Senior Vice President, Technology. Prior to joining Overstock.com, Mr. Shah served as a director in KPMG LLP's IT advisory group since 2009. Prior to that, Mr. Shah held various positions with Bearing Point (formerly KPMG Consulting) including consulting senior manager. Mr. Shah holds a Chemical Engineering Degree from K.E.S Engineering College in Mumbai, India and a Master's of Business Administration Degree in Finance from Bentley University.

Ms. Stormy D. Simon currently serves as our Senior Vice President, Customer and Partner Care. Ms. Simon has also served as a member of our board of directors since May 2011. Ms. Simon previously served as our Senior Vice President, Marketing; Vice President, BMMG; Travel and Off-Line Advertising; Chief of Staff and as our Director of B2B. Prior to joining Overstock.com in 2001, Ms. Simon worked in the media and travel industries.

Product Development since February 2015. Mr. Stephen P. Tryon joined Overstock.com in August 2004, and servesNoursalehi previously served as Senior Vice President, Human Capital ManagementMarketing, as Vice President of OLabs, a research and International.development group within the Company, and as Vice President of new product development. Prior to his appointment as a Vice President, Mr. Noursalehi was the Company’s senior director of website, mobile and search engine optimization. Mr. Noursalehi has been with Overstock since 2005. Prior to joining Overstock.com,Overstock Mr. TryonNoursalehi worked as a software developer. Mr. Noursalehi holds a bachelor's degree in Computer Science from the University of Utah.

Mr. Brian L. Popelka has served as our Senior Vice President, Supplier, Customer and People Care since June 2013. Mr. Popelka previously served as Vice President of Customer Care. Since joining Overstock in 2002, Mr. Popelka has held several positions including the director of Books, Media, Movies and Games Department, and was the Legislative Assistant to the Chief of Staffmanager of the United States Army. During his 21 years with the Army, his assignments included director of plans for the 10th Mountain Division, Congressional Fellow for United States Senator Max Cleland, Assistant Professor of Philosophy at the United States Military Academy,Business-to-Business Department. Mr. Popelka holds a bachelor's degree in Journalism, Broadcasting, Film and commander of a company of paratroopers. Mr. Tryon received a Bachelor's of Science Degree in Applied SciencesHistory from the U.S. Military Academy and a Master's DegreeUniversity of ArtsNebraska in Philosophy from Stanford University.Lincoln.

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 our the Investor Relations sectionssection of our main website, www.overstock.com, as soon as reasonably practicable after

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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.


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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 harm our business (or similar statements) mean that the event could have a material adverse effect on our business, prospects, financial condition and results of operations.operations, which in turn could have a material adverse effect on the market price of our securities. These are not the only 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, 2012, our accumulated deficit was $247 million. We need to generate significant revenues to maintain profitability, and we may not be able to do so. Although we had net income of $14.7 million in 2012, we incurred a net loss of $19.4 million in 2011. We may be unable to maintain profitability in the future. If our revenues grow 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.

We are an e-commerce business and we depend on the continued use of the Internet and the adequacy of the Internet infrastructure.

Our business depends upon the widespread use of the Internet and e-commerce. Factors which could reduce the widespread use of the Internet for e-commerce include:

    •
actual or perceived lack of security of information or privacy protection;

•
cyber attacks
cyber-attacks or other disruptions or damage to the Internet or to users' computers;

•
users’ computers or mobile devices, or the software or cloud-based service programs on which they may depend;
significant increases in the costs of transportation of goods; and

•
taxation and governmental regulation.

We depend on our relationships with independent fulfillment partners for a large portion of the products that we offer for sale on our Website. If we fail to maintain these relationships, our business will suffer.

At December 31, 2012,2014, we had relationships with approximately 2,1003,200 independent fulfillment partners whose products we offer for sale on our Website. Products provided bySales through our fulfillment partners accounted for 86%approximately 90% of our net revenues for the year ended December 31, 2012.2014. If we do not maintain our existing relationships or build new relationships with fulfillment partners on acceptable commercial terms, we may not be able to maintain a broad selection of merchandise, and our business and prospects would suffer severely. Our agreements with fulfillment partners are generally terminable at will by either party upon short notice.

We depend on our fulfillment partners to perform certaincritical services regarding the products that we offer.

In general, we agree to offer the fulfillment partners'partners’ products on our Website and these fulfillment partners agree to conduct a number of other traditional retail operations with respect to their respective products, includingsuch as maintaining inventory, preparing merchandise for shipment to individualour customers and delivering purchased merchandise on a timely basis. We may be unablehave no ability to ensure that these third parties will continue to perform these services to our satisfaction or on commercially reasonable terms.terms we or our customers consider reasonable. In addition, because we do not take possession of these fulfillment parties'parties’ products (other than on the return of such products), we are generally unable to fulfill these


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traditional retail operations ourselves. If our customers become dissatisfied with the services provided by these third parties, our business and reputation and the Overstock.com brand couldwould suffer.


Risks associated with the suppliers from whom our products are sourced and the safety of those products could adversely affect our financial performance.

Global sourcing of many of the products we sell is an important aspect of our business. We depend on our ability to access products from qualified suppliers in a timely and efficient manner. Our ability to find qualified suppliers who meet our standards and supply products in a timely and efficient manner is a significant challenge, especially with respect to goods sourced from outside the U.S. Political and economic instability, the financial stability of suppliers, suppliers'suppliers’ ability to meet our standards, labor problems experienced by our suppliers, the availability of raw materials, merchandise quality issues, currency exchange rates, transport availability and cost, transport security, inflation, and other factors relating to the suppliers and the countries in which they are located or from which they may source materials or products are beyond our control. Further,We also largely rely on our customers count on us to provide them with safe products.suppliers’ representations of product content and quality. Concerns regarding product content or quality, or the safety of products that we source from our suppliers, and then sell could cause shoppers to avoid purchasing certain products from us, or to seek alternative sources of supply for all of their needs, even if the basis for the concern is outside of our control. Any lost confidence on the part of our customers would be difficult and costly to reestablish. As such, any issue regarding the safety of any items we sell, regardless of the cause, could adversely affect our financial performance. Further, we sell products manufactured for us by third parties, some of which may be defective. Ifif any product that we sell were to cause physical injury or injury to property, the injured party or parties might bring claims against us asus. Any indemnity

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agreement we may have with the manufacturer and/supplier may be inadequate or retailer of the product. Ourinapplicable, 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.


Manufacturers may refuse to sell to us or through our site.

We rely upon our fulfillment partners and other suppliers for the product offerings sold on our website and other products and services we use to run our business. Our ability to retain or attract new fulfillment partners and other suppliers may depend in part on our financial performance. Poor financial performance could result in suppliers choosing to limit or suspend doing business with us or require us to prepay for our purchases. Further, some manufacturers are unwilling to offer products for sale on the Internet or on sites like ours. Our inability to source and offer popular products could be a significant problem for us.

Our business depends on our Website, network infrastructure and transaction-processing systems.

As an e-commerce company, we are completely dependent on our infrastructure. Any system interruption that results in the unavailability of our Website or reduced performance of our transaction systems could substantially reduce our ability to conduct our business. If our Website and related systems fail at any time to operate well and quickly enough to satisfy a potential customer, we may quickly lose the opportunity to convert that potential customer into an actual or regular customer. We use internally and externally developed systems for our Website and our transaction processing systems, including personalization databases used for internal analytics, recommendations and order verifications. We have experienced periodic systems interruptions due to server failure and power failure in the past, which we expect will continue to occur from time to time. We have also experienced and may continue to experience temporary capacity constraints due to sharply increased traffic during sales or other promotions and during the holiday shopping season. Capacity constraints can cause system disruptions, slower response times, delayed page presentation, degradation in levels of customer service and other problems. In the past we have also experienced difficulties with our infrastructure upgrades. Any future difficulties with our transaction processing systems or difficulties upgrading, expanding or integrating aspects of our systems may cause system disruptions, slower response times, and degradation in levels of customer service, additional expense, impaired quality and speed of order fulfillment or other problems.


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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.

If the facility where substantially all of our computer and communications hardware is located fails, or if we suffer an interruption or degradation of services at the facility for any reason, our business could be harmed. Our success, and in particular, our ability to successfully receive and fulfill orders and provide high-quality customer service, largely depends on the efficient and uninterrupted operation of our computer and communications systems. Substantially all of our computer and communications hardware is located at a single co-location facility in Salt Lake City, Utah, with a partially redundant back-up system located less than six miles from the co-location facility.Utah. In the event of an earthquake or majorother local disaster, or any other cause of interruption of service, both our primary and back-up sites could be adversely affected. Although we have designed our back-up system in an effort to minimize service interruptions in the event of a failure of our main facility, ourOur 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. In the event of a failure of our primary facility, the failover to our back-up facility would take at least several hours, during which time our Website would be completely shut down. Our back-up facility is designed to support sales at a level slightly above our average daily sales, but is not adequate to support sales at a high level. The back-up facility may not process effectively during time of higher traffic to our Website and may process transactions more slowly and may not support all of the functionality of our primary site. These limitations could have an adverse effect on our conversion rate and sales. Our disaster recovery plan may be inadequate, and we do not carry business interruption insurance sufficient to compensate us for the losses that could occur. Despite our implementation of network security measures, ourOur 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 harm our business.


We depend upon third-partythird party fulfillment and delivery services to fulfill and deliver products to our customers on a timely and consistent basis. Deterioration in our relationship with any one of these third parties could decrease our ability to track shipments, cause shipment delays, and increase our shipping costs and the number of damaged products.

We rely upon third party fulfillment and delivery providers for the shipment of products to customers. We cannot be sure that these relationships will continue on terms we find acceptable, or at all. Increases in shipping or fulfillment costs or delivery times, particularly during the holiday season, could harm our business. If our relationships with these third parties are terminated or impaired or if these third parties are unable to deliver products for us, whether as a result of labor shortage, slow down or stoppage, deteriorating financial or business condition, fulfillment facilities impairment, terrorist attacks, cyber-attacks, Internet or other infrastructure or communications impairment, natural disasters, unexpectedly high shipping volumes

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or for any other reason, we would be required to use alternative fulfillment service providers or carriers for the shipment of products to our customers. In addition, conditionscustomers, if such alternatives were available. Conditions such as adverse weather or natural disasters can prevent any carrier from performing its delivery services, which can have an adverse effect on our customers'customers’ satisfaction with us. In any of these circumstances, we may be unable to engage alternative fulfillment services or carriers on a timely basis, upon terms we find acceptable, or at all. Changing fulfillment services or carriers, or absence of fulfillment services or carrier availability, could have a material adverse effect on our business.


We depend upon our credit card processors and payment card associations.

Our customers primarily use credit cards to buy from us. We are dependent upon our credit card processors to process the sales transactions and remit the proceeds to us. The credit card processors have the right to withhold funds otherwise payable to us to establish or increase a reserve based on their assessment of the inherent risks of credit card processing and their assessment of the risks of


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processing our customers'customers’ credit cards at any time, and have done so from time to time in the past. We are also subject to payment card associations'associations’ operating rules, certification requirements and rules governing electronic funds transfers, which could change or be reinterpreted to make it difficult or impossible for us to comply. If we fail to comply with these rules 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 credit card processors, including cyber-attacks, Internet or other infrastructure or communications impairment or other events that could interrupt the normal operation of the credit card processors, could have a material adverse effect on our business.

We rely upon paid and natural search engines likeincluding Google, Bing, and YahooYahoo! 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 theythe 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,Yahoo!, which use algorithms and other devices to provide users a natural ranked listing of relevant Internet sites matching a user'suser’s search criteria and specifications. Generally, Internet sites ranked higher in the paid and natural search results lists furnished to users attract the largest visitor share among similar Internet sites. Among retail Internet sites, those sites achieving the highest natural search rankingand often benefit from increased sales. Natural search engine algorithms use information available throughout the Internet, including information available on our site. Search engine companies change their natural search engine algorithms periodically, and our ranking in natural searches may be adversely affected by those changes. When this occurs, our financial results may suffer from reduced revenues and from increased marketing expenses as we seek to replace lost revenues by using other sources.

Rules and guidelines of these natural search engine companies govern our participation on their sites and how we share relevant Internet information that may be considered or incorporated into the algorithms used by these sites. If these rules and guidelines or the search engine algorithms change, or if we fail to present, or improperly present, our site information for use by natural search engine companies, or if any of these natural search engine companies determine that we have violated their rules or guidelines, as Google did in February 2011 through April 2011, or if others improperly present our site information to these search engine companies, we may fail to achieve an optimum ranking in natural search engine listing results, or we may be penalized in a way that could harm our business.

In addition, large marketplace websites and sites which aggregate marketplace sellers with a large product selection are becoming increasingly popular, and we may not be able to place our products on these sites to take advantage of their internal search platforms. Our inability to place products on or access these sites may have a material adverse effect on our business.

Our business depends on effective marketing, and we change our advertising and marketing programs often.

We depend on effective marketing and high customer traffic. We have many initiatives in this area, and often change our advertising and marketing programs. The results of our advertising and marketing programs vary. If we are unable to develop and implement effective and efficient advertising and marketing programs, our business and results of operations would be harmed.

Our business relies heavily on email, and any restrictions on the sending of commercial email could have a material adverse effect our business.


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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 we are unable to effectively deliver email to our potential customers, our business, financial condition and operating results would be harmed. Changes in webmail applications’ organization or prioritization of email could reduce the number of potential customers opening our email. For example, Google Inc.’s Gmail service introduced a feature that organizes incoming emails into categories (for example, primary, social and promotions). Such categorization or similar inbox organizational features may result in our emails being delivered in a less prominent location in a subscriber’s inbox or viewed as “spam” by our subscribers and may reduce the likelihood of that subscriber opening our emails. 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. Changes to the terms of these social networking services to limit promotional communications, any restrictions that would limit our ability or our customers’ ability to send communications through their services, disruptions or downtime experienced by these social networking services or decline in the use of or engagement with social networking services by customers and potential customers could materially adversely affect our business, financial condition and operating results.

We intend to increase the amount we spend on Club O Rewards to Club O members and decrease the amount we spend on coupon marketing to non-Club O members, which may adversely affect our revenues.

We engage in significant promotional activities involving coupons, and we depend heavily on coupon marketing to generate sales. We intend to attempt to increase the amounts we spend on Club O Rewards to members of Club O, and to decrease the amounts we spend on coupon marketing to non-Club O members. If we are unable to generate sales to Club O members at rates equal to or better than the rates we have been generating through our coupon marketing to non-Club O members, our business, financial condition and operating results could be materially adversely affected.

We depend upon third parties for all or substantially all of the services we offer.

In addition to the many third parties we rely on in connection with our sale and the delivery of products to our customers, we depend upon third parties for all or substantially all of the services we offer, including our insurance offerings, our consumer financing offerings, our new and used car listings, our car-related services and our pet adoption services. Service offerings are inherently different from product offerings, and we may encounter difficulties with our services offerings that may be different from the types of issues we face with our product offerings.
We are subject to cyber security risks and risks of data loss or other security breaches, and may incur increasing costs in an effort to minimize those risks and to respond to cyber incidents.

Our business is entirely dependent on the secure operation of our websiteWebsite and systems as well as the operation of the Internet generally. Our business involves the storage and transmission of users'users’ proprietary information, and security breaches could expose us to a risk of loss or misuse of this information, litigation, and potential liability.to resulting claims and litigation. A number of large Internet companies have suffered security breaches, somemany of which have involved intentional attacks. From time to time we and many other Internet businesses also experience denial of service attacks whereinin which attackers attempt to block customers'customers’ access to our Website. If we are unable to avert a denial of service attack for any significant period, we could sustain substantial revenue loss from lost sales and customer dissatisfaction. We may not have the resources or technical sophistication to anticipate or prevent rapidly evolving types of cyber-attacks. Cyber attacksCyber-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. If an actual or perceived attack or breach of our security occurs, customer and/or supplier perception of the effectiveness of our security measures could be harmed and we could lose customers, suppliers or both. Actual or anticipated attacks and risks may cause us to incur increasing costs, including costs to deploy additional personnel and protection technologies, train employees, and engage third party experts and consultants.


A person who is able to circumvent our security measures might be able to misappropriate our or our users'users’ proprietary information, cause interruption in our operations, damage our computers or


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those of our users, or otherwise damage our reputation and business. 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 harm our business.


Most of our customers use credit cards to pay for their purchases. We rely on encryption and authentication technology licensed from third parties to provide the security and authentication to effectively secure transmission of confidential

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information, including customer payment card numbers. We cannot provide assurance that our technology can prevent breaches of the systems that we use to protect customer data. Data breaches can also occur as a result of non-technical issues.


Under payment card rules and our contracts with our card processors, if there is a breach of payment card information that we store, we could be liable to the payment card issuing banks for their cost of issuing new cards and related expenses. In addition, if we fail to follow payment card industry security standards, even if there is no compromise of customer information, we could incur significant fines or lose our ability to give customers the option of using payment cards to fund their payments or pay their fees. If we were unable to accept payment cards, our business would be seriously damaged.


Our servers and the servers of our suppliers may also be vulnerable to computer viruses, physical or electronic break-ins, and similar disruptions, including denial-of-service attacks. We may need to expend significant resources to protect against attacks or security breaches or to address problems caused by attacks or breaches. Any attack or breach incident involving us or persons with whom we have commercial relationships, that results in the unauthorized release of our users'users’ personal information, could damage our reputation and expose us to a risk of loss or litigationclaims and possible liability.

litigation.


Third parties have demonstrated that they can breach the security of customer transaction data of large sophisticated Internet retailers, government organizations and others. Any breach, whether it affects us directly or not, could cause our customers to lose confidence in the security of our site or the use of the Internet and e-commerce in general. If third parties are able to penetrate our network security or otherwise misappropriate our customers'customers’ personal information or credit card information, or if we give third parties improper access to our customers'customers’ personal information or credit card information, we could be subject to liability. This liabilityclaims. The claims could include claims for unauthorized purchases with credit card information, impersonation or other similar fraud claims or damages for alleged violations of state or federal laws governing security protocols for the safekeeping of customers'customers’ personal or credit card information. This liabilityThey could also include claims for other misuses of personal information, including unauthorized marketing purposes. These claims could result in litigation. Liability for misappropriationAny of this informationthese types of claims could materially adversely affect our business.

Credit card fraud and our response to it could adversely affect our business.

        We routinely receive orders placed with fraudulent credit card data. We do not carry insurance against the risk of credit card fraud, so our failure to adequately control fraudulent credit card transactions could reduce our net revenues and our gross profit. We have implemented technology to help us detect and reject the fraudulent use of credit card information. However, we may in the future 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, our liability 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.


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Cyber-attacks affecting our suppliers, delivery services or other service providers could adversely affect us.

We depend on our fulfillment partners to provide a large portion of the product selection we offer and on vendors for the products we purchase and offer in our direct business. We also depend on delivery services to deliver products, and on other service providers, including suppliers of services which support Website operations, including payment systems, customer service support, and communications. Cyber-attacks affecting our delivery services or any of our most significant suppliers or affecting a significant number of our suppliers of products or services could have a material adverse effect on our business. The adverse effects could include our inability to source product or fulfill orders, our customers'customers’ or suppliers'suppliers’ inability to contact us or access our Website or call centers or chat lines, or the compromise of our customers'customers’ confidential data.


Credit card fraud and our response to it could adversely affect our business.
We routinely receive orders placed with fraudulent credit card data. We do not carry insurance against the risk of credit card fraud, so our failure to adequately control fraudulent credit card transactions 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 for the goods and services we sell. 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.

Natural disasters, pandemics, and geo-political events could adversely affect our business.

Natural disasters, including hurricanes, cyclones, typhoons, tropical storms, floods, earthquakes and tsunamis, weather conditions, including winter storms, droughts and tornados, whether as a result of climate change or otherwise, 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 adversely affect our business.

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

        Although we maintain liability and other types of insurance, including but not limited to, property, workers compensation, general liability, product liability, and security and privacy breach insurance, we

We cannot be certainprovide any assurance that the types, coverage, or the amounts of any insurance coverage we maintainmay carry from time to time will be adequate to compensate us for any losses we may actually incurred, orincur in the operation of our business. We

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also cannot provide any assurance that theany insurance we may desire to purchase will continue to be available to us on economically reasonable terms.terms we find acceptable or at all. Similarly, although we are indemnified by most of our suppliers and vendors for product liability for products they supply us, and we have indemnification agreements with software and hardware suppliers for losses we might incur as a result of the use of the technology products they supply, we are not indemnified by all our suppliers, nor can we be certain that ourany indemnification rights we may have are enforceable or would be adequate to cover actual losses we may incur as a result of the sale or use of products our indemnitors provide to us. Actual losses for which we are not insured or indemnified, or which exceed our insurance coverage or the capacity of our indemnitors, could harm our business, prospects, financial condition and results of operations.

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

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

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liquidation e-tailers such as SmartBargains;

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online retailers with discount departments such as AliExpress (part of the Alibaba Group), Amazon.com, Inc., eBay, Inc., and Rakuten.com, Inc. (formerly Buy.com, Inc.);

•
private sale sites such as Gilt Groupe and Rue La La and Gilt Groupe;

•
La;
online specialty retailers such as Blue Nile, Inc., Bluefly, Inc., Blue Nile,Wayfair, LLC, Zappos.com, and Zulily, Inc.; and Zappos.com; and

•
traditional general merchandise and specialty retailers and liquidators such as Ross Stores,Barnes and Noble, Inc., Wal-Mart Stores,Best Buy Co. Inc., Costco Wholesale Corporation, Home Depot, Inc., J.C. Penny Company, Inc., Ross Stores, Inc., Sears Holding Corporation, T.J. Maxx, Target Corporation, Best Buy Co.,and Wal-Mart Stores, Inc., Home Depot, Inc. and Barnes and Noble, Inc., all of which also have an online presence.

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We expect the online retail market to become even more competitive as traditional liquidators and online retailers continue to develop and improve services that compete with our services. In addition, more traditional manufacturers and retailers may continue to add or improve their e-commerce offerings. Traditional or online retailers may create proprietary, store-based distribution and returns channels. Competitive pressures, including the introduction of same-day delivery capabilities, from any of our 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, could harm our business.

Further, as a strategic response to changes in the competitive environment, we may from time to time make competitive pricing, service, marketing or other decisions that could harm our business. For example, to the extent that we enter new lines of businesses such as third-partythird party logistics or discount brick and mortar retail, we are or would be competing with large established businesses such as APL Logistics and Ross Stores, Inc. We are currently offering insurance products, and as such face competition from large established businesses with substantially more experience than we have. In the past we have entered the online auctions, car listing and real estate listing businesses in which we compete or competed with large established businesses including eBay, Inc., and AutoTrader.com, Inc. and Realtor.com. We no longer offer online auctions services or real estate listing services.


Mobile commerce and our Club O offerings are becoming increasingly significant to us.

Mobile commerce and our Club O offerings are becoming increasingly significant to us. Customers who use mobile devices and customers who 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, our business could be harmed.

If one or more states successfully assert that we should collect sales or other taxes on the sale of our merchandise or the merchandise of third parties 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 for physical shipmentson sales of goods into states where we have no duty to do so under federal court decisions construing applicable constitutional law. One or more local, state or foreign jurisdictions may seek to impose sales tax collection obligations on us because we are engaged in online commerce, even though to do so would be contrary to existing court decisions. The future location of our fulfillment or customer service centers networks, or any other operation, service contracts with third parties located in another state, channel distribution arrangements or other agreements with third party sellers, or any act that may be deemed by a state to have established a physical presence in states where we are not now present, may result in additional sales and other tax obligations. New York and other states have passed so-called "Internet“Internet affiliate advertising"advertising” statutes, which require a remote seller, with no physical presence in the state, to collect state sales tax if the remote seller contracted for advertising services with an Internet advertiser in that state. In New York and states passing similar laws, we have terminated our use of locally based Internet advertisers. SeveralMany other states currently have passed

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similar taxlaws and others have legislative proposals under consideration. In a case that is nowwent up on appeal, an Illinois state court struck down on constitutional grounds a similar Illinois statute.statute, and the Illinois Supreme Court has upheld that decision. If such laws survive constitutional challenge, we may elect to discontinue in those states valuable marketing through the use of affiliates based in those states, or may begin to collect taxes in those states. In either event, our business could be harmed. Further, our business could be harmed if one or more states or any foreign country successfully asserts that we should collect sales or other taxes on the sale of our merchandise. In September 2009,

The United States Senate passed the Marketplace Fairness Act of 2013 (“MFA”), but it failed to pass in the United States House of Representatives. There continue to be efforts to revive and pass MFA or MFA-type legislation in the current Congress. MFA or MFA-type legislation would permit qualifying states to force remote sellers like us to collect taxes in states where we received a letterhave no physical presence. If the MFA or MFA-type legislation becomes law, our business could be harmed.

Other states have enacted forms of determination from the Ohio Department of Taxation noting the Department's determination thateconomic taxes to which we are required to register for remitting of the Commercial Activity Tax, and owe $612,784 in taxes, interest, and penalties as of June 30, 2009. The Ohio Department of Taxation has issued additional estimated assessments of estimated tax, interest and penalties totaling $146,162 as of December 31, 2012.may be subject. We have filed protestsbeen subject to challengeand in the Department's Assessments on constitutional groundspast contested an audit by one such state of an economic tax assessment and settled the matter is currently pending beforeaudit demand by payment of a diminished assessment without penalty or interest. Other businesses have contested the Ohio Departmentconstitutionality of Taxation's Legal Division for administrative review and determination. A hearing on these matters was held November 18, 2011. No administrative ruling has been issued following the hearing. We believe the determinations to be unlawful and erroneous andeconomic taxes, but these challenges are vigorously contesting the determination. If Ohio is successful and its assessment withstands constitutional challenge in both administrative and judicial appeals, the enforcement of the assessment


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could harm our business.not yet concluded. If other states similarly enact and are successful in enforcingcommence enforcement of similar commercial activity tax laws, these also could harm our business.


Several other states have enacted laws requiring remote vendors to notify resident purchasers in those states of their obligation to pay a use tax on their purchases and, in some instances, to report untaxed purchases to the state tax authorities. In Colorado, a federal court on constitutional grounds granted a preliminary injunction against the state'sstate’s enforcement of its tax-notice and reporting law. However, otherColorado appealed, and the injunction was overturned on jurisdictional grounds. The ruling is being appealed to the United States Supreme Court, and the plaintiff has also commenced an action in Colorado state court, challenging the law. The Colorado state court has issued a preliminary injunction suspending the law's enforcement on constitutional grounds. In February 2014, another bill was introduced in the Colorado House of Representatives that would require retailers without a physical presence in Colorado 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. Other states have enacted similar legislation and more states may enact legislation similarthese laws, or other laws to these laws.force or encourage through economic pressures remote retailers to collect and remit sales tax, despite constitutional prohibitions. Such laws could harm our business by imposing unreasonable notice burdens upon us, by interposing burdensome transaction notices that negatively affect conversion, or by discouraging customer purchases by requiring detailed purchase reporting.

Economic pressure on states could harm our business.

        The current economic climate has resulted in a sharp decline in state revenues, and

Economic circumstances affecting many states have projected large state budget shortfalls inincreased the years ahead. These shortfalls requirepressures on state legislatures and agencies to examine the meansfind ways to increase state revenues. States may continue to increase sales and use tax rates, create new tax laws covering previously untaxed activities, or increase existing license fees or create new fees, any or all of which may directly or indirectly harm our business. Similarly, administrative agencies may apply more rigorous enforcement efforts or take inflexibleaggressive positions respecting the laws they administer, especially if the laws permit the imposition of monetary penalties and fines which either the state or the administrative agency may use to balance their budgets. To the extent that states pass additional revenue measures,budgets or significantly increase their enforcement efforts,otherwise fund operations. Any of these activities could directly or indirectly harm 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, we may lose customers. If competitors introduce new products or services using new technologies or if new industry standards and practices emerge, our Website and our proprietary technology and systems may become obsolete. Our failure to respond to technological change or to adequately maintain, upgrade and develop our computer network and the systems used to process customers'customers’ orders and payments could harm our business.

We have an evolving business model.

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 mayintend to continue to try to offer additional types of products or services, and we cannot offer any assurance that any of them will be successful. From time to time we have also modified aspects of our business model relating to our product mix and the mix of direct/fulfillment partner sourcing of the products we offer. We may continue to modify this aspect of our business as well as other significant aspects of our business. We cannot offer any assurance that these or any other modifications will be successful or will not result in harm to

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the business. 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. We may not be able to manage growth effectively, which could damage our reputation, limit our growth and negatively affect our operating results. Further, any new business or website we launch that is not favorably received by consumers could damage our reputation or the Overstock.comour brand.


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We are attempting to expand our international business, which may cause our business to become increasingly susceptible to numerous international business risks and challenges that could affect our profitability.

We sell products in international markets, and in the future we mayare attempting to expand into these markets more aggressively. International sales and transactions, and our efforts to expand them, are subject to inherent risks and challenges that could adversely affect our profitability, including:

•
the need to develop new supplier and manufacturer relationships;

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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, enforcement oflaws 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; and
•

•
geopolitical events, such as war and terrorist attacks.

attacks;

our limited experience with different local cultures and standards;
•the risk that the products we offer may not appeal to customers in international markets; and
•the additional resources and management attention required for such expansion.
To the extent we generate international sales transactions in the future, any negative impact on our international operations could negatively impact our business. To date, most of our international sales have been denominated in U.S. dollars, and we have not had significant foreign currency risk on 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, such as the U.S. Foreign Corrupt Practices Act, or laws governing or prohibiting the use of cryptocurrency such as bitcoin, could negatively impact our business.

Our foreign brand domain name may cause confusion.

In July 2010, we undertook an effort to associate our brand globally with the domain address: www.O.co. We did this in part because in many foreign markets the word "Overstock"“Overstock” lacked a good foreign cognate. 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. While we have returned domestically to the Overstock.com brand and principal domain address, therewe continue to use the O.co address and brand outside of the United States. There is no assurance that the use of Overstock.com or O.co will gain acceptance or have success in foreign markets.


We have purchased land to build a facility to serve as our future headquarters, and have environmental and other risks, and may incur environmental expense and liabilities, in connection with the project, and under the environmental indemnity agreement we entered into in connection with our recent credit facility.

In the third quarter of 2014, we purchased land in Salt Lake City, Utah in preparation for our construction of our future headquarters. In purchasing the land, we became subject to the risks of owning real estate, including the risks of environmental liabilities and the requirements for compliance with applicable laws, rules, regulations, ordinances and other requirements. The land we purchased is part of the Midvale Slat Superfund Site (“Site”), a former Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") superfund site that has been fully remediated pursuant to CERCLA. As purchaser of the property, O.com Land, LLC expects to be protected from CERCLA liability as a bona fide prospective purchaser ("BFPP") so long as in the construction of the headquarters, O.com Land, LLC follows certain requirements of the CERCLA statute and the consent decree governing Site remediation and the maintenance of BFPP status. Among other things, the consent decree requires that we not disturb the ground water by drilling new wells, or disturbing existing wells, and requires us to remediate any excavated soil material according to the specifications of the consent decree. We intend to strictly follow CERCLA and abide by the terms of the consent decree; however, there can be no guarantee that our subsidiary will succeed in

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maintaining BFPP status. Its failure to do so could expose us to environmental liabilities which could be material. Further, in connection with the credit facility we recently entered into with U.S. Bank and other banks, we entered into a broad environmental indemnity agreement pursuant to which we made detailed representations about the environmental status of the land and agreed to indemnify and defend U.S. Bank and other banks and other persons against a broad array of potential environmental claims, liabilities and exposures relating to the property we purchased and the headquarters we intend to build. 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, prospects, financial condition and results of operations.

We have entered into contracts and plan to spend approximately $95 million to build, equip and furnish a facility to serve as our future headquarters, and expect to incur risks, expense and debt in connection with the project.

As we proceed with the design, development and construction of a facility for our new headquarters, we will incur the risks and expense of doing so. The design and construction of the headquarters we are planning will be complicated. We may encounter unanticipated developments affecting our estimates regarding the expense of the project. We may also encounter unanticipated delays in the negotiation of definitive agreements and/or the construction of the new facility. Any such difficulties could result in our default under the Loan Agreement and related agreements we have entered into with U.S. Bank and other banks, and could result in material liabilities and expense and could have a material adverse effect on our business, prospects, financial condition and results of operations.
In connection with our design, development and construction of a facility for our new headquarters, we have entered into a syndicated senior secured credit facility, and may need to obtain additional financing as well.
Our current estimate of the total cost of the development and construction and related equipment and furniture of our new headquarters is approximately $95 million. We have entered into a syndicated senior secured credit facility with U.S. Bank and other banks that is intended to provide us with construction and term financing of $45.8 million. The facility is designed to convert to an approximately 6.75 year term loan upon completion of construction. We will need to maintain compliance with the requirements governing the facility, including compliance with financial and other covenants, certain of which may be subject to events outside of our control. If we fail to comply with any of such covenants, we may be unable to obtain or utilize the financing contemplated by the facility. If the financing we anticipate under the facility is not fully available to us for any reason, it would have a material adverse effect on our liquidity and could have a material adverse effect on our business, prospects, financial condition and results of operations.
We have pledged the land and our new headquarters and all related assets, as well as our inventory and accounts receivable and related assets, to secure our obligations under the syndicated senior secured credit facility.

We have pledged all of our assets relating to the new headquarters and the site on which it is to be located, as well as our inventory, accounts receivable and related assets, and most of our deposit accounts, to secure our obligations under the syndicated senior secured credit facility. The real estate loan and the revolving loan facilities included within the facility are cross-collateralized and cross-defaulted. If we were to default on either loan or have an Event of Default under the facility, the lenders would have the right to, among other things, foreclose on the collateral for our obligations under the facility, which would have a material adverse effect on our liquidity and could have a material adverse effect on our business, prospects, financial condition and results of operations.

We have entered into long-term interest rate swaps covering a period of approximately nine years.

In connection with the syndicated senior secured credit facility described above, we have entered into interest rate swaps with U.S. Bank and Compass Bank. The interest rate swaps are intended to manage the interest rate risk on the indebtedness we expect to incur in 2015 and 2016 for the Real Estate Loan. However, if for any reason the notional amounts subject to the swaps fail to substantially match our indebtedness for the Real Estate Loan at any time until the October 2023 maturity of the interest rate swaps, we would be exposed to potential liabilities under the swaps that might not be substantially offset by the interest payments we would owe under the loan agreement. If the lenders under the senior secured credit facility were to fail to fund the Real Estate Loan for any reason, we would remain liable for payments due under the swaps unless we were to settle the swaps. If we were to settle the swaps at 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, prospects, financial condition and results of operations.

We may fail to qualify for hedge accounting treatment.

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In connection with the financing we obtained to fund a portion of the construction of our new corporate headquarters, we have entered into interest rate swap transactions with certain of our lenders intended to minimize our exposure to various interest rate risks. At inception in 2014 we designated these swaps as cash flow hedges in accordance with Accounting Standards Codification (“ASC”) 815, Derivatives and Hedging. However, in the future, we may fail to qualify for hedge accounting treatment under these standards for a number of reasons, including if we fail to satisfy hedge documentation and hedge effectiveness assessment requirements or if our derivative instruments are not highly effective. If we fail to qualify for hedge accounting treatment, losses on the swaps caused by the change in their fair value will be recognized as part of net income, rather than being recognized as part of other comprehensive income.

We have entered into a Construction Agreement relating to the construction of the new headquarters; however, many aspects of the proposed construction remain subject to future agreement.

In October 2014, we entered into a Construction Agreement (the “Construction Agreement”) with Okland Construction Company Inc. (“Okland”) regarding preconstruction and construction services to be provided in connection with the construction of our corporate headquarters, together with related facilities and improvements. Okland has agreed that the work contemplated by the Construction Agreement will be performed for the Guaranteed Maximum Price (as defined in the Construction Agreement) and in accordance with the Construction Schedule (as defined in the Construction Agreement). However, neither the Guaranteed Maximum Price nor the Construction Schedule had been finalized as of the date of the Construction Agreement or as of March 2, 2015, and the Construction Agreement provides that Okland does not warrant or guarantee estimates or schedules except as they are included in the future as part of the Guaranteed Maximum Price and the final Project schedule and Construction Schedule. Further, both the Guaranteed Maximum Price and the Construction Schedule are subject to change after they have been determined. Because many aspects of the proposed construction remain subject to future agreement, there is a risk of difficulties under the Construction Agreement, any of which if not resolved to the satisfaction of us and Okland could cause difficulties with the construction of our headquarters, any of which in turn could cause us to default under the syndicated senior secured credit facility we recently entered into with U.S. Bank and other banks. Any such adverse developments could result in material liabilities and expense and could have a material adverse effect on our business, prospects, financial condition and results of operations.

We expect to incur substantial indebtedness.

At December 31, 2012,2014, we had no indebtedness for borrowed money, and our onlymoney. However, we expect to incur substantial indebtedness under the syndicated senior secured credit facility was a $3we recently entered into with U.S. Bank and other banks, and we expect to incur substantial additional indebtedness in connection with the completion of our headquarters. In addition, we expect to incur up to the full $10 million of indebtedness potentially available to us under the revolving credit facility for the issuance of letters of credit. Although we have reduced our indebtedness substantially over the last several years,included in the futuresenior secured credit facility, and we may againalso incur substantial indebtedness. Anyadditional indebtedness, subject to the limitations set forth in the Loan Agreement governing our senior secured credit facility. All such indebtedness wouldwill increase our business risks substantially, including our vulnerability to industry downturns and competitive pressures. Further, the Loan Agreement and related agreements governing the senior secured credit facility contain numerous requirements, including affirmative and negative 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 and could make us more vulnerable to industry downturns and competitive pressures. Our ability to meet our debt service obligations will be dependent upon our future performance, which will be subject to financial, business and other factors affecting our operations, many of which are beyond our control.
We may be unable to generate sufficient cash flow to satisfy our debt service obligations.

Our ability to generate cash flow from operations to make interest and principal payments on our debt obligations will depend on our 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 acceptablefavorable 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, prospects, financial condition and results of operations.


Existing or future government regulation could harm our business.


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We are subject to regulation at the federal, state and international levels, including regulation relating to privacy, security, retention, transfer and use of personal user information and telemarketing laws. Increasing regulation, along with increased governmental or private enforcement, may increase the cost of our business. Compliance with existing and new privacy and security laws may be difficult and costly and may further restrict our ability to collect demographic and personal information from


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users, which could harm our marketing efforts, and could require us to implement new and potentially costly processes, procedures and/or protective measures. The expansion of these and other laws, both in terms of their number and their applicability to the Internet could also harm our business. Many laws, adopted prior to the advent of the Internet, do not contemplate or address the unique issues raised thereby. Consequently, courts or regulators may apply these laws to Internet commerce in ways that may present difficult or impossible compliance challenges. Many of those lawsLaws that do reference the Internet are still being interpretedgenerally remain subject to interpretation by the courts and their applicability and reach are therefore uncertain.not always clear. Moreover, Internet advances and innovations may result in new questions about the applicability and reach of these laws. Additionally, laws governing the permissible contents of products may adversely affect us, and we are subject to federal and state consumer laws, including those governing advertising, product labeling, product content requirements and product safety, and mandated website disclosures about programs to eliminate abusive labor practices in our supply chain.safety. The laws not only apply to future manufacture of consumer product, but also apply to existing inventories and may cause us to incur losses for any non-compliant items in our inventory, or which we may previously have sold whichsold. We may be subject us to regulatory or civil actions. Some of the products we sell or manufacture may, under statutory or common law, from time to time expose us to claims related to personal injury, death, environmental or property damagedamage. We have in the past and may from time to time requirebe required to participate in product recallsrecalls. We may incur expense in connection with any of the foregoing or other matters or actions which may not be covered, in whole, or in part or at all, by our liability insurance. These current and future laws and regulations could harm our business, prospects, financial condition and results of operation.

General economic


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

        General economic

Economic conditions may adversely affect our financial performance. In the United States, weakness in the housing market, changes in interest rates, changes in fuel and other energy costs, weakness in the housing market, inflation or deflation or expectations of either inflation or deflation, higheractual or anticipated levels of unemployment, unavailability or limitations of consumer credit, higher consumer debt levels or efforts by consumers to reduce debt levels, higher tax rates and other changes in tax laws, overall economic slowdown, changes in consumer desires affecting demand for the products and services we sell and other economic factors could adversely affect consumer demand for the products and services we sell,sell. Any of these factors may change the mix of products we sell to a mix with a lower average gross margin andand/or result in slower inventory turnover andand/or greater markdowns on inventory. Higher interest rates, transportation costs, inflation, higher costs of labor, insurance and healthcare, foreign exchange rates fluctuations, higher tax rates and other changes in tax laws, changes in other laws and regulations and other economic factors in the United States canmay increase our cost of sales and operating, may increase our selling, general and administrative expenses, and may otherwise adversely affect our operations and operating results. These factors may affect not only our operations, but also the operations of suppliers from whom we purchase goods, a condition that canwhich may also result in an increase in the cost to us of the goods and services we sell.


Over the last few years the percentage of our sales from home and garden products has increased substantially. We believe that our sales of home and garden products are affected by the strength of the U.S. housing industry, and that our business may be adversely affected by downturns in the U.S. housing industry.

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, also impact our customers'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 our operating results.


We have reversed the valuation allowance for our deferred tax assets, and we may not be able to realize these assets in the future. Our deferred tax 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

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31, 2013, based on the weight of all the positive and negative evidence, we concluded that it was more likely than not that we will realize our net deferred tax assets based upon future taxable income. Therefore we reversed the valuation allowance at December 31, 2013.

Our conclusion at December 31, 2013 that it is more likely than not that we will realize our net deferred tax assets was based primarily on our estimate of future taxable income. Our estimate of future taxable income is based on internal projections which primarily consider historical performance, but also include various internal estimates and assumptions as well as certain external data. We believe all of these inputs to be reasonable, although inherently subject to significant judgment. If actual results differ significantly from these estimates of future taxable income, we may need to reestablish a valuation allowance for some or all of our deferred tax assets. Establishing an allowance on our net deferred tax assets could have a material adverse effect on our financial condition and operating results.

Our income tax provisions and the amounts we reserve for tax contingencies are estimates and are subject to variations and adjustments. The amounts 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.

Changes in state, federal, and foreign tax laws may increase our tax contingencies. The timing of the resolution of income 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 accrued. It is reasonably 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 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. Further 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 adversely impact our business and financial condition.

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 long-lived and intangible assets and goodwill, stock-based compensation and loss contingencies, are highly complex and involve many subjective assumptions, estimates and judgments by our management. Changes in these rules or their interpretation or changes in underlying assumptions, estimates or judgments by our management could significantly change our reported or expected financial performance.

We face risks relating to our inventory.

In our direct business, we sell merchandise that we have purchased and hold in inventory. We assume the risks of inventory damage, theft 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. Subject to our returns policies, we accept returns of products sold through our fulfillment partners as well as products we sell in our direct

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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 suppliers may require us to pay higher prices for products, which could negatively affect our profit margins.


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

We have expanded, contracted and otherwise modified our warehouse and customer service operations from time to time in the past, and expect 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


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our fulfillment and customer service centers at optimal levels. Our failure to do so could negatively impact our operating results and customer experience.


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

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 exceedsubstantially in excess of the amounts of insurance provided by the FDIC, and some deposits may not be covered by insurance at all. We keep our precious metals in a secure third party facility. If any of these institutions were to become insolvent or subject to regulatory action, we could lose some, or all, of such deposits, which would have a material adverse effect on our financial condition.

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

In January 2014, we began accepting bitcoins as a form of payment for purchases on our website. Bitcoin is a cryptocurrency that uses cryptography to control the creation and transfer of the currency between individual parties. Bitcoin is not considered legal tender or backed by any government. Since inception in 2009, bitcoins have experienced price volatility, technological glitches and various law enforcement and regulatory interventions. At present we do not accept bitcoin payments directly, but use a third party vendor to accept bitcoin payments on our behalf. That third party vendor then immediately converts the bitcoin payments into U.S. dollars so that we receive payment for the product sold at the sales price in U.S. dollars.

In September 2014 we launched an updated international checkout system which allows us to accept bitcoin globally. The use of cryptocurrency such as bitcoin has been prohibited or effectively prohibited in some countries. Authorities in other countries have issued statements or regulations prohibiting financial institutions or others from holding or dealing in cryptocurrency. Authorities in some countries have issued statements or regulations to the effect that cryptocurrency is not legal tender. Authorities in many other countries have issued warnings about their perceptions of the risks of dealing in bitcoin or other cryptocurrency and/or announcing that cryptocurrency is subject to money laundering or other laws or to taxation, or that the authorities are studying the legality of cryptocurrency. If we fail to comply with prohibitions applicable to us, we could face regulatory or other enforcement actions and potential fines and other consequences.

We have also begun to hold bitcoin and other cryptocurrency directly. Consequently, we have exchange rate risk on the amounts we hold as well as the risks that regulatory or other developments may adversely affect the value of the cryptocurrency we hold. In the future, we may transact in cryptocurrency directly or increase our cryptocurrency holdings. This will subject us to additional exchange risk and other risks as described above, which may have an adverse effect on our results. There is also uncertainty regarding the future legal and regulatory requirements relating to cryptocurrency or transactions utilizing cryptocurrency. These uncertainties, as well as future accounting and tax developments, or other requirements relating to cryptocurrency, may adversely affect us.


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Our effort to develop code for the purposes of facilitating the creation of a decentralized facility for the trading of securities is an area in which we have limited experience, may be expensive, and is subject to the resolution of significant technical and legal and regulatory constraints.

We are working to develop code for the purposes of facilitating the creation of a decentralized facility for the trading of securities. Although we have hired employees with significant experience in the technical workings of Bitcoin and other cryptocurrencies, we do not have significant experience with the types of projects we are now pursuing. These projects may be expensive, and are subject to substantial risk that they may ultimately be unsuccessful. Further, the creation of a decentralized facility for the trading of securities would be subject to the future resolution of numerous significant legal and regulatory constraints and prohibitions. Consequently, even if all technical challenges to these projects were solved, the legal and regulatory constraints and prohibitions may be insurmountable.

We may be adversely affected by fluctuations in precious metal prices.
At December 31, 2014 our investment in precious metals is alsowas $10.9 million. Our financial results may be adversely affected by declines in the price of precious metals. The prices of precious metals may fluctuate widely in the future and are affected by numerous factors beyond our control such as interest rates, exchange rates, inflation or deflation, fluctuation in the value of the United States dollar and foreign currencies, global and regional supply and demand, and the political and economic conditions of mineral producing countries throughout the world. Our investment consists of actual precious metals, rather than financial instruments. We store our precious metals off-site in a third party facility. Consequently, we are subject to the risks of physical storage with a third party that we do not control.

We have a history of significant losses. If we do not maintain profitability, our financial condition and our stock price movementscould suffer.
We have a history of losses, and we may incur operating and net losses in the precious metals markets.

foreseeable future. At December 31, 2014, our accumulated deficit was $153.9 million. We need to generate significant revenues to maintain profitability, and we may not be able to do so. Although we have generated positive net income in recent years, we incurred a net loss of $19.4 million in 2011. We may be unable to maintain profitability in the future. If our revenues grow 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.

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. Since 2005, we have completed severalWe 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. We are also in the process of designing and constructing a facility to serve as our corporate headquarters. 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 these expenditures on our infrastructure and headquarters, our ability to reduce spendingour expenditures is and will be limited. Therefore, any significant shortfall in the revenues for which we have built and are continuing to build our infrastructurebusiness would likely harm our business.

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

A disproportionate amount of our sales normally occur during our fourth quarter. If we do not stock or are otherwise unable to source products sufficient to meet customer demand, our business would be adversely affected. If we liquidate products, as we have in the past, we may be required to take significant inventory markdowns or write-offs, which could reduce gross profits. 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. If too many customers access our Website within a short period of time due to increased holiday demand, we may experience system interruptions that make our Website unavailable or prevent us from efficiently fulfilling orders, which may reduce the volume of goods we sell and the attractiveness of our products and services. In addition, we may be unable to adequately staff our fulfillment and customer service centers during peak periods, and delivery services and other fulfillment companies and customer service providers may be unable to meet the seasonal demand.


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Significant merchandise returns could harm our business.

We allow our customers to return products, subject to our returns policies. If merchandise returns are significant,higher than we expect, our business, prospects, financial condition and results of operations could be harmed. Further, we modify our policies relating to returns from time to time, and any policies intended to reduce the number of product returns may result in customer dissatisfaction andand/or fewer repeat customers.


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Our pricing strategy may not meet customers'customers’ price expectations or result in net income.

Demand for our products is generally highly sensitive to price. Our pricing strategies have had, and may continue to have, a significant impact on our net sales and net income. We often offer discounted prices, and free or discounted shipping as a means of attracting customers and encouraging repeat purchases. Such offers and discounts reduce our margins. In addition, our competitors'competitors’ pricing and marketing strategies are beyond our control and can significantly impactaffect the results of our pricing strategies. If we fail to meet our customers'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, our business would suffer.


If the products that we offer on our Website do not reflect our customers'customers’ tastes and preferences, our sales and profit margins would decrease.

Our success depends in part on our ability to offer products that reflect consumers'consumers’ tastes and preferences. Consumers'Consumers’ tastes are subject to frequent, significant and sometimes unpredictable changes. Because some of the products that we sell consist of manufacturers'manufacturers’ and retailers'retailers’ excess inventory, we have limited control over some of the products that we are able to offer for sale. If our merchandise fails to satisfy customers'customers’ tastes or respond to changes in customer preferences, our sales could suffer and we could be required to mark down unsold inventory, as we have in the past, which would depress our profit margins. In addition, any failure to offer products in line with customers'customers’ preferences could allow our competitors to gain market share. This could have an adverse effect on our business.


The loss of key personnel or any inability to attract and retain additional personnel could affect our ability to successfully grow our business.

Our performance is substantially dependent on the continued services and on the performance of our senior management and other key personnel. Our performance also depends on our ability to retain and motivate our officers and key employees. The loss of the services of any of our executive officers 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. On February 12,In early 2013 we announced that our Chief Executive Officer and then Chairman of the Board, Dr. Patrick M. Byrne, will be takingtook a two-month personal leave of absence for medical reasons. Leaves of absence for temporary or extended periods may harm our business. We do not have employment agreements with any of our key personnel and we do not maintain "key person"“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 retain and attract the necessary technical, managerial, editorial, merchandising, marketing, and customer service personnel could harm our business.

In order to obtain future revenue growth and sustain profitability, we will have to attract and retain customers on cost-effective terms.

Our success depends on our ability to attract and retain customers on cost-effective terms. We have relationships with online services, search engines, affiliate marketing websites, directories and other website and e-commerce businesses to provide content, advertising banners 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


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to attract new customers and our financial condition would suffer. In addition, certain of our 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 national 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.


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We may be unable to protect our proprietary technology or keep up with that of our competitors.

Our success depends to a significant degree upon the protection of our software and other proprietary intellectual property rights. We may be unable to deter misappropriation of our proprietary information, detect unauthorized use or take appropriate steps to enforce our intellectual property rights. In addition, our competitors may now have or may in the future develop technologies that are as good as or better than our technology without violating our proprietary rights. Our failure to protect our software and other proprietary intellectual property rights or to utilize technologies that are as good as our competitors'competitors’ could put us at a disadvantage to our competitors. In addition, the failure of the third parties whose products we offer for sale on our Website to protect their intellectual property rights, including their domain names, could impair our operations. These failures could harm our business.

We may not be able to obtain trademark protection for our marks, which could impede our efforts to build brand identity.

We have filed trademark applications with the Patent and Trademark Office seeking registration of certain service marks and trademarks. There can be no assurance that our applications will be successful or that we will be able to secure significant protection for our service marks or trademarks in the United States or elsewhere as we expand internationally. Our competitors or others could adopt product or service marks similar to our marks, or try to prevent us from using our marks, thereby impeding our ability to build brand identity and possibly leading to customer confusion. Any claim by another party against us or customer confusion related to our trademarks, or our failure to obtain trademark registration, could harm our business.


We may not be able to enforce protection of our intellectual property rights under the laws of other countries.

We sell products internationally and consequently we are subject to risks of doing business internationally as related to our intellectual property, including:

legal uncertainty regarding liability for the listings and other content provided by our users, including uncertainty as a result of less Internet-friendly legal systems, unique local laws, and lack of clear precedent or applicable law; and
•

•
differing intellectual property laws, which may provide insufficient protection for our intellectual property.

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

Other parties have claimed and may claim that we infringe their intellectual property rights. We have been and are subject to, and expect to continue to be subject to, legal claims of alleged infringement of the intellectual property rights of third parties. The ready availability of damages, royalties and the potential for injunctive relief has increased the defense litigation costs of patent infringement claims, especially those asserted by third parties whose sole or primary business is to assert such claims. Such claims, even if not meritorious, may result in significant expenditure of financial and managerial resources, and the payment of damages or settlement amounts. Additionally, we may become subject to injunctions prohibiting us from using software or business processes we


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currently use or may need to use in the future, or requiring us to obtain licenses from third parties when such licenses may not be available on financially feasible terms or terms acceptable to us or at all. In addition, we may not be able to obtain on favorable terms, or at all, licenses or other rights with respect to intellectual property we do not own in providing e-commerce services to other businesses and individuals under commercial agreements.

Our business and reputation may be harmed by the offering or sale of pirated, counterfeit or illegal items by third parties, and by intellectual property litigation.

We have received in the past, and we anticipate we will receive in the future, communications alleging that items offered or sold through our Website infringe third-partythird party copyrights, trademarks and trade names or other intellectual property rights or that we have otherwise infringed third parties'parties’ past, current or future intellectual property rights. We may be unable to prevent third parties from offering and selling unlawful goods, and we may be subject to allegations of civil or criminal liability for unlawful activities carried out by third parties through our Website. We may implement measures in an effort to protect against these potential liabilities that could require us to spend substantial resources and/or to reduce revenues by discontinuing certain service offerings. Any costs incurred as a result of liability or asserted liability relating to the sale of unlawful goods or the unlawful sale of goods could harm our business. Resolving litigation or claims regarding patents or other intellectual property, whether meritorious or not, could be costly, time-consuming, cause service delays, divert our management and key personnel from our business operations, require expensive or unwanted changes in our methods of doing business or require us to enter into costly royalty or licensing agreements, if available. As a result, these claims could harm our business. Negative

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publicity generated as a result of the foregoing could damage our reputation, harm our business and diminish the value of our brand name.

Use of social media may adversely impact our reputation.

There has been a marked increase in use of social media platforms and similar devices, including weblogs (blogs), social media websites, and other forms of Internet-based communications which allow individual access to a broad audience of consumers and other interested persons. Consumers value readily available information concerning retailers, manufacturers, and their goods and services and often act on such information without further investigation, authentication and without regard to its accuracy. The availability of information on social media platforms and devices is virtually immediate as is its impact. Social media platforms and devices immediately publish the content their subscribers and participants post, often without filters or checks on accuracy of the content posted. The opportunity for dissemination of information, including inaccurate information, is virtually limitless. Information concerning or affecting us may be posted on such platforms and devices at any time. Information posted may be inaccurate and adverse to us, and it may harm our business. The harm may be immediate without affording us an opportunity for redress or correction. Such platforms also could be used for the dissemination of trade secret information or compromise of other valuable company assets, any of which could harm our business.

Our car listing service may be subject to a variety of regulatory requirements and risks.

Many states and other jurisdictions, including Utah, where we are located, have regulations governing the conduct of car sellers and public advertisement for car sales. Generally, these regulations govern the conduct of those sellers advertising their automobiles for sale and are not directly applicable to those providing the medium through which the advertisement is made available to the public. Sellers are often subject to regulations in the nature of "truth“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


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to them and their transactions. The application of these regulations to online car listing service providers is not clear. Although we do not expect these laws to have a significant effect on our listing service, we will incur costs in complying with these laws, and we may from time to time be required to make changes in our service that may increase our costs, reduce our revenues, cause us to prohibit certain listing or advertising practices, or make other changes that may adversely affect our car listing service. 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. To the extent that current or future laws or regulations prevent users from selling items on our car listing site, they could harm our business. In addition, any negative publicity we receive regarding any allegations of unlawful or deceptive conduct may damage our reputation, our ability to attract new customers to our main shopping site, and the Overstock.comour brand name generally.


Our recently-launched Supplier Oasis Fulfillment Services will face competition from other distribution networks and will require substantial resources.

In 2014 we launched Supplier Oasis Fulfillment Services, Inc., a wholly-owned subsidiary of the Company, which provides multi-channel fulfillment services to sellers, suppliers, and partners and a single integration point through which partners can manage their products, inventory and sales channels. The marketplace in which Supplier Oasis Fulfillment Services competes 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 Fulfillment Services may require substantial investments over a lengthy period of time. Further, most of the risks applicable to our business generally are also applicable to the business of Supplier Oasis Fulfillment Services. If we are unable to generate sufficient revenues and gross profits from Supplier Oasis Fulfillment Services, our business, financial condition and operating results could be materially adversely affected.

Our recently-launched Farmers Market will face competition from a variety of competitors and may require substantial resources.

In late 2014 we launched Farmers Market, a tab within our website from which our customers can order locally grown fresh produce and other 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 require substantial attention from our senior executives and 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. Further, most of the risks applicable to our business generally are also applicable to our Farmers Market business.


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Our recently-launched insurance offerings will face competition from traditional insurance brokers and direct insurance marketing organizations.

In 2014 we launched a tab offering insurance for vehicle, residential and small businesses on our website. The tab allows consumers to compare live quotes for insurance on residential, vehicle, and small business insurance, and to bind (pay for and have go into effect) insurance policies. The insurance business is highly competitive, and many of our current and potential competitors in this area have greater brand recognition, longer operating histories, larger customer bases and significantly greater financial, marketing and other resources than we do. Further, most of the risks applicable to our business generally are also applicable to our insurance offerings business.
We are involved in substantial litigation.

From time to time we receive claims of and become subject to consumer protection, employment, intellectual property and other commercial litigation 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 or equitable remedies. In addition, we have in the past been, are now, and in the future may be, involved in substantial litigation in which we are the plaintiff, including litigation regarding the constitutionality of certain state tax laws, and the prime broker litigation described below. Any of such litigation, whether as plaintiff or defendant, could be costly and time consuming and could divert management and key personnel from our regular business operations. We do not currently believe that any of our outstanding litigation will have a material adverse effect on our business, prospects, financial condition or results of operations. However, due to the uncertainty of litigation and depending on the amount and the timing, an unfavorable resolution of some or all of these matters could materially affect our business, prospects, financial condition and results of operations.

California District Attorneys have sued us for alleged violations of California law.

        In April 2008, we received a letter from the Office of the District Attorney of Marin County, California, stating that the District Attorneys of Marin and four other counties in Northern California had begun an investigation into the way we advertise products for sale. In November 2010, District Attorneys for the California Counties of Alameda, Marin, Monterey, Napa, Santa Clara, Shasta and Sonoma filed a lawsuit seeking damages and an injunction, alleging 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 asks for damages in the amount of not less than $15 million. We dispute the allegations and intend to defend ourselves vigorously. However, an unfavorable resolution of this matter could materially affect our business, prospects, financial condition and results of operations.


Our prime broker litigation may have an adverse effect on our business and financial condition.

We remain involved in substantial litigation against Goldman Sachs Group, Inc., Goldman Sachs & Co., Goldman Sachs Execution & Clearing L.P., Merrill Lynch, Pierce, Fenner & Smith, Inc., and Merrill Lynch Professional Clearing Corporation, and the use of management'smanagement’s time and attention in connection with the litigation and related matters may reduce the time management is able to spend on other aspects of our business, which may have adverse effects on other aspects of our business. To the extent that any such adverse effects exceed any benefits we may realize from the litigation, it could harm our business, prospects, financial condition and results of operation.


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Public statements we or our chairman of the board of directors,Chief Executive Officer, Patrick M. Byrne, have made or may make in the future may antagonize regulatory officials or others.

We and our chairman of the board of directors,Chief Executive Officer, 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.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 materially harm our business.

The price of our securities may be volatile and you may lose all or a part of your investment.

The market price of our common stock historically has been subject to significant fluctuations. These fluctuations could continue. It is possible that in future periods our results of operations may be below the expectations of public market analysts and investors. If this occurs, the market price of our securities may decline.


Our quarterly operating results are volatile and may adversely affect the market price of our securities.

Our future revenues and operating results have varied in the past and may continue to vary significantly from quarter to quarter due to a number 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;

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•
•
the extent to which our existing and future marketing campaigns are successful;


•
•
price competition that results in losses or lower profit margins or losses;margins;

•
the amount and timing of operating costs and capital expenditures relating to the expansion of our business operations and infrastructure;infrastructure including those relating to our construction of our new corporate headquarters;
•

•
the amount and timing of our purchases of inventory;


•
•
our inability to manage distribution operations or provide adequate levels of customer service;


•
•
increases in the cost of fuel and transportation;

•
our ability to successfully implement technology changes or to integrate operations and technologies from acquisitions or other business combinations;
•

•
our efforts to offer new lines of products and services; and


•
•
our ability to attract users to our shopping and other sites.

Our operating results may fluctuate depending on the season, and such fluctuations may affect the market price of our securities.

We have experienced and expect to continue to experience fluctuations in our operating results because of seasonal fluctuations in traditional retail patterns. Sales in the retail and wholesale industry tend to be significantly higher in the fourth calendar quarter of each year than in the preceding three quarters due primarily to increased shopping activity during the holiday season. However, there can be no assurance that our sales in the fourth quarter will exceed those of the preceding quarters or, if the


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fourth quarter sales do exceed those of the preceding quarters, that we will be able to manage the increased sales effectively. 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.

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

Several of our stockholders own significant portions of our common stock. If one or more of our stockholders were to sell all or a portion of 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 portions 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 short-term volatility in our stock if any one or more of such stockholders were to decide to sell all or a portion of their holdings of our common stock at once or within a short period of time. In addition, the transfer of ownership of 50% or morea significant portion of our outstanding shares within a three yearthree-year period could adversely affect our ability to use our net operating losses to offset future taxable net income.


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

We have never declared or paid any cash dividends on our common stock and do not intend to pay dividends on our common stock for 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.

Our Amended


Provisions in our amended and Restated Certificaterestated certificate of Incorporation, Amendedincorporation and Restated Bylawsbylaws and the Delaware General Corporation Law contain anti-takeover provisions which couldlaw might discourage, delay or prevent a takeover, even if an acquisition would be beneficial to our stockholders.

        Several provisionschange of control of our Amendedcompany or changes in our management.


Our amended and Restated Certificaterestated certificate of Incorporationincorporation and Amended and Restated Bylawsbylaws contain provisions that could discourage, potential acquisition proposals and could delay or prevent a change in control of our company even ifor changes in our management that change in control would be beneficialthe stockholders of our company may deem advantageous. These provisions among other things:

permit the board of directors to our stockholders. For example,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 which will make it more difficult for a potential acquirer to change(and our amended and restated certificate of incorporation prohibits cumulative voting in the managementelection of our company, even after acquiring a majoritydirectors);
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 common stock. These provisions, which cannot be amended withoutboard could use to implement a stockholder rights plan (also known as a “poison pill”);
eliminate the approval of two-thirdsability of our stockholders could diminish the opportunities for ato call special meetings of stockholders;

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prohibit stockholder action by written consent, which requires all stockholder actions to participate in tender offers, including tender offersbe taken at a price above the then current market valuemeeting of our common stock. In addition, our board of directors, without further stockholder approval, may issue preferred stock, with such terms asstockholders;
provide that the board of directors may determine,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 could have the effect of delaying or preventing a change in controlcan be acted upon by stockholders at annual stockholder meetings;
provide that special meetings of our company. The issuancestockholders may be called only by the board of preferred stock could also adversely affectdirectors, the voting powerschairman 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 commonsixty-six and two-thirds percent (66-2/3%) of the voting power of outstanding capital stock including the lossentitled to vote at an election of voting control to others. We are also afforded the protections ofdirectors.

In addition, Section 203 of the Delaware General Corporation Law which couldmay discourage, delay or prevent a change in control of our company or could impedecompany. In general, Section 203 prohibits a merger, consolidation, takeover or other business combination involving our company or discouragepublicly held Delaware corporation from engaging in a potential acquirer from making“business combination” with an “interested stockholder” for a tender offer or otherwise attemptingperiod of three years following the date the person became an interested stockholder, subject to obtain control of our company.

certain exceptions.

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The price of our stock may be vulnerable to manipulation.

We filed an unfair business practice lawsuit against Morgan Stanley & Co. Incorporated, Goldman Sachs & Co., Bear Stearns Companies, Inc., Bank of America Securities LLC, Bank of New York, Citigroup Inc., Credit Suisse (USA) Inc., Deutsche Bank Securities, Inc., Merrill Lynch, Pierce, Fenner & Smith, Inc., and UBS Financial Services, Inc., and settled the case with respect to all defendants except Goldman Sachs Group, Inc., Goldman Sachs & Co., Goldman Sachs Execution & Clearing L.P.; Merrill Lynch, Pierce, Fenner & Smith, Inc., and Merrill Lynch Professional Clearing Corporation. In January, the trial court granted the remaining defendants' motion for summary judgment. We have appealed the ruling.

The litigation is ongoing.

We believe these remaining defendants engaged in unlawful actions and have caused substantial harm to Overstock, and that certain of the remaining defendants have made efforts to drivemanipulated downward the market price of Overstock'sOverstock’s common stock down.stock. To the extent that the defendants or other persons engage in any such actions or take any other actions to interfere with or destroy or harm Overstock'sOverstock’s existing and/or prospective business relationships with its suppliers, bankers, customers, lenders, investors, prospective investors or others, our business, prospects, financial condition and results of operation could be harmed, and the price of our common stock may be more volatile than it might otherwise be and/or may trade at prices below those that might prevail in the absence of any such efforts. The practice of "abusive“abusive naked short selling"selling” continues to place 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, with the aim that no security would appear on the threshold for any extended period. Despite that aim, our common stock has frequently appeared on the Regulation SHO threshold list for extended and continuous periods and, while we do not currently appear on the Regulation SHO threshold list, in the past our stock has been on the list for more trading days than any other company.


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Any investment in our securities involves a high degree of risk. Investors should consider carefully the risks and uncertainties described above, and all other information in this Annual Report on Form 10-K and in any reports we file with the SEC after we file this Annual Report on Form 10-K, 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 Annual Report on 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.


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ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2.    PROPERTIES

Corporate office space

We lease approximately 128,000 square feet in the Old Mill Corporate Center III in Salt Lake City, Utah for a term expiring in 2015.

2017. We plan to relocate from this corporate facility to our new headquarters under construction in Salt Lake City, Utah.

We lease approximately 12,00010,000 square feet in Provo,the Old Mill Corporate Center II in Salt Lake City, Utah beginning in November 2014, for a term expiring in 2017.
We lease approximately 872 square feet in The Institute of Technology in Sligo, Ireland for a term expiring in 2015.
We lease approximately 3,400 square feet in the Pudong District, Shanghai, China beginning in August 2014, for a term expiring in 2016.

Warehouse and customer service space

We lease approximately 687,000 square feet for our warehouse, and customer service, and other operations in Salt Lake City, Utah for a term expiring in February 2016.

2026.

We lease approximately 15,000 square feet for customer service operations in Tooele, Utah for a term expiring in May 2015.

We lease approximately 27,000 square feet for product liquidation in Sandy, Utah on a month-by-month basis.

        We lease approximately 51,50076,000 square feet of warehouse space in Hebron, Kentucky beginning in March 2013, for a term expiring in March 2016.

Co-location data center

We lease approximately 4,000100,000 square feet at Old Mill Corporate Center Iof warehouse space in Salt Lake City, Utah for a data centerJonestown, Pennsylvania for a term expiring in May 2017.

2015.

We lease approximately 3,000187,000 square feet of warehouse space in Salt Lake City, Utah for a data centerCarlisle, Pennsylvania for a term expiring in April 2016.

2018.

Co-location data centers
We lease approximately 9,000 square feet in Utah for various data centers for terms expiring from 2016 to 2017.
We use all of our properties in both our direct and partner businesses. We believe that the above listed facilities will be sufficient for our needs for at least the next twelve months, subject to potential seasonal requirements for additional warehouse and customer service space during the fourth quarter.

ITEM 3.    LEGAL PROCEEDINGS

The information set forth under Item 15 of Part IV, "Financial Statements—Note 13—13. 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.



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PART II

ITEM 5.    MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

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 sales prices per share for our common stock as reported by Nasdaq.


 Common
Stock Price		 

 High Low  
Common
Stock Price

Year Ended December 31, 2011

 
 High Low
Year Ended December 31, 2013    

First Quarter

 17.18 13.68  16.50
 11.29

Second Quarter

 15.93 13.34  28.20
 11.46

Third Quarter

 15.93 8.91  34.97
 25.65

Fourth Quarter

 10.81 7.57  30.83
 23.22

Year Ended December 31, 2012

 �� 
Year Ended December 31, 2014    

First Quarter

 7.71 5.17  29.80
 18.57

Second Quarter

 6.95 5.01  20.35
 14.69

Third Quarter

 10.55 6.21  18.50
 13.96

Fourth Quarter

 15.90 10.11  27.06
 15.35


Stock Performance Graph


The stock performance graph is included in Part III, Item 12.


Holders

As of February 7, 2013,23, 2015 there were 180166 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 in the foreseeable future. Any future determination to pay dividends 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.


Recent sales of unregistered securities


We maintain 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 the issuance of the interests was exempt from the registration requirements of the Securities Act of 1933, as amended, pursuant to Section 4(2)4(a)(2) thereof and Rule 506 of Regulation D thereunder as a transaction not involving a public offering. The interests were not sold for cash or other consideration, and there were no proceeds to us.


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Issuer purchases of equity securities

        The following table sets forth all


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 made during each month within the fourth quarter of 2012, including all purchases made pursuant to publicly announced plans or programs and those not made pursuant to publicly announced plans or programs. Column (a) sets forth the total number2014.


33
Table of shares purchased, and the footnotes to the table disclose the number of shares purchased other than pursuant to a publicly announced plan or program and the nature of any such purchases. Column (b) sets forth the average price paid per share. Column (c) sets forth the total number of shares purchased as part of publicly announced repurchase plans or programs. Column (d) sets forth the maximum number (or approximate dollar value) of shares that may yet be purchased under the plans or programs.

Contents

Period
 (a)
Total Number of
Shares (or Units)
Purchased		 (b)
Average Price
Paid per Share
or Unit		 (c)
Total Number of
Shares (or Units)
Purchased as Part
of Publicly
Announced Plans
or Programs		 (d)
Maximum Number
(or Approximate
Dollar Value) of
Shares (or Units) that
May Yet Be Purchased
Under the Plans or
Programs		 

October 1, 2012 to October 31, 2012

  — $—  — $— 

November 1, 2012 to November 30, 2012

  479  15.20  —  — 

December 1, 2012 to December 31, 2012

  —  —  —  — 
           

Total

  479(1)    — $— 
           
(1)
Represents 479 shares withheld for minimum tax withholding purposes upon the vesting of a portion of restricted stock units.

Stock based compensation


Stock options

Our board of directors adopted the 2005 Equity Incentive Plan in April 2005, and it was most recently amended and restated and re-approved by the stockholders on May 3, 2012 (as so amended and restated, the "Plan"). Under the Plan, the board of directors may issue non-qualified and incentive stock options to our employees and directors and non-qualified stock options to our consultants, as well as restricted stock units and other types of equity awards of the Company.awards. Options granted under the Plan generally expire at the end of ten years and vest on a straight line basis in accordance with a vesting schedule determined by our board of directors, usually over four years from the grant date. At December 31, 2012, 2.82014, 2.7 million shares of stock remained available for future grants under the Plan.


The following is a summary of stock option activity (amounts in thousands, except per share data):


 2012 2011 2010  2014 2013 2012

 Shares Weighted
Average
Exercise
Price		 Shares Weighted
Average
Exercise
Price		 Shares Weighted
Average
Exercise
Price		  Shares 
Weighted
Average
Exercise
Price
 Shares 
Weighted
Average
Exercise
Price
 Shares 
Weighted
Average
Exercise
Price

Outstanding—beginning of year

 405 $17.58 496 $18.09 721 $20.29  273
 $17.30
 364
 $17.34
 405
 $17.58

Granted at fair value

 — — — — — — 

Exercised

 — — — — (90) 17.05  (30) 17.08
 (89) 17.45
 —
 —

Expired/Forfeited

 (41) 20.06 (91) 20.55 (135) 30.41  (19) 18.00
 (2) 17.08
 (41) 20.06
             

Outstanding—end of year

 364 $17.34 405 $17.58 496 $18.09  224
 $17.27
 273
 $17.30
 364
 $17.34
             

Options exercisable at year-end

 364 $17.34 404 $17.59 472 $18.08  224
 $17.27
 273
 $17.30
 364
 $17.34

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Stock options vest over four years at 28% at the end of the first year and 2% each month thereafter. During the years ended December 31, 2012, 20112014, 2013 and 2010,2012, we recorded stock based compensation related to stock options of $0, $0 and $3,000, $200,000 and $1.6 million, respectively.


Restricted stock units activity


During the years ended December 31, 2012, 20112014, 2013 and 2010,2012, we granted 795,000, 268,000242,000, 275,000 and 302,000795,000 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 three year vesting schedule.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, 2014, 2013 and 2012 2011was $28.24, $16.12 and 2010 was $6.75, $15.47 and $13.17, respectively.


The following is a summary of restricted stock unit activity (amounts in thousands, except per share data):


 2012 2011 2010  2014 2013 2012

 Units Weighted
Average
Grant Date
Fair Value		 Units Weighted
Average
Grant Date
Fair Value		 Units Weighted
Average
Grant Date
Fair Value		  Units 
Weighted
Average
Grant Date
Fair Value
 Units 
Weighted
Average
Grant Date
Fair Value
 Units 
Weighted
Average
Grant Date
Fair Value

Outstanding—beginning of year

 522 $13.40 685 $12.08 640 $11.35  704
 $10.79
 1,003
 $8.81
 522
 $13.40

Granted at fair value

 795 6.75 268 15.47 302 13.17  242
 28.24
 275
 16.12
 795
 6.75

Vested

 (240) 12.11 (318) 12.20 (185) 11.52  (301) 11.87
 (339) 10.23
 (240) 12.11

Forfeited

 (74) 8.25 (113) 13.88 (72) 11.50  (67) 17.70
 (235) 9.38
 (74) 8.25
             

Outstanding—end of year

 1,003 $8.81 522 $13.40 685 $12.08  578
 $16.70
 704
 $10.79
 1,003
 $8.81
             

Restricted stock units granted in 2014 vest over three years at 33.3% per year. Restricted stock units granted in 2013 vest over three years at 40% at the end of the first year, 30% at the end of the second year and 30% at the end of the third year. Restricted stock units granted in or prior to 2012 vest over three years at 25% at the end of the first year, 25% at the end of the second year and 50% at the end of the third year. Each restricted stock unit represents the right to one share of common stock upon vesting. During the years ended December 31, 2012, 20112014, 2013 and 2010,2012, we recorded stock based compensation related to restricted stock units of $3.5$4.0 million, $2.8$3.3 million and $3.5 million, respectively.

        On January 14, 2013, we granted 240,000 additional restricted stock units. These restricted stock units vest over three years at 40% at the end of the first year, and 30% at the end of the second and third years.



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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 subsidiaries 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.

 
 Year ended December 31, 
 
 2012 2011 2010 2009 2008 
 
 (in thousands, except per share data)
 

Consolidated Statement of Operations Data:

                

Revenue, net

                

Direct

 $155,516 $163,609 $209,646 $150,901 $173,687 

Fulfillment partner

  943,773  890,668  880,227  725,868  656,163 
            

Total net revenue

  1,099,289  1,054,277  1,089,873  876,769  829,850 
            

Cost of goods sold

                

Direct

  140,536  149,660  187,124  130,890  153,967 

Fulfillment partner

  760,323  725,529  713,109  581,127  531,647 
            

Total cost of goods sold

  900,859  875,189  900,233  712,017  685,614 
            

Gross profit

  198,430  179,088  189,640  164,752  144,236 
            

Operating expenses:

                

Sales and marketing

  63,467  61,813  61,334  55,549  57,668 

Technology

  65,467  67,043  58,260  52,336  56,677 

General and administrative

  57,259  67,766  55,650  48,906  39,348 

Restructuring(1)

  76  —  (569) (66) (299)
            

Total operating expenses

  186,269  196,622  174,675  156,725  153,394 
            

Operating income (loss)

  12,161  (17,534) 14,965  8,027  (9,158)

Interest income

  116  161  157  170  3,163 

Interest expense

  (809) (2,485) (2,962) (3,470) (3,565)

Other income (expense), net

  3,686  278  2,088  3,277  (1,446)
            

Income (loss) before income taxes

  15,154  (19,580) 14,248  8,004  (11,006)

Provision (benefit) for income taxes

  485  (142) 359  257  — 
            

Net income (loss)

 $14,669 $(19,438)$13,889 $7,747 $(11,006)
            

Deemed dividend related to redeemable common stock

  —  (12) (112) (48) (77)
            

Net income (loss) attributable to common shares

 $14,669 $(19,450)$13,777 $7,699 $(11,083)
            

Net income (loss) per common share—basic:

                

Net income (loss) attributable to common share—basic

 $0.63 $(0.84)$0.60 $0.34 $(0.48)

Weighted average common shares outstanding—basic

  23,387  23,259  23,019  22,821  22,901 

Net income (loss) per common share—diluted:

                

Net income (loss) attributable to common shares—diluted

 $0.62 $(0.84)$0.59 $0.33 $(0.48)

Weighted average common shares outstanding—diluted

  23,672  23,259  23,366  23,067  22,901 
  Year ended December 31,
  2014 2013 (1) 2012 2011 2010
  (in thousands, except per share data)
Consolidated Statement of Operations Data:          
Revenue, net          
Direct $147,460
 $156,032
 $155,516
 $163,609
 $209,646
Partner 1,349,643
 1,148,185
 943,773
 890,668
 880,227
Total net revenue 1,497,103
 1,304,217
 1,099,289
 1,054,277
 1,089,873
Cost of goods sold          
Direct 129,253
 136,282
 140,536
 149,660
 187,124
Partner 1,088,791
 920,275
 760,323
 725,529
 713,109
Total cost of goods sold 1,218,044
 1,056,557
 900,859
 875,189
 900,233
Gross profit 279,059
 247,660
 198,430
 179,088
 189,640
Operating expenses:          
Sales and marketing 109,461
 91,609
 63,467
 61,813
 61,334
Technology 86,258
 71,788
 65,467
 67,043
 58,260
General and administrative 71,777
 68,169
 57,259
 67,766
 55,650
Restructuring (2) (360) (471) 76
 —
 (569)
Total operating expenses 267,136
 231,095
 186,269
 196,622
 174,675
Operating income (loss) 11,923
 16,565
 12,161
 (17,534) 14,965
Interest income 152
 127
 116
 161
 157
Interest expense (39) (113) (809) (2,485) (2,962)
Other income (expense), net 1,169
 (235) 3,686
 278
 2,088
Income (loss) before income taxes 13,205
 16,344
 15,154
 (19,580) 14,248
Provision (benefit) for income taxes 4,404
 (68,034) 485
 (142) 359
Consolidated net income (loss) $8,801
 $84,378
 $14,669
 $(19,438) $13,889
Less: Net loss attributable to noncontrolling interests (53) —
 —
 —
 —
Less: Deemed dividend related to redeemable common stock —
 —
 —
 12
 112
Net income (loss) attributable to stockholders of Overstock.com, Inc. $8,854
 $84,378
 $14,669
 $(19,450) $13,777
Net income (loss) per common share—basic:          
Net income (loss) attributable to common shares—basic $0.37
 $3.56
 $0.63
 $(0.84) $0.60
Weighted average common shares outstanding—basic 23,999
 23,714
 23,387
 23,259
 23,019
Net income (loss) per common share—diluted:          
Net income (loss) attributable to common shares—diluted $0.36
 $3.47
 $0.62
 $(0.84) $0.59
Weighted average common shares outstanding—diluted 24,317
 24,294
 23,672
 23,259
 23,366
See the footnotes beneath the balance sheet data on the following page.


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  As of December 31,
  2014 2013 (1) 2012 2011 2010
  (in thousands)
Balance Sheet Data:          
Cash and cash equivalents $181,641
 $148,665
 $93,547
 $96,985
 $124,021
Restricted cash 580
 1,580
 1,905
 2,036
 2,542
Working capital 15,260
 25,425
 7,497
 (14,129) 14,746
Total assets 376,865
 315,636
 181,985
 179,559
 217,959
Total indebtedness 4,843
 3,155
 1,848
 18,619
 52,845
Redeemable common stock —
 —
 —
 —
 570
Stockholders' equity 129,220
 118,760
 30,962
 13,237
 30,658
(1)
Our consolidated financial statements for the year ended December 31, 2013 include an immaterial revision to current and long-term deferred tax assets and 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 (see Item 15 of Part IV, "Financial Statements"—Note 3—"-Note 3. Restructuring Expense")Expense).


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 As of December 31, 
 
 2012 2011 2010 2009 2008 
 
 (in thousands)
 

Balance Sheet Data:

                

Cash and cash equivalents

 $93,547 $96,985 $124,021 $139,757 $96,457 

Restricted cash

  1,905  2,036  2,542  4,414  4,262 

Marketable securities

  —  —  —  —  8,989 

Working capital

  7,497  (14,129) 14,746  51,236  41,780 

Total assets

  181,985  179,559  217,959  216,500  181,136 

Total indebtedness

  1,848  18,619  52,845  61,687  67,821 

Redeemable common stock

  —  —  570  744  1,263 

Stockholders' equity (deficit)

  30,962  13,237  30,658  10,800  (2,246)

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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 in the Specialabove under "Special Cautionary Note Regarding Forward-Looking StatementsStatements" 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 offering discountprice-competitive brand name, non-brand name and closeout merchandise, including furniture, home décor,decor, bedding and bath, housewares, jewelry and watches, apparel and designer accessories, electronics and computers, and sporting goods, among other products. We also sell hundreds of thousands of best seller and current run books, magazines, CDs, DVDs and video games ("BMMG"). We sell these products through our Internet websites located at www.overstock.com, www.o.co and www.o.biz ("Website"(referred to collectively as the "Website"). Although our three websites are located at different domain addresses, the technology and equipment and processes supporting the Website and the process of order fulfillment described herein are the same for all three websites.


Our company, based in Salt Lake City, Utah, was founded in 1997. We launched our initial website in March 1999. Our Website offers our customers an opportunity to shop for bargains conveniently, while offering our suppliers an alternative inventory liquidation or sales channel. We continually add new, and sometimes limited, inventory to our Website in order to create an atmosphere that encourages customers to visit frequently and purchase products before our inventory sells out. We sell products primarily in the United States, with a small amount of products (less than 1% of our total net revenue) sold internationally.

States.


As used herein, "Overstock," "Overstock.com," "O.co," "O.com," "we," "our" and similar terms include Overstock.com, Inc. and its subsidiaries, unless the context indicates otherwise.


Our Business



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We deal primarily in discount,price-competitive, replenishable and closeout merchandise and use the Internet to aggregate both supply and demand to create an efficient marketplace for selling these products. We provide manufacturers with a one-stop liquidation channel to sell both large and small quantities of excess, closeout and replenishable inventory without disrupting sales through traditional channels. The merchandise offered on our Website is from a variety of sources including well-known, brand-name manufacturers. We have organized our shopping business (sales of product offered through the Shopping Section of our Website) into two principal segments—a "direct" business and a "fulfillment partner""partner" business. We currently offer approximately 344,000683,000 non-BMMG products and approximately 641,000696,000 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 devices.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. Nearly all of our sales are to customers located in the United States. During the years ended December 31, 20122014, 2013 and 20112012 no single customer accounted for more than 1% of our total net revenue.


Direct business


Our direct business includes sales made to individual consumers and businesses whichfrom our owned inventory and that are fulfilled primarily from our warehouse in Salt Lake City, Utah. During the year ended December 31, 2012,2014, we fulfilled approximately 14%10% of our order volume through our warehouses. Our warehouse, which generally ships between 4,0002,000 and 7,000 orders5,000 packages per day and up to approximately 10,00012,000 orders per day during peak periods, using overlapping daily shifts.


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Fulfillment partner

Partner business


For our fulfillment partner business, we sell merchandise of other retailers, cataloguers or manufacturers ("fulfillment 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" or "fulfillment partner" does not mean that we have formed any legal partnerships with any of our fulfillment partners. We currently have relationships with approximately 2,1003,200 third parties who supply approximately 338,000667,000 non-BMMG products, as well as most of the BMMG products, on our Website. These third-party fulfillmentthird party partners generally perform essentially the same fulfillment operations as our warehouse,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 fulfillment partner businesses is recorded net of returns, coupons and other discounts.


Both direct and fulfillment 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 in the foreseeable future.


Generally, we require verification of receipt of payment, or authorization from credit card or other payment vendors whose services we offer to our customers (such as PayPal and BillMeLater), 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 fulfillment partner business, we generally receive payments from our customers before our payments to our suppliers are due.

Consignment

        In September 2009, we began offering a consignment service to suppliers where the suppliers' merchandise is stored in and shipped from


Other offerings

We offer additional products or services that complement our warehouse. We pay the consignment supplier upon sale of the consigned merchandiseprimary offerings, but are not significant to our customer. Revenuerevenues. These include:
Worldstock Fair Trade, a store within our Website that offers handcrafted products made by artisans all over the world, which emphasizes sustainability, fairness, and transparency, and which we attempt to run at 0% profit by donating net profits to fund philanthropic projects in several countries, including Guatemala, Kenya, Malawi, and Nepal;
Main Street Revolution, a store within our Website that features products from our consignment service business in 2012, 2011 and 2010 were less than 1% of total net revenues and are included in the fulfillment partner segment.

International business

        At December 31, 2012, we were offering products to customers in over 100 countries and non-U.S. territories. We do not have sales operations outsidesmall businesses across the United States who offer their products using our national marketing and are usingdistribution channels;

Supplier Oasis Fulfillment Services ("SOFS"), a U.S. based third party to provide logisticssingle integration point through which our partners can manage their products, inventory and fulfillment for all international orders. Revenue generated fromsales channels, while tapping into a our international business is included in either direct or fulfillment partner revenue, depending on whether the product is shipped from our warehouses or from a fulfillment partner. Less than 1% of our 2012, 2011 and 2010 revenues were from international customers.

Ecommercedistribution network;

ecommerce marketplace channels,

        During 2012, we also began offering where some of our products are offered for sale in on-line marketplaces of other Internet retailers' websites, which allows uswebsites;

our international business where we offer products to reachcustomers outside the United States using U.S.-based third party logistics providers;
Pet Adoptions, a broader potential customer base. Underfree service and tab within our Website that leverages our technology to display pets available for adoption from shelters across the terms of our agreements with these ecommerce marketplace retailers, the retailers typically earn a fee that is a percentage of the selling price of the orders they send us. Revenue generated from these ecommerce marketplace channels is included in either direct or fulfillment partner revenue, depending on whether the product is shipped from our warehouses or from a fulfillment partner. Ecommerce marketplace channels were approximately 1% of our 2012 total net revenues.

United States;


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Other businesses

        We operate


Farmers Market, a tab within our Website where our customers can order locally grown fresh produce and other food products;
Insurance, a tab within our Website where our customers can shop for insurance from major carriers for both personal and business insurance policies; and
an online car listing service as part of our Website. The car listing servicewhich allows sellers to list vehicles for sale and allows buyers to review vehicle descriptions and post offers to purchase, and provides the means for prospective purchasers to contact sellers for further information and negotiations on the purchase of an advertised vehicle. We also earn advertisement revenue derived from our cars business. Revenue from the cars businesses is included in the fulfillment partner segment on a net basis. Revenue from our other businesses is less than 1% of total net revenues.


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—"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 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 long-lived and intangible assets and goodwill; and

•
loss contingencies.

Revenue recognition


We derive our revenue primarily from direct revenue and fulfillment partner revenue from merchandise sales. We also earn revenue from advertising on our shopping and other pages, and previously from listing fees and commissions collected from products being listed and sold through the Auctions tab, which we removed from our site in July 2011.pages. We have organized our operations into two principal segments based on the primary source of revenue: direct revenue and fulfillment partner revenue.

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


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factors: (i) the type of shipping carrier (as carriers have different in-transit times); (ii) the fulfillment source (either our warehouses or those of our fulfillment 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.


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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 net lossincome before taxes for the year ended December 31, 20122014 (in thousands):


 Year ended December 31, 2012  Year Ended 
 December 31, 2014
Change in the Estimate of Average Transit Times (Days)
 Increase
(Decrease)
Revenue		 Increase
(Decrease)
Net Income		  Increase (Decrease)
Revenue		 Increase (Decrease)
Income Before Tax

2

 $(5,724)$(818) $(8,418) $(1,077)

1

 $(2,779)$(391) $(2,668) $(348)

As reported

 As reported As reported   As reported
 As reported

-1

 $4,597 $659 

-2

 $8,856 $1,266 
(1) $3,348
 $424
(2) $13,652
 $1,736


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 fulfillment partner revenue is recorded on a gross basis, as we are the primary obligor. In our statements of operations, we present revenue net of sales taxes.


We periodically provide incentive offers to our customers to encourage purchases. Such offers include current discount offers, such as percentage discounts off current purchases and other similar offers, which, when used by our customers, are treated as a reduction of revenue.

Direct revenue

        Direct revenue is derived from merchandise sales to individual consumers and businesses that are fulfilled from our warehouses. Direct revenue comes from sales that occur primarily through our Website, but may also occur through offline and other channels.

Fulfillment partner revenue

        Fulfillment partner revenue is derived from merchandise sales that occur primarily through our Website which fulfillment partners ship directly to consumers and businesses from warehouses maintained by our fulfillment partners.

Consignment

        We offer a consignment service to suppliers where the suppliers' merchandise is stored in and shipped from our warehouse. We pay the consignment supplier upon shipment of the consigned merchandise to the consumer. Revenue from consignment service business in 2012, 2011 and 2010 were less than 1% of total net revenues and are included in fulfillment partner segment on a gross basis.


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International business

        At December 31, 2012, we were offering products to customers in over 100 countries and non-U.S. territories. We do not have sales operations outside the United States, and are using a U.S.-based third party to provide logistics and fulfillment for all international orders. Revenue generated from our international business is included in either direct or fulfillment partner revenue, depending on whether the product is shipped from our warehouses or from a fulfillment partner. Less than 1% of our 2012, 2011 and 2010 revenues were from international customers.

Ecommerce marketplace channels

        During 2012, we also began offering some of our products for sale in on-line marketplaces of other Internet retailers' websites, which allows us to reach a broader potential customer base. Under the terms of our agreements with these ecommerce marketplace retailers, the retailers typically earn a fee that is a percentage of the selling price of the orders they send us. Revenue generated from these ecommerce marketplace channels is included in either direct or fulfillment partner revenue, on a gross basis, depending on whether the product is shipped from our warehouses or from a fulfillment partner. Ecommerce marketplace channels were approximately 1% of our 2012 total net revenues.

Other businesses

        We operate an online site for listing cars for sale as a part of our Website. The cars listing service allows dealers to list vehicles for sale and allows buyers to review vehicle descriptions and post offers to purchase, and provides the means for prospective purchasers to contact sellers for further information and negotiations on the purchase of an advertised vehicle. Revenue from the cars listing business is included in the fulfillment partner segment on a net basis. Revenue from our other businesses is less than 1% of total net revenues.

Club O loyalty program

        We have a customer loyalty program called Club O for which we sell annual memberships. We record membership fees as deferred revenue and we recognize revenue ratably over the membership period. The Club O loyalty program allows members to earn reward dollars for qualifying purchases made on our Website. We also have a co-branded credit card program (see "Co-branded credit card revenue" below for more information). Co-branded cardholders are also Club O members and earn additional reward dollars for purchases made on our Website, and from other merchants. Reward dollars earned may be redeemed on future purchases made through our Website. Club O reward dollars expire 90 days after the customer's Club O membership expires. 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.

        We recognize revenue for Club O reward dollars when customers redeem their reward dollars as part of a purchase at our Website. We recognize other income when Club O reward dollars expire or the likelihood of reward dollars being redeemed by a customer is remote ("reward dollar breakage"). Due to the loyalty program's short history, currently no reward dollar breakage is recognized until the reward dollars expire. However, in the future we plan to recognize such breakage based upon historical redemption patterns.

        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.


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Co-branded credit card revenue

        We have a co-branded credit card agreement with a commercial bank for the issuance of credit cards bearing the Overstock.com brand, under which the bank pays us fees for new accounts 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 life of the credit card relationship. Credit card usage fees are recognized as revenues as actual credit card usage occurs.

Deferred revenue

        Customer orders are recorded as deferred revenue prior to delivery of products or services ordered. We record amounts received for Club O 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.

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 fulfillment 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. Our actual product returns have not differed materially from our estimates at December 31, 2011 and 2010.
The allowance for returns was $10.6$15.5 million and $10.9$13.2 million at December 31, 20122014 and 2011,2013, respectively.

Credit card chargeback allowance

        Revenue is recorded net of estimated 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 $182,000 and $187,000 at December 31, 2012 and 2011, respectively.

Allowance for doubtful accounts

        From time to time, we grant credit to certain of our business customers on normal credit terms (typically 30 days). We perform credit evaluations of our business customers' financial condition and


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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 $797,000 and $574,000 at December 31, 2012 and 2011, respectively.

Valuation of inventories

Inventories, consisting of merchandise purchased for resale, are accounted for using a standard costing system which approximates the first-in-first-out (“FIFO”) method of accounting, and are valued at the lower of cost or market. We write down our inventory for estimated obsolescence and to the lower 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

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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

        Our income tax expense, deferred tax assets and liabilities and reserves for unrecognized tax benefits reflect our best assessment of estimated future taxes to be paid.

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 have concluded based on all available positive and negative evidence it is more likely than not the Company’s deferred tax assets as of December 31, 2014 arising from ordinary income and deductions and tax credits will be realized in the future. We have also concluded it is unlikely the Company’s deferred tax asset arising from unrealized capital losses will be realized in the future. Hence, it is appropriate to record a valuation allowance related to the deferred tax asset for unrealized capital losses. In reaching these conclusions we considered, among other things, our recent financial and operating results (three years of cumulative income, twelve consecutive quarters of profitability, and strong revenue growth during those periods, along with the Company’s forecasted growth rates). We performed multiple sensitivity analyses to address how potential changes in significant assumptions would impact our ability to generate the minimum amount of taxable income required. We gave the most weight to objective evidence related to our recent strong financial results, particularly our positive levels of pre-tax income. 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. Significant judgmentsThis 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.

Tax laws and regulations themselves are requiredsubject to change as a result of changes in determiningfiscal policy, changes in legislation, the consolidatedevolution 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 expense.

        We areliability 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, 2014, we were not under audit by United Statesany income taxingtax authorities. Tax periods within the statutory period of limitations not previously audited are potentially open for examination by the taxingtax 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 taxingtax 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.

        Since inception, we determined We believe that it was more likely than not thatan appropriate estimated liability has been established for potential exposures.


Our uncertain tax positions related to state income taxes represent a cash settlement contingency and are recorded as a liability in our historicconsolidated balance sheets. To the extent interest and current yearpenalties would be assessed by taxing authorities on any underpayment of income taxes, such amounts are accrued and classified as a component of income tax benefits may not be realized and a full valuation allowance should be recorded againstexpense in our deferred tax assets in excessconsolidated statement of our deferred tax liabilities. As of December 31, 2012 and 2011, we have recorded a full valuation allowance of $79.7 million and $83.6 million, respectively, against our net deferred tax assets consisting primarily of net operating loss carry forwards. In evaluating our ability to recover our deferred tax assets, we considered the four sources of taxable income. Because we have no carryback ability and have not identified any viable tax planning strategies, twoRealization of the sources are not available. Reversing taxable temporary differences have been properly considered asunrecognized tax benefits results in a favorable impact to the deferredeffective tax liabilities reverse in the same period as existing deferred tax assets. However, reversing the deferred tax liabilities is insufficient to fully recover existing deferred tax assets. Our valuation allowance is netrate.

Impairment of deferred tax liabilities and there are no deferred taxlong-lived assets or liabilities that have an indefinite reversal period. Therefore, future taxable income, the most subjective of the four sources, is the remaining source available for realization of our net deferred tax assets.

        We consider future taxable income and evaluate the need for a valuation allowance on a regular basis. The determination of recording or releasing tax valuation allowances is made, in part, pursuant to an assessment regarding the likelihood that we will generate future taxable income against which benefits of our deferred tax assets may be realized. This assessment requires us to exercise significant judgment and make estimates with respect to our ability to generate revenues, gross profits, operating income and taxable income in future periods. Among other factors, we must make assumptions



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regarding overall business and retail industry conditions, operating efficiencies, the competitive environment and changes in regulatory requirements which may impact our ability to generate taxable income and, in turn, realize the value of our deferred tax assets.

        The large operating loss in the prior year and significant economic uncertainties in the market have made the projection of future taxable income uncertain. Accordingly, we have a valuation allowance recorded against our deferred tax assets as it is not "more likely than not" that the assets will be realized. To the extent that we remain profitable during the forseeable future, the full or partial release of the valuation allowance could occur in the near term.


Impairment of long-lived assets

We review property and equipment and other long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. Recoverability is measured by comparison of the assets'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'smanagement’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, 2012, 20112014, 2013 and 2010.

2012.


Valuation of goodwill


Goodwill represents the excess of the purchase price paid over the fair value of the tangible net assets acquired in business combinations.

Goodwill is not amortized but must beis tested for impairment at least annually. WeWhen 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 $2.8 million at December 31, 20122014 and 2011.2013. There were no impairments to goodwill recorded during the years ended December 31, 2012, 20112014, 2013 and 2010.

2012.


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 possibleprobable 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.

Accounting pronouncements issued not yet adopted

        Seeincurred (see Item 15 of Part IV, "Financial Statements"—Note 2—"Accounting Policies" subheading "Accounting Pronouncements Issued Not Yet Adopted."

13. Commitments and Contingencies).


Recently issued accounting standards
On May 28, 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard becomes effective for us on January 1, 2017. Early adoption is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. We are evaluating the effect that ASU 2014-09 will have on our consolidated financial statements and related disclosures. We have not yet selected a transition method nor have we determined the effect of the standard on our ongoing financial reporting.

Comparison of Years Ended December 31, 20122014 and 2011

2013


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“Management’s Discussion and Analysis of Financial Condition and Results of Operations",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 the "Special“Special Cautionary Note Regarding Forward-Looking Statements" at the beginning of this Form 10-K.

Statements.”


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        We had positive net income in each of the four fiscal quarters of this year. 2012 net income was $14.7 million versus a net loss of $19.4 million in 2011, a $34.1 million, or $1.46 per diluted share, improvement. The year-over-year improvement in net income resulted primarily from revenue growth of 4%, a 110 basis point improvement in gross margin and $10.5 million of lower general and administrative expenses.


Revenues in 20122014 increased 4%15% compared to 2011, largely2013. The growth in revenue was primarily due to increasing growth ratesa 10% increase in the second half of the year; we posted 9% revenue growthorders, coupled with a 7% increase in Q4 2012 compared to Q4 2011. The primary reason for the improvement this year was an increase of 10% in the average order size, from $123$158 to $135, which is largely$169. 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 mix shift intousing those channels. The increases were also partially offset by an increase in the home and garden category. This increase more than offset the impact of a 3% decrease in customerrevenue we defer from orders taken but not delivered at year end due to lower conversion rates.

higher average daily sales in the last week of the quarter. Although our average order size has increased in recent years, we expect the rate of increase to taper in the future.


Gross profit in 20122014 increased 11%13% compared to 20112013 primarily as a result of 4% revenue growth and a 110 basis point expansiongrowth. Gross margin decreased to 18.6% in gross margin. Approximately $8.1 million of the $19.3 million increase2014 compared to 19.0% in gross profit was due to higher revenue growth, while the other $11.2 million was due to the improvement in gross margin percentage.2013. The increasedecrease in gross margin was primarilylargely due to the sales mix shift referenced above. While we spent $1.7 million more inincreased promotional activities including coupons, site sales, and Club O rewards due to our driving a higher proportion of our sales using those channels.

Sales and marketing in 2012,expenses as a percentage of revenue increased from 7.0% to 7.3% during 2014 as compared to the same period in 2013, primarily due to our increased spending in the sponsored search and display ads marketing channels due to our driving a higher proportion of our sales and marketing expenses declined to 5.8% from 5.9% last year. Thethrough those channels. These trends may continue depending on the proportion of our sales through these channels.

As a result of higher gross profit andthese factors, we had a decrease in marketing spend was 15% growth9% increase in Contribution in 2014 compared to 2013 (see "Non-GAAPNon-GAAP Financial Measures"Measures below for a reconciliation of Contribution to Gross Profit) in 2012, and a 120 basis point improvement in. Contribution margin which increaseddecreased to 12.3%11.3% for 2012.

2014 from 12.0% for 2013.


Technology expense in 2012 decreased $1.62014 increased $14.5 million compared to 2011,2013, primarily due to decreasesincreases in compensationstaff-related costs, depreciation, and recruiting-related costs from lower headcount earlier in the year. However, technology expenses increased during Q4 2012 following investments we made in technology-related initiatives and personnel. We anticipate this trend will continue through 2013. technical consulting.

General and administrative expensesexpense in 2012 decreased $10.52014 increased $3.6 million compared to 2011,2013, primarily due to loweran increase in staff and travel related costs and professional fees, partially offset by a decrease in legal fees.

        Our fulfillment partner business continuescosts.


We continue to make upseek opportunities for growth by expanding our international sales and distribution footprint, through our crypto-initiatives, and through other means. As a large percentageresult of these initiatives, we expect to continue to incur additional technology and G&A expenses, including possible investments in other technology companies. These expenses or investments may be material, and, coupled with the seasonality of our total revenues, expandingbusiness, may lead to nearly 86% of total net revenuereduced income as compared to prior periods or to losses in 2012. Our decisionsome periods.

Provision (benefit) for income taxes in 2014 was $4.4 million compared to shift sales from the Apparel & Shoes category away from the direct business and into the fulfillment partner business contributed($68.0) million in 2013. The large income tax benefit in 2013 was due to this shifta $75.5 million deferred tax asset valuation release in 2012. 2013 after we concluded that it was more likely than not that we will realize our deferred tax assets.

We are converting revenues intoconstructing a new corporate headquarters in Salt Lake City, Utah. We estimate that the total project will cost approximately $95 million. In September 2014, we closed on the purchase of land in connection with the project for approximately $11 million which we funded with cash on average five days before we pay our suppliers. This has reduced the capital requirements needed to operate our business, and has helped us to generate positive operating cash flows on a trailing twelve month basis for the past several years.

        We ended the year with $93.5 million of cash and cash equivalents compared to $97.0 million at December 31, 2011, and working capital improved to $7.5 million from $(14.1) million for the same periods, respectively.hand. In November 2012, we fully paid the $17.0 million in advances under the U.S. Bank Financing Agreement and the facility expired at the end of 2012. In December 2012,October 2014, we entered intoin to a $3.0loan agreement which provides for an aggregate $56 million credit agreement with U.S. Bank to providefacility consisting of a line of credit to support letters of credit.

term loan and revolving loan facility. This financing is discussed in further detail under Liquidity and capital resources—Borrowings below.


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



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Results of Operations

The following table sets forth our results of operations expressed as a percentage of total net revenue for 2012, 2011the years ended December 31, 2014, 2013 and 2010:

2012:


 Year ended December 31  Year ended December 31

 2012 2011 2010  2014 2013 2012

 (as a percentage of total
revenue)
  (as a percentage of total revenue)

Revenue, net

   
  
  

Direct

 14.1% 15.5% 19.2% 9.8 % 12.0 % 14.1 %

Fulfillment partner

 85.9 84.5 80.8 
       
Partner 90.2
 88.0
 85.9

Total net revenue

 100.0 100.0 100.0  100.0
 100.0
 100.0
       

Cost of goods sold

       

Direct

 12.8 14.2 17.2  8.6
 10.4
 12.8

Fulfillment partner

 69.2 68.8 65.4 
       
Partner 72.7
 70.6
 69.2

Total cost of goods sold

 81.9 83.0 82.6  81.3
 81.0
 81.9
       

Gross profit

 18.1 17.0 17.4  18.7
 19.0
 18.1

Operating expenses:

       

Sales and marketing

 5.8 5.9 5.6  7.3
 7.0
 5.8

Technology

 6.0 6.4 5.3  5.8
 5.5
 6.0

General and administrative

 5.2 6.4 5.1  4.8
 5.2
 5.2

Restructuring

 — — (0.1)
       

Total operating expenses

 17.0 18.7 16.0  17.9
 17.7
 17.0
       

Operating income (loss)

 1.1 (1.7) 1.4 
Operating income 0.8
 1.3
 1.1

Interest income

 — — —  —
 —
 —

Interest expense

 (0.1) (0.2) (0.3) —
 —
 (0.1)

Other income, net

 0.3 — 0.2  0.1
 —
 0.3
       

Income (loss) before income taxes

 1.3 (1.9) 1.3 
       
Income before income taxes 0.9
 1.3
 1.3

Provision (benefit) for income taxes

 — — —  0.3
 (5.2) —
       

Net income (loss)

 1.3% (1.9)% 1.3%
       
Consolidated net income 0.6 % 6.5 % 1.3 %

Revenue


The following table reflects our net revenue for the years ended December 31, 20122014 and 20112013 (in thousands):


 Year ended December 31,  
  
  Year ended  
 December 31,		    

 2012 2011 $ Change % Change  2014 2013 $ Change % Change

Revenue, net

   
  
  
  

Direct

 $155,516 $163,609 $(8,093) (4.9)% $147,460
 $156,032
 $(8,572) (5.5)%

Fulfillment partner

 943,773 890,668 53,105 6.0%
         
Partner 1,349,643
 1,148,185
 201,458
 17.5 %

Total revenue, net

 $1,099,289 $1,054,277 $45,012 4.3% $1,497,103
 $1,304,217
 $192,886
 14.8 %
         


The primary reason for the increase inincreased total net revenue for the year ended December 31, 20122014, as compared to the same period in 2013, was ana 10% increase of 10%in orders, coupled with a 7% increase in average order size, from $123$158 to $135, primarily due to a sales mix shift into more home and garden products,$169. These increases were partially offset by increased promotional activities including coupons, site sales, and Club O Rewards (which we recognize as a decreasereduction of 3% in customer ordersrevenue) due to lower conversion rates comparedour driving a higher proportion of our sales using those channels. The increases were also partially offset by an increase in the revenue we defer from orders taken but not delivered at year end due to higher average daily sales in the last year.

week of the quarter. Although our average order size has increased in recent years, we expect the rate of increase to taper in the future.

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The primary reason for the decrease indecreased direct revenue for the year ended December 31, 20122014, as compared to 2013, was a decrease in sales of clothing and shoes and a sales mix shift in sales mix, particularlybedding and bath products from our direct to our partner business.

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The increase in Apparel and Shoes, from a direct inventory-based modelpartner revenue for the year ended December 31, 2014, as compared to a fulfillment partner-based model2013, was primarily due to reduce exposure from seasonal inventory and mark downs; partially offset by an increase in sales of home and garden products.


The primary reasonshift of business from direct to partner (or vice versa) is an economic decision 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 increasesize of either. We believe that the mix of the business between direct and partner is consistent with our strategic objectives for our business model in fulfillment partnerthe current economic environment and we do not currently foresee any material shifts in mix.
The product lines we offer, and their respective percentages of our revenue, forare based on many factors including customer demand, our marketing efforts, promotional pricing and joint-marketing offered by our suppliers, and the year ended December 31, 2012 was an increase in salestypes of liquidated inventory we are able to obtain. These factors change frequently and affect the mix of the product lines we sell. While we have experienced a trend toward our home and garden products; partially offset by decreasescategory in recent years, our business model is to deal primarily in price-competitive, replenishable and closeout merchandise, which includes a wide variety of product offerings. While we do not currently expect any material shifts in our product line mix, the amount of the product lines we sell is an economic decision based on the factors described above which may change.

We continue to seek increased participation in our Club O loyalty program. We also intend to increase Club O Rewards to our Club O members in lieu of coupons we offer to all customers. This may adversely impact our revenues if the incremental sales from our Club O members as a result of electronics, jewelry and watches and books and media.

        Total revenuesthis change are less than any decrease in the sales from other businesses were $657,000 and $1.7 million for the years ended December 31, 2012 and 2011, respectively. Total revenues from international sales were $10.2 million and $8.8 million for the years ended December 31, 2012 and 2011, respectively.

        See "Executive Commentary" above forour current coupon program. For additional discussioninformation regarding revenue.

our Club O loyalty program see Item 15 of Part IV, "Financial Statements"—Note 2. Accounting Policies, Club O loyalty program.


Gross profit

and gross margin

Our overall gross margins fluctuate based on our sales volume mix between our direct business and fulfillment partner business; changes in vendorsupplier cost and / or customer pricing,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.


The following table reflects our net revenues, cost of goods sold and gross profit for the yearyears ended December 31, 20122014 and 20112013 (in thousands):


 Year ended December 31,  
  
  Year ended December 31,    

 2012 2011 $ Change % Change  2014 2013 $ Change % Change

Revenue, net

   
  
  
  

Direct

 $155,516 $163,609 $(8,093) (4.9)% $147,460
 $156,032
 $(8,572) (5.5)%

Fulfillment partner

 943,773 890,668 53,105 6.0%
         

Total net revenues

 $1,099,289 $1,054,277 $45,012 4.3%
         
Partner 1,349,643
 1,148,185
 201,458
 17.5 %
Total net revenue 1,497,103

1,304,217
 192,886
 14.8 %

Cost of goods sold

   
  
  
  

Direct

 $140,536 $149,660 $(9,124) (6.1)% 129,253
 136,282
 (7,029) (5.2)%

Fulfillment partner

 760,323 725,529 34,794 4.8%
         
Partner 1,088,791
 920,275
 168,516
 18.3 %

Total cost of goods sold

 $900,859 $875,189 $25,670 2.9% 1,218,044
 1,056,557
 161,487
 15.3 %
         

Gross Profit

   
  
  
  

Direct

 $14,980 $13,949 $1,031 7.4% 18,207
 19,750
 (1,543) (7.8)%

Fulfillment partner

 183,450 165,139 18,311 11.1%
         
Partner 260,852
 227,910
 32,942
 14.5 %

Total gross profit

 $198,430 $179,088 $19,342 10.8% $279,059
 $247,660
 $31,399
 12.7 %
         


Gross margins for the past eight quarterly periods and years ending December 31, 20122014 and 20112013 were:


 Q1 2012 Q2 2012 Q3 2012 Q4 2012 FY 2012  Q1 2014 Q2 2014 Q3 2014 Q4 2014 FY 2014

Direct

 8.0% 8.3% 10.3% 11.5% 9.6% 13.0% 11.3% 12.5% 12.5% 12.3%

Fulfillment Partner

 20.0% 19.6% 19.4% 18.9% 19.4%
Partner 19.5% 19.7% 19.7% 18.7% 19.3%

Combined

 18.1% 18.0% 18.2% 17.9% 18.1% 18.8% 18.8% 19.0% 18.2% 18.6%


44
 
 Q1 2011 Q2 2011 Q3 2011 Q4 2011 FY 2011 

Direct

  10.7% 9.6% 6.6% 7.0% 8.5%

Fulfillment Partner

  20.7% 18.1% 17.6% 17.8% 18.5%

Combined

  18.9% 16.9% 16.0% 16.2% 17.0%

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  Q1 2013 Q2 2013 Q3 2013 Q4 2013 FY 2013
Direct 11.4% 12.2% 13.7% 13.4% 12.7%
Partner 20.0% 20.8% 20.4% 18.6% 19.8%
Combined 18.9% 19.7% 19.6% 18.0% 19.0%

The 110 and 9031 basis point increasesdecrease in direct and fulfillment gross margins, respectively,margin for the year ended December 31, 2012 when2014, as compared to the same period in 2011 are2013, was primarily due to shiftsincreased net returns costs and increased promotional activities, which we recognize as a reduction of revenue (including coupons, site sales, and our Club O Rewards program) due to our driving a higher proportion of our sales using those channels. These increases were partially offset by a continued shift in the sales mix into higher margin home and garden productsproducts.

The 52 basis point decrease in partner gross margin for the year ended December 31, 2014, as compared to 2013, was primarily due to increased promotional activities including coupons, site sales, and lower credit card fees,our Club O Rewards program due to our driving a higher proportion of our sales using those channels. This decrease was partially offset by a continued shift in sales mix into higher returns-relatedmargin home and freight costs.

        The shift of business between direct to fulfillment partner (or vice versa) is an economic decision based on the economics of each particular product offering at the time and we do not have particular goals for "appropriate" mix or percentages for the size of either. We believe that the mix of the business between direct and fulfillment partner is consistent with our strategic objectives for our business model in the current economic environment and with the exception of a transition of our direct Apparel and Shoes category to a fulfillment partner model to reduce our seasonal inventory risks, we do not currently foresee any material shifts in mix between the direct and fulfillment partner.

        The other factors described above, such as coupons, promotions and operational costs did not have a significant impact on the change in gross margin.

garden products.


Cost of goods sold includes stock-based compensation expense of $272,000$181,000 and $193,000$154,000 for the years ended December 31, 20122014 and 2011,2013, respectively.

        See "Executive Commentary" above for additional discussion.

Fulfillment costs


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

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


 Year ended December 31, 

 2012 2011  Year ended December 31,

Total net revenue

 $1,099,289 100%$1,054,277 100%
          2014 2013
Total revenue, net $1,497,103
 100% $1,304,217
 100%

Cost of goods sold

   
    
  

Product costs and other cost of goods sold

 848,842 77% 821,739 78% 1,152,489
 77.0% 999,519
 76.6%

Fulfillment and related costs

 52,017 5% 53,450 5% 65,555
 4.4% 57,038
 4.4%
         

Total cost of goods sold

 900,859 82% 875,189 83% 1,218,044
 81.4% 1,056,557
 81.0%
         

Gross profit

 $198,430 18%$179,088 17% $279,059
 18.6% $247,660
 19.0%
         

Fulfillment costs as a percentage of sales may vary due to several factors, such as our ability to manage costs at our warehouses, significant 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. There were no significant changes in our fulfillmentFulfillment and related costs as a percentage of net revenueremained relatively flat during the year ended December 31, 2012.

2014 as compared to 2013.

See "Gross profit"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.


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Operating expenses

Sales and marketing expenses

        We advertise through a number of targeted online marketing channels, such as sponsored search, affiliate marketing, portal advertising, e-mail campaigns, and other initiatives. We also use nationwide television, print and radio advertising campaigns to promote sales.


The following table reflects our sales and marketing expenses for the years ended December 31, 20122014 and 20112013 (in thousands):


 Year ended
December 31,		  
  
  Year ended  
 December 31,		    

 2012 2011 $ Change % Change  2014 2013 $ Change % Change

Sales and marketing expenses

 $63,467 $61,813 $1,654 2.7% $109,461
 $91,609
 $17,852
 19.5%

Sales and marketing expenses as a percent of net revenues

 5.8% 5.9%      7.3% 7.0%  
  

        Sales

The 29 basis point increase in sales and marketing expenses as a percentage of revenue decreased slightly for the year ended December 31, 2012, when2014, as compared to 2013, was primarily due to increased spending in the same period in 2011.

sponsored search and display ad marketing channels due to driving a higher proportion of our sales through those channels. These trends may continue depending on the proportion of our sales through these channels.


Sales and marketing expenses include stock-based compensation expense of $318,000$336,000 and $377,000$167,000 for the years ended December 31, 20122014 and 2011,2013, 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 new policy of free shipping on orders over $50, introduced in early January 2013, as an effective marketing tool, and intend to continue to offer them as we deem appropriate as part of our overall marketing plan.


Technology expenses


We seek to invest efficiently in technology, including web services, customer support solutions, and website search, and in expansion of new and existing product categories, and in investments in technology to enhance the customer experience, improve our process efficiency and support and expand our logistics infrastructure.

We expect to continue to increase our technology expenses to support these initiatives and these increases may be material.


We have noted an increase in the frequency and variety of cyber attacks on our Website. The impact of these attacks, their costs, and the costs incurred to protect our Website against future attacks have not been material. However, we consider the threat from cyber attacks to be serious and will continue to incur costs relating to them.

The following table reflects our technology expenses for the years ended December 31, 20122014 and 20112013 (in thousands):


 Year ended
December 31,		  
  
  Year ended  
 December 31,		    

 2012 2011 $ Change % Change  2014 2013 $ Change % Change

Technology expenses

 $65,467 $67,043 $(1,576) (2.4)% $86,258
 $71,788
 $14,470
 20.2%

Technology expenses as a percent of net revenues

 6.0% 6.4%      5.8% 5.5%  
  


The decrease$14.5 million increase in technology costs for the year ended December 31, 2012 is2014, as compared to 2013, was primarily due to decreases in compensation and recruiting-related costs primarily from lower headcount earlier in the year; partially offset by an increase in third partystaff-related costs of $7.6 million, increased depreciation of $3.7 million, and a $1.5 million increase in technical consulting.

We continue to seek opportunities for growth by expanding our international sales and distribution footprint, through our crypto-initiatives, and through other means. As a result of these initiatives, we expect to continue to incur additional technology services. Technologyand G&A expenses, including possible investments in Q4 2012 increased by $2.2 millionother technology companies. These expenses or investments may be material, and, coupled with the seasonality of our business, may lead to reduced income as compared to Q4 2011 largely dueprior periods or to investments madelosses in new personnel and third party technology services.

some periods.


Technology expenses include stock-based compensation expense of $799,000$751,000 and $628,000$352,000 for the years ended December 31, 20122014 and 2011,2013, 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, 20122014 and 20112013 (in thousands):


 Year ended
December 31,		  
  
  Year ended  
 December 31,		    

 2012 2011 $ Change % Change  2014 2013 $ Change % Change

General and administrative expenses

 $57,259 $67,766 $(10,507) (15.5)% $71,777
 $68,169
 $3,608
 5.3%

General and administrative expenses as a percent of net revenues

 5.2% 6.4%      4.8% 5.2%  
  


The decrease$3.6 million increase in general and administrativeG&A expenses for the year ended December 31, 20122014, as compared to 2013, was primarily due to an increase of $7.2 million in staff and travel-related costs and $2.0 million in professional fees, partially offset by a decrease of $7.1 million in legal costs. The decrease in legal costs is primarily due to defense costs and civil penalties totaling $13.9 million in 2013 related to the California district attorney case, compared to defense costs and judgment totaling $6.0 million in 2014 related to a decrease in legal fees.

        General and administrativepatent infringement case.


G&A expenses include stock-based compensation expense of approximately $2.1$2.8 million and $1.9$2.6 million for the years ended December 31, 20122014 and 2011,2013, respectively.

Restructuring


We incurred $76,000reversed approximately $360,000 and $471,000 of restructuring chargeslease termination costs during the yearyears ended December 31, 2012 due to ceasing the use of some of our office facilities, changes in our estimate of sublease income2014 and 2013 as a result of our entering into a new sublease agreement and terminationreoccupation of an existing sublease. There were no restructuring charges or reversals during the year endedformerly restructured facility space. At December 31, 2011.

2014 our restructuring liability was zero.

Depreciation expense

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


 Year ended
December 31,		 

 2012 2011  Year ended  
 December 31,

Cost of goods sold—direct

 $470 $714 
 2014 2013
Cost of goods sold - direct $282
 $380

Technology

 14,177 14,433  16,651
 12,917

General and administrative

 1,362 1,203  1,131
 1,225
     

Total depreciation and amortization, including internal-use software and website development

 $16,009 $16,350  $18,064
 $14,522
     

Non-operating income (expense)

Interest income

Interest income is primarily derived from the investment of our cash in cash equivalents and cash equivalents.short-term investments. Interest income for the years ended December 31, 20122014 and 20112013 totaled $116,000$152,000 and $161,000,$127,000, respectively.

Interest expense

Interest expense is primarily related to interest incurred on our Senior Notes, finance obligations, line of credit and our capital leases. Interest expense for the years ended December 31, 20122014 and 20112013 totaled $809,000$39,000 and $2.5 million,$113,000, respectively. The decreasedecreases in interest expense are primarily due to the elimination of the restructuring accrual.

Other income (expense), net

Other income (expense), net for the year ended December 31, 2014 was $1.2 million as compared to ($235,000) in 2013. The change is primarily a resultdue to increased Club O Rewards breakage of extinguishments of$947,000 due to increased participation in the Club O Rewards program, including our Senior Notes and finance obligations in 2011, partially offset byrecently introduced Club O Lite program, an increase of $306,000 in interest expense on our line of credit.

gift card


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Other income, net

        Other income, net


breakage, and a decrease in unrealized losses on precious metals of $188,000. Because we recently introduced Club O Lite, and enrolled a significant number of Club O Lite members, reward dollars earned and resulting breakage may increase as compared to prior periods.

Income taxes
Our effective tax rate for the years ended December 31, 20122014 and 2011 totaled $3.7 million2013 was 33.4% and $278,000,(416.3%), respectively. Our effective tax rate is affected by recurring items such as research tax credits and non-recurring items such as a valuation allowance release and a non-recurring civil penalty in 2013. It is also affected to a lesser extent by tax rates in foreign jurisdictions and the relative amount of income we earn in jurisdictions, which we expect to be fairly consistent in the near term. The increase wasin the 2014 effective tax rate relative to the 2013 effective tax rate is primarily due to an increasethe release of a valuation allowance for deferred tax assets in Club O rewards breakage. Additionally, 2011 included a $1.2 million loss on early retirementthe fourth quarter of our finance obligations resulting from a prepayment premium. There were no losses on early retirement2013, which significantly reduced the 2013 provision and effective tax rate. We have indefinitely reinvested foreign earnings of debt in 2012.

Income taxes

        Our provision (benefit) for income taxes for the years ended$142,000 at December 31, 20122014. We would need to accrue and 2011 of $485,000 and ($142,000) is for federal alternative minimum tax and certainpay U.S. income tax uncertainties, including interest and penalties. As of December 31, 2012 and December 31, 2011 we had federal net operating loss carry forwards of approximately $174.1 million and $192.5 million, respectively, and state net operating loss carry forwards of approximately $151.6 million and $176.1 million, respectively, which may be usedon this amount if repatriated. We do not intend to offset future taxable income. We are currently reviewing whether we had any ownership changes. Ownership changes under Internal Revenue Code Section 382 would limit the amount of net operating losses that could be used in any annual period. Our net operating loss carry forwards will begin to expire in 2018.

repatriate these earnings.


Seasonality

Based upon our historical experience, revenue typically increases during the fourth quarter because of the holiday retail season.season and gross margin decreases due to increased sales of certain lower margin products, such as electronics. 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 2012, 20112014, 2013 and 20102012 (in thousands):

 
 First
Quarter		 Second
Quarter		 Third
Quarter		 Fourth
Quarter		 

2012

 $262,367 $239,536 $255,352 $342,034 

2011

 $265,470 $234,992 $239,738 $314,077 

2010

 $264,330 $231,253 $245,420 $348,870 
  
First
Quarter
 
Second
Quarter
 
Third
Quarter
 
Fourth
Quarter
2014 $341,207
 $332,545
 $352,991
 $470,360
2013 $311,994
 $293,204
 $301,426
 $397,593
2012 $262,367
 $239,536
 $255,352
 $342,034

Comparison of Years Ended December 31, 20112013 and 2010

2012

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“Management’s Discussion and Analysis of Financial Condition and Results of Operations",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 the "Special“Special Cautionary Note Regarding Forward-Looking Statements" at the beginning of this Form 10-K.

        The key factors that affected financial results for the year ended December 31, 2011 were declining revenue, lower gross margin, andStatements.”

Revenues in 2013 increased operating expenses (including increases in personnel-related and legal expenses), all of which resulted in a net loss for the year.

        Revenue for 2011 decreased by $35.6 million (3%),19% compared to 2010. Visits2012. The growth in revenue was primarily due to our website were down 1% and new customer growth fell 9% which was partially offset by a slightly higher17% increase in average order size. We believe our revenues were adversely impacted during the first and second quarters when


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Google Inc. notified us that it was penalizing ussize, from $135 to $158, coupled with a 2% increase in natural search results for noncompliance with some of Google's natural search guidelines. During this penalty period, we dropped significantlyorders. The increase in some Google natural search result rankings. We made changes to conform to Google's guidelines and, on April 21, 2011, Google ended its penalization of our natural search results. We were able to offset some of the negative impact to revenue by increasing expenditures in other marketing channels.

        Revenues were hurt by a shift of marketing resources into our Club O loyalty program and away from coupons and other site-wide promotions, which were less effective in generating revenues during the second and third quarter of 2011.

        We also believe that our efforts to rebrand ourselves from Overstock.com to O.co hurt revenue growth in 2011 as it confused some prospective customers who had trouble finding our website.

        Revenues declined by 22% in our direct business due primarily to a transition of some of our clothing and shoes category to a fulfillment partner model. Revenue from our fulfillment partner business increased by 1%. The direct business declined to 16% of total revenue in 2011 from 19% in 2010, while our fulfillment partner business generated 84% of our total revenue in 2011 compared to 81% in 2010.

        Gross profit declined by 6% while gross margin declined by 40 basis points from 2010 to 2011. Direct gross margin declined by 220 basis points dueaverage order size is largely to fixed costs increasing as a percentage of revenue due to declining direct revenues, higher inbound and outbound freight and higher product costs of returned goods due to a sales mix shift tointo the home and garden category. Fulfillment partnerAlthough the trend towards our home and garden category has accelerated in recent years, we do not expect the sales mix shift to continue to increase at the same rate.

Gross profit in 2013 increased 25% compared to 2012 primarily as a result of that revenue growth and a shift in product sales mix into higher margin home and garden products. Approximately $37.0 million of the $49.2 million increase in gross profit was due to higher revenue, and $12.2 million due to the improvement in gross margin declined by 50 basis points, largelypercentage. The increase in gross margin was primarily due to competitive pricing initiatives.

the sales mix shift referenced above.

Sales and marketing expenses as a percentage of revenue increased by 30 basis pointsfrom 5.8% in 2011. This2012 to 7.0% for 2013, primarily due to increased spending in the sponsored search marketing channel due to a higher proportion of our revenue coming through that channel. In addition, during the last several weeks of 2013, we increased our marketing spending as a result of softer sales observed during this period.


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In late 2012, Google, Inc. (“Google”) discontinued providing its free Google Base product listing service to retailers and instead offered retailers a new fee-based product listing service. In addition, during the third quarter of 2013, Google tested and later implemented changes to its search engine algorithms, which reduced our ranking in certain Google search results during some periods. While we worked on adapting to Google's changes, we emphasized other marketing channels, such as sponsored search, which generated revenue growth but with higher associated marketing expenses as a percentage of revenue than was largelythe case for revenue coming from Google Base and natural search.
Technology expense in 2013 increased $6.3 million compared to 2012, primarily due to an increase in online search marketing throughout the year. Westaff-related costs partially offset by a decrease in depreciation.

G&A expense in 2013 increased $10.9 million compared to 2012, primarily due to $10.1 million of increased activity on legal matters, including our online search marketingdefense of a case brought by district attorneys in eight California counties, and for civil penalties assessed in an adverse judgment received in the first and second quarter of 2011case.

Provision (benefit) for income taxes in 2013 was ($68.0) million compared to help offset the lower natural search revenue following the Google penalty, and online marketing spending increased$485,000 in the second half of the year to compensate for lower revenues as a result of the customer confusion from our O.co rebranding campaign.

        Operating expense outpaced gross profit and Contribution (see "Non-GAAP Financial Measures" below for a reconciliation of Contribution to Gross Profit)2012. The large income tax benefit in 2011. Contribution declined by 9%2013 was due to lower gross profit and higher sales and marketing expenses, while combined technology and general and administrative expenses increased by 18% driven by increasesa $75.5 million deferred tax asset valuation release in technology-related personnel growth, depreciation expense and higher legal fees. As a result,2013 after we incurred a net loss of $19.4 million for 2011.

        We completed the redemption ofconcluded that it was more likely than not that we will realize our Senior Notes on September 21, 2011 through a combination of cash on hand and a $17 million borrowing under our Financing Agreement with U.S. Bank National Association.

        On December 27, 2011, we terminated our Master Lease Agreement dated September 17, 2010 and all related schedules with U.S. Bancorp Equipment Finance, Inc.—Technology Finance Group. We paid approximately $20.1 million to terminate the agreement, including approximately $1.2 million in prepayment premiums.

        We ended the year with $97.0 million of cash and cash equivalents and working capital of ($14.1) million. This includes the $17.0 million borrowed under the Financing Agreement with U.S. Bank that matures on December 31, 2012.

        We experienced a $21.1 million year over year increase in free cash flow (See "Non-GAAP Financial Measures" below for a reconciliation of Free Cash Flow to net cash provided by operating activities), from ($4.2) million in 2010 to $16.9 million in 2011. This was due primarily to a $9.3 million improvement in operating cash flows and an $11.8 million reduction in capital expenditures in 2011.

deferred tax assets.

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



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Results of Operations


The following table sets forth our results of operations expressed as a percentage of total net revenue for 2011the years ended 2013 and 2010:

2012:

 Year ended December 31

 Year ended
December 31		  2013 2012

 2011 2010  
(as a percentage of total
revenue)

Revenue, net

     

Direct

 15.5% 19.2% 12.0% 14.1%

Fulfillment partner

 84.5 80.8 
     
Partner 88.0
 85.9

Total net revenue

 100.0 100.0  100.0
 100.0
     

Cost of goods sold

     

Direct

 14.2 17.2  10.4
 12.8

Fulfillment partner

 68.8 65.4 
     
Partner 70.6
 69.2

Total cost of goods sold

 83.0 82.6  81.0
 81.9
     

Gross profit

 17.0 17.4  19.0
 18.1

Operating expenses:

     

Sales and marketing

 5.9 5.6  7.0
 5.8

Technology

 6.4 5.3  5.5
 6.0

General and administrative

 6.4 5.1  5.2
 5.2

Restructuring

 — (0.1) —
 —
     

Total operating expenses

 18.7 16.0  17.7
 17.0
     

Operating income (loss)

 (1.7) 1.4  1.3
 1.1

Interest income

 — —  —
 —

Interest expense

 (0.2) (0.3) —
 (0.1)

Other income (expense), net

 — 0.2  —
 0.3
     

Net income (loss) before income taxes

 (1.9) 1.3 
     

Provision for income taxes

 — — 
     
Income (loss) before income taxes 1.3
 1.3
Provision (benefit) for income taxes (5.2) —

Net income (loss)

 (1.9)% 1.3% 6.5% 1.3%
     


Revenue


The following table reflects our net revenue for the years ended December 31, 20112013 and 20102012 (in thousands):


 Year ended December 31,  
  
  Year ended December 31,    

 2011 2010 $ Change % Change  2013 2012 $ Change % Change

Revenue, net

         

Direct

 $163,609 $209,646 $(46,037) (22.0)% $156,032
 $155,516
 $516
 0.3%

Fulfillment partner

 890,668 880,227 10,441 1.2%
         
Partner 1,148,185
 943,773
 204,412
 21.7%

Total revenue, net

 $1,054,277 $1,089,873 $(35,596) (3.3)% $1,304,217
 $1,099,289
 $204,928
 18.6%
         

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        Revenues declined by 22% in our direct business due primarily to a transition of some of our clothing and shoes category to a fulfillment partner model to reduce seasonal inventory risks. Revenue from our fulfillment partner business

The primary reason for increased by 1%. The direct business declined to 16% of total revenue in 2011 from 19% in 2010, while our fulfillment partner business generated 84% of our total revenue in 2011 compared to 81% in 2010.

        The decrease in net revenue for the year ended December 31, 20112013 was primarilyan increase of 17% in average order size, from $135 to $158, coupled with a 2% increase in orders. The increase in average order size is largely due to visits toa sales mix shift into home and garden products.


The primary reason for increased direct revenue for the year ended December 31, 2013 was a continued shift in sales mix into our website decreasing 1%home and new customer growth decreasing 9%,garden products, partially offset by a slightly higher average order size.

        We believedecrease in sales of clothing and shoes due to our revenues were negatively impacted during the firstshift from a direct inventory-based model to a partner-based model to reduce exposure from seasonal inventory and second quarters of 2011 when Google Inc. notified us that it was penalizing us in natural search results for noncompliance with some of Google's natural search guidelines. During this penalty period, we dropped significantly in some of Google's natural search result rankings. We made changes to conform to Google's guidelines and on April 21, 2011 Google ended its penalization of our natural search results. We were able to offset some of the negative impact to revenue by increasing expenditures in other marketing channels.

        Revenues were also hurt by a shift of marketing resources into our Club O loyalty program and away from coupons and other site-wide promotions, which were less effective in generating revenues during the second and third quarter of 2011.

        We also believe that our efforts to rebrand ourselves from Overstock.com to O.co hurt revenue growth in 2011 as it confused some prospective customers who had trouble finding our website.

        Total revenues from the Auctions, Cars, Insurance, Travel and Real Estate businesses were $1.7 million and $2.9 millionmark downs.

The primary reason for the yearsincrease in partner revenue for the year ended December 31, 20112013 was an increase in sales of home and 2010, respectively. Total revenues from International sales were $8.8 million and $9.4 million for the years ended December 31, 2011 and 2010, respectively.

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

Gross profit

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

garden products.


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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, 20112013 and 20102012 (in thousands):


 Year ended December 31,  
  
  Year ended December 31,    

 2011 2010 $ Change % Change  2013 2012 $ Change % Change

Revenue, net

         

Direct

 $163,609 $209,646 $(46,037) (22.0)% $156,032
 $155,516
 $516
 0.3 %

Fulfillment partner

 890,668 880,227 10,441 1.2%
         
Partner 1,148,185
 943,773
 204,412
 21.7 %

Total net revenues

 $1,054,277 $1,089,873 $(35,596) (3.3)% $1,304,217
 $1,099,289
 $204,928
 18.6 %
         

Cost of goods sold

         

Direct

 $149,660 $187,124 $(37,464) (20.0)% $136,282
 $140,536
 $(4,254) (3.0)%

Fulfillment partner

 725,529 713,109 12,420 1.7%
         
Partner 920,275
 760,323
 159,952
 21.0 %

Total cost of goods sold

 $875,189 $900,233 $(25,044) (2.8)% $1,056,557
 $900,859
 $155,698
 17.3 %
         

Gross Profit

         

Direct

 $13,949 $22,522 $(8,573) (38.1)% $19,750
 $14,980
 $4,770
 31.8 %

Fulfillment partner

 165,139 167,118 (1,979) (1.2)%
         
Partner 227,910
 183,450
 44,460
 24.2 %

Total gross profit

 $179,088 $189,640 $(10,552) (5.6)% $247,660
 $198,430
 $49,230
 24.8 %
         


Gross margins for the past eight quarterly periods and years endingended December 31, 20112013 and 20102012 were:



 Q1 2011 Q2 2011 Q3 2011 Q4 2011 FY 2011  Q1 2013 Q2 2013 Q3 2013 Q4 2013 FY 2013

Direct

 10.7% 9.6% 6.6% 7.0% 8.5% 11.4% 12.2% 13.7% 13.4% 12.7%

Fulfillment Partner

 20.7% 18.1% 17.6% 17.8% 18.5%
Partner 20.0% 20.8% 20.4% 18.6% 19.8%

Combined

 18.9% 16.9% 16.0% 16.2% 17.0% 18.9% 19.7% 19.6% 18.0% 19.0%



 Q1 2010 Q2 2010 Q3 2010 Q4 2010 FY 2010  Q1 2012 Q2 2012 Q3 2012 Q4 2012 FY 2012

Direct

 13.8% 11.7% 9.1% 9.0% 10.7% 8.0% 8.3% 10.3% 11.5% 9.6%

Fulfillment Partner

 18.8% 19.4% 18.7% 19.0% 19.0%
Partner 20.0% 19.6% 19.4% 18.9% 19.4%

Combined

 17.9% 18.0% 16.9% 17.0% 17.4% 18.1% 18.0% 18.2% 17.9% 18.1%


The decreaseincrease in direct gross margin for the year ended December 31, 20112013 compared to the same period in 2012 is primarily due to fixed costs increasing as a percentage of revenue due to declining direct sales, higher inbound and outbound freight and higher product costs from returned goods due to ashift in sales mix shift to theinto higher margin home and garden category.

products, lower warehousing costs, partially offset by higher freight costs.


The decreaseincrease in fulfillment partner gross margin for the year ended December 31, 20112013 is primarily due to competitive pricing initiatives. The decreasehigher revenue and a shift in fulfillment partner grossproduct sales mix into higher margin for the three months ended December 31, 2011 is primarily due to competitive pricing initiatives, partially offset by a decline in credit card processing fees.

        The shift of business between direct to fulfillment partner (or vice versa) is an economic decision based on the economics of each particular product offering at the timehome and we do not have particular goals for "appropriate" mix or percentages for the size of either. We believe that the mix of the business between direct and fulfillment partner is consistent with our strategic objectives for our business model in the current economic environment and, with the exception of a transition of some of our direct clothing and shoes category to a fulfillment partner model to reduce our seasonal inventory risks, we do not currently foresee any material shifts in mix.

        During reviews of our partner billing system for returns, we discovered that we had under billed our fulfillment partners for certain fees and charges related to returns of approximately $157,000 and

garden products.

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$822,000 for the years ended December 31, 2011 and 2010, respectively. Since our business model is reliant on our relationships with our fulfillment partners and the problem related to an internal record keeping issue on our part, we made the determination to not seek recovery of these amounts from our fulfillment partners and consequently have not recognized any related recoveries in our consolidated financial statements.

        The other factors described above, such as operational and fulfillment costs did not have a significant impact on the change in gross margin.

Cost of goods sold includes stock-based compensation expense of $193,000$154,000 and $212,000$272,000 for the years ended December 31, 20112013 and 2010.

        See "Executive Commentary" above for additional discussion.

2012, 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.

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):


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 Year ended December 31,  Year ended December 31,

 2011 2010  2013 2012

Total net revenue

 $1,054,277 100%$1,089,873 100% $1,304,217
 100% $1,099,289
 100%
         

Cost of goods sold

         

Product costs and other cost of goods sold

 821,739 78% 842,064 78% 999,519
 77% 848,842
 77%

Fulfillment and related costs

 53,450 5% 58,169 5% 57,038
 4% 52,017
 5%
         

Total cost of goods sold

 875,189 83% 900,233 83% 1,056,557
 81% 900,859
 82%
         

Gross profit

 $179,088 17%$189,640 17% $247,660
 19% $198,430
 18%
         


Fulfillment costs as a percentage of sales may vary due to several factors, such as our ability to manage costs at our warehouses, significant 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. There have been no significant changes in our fulfillmentFulfillment and related costs as a percentage of revenueremained relatively flat during the year ended December 31, 2011.

2013 as compared to 2012.


See "Gross profit"Gross profit and gross margin above for additional discussion.


Operating expenses


Sales and marketing expenses

        We advertise through a number of targeted online marketing channels, such as sponsored search, affiliate marketing, portal advertising, e-mail campaigns, and other initiatives. We also use nationwide television, print and radio advertising campaigns to promote sales.


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The following table reflects our sales and marketing expenses for the years ended December 31, 20112013 and 20102012 (in thousands):


 Year ended
December 31,		  
  
  
Year ended
December 31,
    

 2011 2010 $ Change % Change  2013 2012 $ Change % Change

Sales and marketing expenses

 $61,813 $61,334 $479 0.8% $91,609
 $63,467
 $28,142
 44.3%

Sales and marketing expenses as a percent of net revenues

 5.9% 5.6%      7.0% 5.8%  
  

        The increase in sales


Sales and marketing expenses as a percentage of net revenues isrevenue increased from 5.8% to 7.0% for the year ended December 31, 2013 as compared to the same period in 2012, primarily due to increased spendingexpenditures in the sponsored search marketing increasedchannel due to a higher proportion of our revenue coming through that channel.
In late 2012, Google discontinued providing its free Google Base product listing service to retailers and instead offered retailers a new fee-based product listing service. In addition, during the third quarter of 2013, Google tested and later implemented changes to its search engine algorithms, which reduced our ranking in partcertain Google search results during some periods. While we worked on adapting to offsetGoogle's changes, we emphasized other marketing channels, such as sponsored search, which generated revenue growth but with higher associated marketing expenses as a percentage of revenue than was the negative impact of thecase for revenue coming from Google penalty on revenues as described above, partially offset by a decline in spending for affiliate marketingBase and television advertising.

natural search.

Sales and marketing expenses include stock-based compensation expense of $377,000$167,000 and $608,000$318,000 for the years ended December 31, 20112013 and 2010, 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 as an effective marketing tool, and intend to continue to offer them as we deem appropriate as part of our overall marketing plan.

2012, respectively.


Technology expenses

        We seek to efficiently invest in technology, including web services, customer support solutions and website search, and in expansion of new and existing product categories, and in investments in technology to enhance the customer experience, improve our process efficiency and support our logistics infrastructure.


The following table reflects our technology expenses for the years ended December 31, 20112013 and 20102012 (in thousands):


 Year ended
December 31,		  
  
  
Year ended
December 31,
    

 2011 2010 $ Change % Change  2013 2012 $ Change % Change

Technology expenses

 $67,043 $58,260 $8,783 15.1% $71,788
 $65,467
 $6,321
 9.7%

Technology expenses as a percent of net revenues

 6.4% 5.3%      5.5% 6.0%  
  


The $6.3 million increase for the year ended December 31, 20112013 is primarily due to a $4.7 millionan increase in compensation expense (primarily due to increasesstaff-related costs partially offset by a decrease in staffing), and a $1.9 million increase in depreciation expense.

depreciation.


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Technology expenses include stock-based compensation expense of $628,000$352,000 and $1.1$799,000 for the years ended December 31, 2013 and 2012, respectively.
General and administrative expenses
The following table reflects our G&A expenses for the years ended December 31, 2013 and 2012 (in thousands):
  
Year ended
December 31,
    
  2013 2012 $ Change % Change
General and administrative expenses $68,169
 $57,259
 $10,910
 19.1%
General and administrative expenses as a percent of net revenues 5.2% 5.2%  
  

The $10.9 million increase in G&A expenses for the year ended December 31, 2013 is primarily due to a $10.1 million increase in legal costs due to an increase in activity on legal matters, including our defense of a case brought by district attorneys in eight California counties, and for civil penalties assessed in an adverse judgment received in the case.

G&A expenses include stock-based compensation expense of approximately $2.6 million and $2.1 million for the years ended December 31, 20112013 and 2010,2012, respectively.


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General and administrative expenses

        The following table reflects our general and administrative expenses for the years ended December 31, 2011 and 2010 (in thousands):

Restructuring
 
 Year ended
December 31,		  
  
 
 
 2011 2010 $ Change % Change 

General and administrative expenses

 $67,766 $55,650 $12,116  21.8%

General and administrative expenses as a percent of net revenues

  6.4% 5.1%      

        The increase in general and administrative expenses for

During the year ended December 31, 2011 is2013, we reversed approximately $471,000 of lease termination costs primarily due to changes in our restructuring accrual as a $12.3 million increase in legal fees. See Legal Proceedings for more information.

        General and administrative expenses include stock-based compensation expenseresult of approximately $1.9 million and $3.2 million for the years ended December 31, 2011 and 2010, respectively.

Restructuring

        There were noour reoccupation of a portion of formerly restructured office space. We incurred $76,000 of restructuring charges or reversals during the year ended December 31, 2011. We reversed $569,000 of lease termination costs liability during the year ended December 31, 20102012 due to changes in ourthe estimate of sublease income primarily as a result of our entering into agreements with a sub lessee to terminatenew sublease agreement and ceasing the subleases and have us re-occupy a portionuse of the space previously abandoned (see Item 15some of Part IV, "Financial Statements"—Note 3—"Restructuring Expense").

Operating Expenses

        Overall, our total operating expenses increased 12.6% to $196.6 million for the year ended December 31, 2011 from $174.7 million for the year ended December 31, 2010, while total net revenues decreased 3.3% and gross profit decreased 5.6%.

office facilities.


Depreciation expense


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


 Year ended
December 31,		  
Year ended
December 31,

 2011 2010  2013 2012

Cost of goods sold—direct

 $714 $1,179  $380
 $470

Technology

 14,433 12,489  12,917
 14,177

General and administrative

 1,203 912  1,225
 1,362
     

Total depreciation and amortization, including internal-use software and website development

 $16,350 $14,580  $14,522
 $16,009
     


Non-operating income (expense)


Interest income

Interest income is primarily derived from the investment of our cash in cash equivalents and short-term investments. Interest income for the years ended December 31, 20112013 and 20102012 totaled $161,000$127,000 and $157,000,$116,000, respectively.


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Interest expense

Interest expense is primarily related to interest incurred on our Senior Notes, finance obligations, line of credit and our capital leases. Interest expense for the years ended December 31, 2013 and 2012 totaled $113,000 and $809,000, respectively. The decrease is primarily due to our repayment of the $17.0 million in advances under the U.S. Bank Financing Agreement in November 2012.
Other income (expense), net
Other income (expense), net for the year ended December 31, 2011 and 2010 totaled $2.52013 decreased to $(235,000) from $3.7 million and $3.0in 2012 primarily related to $1.7 million respectively. The decrease in interest expense is primarily a result of extinguishments of our Senior Notes, partially offset by an increase from our finance obligations and line of credit.

Other income, net

        Other income, net for the years ended December 31, 2011 and 2010 totaled $278,000 and $2.1 million, respectively. The decrease was primarilydecreased Club O rewards breakage due to a $1.2fewer expiring promotional memberships and $1.5 million lossof losses on early retirementour investment in precious metals.


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Table of our finance obligations resulting from a prepayment premium in 2011 and a $346,000 decrease due to gains on Senior Notes buybacks in 2010.

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Income taxes


Our provision (benefit)benefit for income taxes for the yearsyear ended December 31, 2011 and 20102013 of ($142,000) and $359,000$68.0 million is primarily due to our decision to release our deferred tax asset valuation allowance of $75.5 million at December 31, 2013. Our provision for income taxes for the year ended December 31, 2012 of $485,000 was for federal alternative minimum tax and certain income tax uncertainties, including interest and penalties. As

Liquidity and Capital Resources
Current sources of December 31, 2011 and December 31, 2010 we had federal net operating loss carry forwardsliquidity
Subject to our need for additional financing for a portion of approximately $192.5 and $166.7 million, respectively, and state net operating loss carry forwardsthe anticipated costs of approximately $176.1 and $150.7 million, respectively, which may be used to offset future taxable income.

Liquidity

        Whilecompleting our new corporate headquarters as described below, we believe that the cash and cash equivalents currently on hand and expected cash flows from future operations will be sufficient to continue operations for at least the next twelve months;months. However, we may require additional financing.financing for the completion of the new corporate headquarters and related equipment and furniture. Although we may attemptare attempting to obtain additional financing, there can be no assurance that we will be able to do so. There can be no assuranceso, or that if additionalany financing is necessary itavailable will be available or, if available, that such financing can be obtained on satisfactory terms. 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.


As we have previously announced, we plan to build a new corporate headquarters in Salt Lake City, Utah. In September 2014, our wholly owned real estate subsidiary purchased the site for the headquarters for approximately $11 million in cash. In October 2014, the subsidiary entered into a Construction Agreement relating to the construction of the future headquarters (see Construction agreement below). We currently estimate the total cost of the headquarters, including the cost of the land and related equipment and furniture, at approximately $95 million.

On October 24, 2014, we entered into a syndicated senior secured credit facility with U.S. Bank National Association, and other banks which provides for an approximately 27-month construction loan of $45.8 million (which is designed to subsequently 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 facility that terminates on October 24, 2017 but may be renewed with the consent of all lenders.

The actual amount of financing to be available under the construction loan facility will be limited by a loan-to-value limit of 80% based on periodic appraisals. The loan agreement requires us to fund a substantial portion of the project costs ($37.4 million) prior to any draws on either the term loan facility or the revolving facility. We have the right to prepay either loan without penalty at any time.

If the conditions to the conversion of the construction loan into the term loan are not satisfied in early 2017, both the construction loan and the revolver would become due immediately. This would have a material adverse effect on our liquidity.

The $10 million in financing to be available under the revolving loan facility may be used for working capital, capital expenditures and other corporate purposes, but may not be used for the construction of the headquarters. In order to draw on either the construction loan or the revolving loan we are required to satisfy a number of conditions set forth in the loan agreement. Based on these conditions (primarily the requirement to fund a substantial portion of the project costs) we do not expect to draw on the construction loan until the second half of 2015 (see Borrowings - U.S. Bank term loan and revolving loan agreement below).

We expect to continue discussions with the bank regarding additional financing for equipment and furniture for our new corporate headquarters, when we are nearer to completion of construction.

Our principal sources of liquidity are cash flows generated from operations, and our existing cash and cash equivalents. At December 31, 2012, our only available credit facility was a $3.0 million facility solely to support letters of credit. At December 31, 2012, our2014, we had cash and cash equivalents balance was $93.5of $181.6 million.


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Cash flow information is as follows:

follows (in thousands):


 Year ended
December 31		  Year ended  
 December 31,

 2012 2011  2014 2013

Cash provided by (used in):

   
  

Operating activities

 $28,145 $25,663  $80,834
 $83,645

Investing activities

 (13,764) (8,905) (44,430) (26,000)

Financing activities

 (17,819) (43,794) (3,428) (2,527)

Free cash flow

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“Free Cash Flow

        "Free cash flow"Flow” (a non-GAAP measure) for the years ended December 31, 2012,2014 and 2011,2013, was $15.7$39.5 million and $16.9$65.6 million, respectively. See "Non-GAAP financial measures"Non-GAAP Financial Measures below for a reconciliation of Free Cash Flow to net cash provided by (used in) operating activities.


Cash provided byflows from operating activities


For the years ended December 31, 20122014 and 2011,2013, our operating activities resulted in net cash inflows of $28.1$80.8 million and $25.7$83.6 million, respectively.


Cash received from customers generally corresponds to our net revenues as our customers primarily use credit cards to buy from us causing our receivables from these sales transactions to settle quickly. We have payment terms with our fulfillment 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 causes payables and accruals to grow significantly in the fourth quarter, and then decrease in the first quarter when they are typically paid.


The $28.1$80.8 million of net cash provided by operating activities during the year ended December 31, 20122014 was primarily from an increase in accounts payable of $21.7 million and accrued liabilities of $15.6 million, and non-cash depreciation and amortization expense of $18.1 million. Accounts payable increased due to increased holiday sales during the fourth quarter of 2014. Accrued liabilities increased due to increased marketing activities and legal matters. Depreciation and amortization expense increased primarily due to net income of $14.7 million, non-cash depreciation, amortization and stock compensation expense of $19.5 million, and an increase in depreciation of web development projects. Other factors contributing to net cash provided by operating activities were the increases in deferred revenue of $10.4 million primarily due to strong sales growth at the end of year and an increase in the amount of orders sold but not yet delivered to our customers due to shipping holidays near year-end, partially offset by a decrease in accounts payable of $7.9 million, an increase in accounts receivable of $5.8$11.1 million and an increase in inventoryconsolidated net income of $3.5 million primarily for home and garden products.

$8.8 million.


The $25.7$83.6 million of net cash provided by operating activities during the year ended December 31, 20112013 was primarily due to a decrease in inventory of $9.1 million from an effort to maintain lower inventory levels and a shift in sales mix, particularly in clothing and shoes, from a direct inventory-based model to a fulfillment partner-based model to reduce seasonal inventory risks, an increase in accrued liabilities of $7.0 million primarily related to marketing and legal expenses, an increase in deferred revenue of $4.0 million primarily due to continued growth of our Club O loyalty program and an increase in accounts payable and accrued liabilities of $2.9 million.

Cash (used in)$28.2 million and $18.0 million, respectively. Accounts payable increased due to increased sales and in part due to a change in the timing of key holiday sales during the fourth quarter. In 2013, the holiday sales season began later than in 2012, and as a result some of our payments to our suppliers for holiday sales were due in January rather than in December. Accrued liabilities increased due to the timing of some invoices outstanding at year-end 2013 as compared to 2012, in particular, accruals for marketing expenses and legal matters increased. Other reasons for the increase in net cash provided by operating activities during 2013 were income before taxes of $16.3 million and non-cash depreciation and amortization expense of $14.5 million.


Cash flows from investing activities


Cash provided by investing activities primarily corresponds with purchases, sales, and maturities of marketable securities and cash expenditures for fixed assets including internal-use software and website development costs. investments in precious metals.

For the yearsyear ended December 31, 2012 and 2011,2014, investing activities resulted in net cash outflows of $13.8$44.4 million, and $8.9 million, respectively.

        The $13.8 million used in investing activities during the year ended December 31, 2012 resulted primarily from expenditures for fixed assets of $12.5$41.3 million. The increase in expenditures for fixed assets includes $16.7 million which largely consistedfor the purchase of softwareland and hardware purchases, and a $1.4 million investment in precious metals in an effort to diversifydevelopment costs for our investments.

        The $8.9 million used in investing activities duringfuture headquarters.



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For the year ended December 31, 20112013, investing activities resulted in net cash outflows of $26.0 million, resulting primarily from expenditures for fixed assets of $8.7$18.1 million which largely consistedand investments in precious metals of software and hardware purchases.

$8.1 million.

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Cash used inflows from financing activities

For the years ended December 31, 20122014 and 2011,2013, financing activities resulted in net cash outflows of $17.8$3.4 million and $43.8$2.5 million, respectively.

        Financing


The $3.4 million used in financing activities forduring the year ended December 31, 20122014 resulted in net cash outflows of $17.8 million primarily from $17.0 million used for repaymentthe purchase of our line of credit.

        Financing activities for the year ended December 31, 2011 resulted in net cash outflows of $43.8 million primarily from $34.6 million used for retirement of long-term debt, $24.9 million used for retirement of finance obligations, partially offset by $17.0 million in proceeds from a draw on our line of credit (which was used for the retirement of long-term debt).

Stock Repurchase Program

        At present we do not have an authorized stock repurchase program, and we did not repurchase any shares of our common stock in the market or any of our debt during 2012. Our board of directors may authorize a stock repurchase program in the future. During the years ended December 31, 2012 and 2011, we withheld from vesting restricted stock awards a total of 68,000 and 100,000 shares of our common stock for $471,000 and $1.6 million, respectively. The shares withheld represented the minimum tax withholdings upon the vesting of thosea portion of certain restricted stock award grants and debt issuance costs related to satisfy the financing we obtained in preparation for the construction of our new corporate headquarters.


The $2.5 million used in financing activities during the year ended December 31, 2013 resulted primarily from $2.6 million for prepayment of capital leases for computer equipment in exchange for discounted pricing and $1.4 million for the purchase of shares of our common stock withheld for minimum tax withholdings owed byupon the granteevesting of thea portion of certain restricted stock award grant. Nonegrants, partially offset by $1.6 million in proceeds for the exercise of these shares were repurchased in the open market.

stock options.


Contractual obligationsObligations and commitments

Commitments

The following table summarizes our contractual obligations as of December 31, 20122014 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  Payments Due by Period
Contractual Obligations
 2013 2014 2015 2016 2017 Thereafter Total  2015 2016 2017 2018 2019 Thereafter Total

Operating leases

 9,452 9,899 8,320 1,630 183 — 29,484  $11,546
 $9,342
 $4,963
 $4,585
 $3,916
 $28,521
 $62,873

Naming rights

 1,273 1,311 1,351 1,391 — — 5,326  1,351
 1,391
 —
 —
 —
 —
 2,742

Purchase obligations

 15,114 — — — — — 15,114  18,774
 —
 —
 —
 —
 —
 18,774

Other

 1,974 2,424         4,398 
               

Total contractual cash obligations

 $27,813 $13,634 $9,671 $3,021 $183 $— $54,322 
               
Marketing, technology and other services 2,655
 1,812
 —
 —
 —
 —
 4,467
Headquarters construction costs 46,474
 30,869
 208
 —
 —
 —
 77,551
U.S. Bank term loan payments 199
 1,929
 3,283
 3,322
 3,266
 50,032
 62,031
Total contractual cash obligations (1) $80,999
 $45,343
 $8,454
 $7,907
 $7,182
 $78,553
 $228,438

 ___________________________________________
(1)
As described below under "U.S. Bank Term Loan Payments," $45.8 million of the payments shown here is duplicative. See U.S. Bank term loan payments below.


 Amounts of Commitment Expiration Per Period  Amounts of Commitment Expiration Per Period
Other Commercial Commitments
 2013 2014 2015 2016 2017 Thereafter Total  2015 2016 2017 2018 2019 Thereafter Total

Letters of credit

 $1,780 $— $— $— $— $— $1,780  $580
 $—
 $—
 $—
 $—
 $—
 $580
               


Operating leases

From time to time we enter into operating leases for facilities and equipment for use in our operations.

During 2014, we entered into amendments to extend the leases on our corporate headquarters and a data center space from their previous expiration of June 30, 2016 to January 31, 2017 to better coincide with the expected timing of completion of our new corporate headquarters. The minimum future payments due under these amended operating leases are included in the table above.


Naming rights

During 2011, we entered into a six-year agreement with the Oakland-Alameda County Coliseum Authority ("OACCA"(“OACCA”) for the right to name the Oakland Alameda County Coliseum.Coliseum (now known as “O.co Coliseum”). Amounts represent annual payments due OACCA for the naming rights. We have the right to terminate this agreement at our sole option, subject to payment of a termination fee.



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Purchase Obligations

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, 2012.2014. 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.

Other


Marketing, technology and other services

From time to time we enter into long-term contractual agreements for marketing, technology, or other services.


Headquarters construction costs

We have entered into various agreements under which we have incurred obligations relating to our plans to build an approximately 225,000 square foot building in Salt Lake City, Utah, to serve as our corporate headquarters, together with related facilities and improvements (collectively, the “Project”). We expect the total Project costs to be approximately $95 million. Under the financing agreement described below we are required to fund the first $37.4 million of project costs before we can draw on the loan (of which we had funded $16.7 million at December 31, 2014, including $11 million we paid to purchase the land). Our obligations include payments to become due under the Construction Agreement described below, and under engineering, architectural, project management and consulting agreements, as well as anticipated expenditures for fixed assets and various other anticipated obligations related to the Project. These costs are based on our current estimates; however, the costs we actually incur, the amounts we actually pay and the timing of the actual payments could vary significantly from these estimates.

U.S. Bank term loan payments

We have entered into a financing agreement related to the Project (see Borrowings below). The amounts presented reflect our estimated payments of principal and interest based on our anticipated draws on the loan. The timing and amount of our draws on the loan could vary significantly from these estimates. Further, $45.8 million of the amounts shown in the row titled "U.S. Bank term loan payments" reflect the scheduled repayment of the financing of $45.8 million of costs shown in the row titled "Headquarters construction costs."

Construction agreement

We estimate the total cost of building our corporate headquarters, including the land and related equipment and furniture, at approximately $95 million over approximately the next two years. Our wholly owned subsidiary O.com Land is party to a construction agreement dated October 13, 2014 (the “Construction Agreement”) with Okland Construction Company Inc. (“Okland”) regarding preconstruction and construction services to be provided by Okland in connection with the construction of the Project.

In accordance with the Project Milestones as described in the Construction Agreement, Okland is required to Substantially Complete the Work (as such term is defined in the Construction Agreement) within 100 weeks following the commencement of the Construction Phase (as defined in the Construction Agreement) subject to modification under certain circumstances. Pursuant to the Construction Agreement, O.Com Land agreed to make progress payments to Okland for construction services as set forth in the Construction Agreement, and subject to a 5% retention on progress payments for the Work.
Tax Contingencies

        Our contractual obligations presented above exclude unrecognizedcontingencies


As of December 31, 2014 and December 31, 2013, tax contingencies including interestwere $709,000 and penalties,$495,000, respectively. We expect the total amount of $329,000 for which we cannot make a reasonably reliable estimatetax 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 periodresolution of payment. For further information regardingincome tax contingencies is highly uncertain, and the applicationamounts ultimately paid, if any, upon resolution of ASC 740-10-5, seeissues raised by the information set forth under Item 15taxing 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

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Table of Part IV, "Financial Statements—Note 20—Income Taxes," contained in the "Notes to Consolidated Financial Statements" of this Annual Report on Form 10-K.

Borrowings

Contents



U.S. Bank Financing Agreement

        In November 2012,term loan and revolving loan agreement


On October 24, 2014, we repaid all amounts outstanding under our Financing Agreemententered 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. The Facility is governed by a Loan Agreement dated as of October 24, 2014 and collateral and other agreements. The Loan Agreement provides for an aggregate credit amount of $55.8 million, consisting of (i) a senior secured real estate loan of $45.8 million (the “Real Estate Loan”) to be used to finance a portion of the development and construction of the Project described above, and (ii) a three-year $10 million senior secured revolving credit facility (the “Revolving Loan”) for working capital and capital expenditures, but not construction of the Project. We must satisfy a number of conditions at least 60 days prior to any funding under the Facility, including making cash contributions totaling approximately $37.4 million toward the Project. We may also be required to make additional cash contributions if necessary to maintain a loan to value ratio of 80% or less. 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 expect to satisfy the conditions to funding under the Facility in the second half of 2015.

The Real Estate Loan is intended initially to provide financing for a portion of the construction of the Project. On or about January 1, 2017 (subject to one potential extension of up to three months, and subject to potential additional extensions of up to 30 days for force majeure), upon completion of the Project, the Real Estate Loan is designed to convert into an approximately 6.75-year term loan due October 1, 2023 (the “Term Loan”). The Financing Agreement expiredconditions to conversion of the Real Estate Loan to the Term Loan include, among others, requirements that the Project must have been completed in accordance with its terms on December 31, 2012;the applicable plans, paid for in full, and be generally free of liens; completion must have been certified by the project architect and the inspecting architect; certificates of occupancy must have been issued; we entered into a $3 million cash-collateralized line of credit agreement (the "Credit Agreement")must have paid all amounts then due to the Banks and must be in compliance with U.S. Bank for the issuance of letters of credit. Advancescovenants under the CreditLoan Agreement; the Real Estate Loan must be or must be brought “in balance” as defined in the Loan Agreement, bear interest at one-month LIBOR plus 1.0%which may require us to contribute additional cash to the Project; we must have paid the final amount of our cash contribution as required by the Loan Agreement; and if required by the Administrative Bank, an updated appraisal must show that the Project is in compliance with an 80% loan to value ratio requirement (or we must pay down the principal balance and/or agree to reduce the amount of the Term Loan commitment to reach the required ratio). The Credit Agreement matures on December 31, 2013. There were noIf the conditions to conversion are not satisfied in early 2017, all amounts outstanding onunder the Credit Agreement at December 31, 2012.

Facility will become immediately due and payable.


Amounts outstanding under the Financing AgreementReal Estate Loan and the Term Loan will carry an interest rate based on LIBOR plus 2.00% or an Alternate Base Rate plus 1.00%. However, we have entered into interest rate swap agreements with U.S. Bank and Compass Bank designed to fix our interest rate on the Real Estate Loan and the Term Loan at approximately 4.6% annually. Monthly payments of interest only will be due and payable on the Real Estate Loan prior to conversion, after which monthly payments of principal in the amount of $1.1 million annually plus interest will be due and payable, with a balloon payment of all then unpaid principal (estimated to be $38 million), interest and other amounts due and payable on the Term Loan due on October 1, 2023. 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, 20122014 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 million.

At December 31, 20112014, we were zeroin 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 $17.0our business, including covenants limiting certain indebtedness, including senior-secured indebtedness consisting of interest-bearing debt for borrowed money or for financed assets. However, the Loan Agreement permits us to incur up to $20 million respectively,principal amount of additional senior-secured indebtedness for equipment financing, 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.


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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, 2014 and as of March 2, 2015, we had not borrowed any amounts under either the Real Estate Loan or the Revolving Loan.

U.S. Bank letters of credit
As of December 31, 2014 and 2013, letters of credit totaling $1.8 million$580,000 and $2.0$1.6 million, respectively, were issued on our behalf collateralized by compensating cash balances held at U.S. Bank, which are included in Restrictedrestricted cash in the accompanying consolidated balance sheets.


U.S. Bank Purchasing Card Agreement

commercial purchasing card agreement

We have a commercial purchasing card (the "Purchasing Card"“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, 2012, $3.9 million2014, $803,000 was outstanding and $1.1$4.2 million was available under the Purchasing Card. At December 31, 2011, $3.4 million2013, $517,000 was outstanding and $1.6$4.5 million was available under the Purchasing Card.

Off-balance sheet


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.


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.


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Non-GAAP financial measures

Financial Measures


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


Contribution and contribution margin

Contribution (a non-GAAP financial measure) (whichmeasure which we reconcile to "Gross profit"“Gross profit” in our statementconsolidated statements of operations)income and comprehensive income) consists of gross profit less sales and marketing expense and reflects an additional way of viewing our results. Contribution Margin is Contribution as a percentage of revenues. When viewed together with our GAAP results, we believe Contribution and Contribution margin providesMargin 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. 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. You should review our financial statements and publicly-filed reports in their entirety and not rely on any single financial measure. 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 non-operating income and expenses. Management compensates for these limitations when using this measure by looking at other GAAP measures, such as operating income (loss) and net income (loss).

income.



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For further details on Contribution and Contribution Margin, see the calculation of thisthese non-GAAP measurefinancial measures below (in thousands):


 Year ended December 31, 

 2012 2011 2010  Year ended  
 December 31,

Total revenue

 $1,099,289 $1,054,277 $1,089,873 
 2014 2013 2012
Total net revenue $1,497,103
 $1,304,217
 $1,099,289

Cost of goods sold

 900,859 875,189 900,233  1,218,044
 1,056,557
 900,859
       

Gross profit

 198,430 179,088 189,640  279,059
 247,660
 198,430

Less: Sales and marketing expense

 63,467 61,813 61,334  109,461
 91,609
 63,467
       

Contribution

 $134,963 $117,275 $128,306  $169,598
 $156,051
 $134,963
       

Contribution margin

 12.3% 11.1% 11.8% 11.3% 12.0% 12.3%


Free Cash Flow

cash flow

Free cash flow (a non-GAAP financial measure) reflects an additional way of viewing our cash flows and liquidity that, when viewed with our GAAP results, provides a more complete understanding of factors and trends affecting our cash flows and liquidity. Free cash flow, which we reconcile to "Net“Net cash provided by (used in) operating activities",activities,” is net cash flows from operationsprovided by operating activities reduced by "Expenditures“Expenditures for fixed assets, including internal-use software and website development."” We believe that net cash flows fromprovided 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 we have paid allpurchases of our operating expenses.fixed assets. Therefore, we


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believe it is important to view free cash flow as a complement to our entire consolidated statements of cash flows as calculated below (in thousands):


 Year ended December 31,  Year ended  
 December 31,

 2012 2011 2010  2014 2013 2012

Net cash provided by operating activities

 $28,145 $25,663 $16,322  $80,834
 $83,645
 $28,145

Expenditures for fixed assets, including internal-use software and website development

 (12,489) (8,741) (20,511) (41,346) (18,067) (12,489)
       

Free cash flow

 $15,656 $16,922 $(4,189) $39,488
 $65,578
 $15,656
       


ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

        We

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, except, prior to January 1, 2013, for an interest rate cap agreement on our line of credit (which expired on December 31, 2012), 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 beginning at approximately $3.7 million on September 1, 2015, increasing to a maximum of approximately $45.8 million on October 1, 2016, and decreasing thereafter to approximately $38.2 million on October 1, 2023. The swaps effectively fix our effective interest rate on the approximate amounts expected to be outstanding from time to time on the Real Estate Loan at an annual rate of approximately 4.6%. At December 31, 2014 we had no amounts outstanding under the Real Estate Loan, and the notional amount of the swaps was zero.

We carry our interest rate swaps at fair value on our consolidated balance sheets. At December 31, 2014 our swaps are included as Other long-term liabilities in the amount of $1 million. The change in fair value of our swaps for the year ended December 31, 2014 was a loss of $1 million. The fair value of the swaps can be impacted by several factors including forward rates, interest rates and discount rates (see Item 15 of Part IV, "Financial Statements"—Note 2. Accounting Policies, Fair value of financial instruments). Because we have designated our swaps as cash flow hedges for accounting purposes, changes in the

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fair value of the instruments are recognized through Other comprehensive income in our statements of comprehensive income (see Item 15 of Part IV, "Financial Statements"—Note 2. Accounting Policies, Derivative financial instruments).

Our exposure to market risk for changes in interest rates relates primarily to our short-term investments and short-term obligations; thus, 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, 2012,2014, we had $93.5$181.6 million in cash and cash equivalents. Hypothetically, an increase or decrease in interest rates of one hundred basis points would have an estimated impact of $935,000$1.8 million on our earnings or loss, or the fair market value or cash flows of these instruments.

At December 31, 2012,2014, we had assets consisting of investments in precious metals totaling $10.9 million. Hypothetically, an increase or decrease in the market value of one hundred basis points would have an estimated impact of $109,000 on our earnings or loss, or the recorded value or cash flows of these instruments. Earnings resulting from increases in the market value of precious metals would be limited to losses incurred in the same fiscal year.

At December 31, 2014, letters of credit totaling $1.8 million$580,000 were outstanding under our credit facility.facilities. Hypothetically, an increase or decrease in interest rates of one hundred basis points would have an estimated impact of $18,000$5,800 on our earnings or loss, or the cash flows of these instruments, if the letters of credit were fully drawn.


At December 31, 2014, we had cryptocurrency-denominated assets totaling $340,000. Hypothetically, an increase or decrease in the market value of one hundred basis points would have an estimated impact of $3,400 on our earnings or loss, or the recorded value or cash flows of these instruments. Reported earnings resulting from increases in the market value of cryptocurrency would be limited to their historical cost.

ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY 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 and are presented beginning on page F-1.

10-K.

ITEM 9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.


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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 termdisclosure 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 1934Exchange 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

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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 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 withwith the policies or procedures may deteriorate.

Management has assessed the effectiveness of our internal control over financial reporting as of December 31, 2012.2014. In making our assessment of the effectiveness of internal control over financial reporting, management used the criteria set forth inInternal Control—Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO"). Based on this assessment, management has concluded that, as of December 31, 2012,2014, our internal control over financial reporting was effective.


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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.

The effectiveness of our internal control over financial reporting as of December 31, 20122014 has been audited by KPMG LLP, an independent registered public accounting firm, as stated in their report which is in Item 9A(c).



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(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, 2012,2014, based on criteria established inInternal Control—Integrated Framework (1992) 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, 2012,2014, based on criteria established inInternal Control—Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission.Commission (COSO).

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, 20122014 and 2011,2013, and the related consolidated statements of operations andincome, comprehensive income, (loss), changes in stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2012,2014, and our report dated February 21, 2013March 12, 2015 expressed an unqualified opinion on those consolidated financial statements.

/s/ KPMG LLP

Salt Lake City, Utah
March 12, 2015

February 21, 2013


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(d)   Changes in Internal Control Over Financial Reporting

During the fiscal quarter ended December 31, 2012,2014, 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.



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ITEM 9B. OTHER INFORMATION
None.

        None.


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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—
"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 20132015 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 2013
2015 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 the principal executive officer, principal financial officer, and principal accounting officer. The Code
includes provisions that are specifically applicable to our senior financial officers. We intend to disclose any amendments to
these provisions and any waivers from any of these provisions granted to our principal executive officer, principal financial
officer or principal accounting officer in the Investor Relations section of our Website,www.overstock.com. www.overstock.com. We will provide a
copy of the relevant portion to any person without any charge upon request in writing addressed to Overstock.com. Attn:
Investor Relations, 6350 South 3000 East, Salt Lake City, UT 84121.



ITEM 11.    EXECUTIVE COMPENSATION

The information required by this Item is incorporated by reference to our definitive proxy statement for the 2013 2015
annual meeting of stockholders.



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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 20132015 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, 20082010 through December 31, 2012.2014. 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.


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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 2013 2015
annual meeting of stockholders.



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ITEM 14.    PRINCIPAL ACCOUNTING FEES AND SERVICES

The information required by this Item is incorporated by reference to our definitive proxy statement for the 2013 2015
annual meeting of stockholders.



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PART IV

ITEM 15.    EXHIBITS, FINANCIAL STATEMENT SCHEDULES

1.     Financial Statements

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Report of Independent Registered Public Accounting Firm

F-175

Consolidated Balance Sheets

F-276

Consolidated Statements of Operations andIncome

77
Consolidated Statements of Comprehensive Income (Loss)

F-378

Consolidated Statements of Changes in Stockholders' Equity

F-479

Consolidated Statements of Cash Flows

F-580

Notes to Consolidated Financial Statements

F-681

Schedule II Valuation and Qualifying Accounts

F-40107

2.     Financial Statement Schedule

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

        The exhibits listed below are filed as part of, or incorporated by reference into, this Form 10-K.

Exhibit NumberDescription of Document
Exhibits 
3.1(a)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)).
   
3.2 Amended and Restated Bylaws (incorporated by reference to Exhibit 3.1 to our Current Report on Form 8-K (File No. 000-49799) filed on February 5, 2009)10, 2014 (File No. 000-49799)).
   
4.1(b)Form of specimen common stock certificate.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).
   
10.1(b)Form of Indemnification Agreement between Overstock.com, Inc. and each of its directors and officers.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).
   
10.2 Lease Agreement dated January 23, 2002 between Overstock.com, Inc. and Holladay Building East L.L.C. (incorporated by reference to Exhibit 10.8 to our Registration Statement on Form S-1 (File No. 333-83728), which became effective on May 29, 2002).
   
10.3 Intellectual Property Assignment Agreement with Douglas Greene dated February 28, 2002 (incorporated by reference to Exhibit 10.14 to our Registration Statement on Form S-1 (File No. 333-83728), which became effective on May 29, 2002).
   
10.4 Amendment No. 1, dated April 29, 2002, to Intellectual Property Assignment Agreement dated February 28, 2002 by and between Overstock.com, Inc. and Douglas Greene.Greene (incorporated by reference to Exhibit 10.18 to our Registration Statement on Form S-1 (File No. 333-83728), which became effective on May 29, 2002).
   
10.5 Sublease Agreement by and between Overstock.com, Inc., Old Mill Technology Center, LLC, and Old Mill Building LLC (incorporated by reference to Exhibit 99.1 to our Current Report on Form 8-K/A (File No. 000-49799) filed on December 7, 2004)2004 (File No. 000-49799)).

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Exhibits  
10.6 Sublease Agreement by and between Overstock.com, Inc., Document Controls Systems, Inc., and Old Mill Building LLC (incorporated by reference to Exhibit 99.2 to our Current Report on Form 8-K/A (File No. 000-49799) filed on December 7, 2004)2004 (File No. 000-49799)).

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Exhibit NumberDescription of Document
 
10.7 Sublease Agreement by and between Overstock.com, Inc., Information Technology International, Inc., and Old Mill Building LLC (incorporated by reference to Exhibit 99.3 to our Current Report on Form 8-K/A filed on December 7, 2004)2004 (File No. 000-49799)).
    
10.8 Old Mill Corporate Center Fourth Amendment to the Lease Agreement dated as of December 1, 2004 by and among Holladay Building East L.L.C., Overstock.com, Inc. and Old Mill Building LLC (incorporated by reference to Exhibit 99.4 to our Current Report on Form 8-K/A filed on December 7, 2004)2004 (File No. 000-49799)).
    
10.9 Old Mill Corporate Center Fifth Amendment to the Lease Agreement dated March 6, 2014 by and between Old Mill Corporate Center III, LLC, other related parties and Overstock.com, Inc. (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on March 11, 2014 (File No. 000-49799)).
  10.9
10.10 Co-locationColocation Center Agreement dated as of December 1, 2004 between Old Mill Technology Center, LLC and Overstock.com, Inc. (incorporated by reference to Exhibit 99.5 to our Current Report on Form 8-K/A (File No. 000-49799) filed on December 7, 2004)2004 (File No. 000-49799)).
    
10.11 First Amendment to the Colocation Center Agreement dated March 6, 2014 by and between OMTek, LLC and Overstock.com, Inc. (incorporated by reference to Exhibit 10.2 to our Current Report on Form 8-K filed on March 11, 2014 (File No. 000-49799)).
  10.10
10.12 2002 Stock Option Plan, as amended (incorporated by reference to Exhibit 99.6 to our Current Report on Form 8-K (File No. 000-49799) filed May 7, 2004)2004 (File No. 000-49799)).
   
10.1110.13 2005 Equity Incentive Plan, as amended (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K (File No. 000-49799) filed on May 7, 2012)2012 (File No. 000-49799)).
    
*10.1210.14 Form of Restricted Stock Unit Grant Notice and Restricted Stock Agreement under the 2005 Equity Incentive Plan (incorporated by reference to Exhibit 10.12 to our Annual Report on Form 10-K filed on February 21, 2013 (File No. 000-49799)).
    
10.1310.15 Industrial Net Lease Agreement with Natomas Meadows,dated May 1, 2013 between Overstock.com, Inc. and Landmark 4, LLC dated April 8, 2008 (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed May 17, 2013 (File No. 000-49799) on April 11, 2008)).
    
10.14*10.16 (a) First Amendment to Lease amending the terms of the Lease Agreement with Natomas Meadows, LLC dated December 16, 2008 (incorporated by reference to Exhibit 10.1 to our Report on Form 8-K (File No. 000-49799) filed on December 17, 2008).
10.15Lease Termination Agreement with Landmark Building One, LLC dated March 20, 2009 (incorporated by reference to exhibit 10.1 to our Report on Form 8-K (File No. 000-49799) dated March 23, 2009).
*10.16(c)Summary of unwritten compensation arrangements with Directors.
   
10.17 (a)Description of unwritten bonus pool plan adopted January 28, 2014 (incorporated by reference to our Current Report on Form 8-K filed on January 29, 2014 (File No. 000‑49799)).
 
10.18 (a)Description of unwritten bonus pool plan adopted February 5, 2015 (incorporated by reference to our Current Report on Form 8-K filed on February 11, 2015 (File No. 000‑49799)).
10.19

Purchase and Sale Agreement dated May 5, 2014 between O.Com Land LLC, Gardner Bingham Junction Holdings, L.C. and Arbor Bingham Junction Holdings, L.C. (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on May 7, 2014 (File No. 000-49799)).
10.20First 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)).
10.21

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)).

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Exhibits
10.22Project 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)).
10.23Purchase 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)).
10.24Loan 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)).
10.25Revolving Note dated October 24, 2014 made by Overstock.com, Inc. to U.S. Bank pursuant to the Loan Agreement (incorporated by reference to Exhibit 10.2 to our Current Report on Form 8-K filed on October 28, 2014 (File No. 000-49799)).
10.26Revolving 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)).
10.27

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)).
10.28Construction Note dated October 24, 2014 made by O.com Land, LLC to U.S. Bank pursuant to the Loan Agreement (incorporated by reference to Exhibit 10.5 to our Current Report on Form 8-K filed on October 28, 2014 (File No. 000-49799)).
10.29Construction Note dated October 24, 2014 made by O.com Land, LLC to Compass Bank pursuant to the Loan Agreement (incorporated by reference to Exhibit 10.6 to our Current Report on Form 8-K filed on October 28, 2014 (File No. 000-49799)).
10.30Form of Term Note to be made by O.com Land, LLC pursuant to the Loan Agreement (incorporated by reference to Exhibit 10.7 to our Current Report on Form 8-K filed on October 28, 2014 (File No. 000-49799)).
10.31Security 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)).
10.32Deed 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 8-K filed on October 28, 2014 (File No. 000‑49799)).
10.33Assignment 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)).
10.34Assignment 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)).




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Exhibits
10.35Repayment 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)).
10.36Environmental 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)).
10.37ISDA 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)).
10.38ISDA 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)).
10.39Unlimited Continuing Guaranty (Swap Transactions) entered into on October 24, 2014 but dated as of October 22, 2014 made by Overstock.com, Inc. to U.S. Bank National Association (incorporated by reference to Exhibit 10.16 to our Current Report on Form 8‑K filed on October 28, 2014 (File No. 000-49799)).
10.40

Confirmation of swap transaction dated October 24, 2014 from U.S. Bank National Association to O.com Land, LLC (incorporated by reference to Exhibit 10.17 to our Current Report on Form 8-K filed on October 28, 2014 (File No. 000-49799)).
10.41Confirmation of swap transaction dated October 27, 2014 from Compass Bank to O.com Land, LLC (incorporated by reference to Exhibit 10.18 to our Current Report on Form 8‑K filed on October 28, 2014 (File No. 000-49799)).
10.42Lease 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)).
10.43Construction 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)).
*21 Subsidiaries of the Registrant.Registrant
   
*23 Consent of Independent Registered Public Accounting Firm
   
24 Powers of Attorney (see signature page)
   
*31.1 Exhibit 31 Certification of ChiefPrincipal Executive Officer
   
*31.2 Exhibit 31 Certification of ChiefPrincipal Financial Officer
   
*32.1 Section 1350 Certification of ChiefPrincipal Executive Officer
   
*32.2 Section 1350 Certification of ChiefPrincipal Financial Officer







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Exhibits  
101(b)101(d)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, 20122014 and 2011;2013; (ii) Consolidated StatementStatements of Operations and Comprehensive Income (Loss) for the years ended December 31, 2012, 2011,2014, 2013, and 2010;2012; (iii) Consolidated Statements of Comprehensive Income for the years ended December 31, 2014, 2013, and 2012; (iv) Consolidated Statements of Changes in Stockholder's Equity for the years ended December 31, 2012, 2011,2014, 2013, and 2010; (iv)2012; (v) Consolidated Statements of Cash Flows for the years ended December 31, 2012, 2011,2014, 2013, and 2010;2012; and (v)(vi) Notes to Consolidated Financial Statements. Users of this data are advised pursuant

(a)Management contract or compensatory plan or arrangement.
(b)Pursuant to Rule 406T of Regulation S-T, that thisthese interactive data file isfiles are deemed not filed or part of a registration statement or prospectus for purposes of sectionsSections 11 or 12 of the Securities Act of 1933 is deemed not filed for purposes of sectionor Section 18 of the Securities and Exchange Act of 1934 and otherwise isare not subject to liability under these sections.
(a)
Incorporated by reference to exhibits of the same number filed with our Form 10-Q (File No. 000-49799), filed on August 13, 2002.

* Filed herewith.

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(b)
Incorporated by reference to exhibits of the same number filed with our Registration Statement on Form S-1 (File No. 333-83728), which became effective on May 29, 2002.

(c)
Management contract or compensatory plan or arrangement.

(d)
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.

*
Filed herewith.
SIGNATURES

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of 1934, the registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, on February 21, 2013.

March 12, 2015.

  OVERSTOCK.COM, INC.

 
 
By:
 
/s/ JONATHAN E. JOHNSON III
Jonathan E. Johnson III
Acting 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 Jonathan E. Johnson IIIPatrick M. Byrne and Stephen J. Chesnut,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

 
 
 
 
 
/s/ JONATHAN E. JOHNSON III
Jonathan E. Johnson IIISignature		 Acting TitleDate
/s/ PATRICK M. BYRNE
Patrick M. Byrne
Chief Executive Officer (Principal Executive Officer), President and Corporate Secretary February 21, 2013March 12, 2015

/s/ STEPHEN J. CHESNUT
Stephen J. ChesnutJONATHAN E. JOHNSON III
Jonathan E. Johnson III

 
Chairman of the Board		March 12, 2015
/s/ STORMY D. SIMON
Stormy D. Simon
President and DirectorMarch 12, 2015
/s/ ROBERT P. HUGHES
Robert P. Hughes
Senior Vice President, Finance and Risk Management (Principal Financial Officer and Principal Accounting Officer)
 
February 21, 2013March 12, 2015

/s/ PATRICK M. BYRNE
Patrick M. Byrne

Chairman of the Board and Director

February 21, 2013

/s/ STORMY D. SIMON
Stormy D. Simon

Senior Vice President, Customer and Partner Care and Director

February 21, 2013

/s/ ALLISON H. ABRAHAM
Allison H. Abraham


Director

February 21, 2013

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Signature
Title
Date





/s/ BARCLAY F. CORBUS
Barclay F. Corbus		 Director February 21, 2013March 12, 2015

/s/ BARCLAY F. CORBUS
Barclay F. Corbus
DirectorMarch 12, 2015
/s/ KIRTHI KALYANAM
Kirthi Kalyanam
DirectorMarch 12, 2015
/s/ SAMUEL A. MITCHELL
Samuel A. Mitchell
DirectorMarch 12, 2015
/s/ JOSEPH J. TABACCO, JR.
Joseph J. Tabacco, Jr.

 
Director
 
February 21, 2013

/s/ SAMUEL A. MITCHELL
Samuel A. Mitchell

Director

February 21, 2013March 12, 2015


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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, 20122014 and 2011,2013, and the related consolidated statements of operations andincome, comprehensive income, (loss), changes in stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2012.2014. 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, 20122014 and 2011,2013, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2012,2014, 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, 2012,2014, based on criteria established inInternal Control—Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 21, 2013March 12, 2015 expressed an unqualified opinion on the effectiveness of the Company's internal control over financial reporting.

/s/ KPMG LLP

Salt Lake City, Utah
February 21, 2013

March 12, 2015


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Overstock.com, Inc.

Consolidated Balance Sheets

(in thousands)


 December 31,
2012		 December 31,
2011		 December 31,
2014		 December 31,
2013

Assets

  
  

Current assets:

  
  

Cash and cash equivalents

 $93,547 $96,985 $181,641
 $148,665

Restricted cash

 1,905 2,036 580
 1,580

Accounts receivable, net

 19,273 13,501 18,963
 16,047

Inventories, net

 26,464 22,993 26,208
 27,043

Prepaid inventories, net

 1,912 1,027 3,214
 1,804
Deferred tax assets, net14,835
 13,570

Prepaids and other assets

 12,897 12,651 12,621
 10,298
     

Total current assets

 155,998 149,193 258,062
 219,007

Fixed assets, net

 21,037 25,322 52,071
 27,194
Precious metals10,905
 9,678
Deferred tax assets, net50,331
 54,950

Goodwill

 2,784 2,784 2,784
 2,784

Other long-term assets, net

 2,166 2,260 2,712
 2,023
     

Total assets

 $181,985 $179,559 $376,865
 $315,636
     

Liabilities and Stockholders' Equity

 
Liabilities and Stockholders’ Equity 
  

Current liabilities:

  
  

Accounts payable

 $62,416 $70,332 $112,787
 $90,582

Accrued liabilities

 47,674 47,902 81,564
 65,679

Deferred revenue

 38,411 27,978 48,451
 37,321

Line of credit

 — 17,000 

Capital lease obligations, current

 — 110 
     

Total current liabilities

 148,501 163,322 242,802
 193,582

Capital lease obligations, non-current

 — 2 

Other long-term liabilities

 2,522 2,998 4,843
 3,294
     

Total liabilities

 151,023 166,322 247,645
 196,876
     

Commitments and contingencies (Note 13)

 —
 —

Stockholders' equity:

 
Stockholders’ equity: 
  

Preferred stock, $0.0001 par value:

      
  

Authorized shares—5,000

     

Issued and outstanding shares—none

 — — 
Authorized shares - 5,000 
  
Issued and outstanding shares - none—
 —

Common stock, $0.0001 par value

      
  

Authorized shares—100,000

     

Issued shares—26,481 and 26,241

     

Outstanding shares—23,451 and 23,279

 2 2 
Authorized shares - 100,000 
  
Issued shares - 27,241 and 26,909 
  
Outstanding shares - 24,037 and 23,7852
 2

Additional paid-in capital

 356,895 353,368 366,252
 361,706

Accumulated deficit

 (247,096) (261,765)(153,864) (162,718)
Accumulated other comprehensive loss(621) —

Treasury stock:

  
  

Shares at cost—3,030 and 2,962

 (78,839) (78,368)
     

Total stockholders' equity

 30,962 13,237 
     

Total liabilities and stockholders' equity

 $181,985 $179,559 
     
Shares at cost - 3,204 and 3,124(82,531) (80,230)
Equity attributable to stockholders of Overstock.com, Inc.129,238
 118,760
Equity attributable to noncontrolling interests(18) —
Total equity129,220
 118,760
Total liabilities and stockholders’ equity$376,865
 $315,636

See accompanying notes to consolidated financial statements.



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Overstock.com, Inc.

Consolidated Statements of Operations and Comprehensive Income (Loss)

(in thousands, except per share data)

 
 Year ended December 31 
 
 2012 2011 2010 

Revenue, net

          

Direct

 $155,516 $163,609 $209,646 

Fulfillment partner

  943,773  890,668  880,227 
        

Total net revenue

  1,099,289  1,054,277  1,089,873 
        

Cost of goods sold

          

Direct(1)

  140,536  149,660  187,124 

Fulfillment partner

  760,323  725,529  713,109 
        

Total cost of goods sold

  900,859  875,189  900,233 
        

Gross profit

  198,430  179,088  189,640 
        

Operating expenses:

          

Sales and marketing(1)

  63,467  61,813  61,334 

Technology(1)

  65,467  67,043  58,260 

General and administrative(1)

  57,259  67,766  55,650 

Restructuring

  76  —  (569)
        

Total operating expenses

  186,269  196,622  174,675 
        

Operating income (loss)

  12,161  (17,534) 14,965 

Interest income

  116  161  157 

Interest expense

  (809) (2,485) (2,962)

Other income, net

  3,686  278  2,088 
        

Income (loss) before income taxes

  15,154  (19,580) 14,248 
        

Provision (benefit) for income taxes

  485  (142) 359 
        

Net income (loss)

 $14,669 $(19,438)$13,889 
        

Deemed dividend related to redeemable common stock

  —  (12) (112)
        

Net income (loss) attributable to common shares

 $14,669 $(19,450)$13,777 
        

Net income (loss) per common share—basic:

          

Net income (loss) attributable to common shares—basic

 $0.63 $(0.84)$0.60 

Weighted average common shares outstanding—basic

  23,387  23,259  23,019 

Net income (loss) per common share—diluted:

          

Net income (loss) attributable to common shares—diluted

 $0.62 $(0.84)$0.59 

Weighted average common shares outstanding—diluted

  23,672  23,259  23,366 
        

Comprehensive income (loss)

 $14,669 $(19,438)$13,889 
        
(1)
Includes stock-based compensation as follows (Note 17):
 Year ended  
 December 31,
 2014 2013 2012
Revenue, net 
  
  
Direct$147,460
 $156,032
 $155,516
Partner1,349,643
 1,148,185
 943,773
Total net revenue1,497,103
 1,304,217
 1,099,289
Cost of goods sold 
  
  
Direct(1)129,253
 136,282
 140,536
Partner1,088,791
 920,275
 760,323
Total cost of goods sold1,218,044
 1,056,557
 900,859
Gross profit279,059
 247,660
 198,430
Operating expenses: 
  
  
Sales and marketing(1)109,461
 91,609
 63,467
Technology(1)86,258
 71,788
 65,467
General and administrative(1)71,777
 68,169
 57,259
Restructuring(360) (471) 76
Total operating expenses267,136
 231,095
 186,269
Operating income11,923
 16,565
 12,161
Interest income152
 127
 116
Interest expense(39) (113) (809)
Other income (expense), net1,169
 (235) 3,686
Income before income taxes13,205
 16,344
 15,154
Provision (benefit) for income taxes4,404
 (68,034) 485
Consolidated net income$8,801
 $84,378
 $14,669
Less: Net loss attributable to noncontrolling interests(53) —
 —
Net income attributable to stockholders of Overstock.com, Inc.$8,854
 $84,378
 $14,669
Net income per common share—basic: 
  
  
Net income attributable to common shares—basic$0.37
 $3.56
 $0.63
Weighted average common shares outstanding—basic23,999
 23,714
 23,387
Net income per common share—diluted: 
  
  
Net income attributable to common shares—diluted$0.36
 $3.47
 $0.62
Weighted average common shares outstanding—diluted24,317
 24,294
 23,672

Cost of goods sold—direct

 $272 $193 $212 
(1) Includes stock-based compensation as follows (Note 16): 
  
  
Cost of goods sold — direct$181
 $154
 $272

Sales and marketing

 318 377 608 336
 167
 318

Technology

 799 628 1,071 751
 352
 799

General and administrative

 2,138 1,853 3,165 2,767
 2,578
 2,138
       

Total

 $3,527 $3,051 $5,056 $4,035
 $3,251
 $3,527
       


See accompanying notes to consolidated financial statements.



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Overstock.com, Inc.

Consolidated Statements of Changes in Stockholders' Equity

Comprehensive Income
(in thousands)

 
 Common stock  
  
 Treasury stock  
 
 
 Additional
Paid-in
Capital		 Accumulated
Deficit		  
 
 
 Shares Amount Shares Amount Total 

Balances at December 31, 2009

  25,583 $2 $343,040 $(256,056) 2,807 $(76,186)$10,800 
                

Net income

           13,889        13,889 

Exercise of stock options

  90     1,503           1,503 

Stock-based compensation to employees and directors

  —  —  5,056  —  —  —  5,056 

Common stock issued upon vesting of restricted stock

  185  —  —  —  —  —  — 

Purchase of treasury stock

  —  —  —  —  63  (825) (825)

Treasury stock issued for 401(k) matching contributions

  —  —  —  (160) (7) 247  87 

Redeemable common stock repurchased under rescission offer

  1  —  —  —  (1) —  — 

Lapse of rescission rights of redeemable common stock

  18  —  260  —  —  —  260 

Deemed dividend related to redeemable common stock

  —  —  (112) —  —  —  (112)
                

Balances at December 31, 2010

  25,877 $2 $349,747 $(242,327) 2,862 $(76,764)$30,658 
                

Net loss

           (19,438)       (19,438)

Stock-based compensation to employees and directors

  —  —  3,051  —  —  —  3,051 

Common stock issued upon vesting of restricted stock

  318  —  —  —  —  —  — 

Purchase of treasury stock

  —  —  —  —  100  (1,604) (1,604)

Lapse of rescission rights of redeemable common stock

  46  —  582  —  —  —  582 

Deemed dividend related to redeemable common stock

  —  —  (12) —  —  —  (12)
                

Balance at December 31, 2011

  26,241 $2 $353,368 $(261,765) 2,962 $(78,368)$13,237 
                

Net income

  —  —  —  14,669  —  —  14,669 

Stock-based compensation to employees and directors

  —  —  3,527  —  —  —  3,527 

Common stock issued upon vesting of restricted stock

  240  —  —  —  —  —  — 

Purchase of treasury stock

  —  —  —  —  68  (471) (471)
                

Balance at December 31, 2012

  26,481 $2 $356,895 $(247,096) 3,030 $(78,839)$30,962 
                
 Year ended  
 December 31,
 2014 2013 2012
Consolidated net income$8,801
 $84,378
 $14,669
Other comprehensive loss:     
Unrealized loss on cash flow hedges, net of benefit for taxes of $387, $0, and $0(621) —
 —
Other comprehensive loss(621) —
 —
Comprehensive income$8,180
 $84,378
 $14,669
Less: Comprehensive loss attributable to noncontrolling interests(53) —
 —
Comprehensive income attributable to stockholders of Overstock.com, Inc.$8,233
 $84,378
 $14,669

See accompanying notes to consolidated financial statements


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Overstock.com, Inc.

Consolidated Statements of Cash Flows

(in thousands)

 
 Year ended December 31 
 
 2012 2011 2010 

Cash flows from operating activities:

          

Net income (loss)

 $14,669 $(19,438)$13,889 

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

          

Depreciation and amortization

  16,009  16,350  14,580 

Realized gain on marketable securities

  (9) —  — 

Loss on disposition of fixed assets

  72  —  — 

Stock-based compensation to employees and directors

  3,527  3,051  5,056 

Amortization of debt discount and deferred loan costs

  73  127  391 

(Gain) loss from early extinguishment of debt

  —  1,253  (346)

Restructuring charge (reversals)

  76  —  (569)

Changes in operating assets and liabilities:

          

Restricted cash

  131  506  1,872 

Accounts receivable, net

  (5,772) 59  (1,920)

Inventories, net

  (3,471) 9,121  (8,739)

Prepaid inventories, net

  (885) 1,055  797 

Prepaids and other assets

  1,294  (456) 368 

Other long-term assets, net

  (267) (160) (215)

Accounts payable

  (7,902) 2,944  (9,315)

Accrued liabilities

  (459) 6,952  (2,575)

Deferred revenue

  10,433  3,951  3,362 

Other long-term liabilities

  626  348  (314)
        

Net cash provided by operating activities

  28,145  25,663  16,322 
        

Cash flows from investing activities:

          

Purchases of marketable securities

  (82) (160) (136)

Purchases of intangible assets

  (6) (4) (396)

Sale of marketable securities prior to maturity

  154  —  — 

Investment in precious metals

  (1,397) —  (1,657)

Expenditures for fixed assets, including internal-use software and website development

  (12,489) (8,741) (20,511)

Proceeds from sale of fixed assets

  56  —  — 
        

Net cash provided used in investing activities

  (13,764) (8,905) (22,700)
        

Cash flows from financing activities:

          

Payments on capital lease obligations

  (112) (730) (490)

Drawdowns on line of credit

  —  17,000  — 

Payments on line of credit

  (17,000) —  — 

Capitalized financing costs

  —  (140) — 

Proceeds from finance obligations

  —  1,429  16,383 

Payments on finance obligations

  —  (24,918) (841)

Paydown on direct financing arrangement

  (236) (216) (197)

Payments to retire convertible senior notes

  —  (34,615) (24,865)

Purchase of redeemable stock

  —  —  (26)

Purchase of treasury stock

  (471) (1,604) (825)

Exercise of stock options

  —  —  1,503 
        

Net cash used in financing activities

  (17,819) (43,794) (9,358)
        

Net decrease in cash and cash equivalents

  (3,438) (27,036) (15,736)

Cash and cash equivalents, beginning of period

  96,985  124,021  139,757 
        

Cash and cash equivalents, end of period

 $93,547 $96,985 $124,021 
        

Supplemental disclosures of cash flow information:

          

Cash paid during the year:

          

Interest paid

 $582 $2,369 $2,534 

Taxes paid

  299  260  187 

Non-cash investing and financing activities:

          

Fixed assets, including internal-use software and website development, costs financed through accounts payable and accrued liabilities

 $502 $(33)$795 

Equipment acquired under finance obligations

  —  5,077  599 

Equipment and software acquired under capital lease obligations

  —  —  6 

Lapse of rescission rights of redeemable stock

  —  582  260 

Issuance of common stock from treasury for 401(k) matching contribution

  —  —  87 

See accompanying notes to consolidated financial statements.



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Overstock.com, Inc.
Consolidated Statements of Changes in Stockholders’ Equity
(in thousands, except per share data)
 Year ended  
 December 31,
 2014 2013 2012
Equity attributable to stockholders of Overstock.com, Inc. 
  
  
Number of common shares issued     
Balance at beginning of year26,909
 26,481
 26,241
Common stock issued upon vesting of restricted stock302
 339
 240
Exercise of stock options30
 89
 —
Balance at end of year27,241

26,909

26,481
      
Number of treasury stock shares     
Balance at beginning of year3,124
 3,030
 2,962
Purchases of treasury stock80
 94
 68
Balance at end of year3,204
 3,124
 3,030
Total number of outstanding shares24,037
 23,785
 23,451
      
Common stock$2
 $2
 $2
      
Additional paid-in capital

 

  
Balance at beginning of year$361,706
 $356,895
 $353,368
Stock-based compensation to employees and directors4,035
 3,251
 3,527
Exercise of stock options511
 1,560
 —
Balance at end of year$366,252

$361,706

$356,895
      
Accumulated deficit     
Balance at beginning of year$(162,718) $(247,096) $(261,765)
Net income attributable to stockholders of Overstock.com, Inc.8,854
 84,378
 14,669
Balance at end of year$(153,864) $(162,718) $(247,096)
      
Accumulated other comprehensive loss     
Balance at beginning of year$—
 $—
 $—
Net other comprehensive loss(621) —
 —
Balance at end of year$(621) $—
 $—
      
Treasury stock     
Balance at beginning of year$(80,230) $(78,839) $(78,368)
Purchases of treasury stock(2,301) (1,391) (471)
Balance at end of year(82,531) (80,230) (78,839)
Total equity attributable to stockholders of Overstock.com, Inc.$129,238
 $118,760
 $30,962
      
Equity attributable to noncontrolling interests     
Balance at beginning of year$—
 $—
 $—
Net loss attributable to noncontrolling interests(53) —
 —
Paid-in capital attributable to noncontrolling interests35
 —
 —
Total equity attributable to noncontrolling interests$(18)
$—

$—
      
Total equity$129,220

$118,760

$30,962
See accompanying notes to consolidated financial statements.

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Overstock.com, Inc.
Consolidated Statements of Cash Flows
(in thousands)
 Year ended December 31,
 2014 2013 2012
Cash flows from operating activities: 
  
  
Consolidated net income$8,801
 $84,378
 $14,669
Adjustments to reconcile net income to net cash provided by operating activities: 
  
  
Depreciation and amortization18,064
 14,522
 16,009
Stock-based compensation to employees and directors4,035
 3,251
 3,527
Deferred income taxes3,741
 (68,520) —
Loss on investment in precious metals1,269
 1,457
 —
Restructuring charges (reversals)(360) (471) 76
Other(8) (15) 136
Changes in operating assets and liabilities: 
  
  
Restricted cash1,000
 200
 131
Accounts receivable, net(2,916) 3,226
 (5,772)
Inventories, net835
 (579) (3,471)
Prepaid inventories, net(1,410) 108
 (885)
Prepaids and other assets(1,455) (536) 1,294
Other long-term assets, net26
 2
 (267)
Accounts payable21,652
 28,180
 (7,902)
Accrued liabilities15,607
 17,959
 (459)
Deferred revenue11,130
 (1,090) 10,433
Other long-term liabilities823
 1,573
 626
Net cash provided by operating activities80,834
 83,645
 28,145
Cash flows from investing activities: 
  
  
Purchases of marketable securities(23) (132) (82)
Sales of marketable securities77
 292
 154
Purchases of intangible assets(135) (13) (6)
Investment in precious metals(2,496) (8,080) (1,397)
Investment in cryptocurrency(300) —
 —
Equity method investment(250) —
 —
Expenditures for fixed assets, including internal-use software and website development(41,346) (18,067) (12,489)
Proceeds from sale of fixed assets43
 —
 56
Net cash used in investing activities(44,430) (26,000) (13,764)
Cash flows from financing activities: 
  
  
Payments on capital lease obligations(325) (2,563) (112)
Payments on line of credit—
 —
 (17,000)
Paydown on direct financing arrangement(282) (258) (236)
Change in restricted cash—
 125
 —
Proceeds from exercise of stock options511
 1,560
 —
Purchase of treasury stock(2,301) (1,391) (471)
Debt issuance costs(1,031) —
 —
Net cash used in financing activities(3,428) (2,527) (17,819)
Net increase (decrease) in cash and cash equivalents32,976
 55,118
 (3,438)
Cash and cash equivalents, beginning of period148,665
 93,547
 96,985
Cash and cash equivalents, end of period$181,641
 $148,665
 $93,547

Continued on the following page
Overstock.com, Inc.
Consolidated Statements of Cash Flows
(Continued)
(in thousands)
 Year ended December 31,
 2014 2013 2012
Supplemental disclosures of cash flow information: 
  
  
Cash paid during the period: 
  
  
Interest paid$47
 $71
 $582
Taxes paid76
 546
 299
Non-cash investing and financing activities: 
  
  
Fixed assets, including internal-use software and website development, costs financed through accounts payable and accrued liabilities$1,410
 $219
 $502
Equipment acquired under capital lease obligations325
 2,563
 —
Capitalized interest cost26
 —
 —
Change in value of cash flow hedge1,008
 —
 —

See accompanying notes to consolidated financial statements.

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Overstock.com, Inc.
Notes to Consolidated Financial Statements

1. BUSINESS AND ORGANIZATION

BASIS OF PRESENTATION


Business and organization

     As used herein, "Overstock," "Overstock.com," "O.co," "we," "our" and similar terms include Overstock.com, Inc. and itsour 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 offering discountprice-competitive brand name, non-brand name and closeout merchandise, including furniture, home décor,decor, bedding and bath, housewares, jewelry and watches, apparel and designer accessories, electronics and computers, and sporting goods, among other products. We also sell hundreds of thousands of best seller and current run books, magazines, CDs, DVDs and video games ("BMMG"). We sell these products through our Internet websites located at www.overstock.com, www.o.co and www.o.biz ("Website"(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.

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. 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 valuation, income taxes, stock-based compensation, performance-based compensation, restructuring liabilities and contingencies. Actual results could differ materially from those estimates.

Cash equivalents


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We classify all highly liquid instruments, including money market funds with a remaining maturity of three months or less at the time of purchase, as cash equivalents. Cash equivalents as of were $135.1 million and $58.1 million at December 31, 20122014 and December 31, 2011 were $76.2 million and $81.2 million,2013, respectively.

Restricted cash

We consider cash that is legally restricted and cash that is held as a compensating balance for letter of credit arrangements as restricted cash. At Restricted cash was $580,000 and $1.6 million at December 31, 20122014 and 2011, restricted cash was $1.9 million and $2.0 million, respectively, and was held primarily in cash or money market accounts.

2013, respectively.

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Overstock.com, Inc.

Notes to Consolidated Financial Statements (Continued)

2. ACCOUNTING POLICIES (Continued)

Fair value of financial instruments

        Our financial instruments, including cash, cash equivalents, restricted cash, accounts receivable, accounts payable and accrued liabilities are carried at cost, which approximates their fair value because of the short-term maturity of these instruments.


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 following fair-value hierarchy:


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.

        This hierarchy requires us


Under GAAP, certain assets and liabilities are required to minimizebe 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 useclosing price as of unobservablethe 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 and to useused in these models are readily available in public markets, or can be derived from observable market data, if available, when determining fair value.

        Thetransactions, 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 thesederivative 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 was determined 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, 20122014 and December 31, 2013 as indicated (in thousands):

 
 Fair Value Measurements at
December 31, 2012:		 
 
 Total Level 1 Level 2 Level 3 

Assets:

             

Cash equivalents and restricted cash—Money market mutual funds

 $76,248 $76,248 $— $— 

Trading securities held in a "rabbi trust"(1)

  264  264       
          

Total assets

 $76,512 $76,512 $— $— 
          

Liabilities:

             

Deferred compensation accrual "rabbi trust"(2)

 $266 $266 $— $— 

Restructuring(3)

  65  —  —  65 
          

Total liabilties

 $331 $266 $— $65 
          
 Fair Value Measurements at December 31, 2014:
 Total Level 1 Level 2 Level 3
Assets: 
  
  
  
Cash equivalents - Money market mutual funds$135,092
 $135,092
 $—
 $—
Trading securities held in a “rabbi trust” (1)90
 90
 —
 —
Total assets$135,182
 $135,182
 $—
 $—
Liabilities: 
  
  
  
Derivatives (2)$1,008
 $—
 $1,008
 $—
Deferred compensation accrual “rabbi trust” (3)94
 94
 —
 —
Total liabilities$1,102
 $94
 $1,008
 $—


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Overstock.com, Inc.

Notes to Consolidated Financial Statements (Continued)

2. ACCOUNTING POLICIES (Continued)

        The

 Fair Value Measurements at December 31, 2013:
 Total Level 1 Level 2 Level 3
Assets: 
  
  
  
Cash equivalents - Money market mutual funds$58,081
 $58,081
 $—
 $—
Trading securities held in a “rabbi trust” (1)138
 138
 —
 —
Total assets$58,219
 $58,219
 $—
 $—
Liabilities: 
  
  
  
Deferred compensation accrual “rabbi trust” (3)$212
 $212
 $—
 $—
Total liabilities$212
 $212
 $—
 $—
 ___________________________________________
(1)
— Trading securities held in a rabbi trust are included in Other current and Other long-term assets in the consolidated balance sheets.
(2)— Derivative financial instruments are included in Other long-term liabilities in the consolidated balance sheets.
(3)— Non qualified deferred compensation in a rabbi trust is included in Accrued liabilities and Other long-term liabilities in the consolidated balance sheets.

Our other financial instruments, including cash, restricted cash, accounts receivable, accounts payable and accrued liabilities are carried at cost, which approximates their fair value because of the short-term maturity of these financial instruments was determined using the following levels of inputs as of December 31, 2011 (in thousands):

 
 Fair Value Measurements at
December 31, 2011:		 
 
 Total Level 1 Level 2 Level 3 

Assets:

             

Cash equivalents and restricted cash—Money market mutual funds

 $81,159 $81,159 $— $— 

Trading securities held in a "rabbi trust"(1)

  302  302       
          

Total assets

 $81,461 $81,461 $— $— 
          

Liabilities:

             

Deferred compensation accrual "rabbi trust"(3)

  302  302  —  — 
          

Total liabilities

 $302 $302 $— $— 
          
instruments.
(1)
—Trading securities held in a rabbi trust are included in Other current and long-term assets in the consolidated balance sheets (Note 18—Employee Retirement Plan).

(2)
—Non qualified deferred compensation for rabbi trust is included in Accrued liabilities and Other long-term liabilities in the consolidated balance sheets (Note 18—Employee Retirement Plan).

(3)
—The fair value was determined based on the income approach, in which we used internal cash flow projections over the life of the underlying lease agreements discounted based on a credit adjusted risk-free rate of return. See the roll forward related to the restructuring accrual at Note 3—Restructuring Expense.

Restricted investments

        In December 2009, we implementedWe have a Non QualifiedNon-Qualified Deferred Compensation Plan (the "NQDC Plan"“NQDC Plan”) for senior management (Note 18—Employee Retirement Plan).management. Deferred compensation amounts are invested in mutual funds held in a "rabbi trust"“rabbi trust” and are restricted for payment to the participants of the NQDC Plan. We account for our investments held in the trust in accordance with Accounting Standards Codification ("ASC"(“ASC”) No. 320 "“Investments—Investments — Debt and Equity Securities"Securities”. The investments held in the trust are classified as trading securities. The fair value of the investments held in the trust totaled $264,000 and $302,000$90,000 at December 31, 2012 and December 31, 2011, respectively,2014 and are included in Other current and Other long-term assets in the consolidated balance sheets. GainsOur gains and losses on these investments were immaterial for the years ended December 31, 20122014 and 2011.

2013.


Accounts receivable

Accounts receivable consist primarily of trade amounts due from customers and from uncleared credit card transactions at period end. Accounts receivable are recorded at invoiced amounts and do not bear interest.


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Overstock.com, Inc.

Notes to Consolidated Financial Statements (Continued)

2. ACCOUNTING POLICIES (Continued)

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'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 $797,000$511,000 and $574,000$152,000 at December 31, 20122014 and December 31, 2011,2013, respectively.

Concentration of credit risk

Cash equivalents include short-term, highly liquid instruments with maturities at date of purchase of three months or less. At December 31, 20122014 and 2011, 2013, 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.

Our accounts receivable are derived primarily from revenue earned from customers located in the United States. We maintain an allowance for doubtful accounts based upon the expected collectability of accounts receivable.

Valuation of inventories


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Inventories, consisting of merchandise purchased for resale, are accounted for using a standard costing system which approximates the first-in-first-out ("FIFO"(“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

Prepaid inventories, net represent inventories paid for in advance of receipt. Prepaid inventories, net were $3.2 million and $1.8 million at December 31, 20122014 and 2011 were $1.9 million and $1.0 million2013, respectively.


Prepaids and other assets


Prepaids and other assets represent expenses paid prior to receipt of the related goods or services, including advertising, license fees, maintenance, packaging, insurance, and other miscellaneous costs, as well as investments in precious metals.costs. Total prepaids and other assets were $12.6 million and $10.3 million at December 31, 20122014 and 2011 were $12.9 million and $12.7 million,2013, respectively.


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Overstock.com, Inc.

Notes to Consolidated Financial Statements (Continued)

2. ACCOUNTING POLICIES (Continued)

Fixed assets

Fixed assets, which include assets such as technology infrastructure, internal-use software, website development, furniture and fixtures 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, as follows:


Life (years)

Computer software

 2 - 3
Life
(years)

Computer hardware

software		32-4

Computer hardware

3-4
Furniture and equipment

3 - 53-5

Leasehold improvements are amortized over the shorter of the term of the related leases or estimated useful lives.


Depreciation and amortization expense is classified within the corresponding operating expense categories on the consolidated statements of operationsincome as follows (in thousands):


 Year ended December 31, 

 2012 2011 2010 Year ended  
 December 31,

Cost of goods sold—direct

 $470 $714 $1,179 
2014 2013 2012
Cost of goods sold - direct$282
 $380
 $470

Technology

 14,177 14,433 12,489 16,651
 12,917
 14,177

General and administrative

 1,362 1,203 912 1,131
 1,225
 1,362
       

Total depreciation and amortization, including internal-use software and website development

 $16,009 $16,350 $14,580 $18,064
 $14,522
 $16,009
       

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

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.

During the years ended December 31, 20122014 and 2011,2013, we capitalized $8.2$13.9 million and $9.6$11.4 million, respectively, of costs associated with internal-use software and website development, both developed internally and acquired externally. AmortizationDepreciation of costs associated with internal-use software and website development was $8.2$10.8 million and $8.0 million for those respective periods.


Equity method investments

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During 2014, we acquired a 24.9% interest in a registered broker-dealer as part of our efforts to develop and license software to trade cryptosecurities using the Bitcoin network and its protocols. The purchase price for the investment was $250,000 and is accounted for as an equity method investment which is included in Other long-term assets in our consolidated balance sheets. The difference between the carrying value of this investment and the amount of underlying equity in net assets of the investee is not significant. Our proportionate share of the net income or loss of our equity method investee for the year ended December 31, 2014 is not significant. When we record our proportionate share of net income, it increases income (or decreases loss) in our consolidated statements of income and our carrying value in that investment. Conversely, when we record our proportionate share of a net loss, it decreases income (or increases loss) in our consolidated statements of income and our carrying value in that investment. As part of the agreement with the registered broker-dealer, we formed an entity that is 75.1% owned by us and 24.9% owned by the registered broker-dealer. This entity is included in our consolidated financial statements. Intercompany transactions with the entity have been eliminated and the remaining contributions and gains or losses realized by the entity that are attributable to noncontrolling interests have been disclosed in our consolidated financial statements.
Leases

We account for lease agreements as either operating or capital leases depending on certain defined criteria. In certain of our lease agreements, we receive rent holidays and other incentives. We recognize


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Overstock.com, Inc.

Notes to Consolidated Financial Statements (Continued)

2. ACCOUNTING POLICIES (Continued)

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'stockholders’ equity.

Precious metals
Other long-term assetsOur investments in precious metals were $10.9 million and $9.7 million at

        Other long-termDecember 31, 2014 and 2013, respectively. Our precious metals consisted of $6.3 million in gold and $4.6 million in silver at December 31, 2014 and $4.0 million in gold and $5.7 million in silver at December 31, 2013. We store our precious metals at an off-site secure facility. Because these assets consist primarily of long-term prepaid expenses.

Impairmentactual precious metals, rather than financial instruments, we account for them as a cost method investment initially recorded at cost (including transaction fees) and then adjusted to the lower of long-livedcost or market based on an average unit cost. On an interim basis, we recognize decreases in the value of these assets

        We review property and equipment and other long-lived caused by market declines. Subsequent increases in the value of these assets for impairment whenever eventsthrough 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 circumstances indicate that the carrying amountvalue of an asset group may not be recoverable. Recoverability is measured by comparisonour precious metal assets are recorded in Other income (expense), net in our consolidated statements of the assets' carrying amount to future undiscounted net cash flows the asset group is expected to generate. Cash flow forecasts are basedincome. Losses on trends of historical performanceinvestments in precious metals were $1.3 million, $1.5 million, 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$0 for the years ended December 31, 2014, 2013 and 2012, 2011, and 2010.

respectively.


Goodwill


Goodwill represents the excess of the purchase price paid over the fair value of the tangible net assets acquired in business combinations.

Goodwill is not amortized but is tested for impairment at least annually. When evaluating whether goodwill is impaired, we make a 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.


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In accordance with this guidance, we test for impairment of goodwill in the fourth quarter or when we deem that a triggering event has occurred. Goodwill totaled $2.8 million at December 31, 20122014 and


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Overstock.com, Inc.

Notes to Consolidated Financial Statements (Continued)

2. ACCOUNTING POLICIES (Continued)

2011.. There were no impairments to goodwill recorded during the years ended December 31, 2012, 2011,2014, 2013 and 2010.2012.


Cryptocurrency holdings

We hold cryptocurrency-denominated assets such as bitcoin and we include them in other current assets in our Consolidated Balance Sheets. Cryptocurrency-denominated assets were $340,000 and zero at December 31, 2014 and 2013, respectively, and are recorded at the lower of cost or 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 (expense), net in our consolidated statements of income. Losses on cryptocurrency holdings were $8,000 during the year ended December 31, 2014. There were no losses on cryptocurrency holdings for the year ended December 31, 2013.

Other long-term assets
Other long-term assets consist primarily of long-term prepaid expenses.

Impairment of long-lived assets
We review property and equipment and other long-lived assets for impairment whenever events or changes in circumstances indicate that 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, 2014, 2013 and 2012.

Derivative financial instruments
In October 2014, we entered into a loan agreement in connection with the construction of our new corporate headquarters. We expect to borrow against the loan agreement in the second half of 2015. Because amounts borrowed on the loan will carry a variable LIBOR-based interest rate, we will 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 expect to borrow 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. Because we have not yet borrowed against the loan agreement related to our cash flow hedges, the notional amounts under our hedges at December 31, 2014 were zero.

Our derivatives are carried at fair value in our consolidated balance sheets in Other long-term liabilities on a gross basis. The accounting for gains and losses that result from changes in the fair values of derivative instruments depends on whether the derivatives have been designated and qualify as hedging instruments under GAAP. Our derivatives have been designated and qualify as cash flow hedges. We formally designated and documented, at inception, the financial instruments as hedges of specific underlying exposures, the risk management objectives, and the strategy for undertaking the hedging transactions. In addition, we formally assess, both at the inception and at least quarterly thereafter, whether the financial instruments used in hedging transactions are effective at offsetting changes in the cash flows of the related underlying exposures. To the extent that the hedges are effective, the changes in fair values of our cash flow hedges are recorded in Accumulated other comprehensive income. Any ineffective portion is immediately recognized into earnings.

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

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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) 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)
Year ended December 31, 2014          
Interest rate swap $(621) Interest expense $—
 Interest expense $—
The following table provides the outstanding notional balances and fair values of derivative financial instruments that were designated as accounting hedges outstanding positions for the dates indicated, and recorded gains/(losses) during the periods indicated (in thousands):
Cash flow hedges (1) Location in balance sheet Expiration date Outstanding notional Fair value Beginning gains (losses) Gains (losses) recorded during period (2) Ending gains (losses)
Year ended December 31, 2014              
Interest rate swap Other long-term liabilities 2023 $—
 $(1,008) $—
 $(1,008) $(1,008)


(1)
— There were no outstanding derivative instruments for the years ended December 31, 2013 and 2012.
(2)
— Gains (losses) recorded during the period are presented gross of the related tax impact.

Revenue recognition

We derive our revenue primarily from direct revenue and fulfillment partner revenue from merchandise sales. We also earn revenue from advertising on our shopping and other pages, and previously from listing fees and commissions collected from products being listed and sold through the Auctions tab, which we removed from our site in July 2011.pages. We have organized our operations into two principal segments based on the primary source of revenue: direct revenue and fulfillment partner revenue (see Note 22 "Business Segments")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 fulfillment 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 fulfillment partner revenue is recorded on a gross basis, as we are the primary obligor. We present revenue net of sales taxes.


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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.

Direct revenue

Direct revenue is derived from merchandise sales of our owned inventory to individual consumers and businesses that are fulfilled from our warehouses.businesses. Direct revenue comes from merchandise sales that occur primarily through our Website, but may also occur through offline and other channels.


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Overstock.com, Inc.

Notes to Consolidated Financial Statements (Continued)

2. ACCOUNTING POLICIES (Continued)

Fulfillment partner

Partner revenue

        Fulfillment partner

Partner revenue is derived from merchandise sales of inventory owned by our partners which they generally ship directly to our consumers and businesses. Partner revenue comes from merchandise sales that occur primarily through our Website, which fulfillment partners ship directly to consumersbut may also occur through offline and businesses from warehouses maintained by our fulfillment partners.

Consignment

        We offer a consignment service to suppliers where the suppliers' merchandise is stored in and shipped from our warehouses. We pay the consignment supplier upon shipment of the consigned merchandise to the consumer. Revenue from consignment service business in 2012, 2011 and 2010 were less than 1% of total net revenues and are included in fulfillment partner segment on a gross basis.

International business

        At December 31, 2012, we were offering products to customers in over 100 countries and non-U.S. territories. We do not have sales operations outside the United States, and are using a U.S. based third party to provide logistics and fulfillment for all international orders. Revenue generated from our international business is included in either direct or fulfillment partner revenue, depending on whether the product is shipped from our warehouses or from a fulfillment partner. Less than 1% of our 2012, 2011 and 2010 revenues were from international customers.

        Total revenues from International sales were $10.2 million, $8.8 million, and $9.4 million for the years ended December 31, 2012, 2011 and 2010 respectively.

Ecommerce marketplace channels

        During 2012, we began offering some of our products for sale in on-line marketplaces of other Internet retailers' websites, which allows us to reach a broader potential customer base. Under the terms of our agreements with these ecommerce marketplace retailers, the retailers typically earn a fee that is a percentage of the selling price of the orders they send us. Revenue generated from these ecommerce marketplace channels is included in either direct or fulfillment partner revenue, on a gross basis, depending on whether the product is shipped from our warehouses or from a fulfillment partner. Ecommerce marketplace channels were approximately 1% of our 2012 total net revenues.

Other businesses

        We operate an online site for listing cars for sale as a part of our Website. The cars listing service allows dealers to list vehicles for sale and allows buyers to review vehicle descriptions and post offers to purchase, and provides the means for prospective purchasers to contact sellers for further information and negotiations on the purchase of an advertised vehicle. Revenue from the cars listing business is included in the fulfillment partner segment on a net basis. Revenue from our other businesses is less than 1% of total net revenues.

channels.


Club O loyalty program

We have a customer loyalty program called Club O for which we sell annual memberships. Wememberships ("standard Club O"). During the third quarter of 2014, we also introduced an introductory customer loyalty program called Club O Lite for customers who sign up to receive promotional emails. For standard Club O memberships, we record membership fees as deferred revenue and we recognize revenue ratably over the membership period. TheBoth the standard Club O and Club O Lite loyalty program allowsprograms allow members to earn reward dollars for qualifying purchases


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Overstock.com, Inc.

Notes to Consolidated Financial Statements (Continued)

2. ACCOUNTING POLICIES (Continued)

made on our Website. We also have a co-branded credit card program (see "Co-brandedCo-branded credit card revenue"revenue below for more information). Co-branded cardholders are also standard Club O members and earn additional reward dollars for purchases made on our Website, and from other merchants.


Club O Reward dollars earned may be redeemed on future purchases made through our Website. Standard Club O membership reward dollars expire 90 days after the customer’s Club O membership expires. Club O Lite reward dollars expire 90 days after the customer's Club O membership expires. they are earned if no additional qualifying purchases are made during that period.

We account for these transactions as multiple element arrangements and allocate revenue to the elements using their relative fair values. We 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.


We recognize revenue for Club O reward dollars when customers redeem their reward dollars as part of a purchase at our Website. We recognize other income when Club O rewardReward dollars expire or the likelihood of reward dollars being redeemed by a customer is remote ("(“reward dollar breakage"breakage”). Due to the program's short history, currently no rewardReward dollar breakage is currently recognized untilwhen the reward dollars expire. However,expire as Other income in the futureour consolidated statements of income. Because we planrecently introduced Club O Lite, and enrolled a significant number of Club O Lite members, reward dollars and resulting breakage may increase as compared to recognize such breakage based upon historical redemption patterns.

prior periods.

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 revenue

programs

We have entered into 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(see Club O loyalty program"program above for more information). New account fees are recognized as revenue on a straight-line basis over the estimatedremaining life of the credit card relationship.relationship which runs through April 2015. Credit card usage fees are recognized as revenues as actual credit card usage occurs.



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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 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.

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 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 fulfillment partners have made an error, such as shipping the wrong product.


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Overstock.com, Inc.

Notes to Consolidated Financial Statements (Continued)

2. ACCOUNTING POLICIES (Continued)

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 $10.6$15.5 million and $10.9$13.2 million at December 31, 20122014 and 2011,2013, respectively.

Credit card chargeback allowance

Revenue is recorded net of credit card chargebacks. We maintain an allowance for credit card chargebacks based on current period revenues and historical chargeback experience. The allowance for chargebacks was $182,000$129,000 and $187,000$94,000 at December 31, 20122014 and 2011,2013, respectively.

Cost of goods sold

Cost of goods sold includes product costs, warehousing costs, outbound shipping costs, handling and fulfillment costs, customer service costs 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):


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 Year ended December 31, 

 2012 2011 2010 Year ended  
 December 31,

Total net revenue

 $1,099,289 100%$1,054,277 100%$1,089,873 100%
             2014 2013 2012
Total revenue, net$1,497,103
 100% $1,304,217
 100% $1,099,289
 100%

Cost of goods sold

  
    
    
  

Product costs and other cost of goods sold

 848,842 77% 821,739 78% 842,064 78%1,152,489
 77% 999,519
 77% 848,842
 77%

Fulfillment and related costs

 52,017 5% 53,450 5% 58,169 5%65,555
 4% 57,038
 4% 52,017
 5%
             

Total cost of goods sold

 900,859 82% 875,189 83% 900,233 83%1,218,044
 81% 1,056,557
 81% 900,859
 82%
             

Gross profit

 $198,430 18%$179,088 17%$189,640 17%$279,059
 19% $247,660
 19% $198,430
 18%
             


Advertising expense

We expense the costs of producing advertisements the first time the advertising takes place and expense the cost of communicating advertising 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


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Overstock.com, Inc.

Notes to Consolidated Financial Statements (Continued)

2. ACCOUNTING POLICIES (Continued)

totaled $55.6$99.6 million, $52.5$82.1 million and $53.2$55.6 million during the years ended December 31, 2012, 20112014, 2013 and 2010,2012, respectively. Prepaid advertising which consists primarily of prepaid advertising airtime, (included in Prepaids and other assets in the accompanying consolidated balance sheets) was $1.2$1.5 million and $1.4 million at December 31, 20122014 and 2011,2013, respectively.


Stock-based compensation

We measure compensation expense for all outstanding unvested share-based awards at fair value on the date of grant and recognize 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 will beare 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 17—16. Stock-Based Awards).

Loss contingencies

In the normal course of business, we are involved in legal proceedings and other potential loss contingencies. We accrue a liability for such 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.

incurred (see Note 13. Commitments and Contingencies).

Restructuring
Restructuring

Restructuring expenses are primarily comprised of lease termination costs. ASC Topic 420,Accounting for Costs Associated with Exit or Disposal Activities, requires that when an entity ceases using a property that is leased under an operating lease before the end of the contractual term, the termination costs should be recognized and measured at fair value when the entity ceases using the facility. Key assumptions in determining the restructuring expenses include the terms that may be negotiated to exit certain contractual obligations (see Note 3—3. Restructuring Expense).

Income taxes

Income taxes are accounted for under the asset and liability method. Deferred income taxes arise from temporarymethod, 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 financial statement recognitionliabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.


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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.

        At December 31, 2012 and December 31, 2011,


We record uncertain tax positions in accordance with ASC 740 on the basis of a two-step process whereby (1) we have a full valuation allowance against our deferred tax assets, net of expected reversals of existing deferred tax liabilities, as we believedetermine whether it is more likely than not that these benefitsthe tax positions will not be realized. Significant judgment is required in making this assessment, and it is very difficult to predict when our assessment may conclude thatsustained on the remaining portionbasis of the deferredtechnical merits of the position and (2) for those tax assetspositions that meet the more-likely-than-not recognition threshold, we recognize the largest amount of tax benefit that is realizable.


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Overstock.com, Inc.

Notesmore than 50 percent likely to Consolidated Financial Statements (Continued)

2. ACCOUNTING POLICIES (Continued)

be realized upon ultimate settlement with the related tax authority. We have tax deductions from stock-based compensation that exceed the stock-based compensation recorded for such instruments. To the extent such excessrecognize interest and penalties related to unrecognized tax benefits within the income tax expense line in the accompanying consolidated statements of income. Accrued interest and penalties are ultimately realized, they will increase shareholders' equity. We utilizeincluded within the with-and without approachrelated tax liability line in determining if and when such excess tax benefits are realized, and under this approach excess tax benefits related to stock based compensation are the last to be realized.

our consolidated balance sheets.


Earnings (loss) per share

Basic earnings (loss) per share is computed by dividing net income (loss) attributable to common shares by the weighted average number of common shares outstanding during the period. Diluted earnings (loss) per share is computed by dividing net income (loss) attributable to common shares for the period by the weighted average number of common and potential common shares outstanding during the period. Potential common shares, comprising incremental common shares issuable upon the exercise of stock options and restricted stock awards and convertible senior notes are included in the calculation of diluted earnings (loss) per common share to the extent such shares are dilutive.

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

 
 Year ended December 31 
 
 2012 2011 2010 

Net income (loss)

 $14,669 $(19,438)$13,889 
        

Deemed dividend related to redeemable common stock

  —  (12) (112)
        

Net income (loss) attributable to common shares

 $14,669 $(19,450)$13,777 
        

Net income (loss) per common share—basic:

          

Net income (loss) attributable to common shares—basic

 $0.63 $(0.84)$0.60 

Weighted average common shares outstanding—basic

  23,387  23,259  23,019 

Effect of dilutive securities:

          

Stock options and restricted stock awards

  285  —  347 

Convertible senior notes

  —  —  — 
        

Weighted average common shares outstanding—diluted

  23,672  23,259  23,366 

Net income (loss) attributable to common shares—diluted

 $0.62 $(0.84)$0.59 
 Year ended December 31,
 2014 2013 2012
Net income attributable to stockholders of Overstock.com, Inc.$8,854
 $84,378
 $14,669
Net income per common share—basic: 
  
  
Net income attributable to common shares—basic$0.37
 $3.56
 $0.63
Weighted average common shares outstanding—basic23,999
 23,714
 23,387
Effect of dilutive securities: 
  
  
Stock options and restricted stock awards318
 580
 285
Weighted average common shares outstanding—diluted24,317
 24,294
 23,672
Net income attributable to common shares—diluted$0.36
 $3.47
 $0.62


The following shares were excluded from the calculation of diluted shares outstanding as their effect would have been anti-dilutive (in thousands):

 
 Year ended December 31 
 
 2012 2011 2010 

Stock options and restricted stock units

  537  927  551 

Convertible senior notes

  —  —  454 
 Year ended December 31,
 2014 2013 2012
Stock options and restricted stock units291
 154
 537


Recently issued accounting standards
Accounting pronouncements adopted

        We adoptedOn May 28, 2014, the FASB issued ASU 2011-04,No. 2014-09, Revenue from Contracts with Customers, which amends currentrequires 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 to achieve common fair value measurement and disclosure requirements in U.S. GAAP and International Financial Reporting


Tablewhen it becomes effective. The new standard becomes effective for us on January 1, 2017. Early adoption is not permitted. The standard permits the use of Contents


Overstock.com, Inc.

Notes to Consolidated Financial Statements (Continued)

2. ACCOUNTING POLICIES (Continued)

Standards. The amendments generally represent clarification of FASB ASC Topic 820, but also include instances where a particular principleeither the retrospective or requirement for measuring fair value or disclosing information about fair value measurements has changed. The adoption ofcumulative effect transition method. We are evaluating the effect that ASU 2011-04 did not2014-09 will have a material effect on our consolidated financial statements.

statements and related disclosures. We adopted ASU 2011-05, which provided new guidance onhave not yet selected a transition method nor have we determined the presentationeffect of comprehensive income (FASB ASC Topic 220) in financial statements. Entities are required to present total comprehensive income either in a single, continuous statement of comprehensive income or in two separate, but consecutive, statements. Under the single-statement approach, entities must include the components of net income, a total for net income, the components of other comprehensive income and a total for comprehensive income. Under the two-statement approach, entities must report an income statement and, immediately following, a statement of other comprehensive income. The adoption of ASU 2011-05 did not have a material effectstandard on our consolidatedongoing financial statements.

        We adopted ASU 2011-08, which allows an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. Under these amendments, an entity would not be required to calculate the fair valuereporting.



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Table of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. The amendments include a number of events and circumstances for an entity to consider in conducting the qualitative assessment. The adoption of ASU 2011-08 did not have a material effect on our consolidated financial statements.

Accounting pronouncements issued not yet adopted

        In July 2011, the Financial Accounting Standards Board ("FASB") issued ASU No. 2012-02,Intangibles—Goodwill and Other (FASB Accounting Standards Codification Topic 350) which permits an entity to make a qualitative assessment to determine whether it is more likely than not that an indefinite-lived intangible asset, other than goodwill, is impaired. The Accounting Standard Update applies to both public and nonpublic entities and is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. We do not expect this pronouncement to have a material effect on our consolidated financial statements.

Contents



3. RESTRUCTURING EXPENSE

During the fourth quarter of 2006, we began a facilities consolidation and restructuring program designed to reduce the overall expense structure in an effort to improve future operating performance. The facilities consolidation and restructuring program was substantially completed by the end of the second quarter of 2007.

Restructuring liabilities along with charges (credits) to expense and payments associated with the facilities consolidation and restructuring program are as follows (in thousands):

 
 Balance at
Beginning of
Year		 Accretion
Expense		 Net Cash
Payments		 Adjustments Balance at
End of Year		 

Year ended December 31, 2012

 $1,491 $143 $(513)$76 $1,197 

Year ended December 31, 2011

 $1,797 $166 $(472)$— $1,491 
 
Balance at
Beginning of Year
 
Accretion
Expense
 
Net Cash
Payments
 Adjustments Balance at End of Year
Year ended December 31, 2014$445
 $7
 $(92) $(360) $—
Year ended December 31, 2013$1,197
 $71
 $(352) $(471) $445

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Overstock.com, Inc.

Notes to Consolidated Financial Statements (Continued)

3. RESTRUCTURING EXPENSE (Continued)

        We incurred $76,000 of restructuring charges during

During the yearyears ended December 31, 20122014 and 2013, we reversed approximately $360,000 and $471,000, respectively, of lease termination costs primarily due to ceasing the use of some of our office facilities and changes in the estimate of sublease incomeour restructuring accrual as a result of our entering intoreoccupation of a new sublease agreement and terminating another sublease agreement. There were no restructuring charges or reversals during the year ended December 31, 2011.

portion of formerly restructured office space.



4. COMPREHENSIVE INCOME (LOSS)


Our comprehensive income (loss) is as follows (in thousands):

 
 Year ended December 31, 
 
 2012 2011 2010 

Net income (loss)

 $14,669 $(19,438)$13,889 

Components of other comprehensive income, net of tax

  —  —  — 
        

Comprehensive income (loss)

 $14,669 $(19,438)$13,889 
        
 Year ended December 31,
 2014 2013 2012
Consolidated net income$8,801
 $84,378
 $14,669
Other comprehensive loss:     
Unrealized loss on cash flow hedges, net of benefit for taxes of $387, $0, and $0(621) —
 —
Other comprehensive loss(621) —
 —
Comprehensive income$8,180
 $84,378
 $14,669



5. ACCOUNTS RECEIVABLE


Accounts receivable consist of the following (in thousands):


 December 31,  December 31,

 2012 2011  2014 2013

Accounts receivable, other

 $10,888 $8,033  $11,292
 $10,098

Credit card receivables

 9,182 6,042  8,182
 6,101
      19,474
 16,199

 20,070 14,075 

Less: allowance for doubtful accounts

 (797) (574) (511) (152)
     

Accounts receivable, net

 $19,273 $13,501  $18,963
 $16,047
     



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6. INVENTORIES


Inventories consist of the following (in thousands):


 December 31,  December 31,

 2012 2011  2014 2013

Product inventory

 $18,044 $14,904  $17,117
 $18,841

Inventory in-transit

 8,420 8,089  9,091
 8,202
     

Total inventories, net

 $26,464 $22,993  $26,208
 $27,043
     

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Overstock.com, Inc.

Notes to Consolidated Financial Statements (Continued)

7. PREPAIDS AND OTHER ASSETS


Prepaids and other assets consist of the following (in thousands):


 December 31,  December 31,

 2012 2011  2014 2013

Prepaid maintenance

 $6,494 $6,995  $6,872
 $6,949

Investment in precious metals

 3,055 1,657 

Prepaid other

 2,148 2,592  4,231
 1,993

Prepaid advertising

 1,200 1,407  1,518
 1,356
     

Total prepaids and other assets

 $12,897 $12,651  $12,621
 $10,298
     



8. FIXED ASSETS


Fixed assets consist of the following (in thousands):


 December 31,  December 31,

 2012 2011  2014 2013

Computer hardware and software, including internal-use software and website development

 $151,155 $141,435  $156,700
 $170,702
Land 10,861
 —

Furniture and equipment

 14,283 13,945  10,605
 14,457

Leasehold improvements

 6,339 5,445  7,630
 6,539
     
Construction in progress - building 5,810
 —

 171,777 160,825  191,606
 191,698

Less: accumulated depreciation and amortization

 (150,740) (135,503) (139,535) (164,504)
     

Total fixed assets, net

 $21,037 $25,322  $52,071
 $27,194
     


Depreciation and amortization of property and equipment totaled $16.0$18.1 million, $16.4$14.5 million, and $14.6$16.0 million for the years ended December 31, 2012, 20112014, 2013 and 2010,2012, respectively. Fixed assets included assets under capital leases of $1.7$4.7 million and $1.7$4.2 million, and accumulated amortizationdepreciation related to assets under capital leases of $1.7$2.8 million and $1.5$2.1 million, at December 31, 20122014 and 2011,2013, respectively.

Depreciation expense of assets recorded under capital leases was $707,000 and $429,000 for the years ended December 31, 2014 and 2013, respectively. During 2014, we retired $43 million of fully depreciated fixed assets that were removed from service in 2014.



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9. OTHER LONG-TERM ASSETS


Other long-term assets consist of the following (in thousands):


 December 31,  December 31,

 2012 2011  2014 2013

Prepaid expenses, long-term portion

 $1,816 $1,762  $1,156
 $1,585

Prepaid other

 350 498 
     
Capitalized debt issuance costs 849
 —
Other long-term assets 707
 438

Total other long-term assets, net

 $2,166 $2,260  $2,712
 $2,023
     

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Overstock.com, Inc.

Notes to Consolidated Financial Statements (Continued)

10. ACCRUED LIABILITIES


Accrued liabilities consist of the following (in thousands):


 December 31, 

 2012 2011  December 31,
 2014 2013
Accounts payable accrual $20,682
 $10,870

Allowance for returns

 $10,618 $10,899  15,531
 13,232
Other accrued expenses 13,497
 9,934
Accrued marketing expenses 12,167
 13,715

Accrued compensation and other related costs

 9,135 6,819  6,682
 8,558

Accounts payable accrual

 8,416 8,284 

Accrued marketing expenses

 6,172 7,632 

Other accrued expenses

 4,034 3,416 

Accrued freight

 2,761 2,392  5,115
 4,276
Inventory received but not invoiced 3,048
 864

Accrued taxes

 2,349 1,540  2,639
 1,833
Accrued professional expenses 954
 824
Credit card processing fee accrual 776
 700

Facility lease accruals

 1,653 1,841  473
 567

Accrued professional expenses

 760 3,013 

Inventory received but not invoiced

 700 1,069 

Credit card processing fee accrual

 584 535 

Short term portion of restructuring accrual (Note 3)

 492 462  —
 306
     

Total accrued liabilities

 $47,674 $47,902  $81,564
 $65,679
     



11. DEFERRED REVENUE


Deferred revenue consists of the following (in thousands):


 December 31,  December 31,

 2012 2011  2014 2013

Payments owed or received prior to product delivery

 $29,280 $17,691  $30,608
 $24,402

Club O membership fees and reward points

 3,579 5,193  8,008
 5,697
In store credits 5,389
 2,400

Unredeemed gift cards

 2,973 3,738  2,872
 3,061

Other

 2,579 1,356  1,574
 1,761
     

Total deferred revenue

 $38,411 $27,978  $48,451
 $37,321
     


12. BORROWINGS

U.S. Bank Financing Agreement

term loan and revolving loan agreement


On December 26, 2012,October 24, 2014, we entered into a $3.0 million cash-collateralized line ofsyndicated senior secured credit agreementfacility (the "Credit Agreement"“Facility”) with U.S. Bank National Association ("U.S. Bank" or the "Administrative Bank") and certain other banks in connection with the construction of

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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 million senior secured revolving credit facility (the “Revolving Loan”) for working capital and capital expenditures, but not for the issuanceProject. We must satisfy a number of letters of credit. Advancesconditions at least 60 days prior to any funding under the Credit Agreement bear interest at one-month LIBOR plus 1.0%Facility, including making cash contributions of approximately $37.4 million toward the Project. We may also be required to make additional cash contributions if necessary to maintain a loan to value ratio of 80% or less. 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 expect to begin borrowing under the Facility in the second half of 2015.

On or about January 1, 2017, upon completion of the Project, the Real Estate Loan is designed to convert into an approximately 6.75-year term loan due October 1, 2023 (the “Term Loan”). The Creditconditions to conversion of the Real Estate Loan to the Term Loan include, among others, requirements that the Project must have been completed in accordance with the applicable plans, paid for in full, and generally free of liens; completion must have been certified by the project architect and the inspecting architect; certificates of occupancy must have been issued; we must have paid all amounts then due to the lending banks and must be in compliance with the covenants under the Loan Agreement; the Real Estate Loan must be brought “in balance” as defined in the Loan Agreement, matures on December 31, 2013. There were no amounts outstanding onwhich may require us to contribute additional cash to the Credit Agreement at December 31, 2012.

        Until December 31, 2012,Project; we were partymust have paid the final amount of our cash contribution as required by the Loan Agreement; and if required by the Administrative Bank, an updated appraisal must show that the Project is in compliance with an 80% loan to a Financing Agreement with U.S. Bank (the "Financing Agreement"). In November 2012, we repaidvalue ratio requirement. If the conditions to conversion are not satisfied in early 2017, all amounts outstanding under the Financing Agreement. The Financing Agreement expired in accordance with its terms on December 31, 2012. The maximum credit potentially available under the revolving facility was $20 million. Our obligations under

Facility will become immediately due and payable.

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Overstock.com, Inc.

Notes to Consolidated Financial Statements (Continued)

12. BORROWINGS (Continued)

the Financing Agreement and all related agreements were secured by all or substantially all of our assets, excluding our interest in certain litigation.

        Advances under the Financing Agreement bore interest at one-month LIBOR plus 2.5%. We had also entered into an interest rate cap agreement with U.S. Bank with an effective date of October 1, 2011 which limited our exposure for one-month LIBOR at 0.5% for the term of the Financing Agreement.

Amounts outstanding under the Financing AgreementReal Estate Loan and the Term Loan will 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 Note 2. Accounting Policies). Monthly payments of interest only will be 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 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, 20122014 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 million.

At December 31, 20112014 we were zeroin 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 $17.0our business, including covenants limiting certain indebtedness. Notwithstanding, the Loan Agreement permits us to incur up to $20 million respectively,of additional senior-secured indebtedness for equipment financing, 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, 2014 we had not borrowed any amounts under either the Real Estate Loan or the Revolving Loan.

U.S. Bank letters of credit

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At December 31, 2014 and 2013, letters of credit totaling $1.8 million$580,000 and $2.0$1.6 million, respectively, 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.

        Prior to December 27, 2011, we were a party to a Master Lease Agreement and a Financial Covenants Rider and related documents (collectively, the "Master Lease Agreement") dated September 17, 2010 with U.S. Bancorp Equipment Finance, Inc.—Technology Finance Group ("Lessor"), an affiliate of

U.S. Bank National Association. Under the Master Lease Agreement we entered into four separate leases, pursuant to which we sold certain information technology hardware ("IT Assets") to Lessor, which were simultaneously leased back for a period of 48 months and financed certain software licenses for a period of 48 months for proceeds totaling $16.4 million. Subsequently, we entered into eleven additional leases; whereby we leased $8.2 million in IT Assets and financed certain software licenses directly from the Lessor. We had the right to repurchase the IT Assets at the end of the 48-month term for $1.00. Payments on the Master Lease Agreement were due monthly. The weighted average effective interest rate under the Master Lease Agreement was 6.29%. We had accounted for the Master Lease Agreement as a financing transaction and amounts owed were included in Finance Obligations, current and non-current in the consolidated balance sheets. We recorded no gain or loss as a result of entering into these transactions.

        On December 27, 2011, we and the Lessor agreed to terminate the Master Lease Agreement and all related schedules. We paid approximately $20.1 million to Lessor in connection with the amendment andcommercial purchasing card agreement to terminate the Master Lease Agreement, resulting in a $1.2 million loss on early retirement of debt included in Other income, net in our consolidated statements of operations. As of December 31, 2011 no amounts under the finance obligations remained outstanding.

U.S. Bank Purchasing Card Agreement

We have a commercial purchasing card (the "Purchasing Card"“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, 2012, $3.9 million2014, $803,000 was outstanding and $1.1$4.2 million was available under the Purchasing Card. At December 31, 2011, $3.4 million2013, $517,000 was outstanding and $1.6$4.5 million was available under the Purchasing Card.


Capital leases

3.75% Convertible Senior Notes

In November 2004,May 2014 and March 2013, we completed an offeringentered into a capital lease arrangements of $120.0computer equipment for $325,000 and $2.6 million of 3.75% Convertible Senior Notes due 2011 (the "Senior Notes"). Proceedsrespectively. These arrangements will expire in 2017. In order to us were $116.2obtain discounted pricing, we prepaid the entire $325,000 and $2.6 million net of $3.8 million of initial purchaser's discount and debt issuance costs. The discount and debt issuance costs were amortized usingshortly after entering into the straight-line method which approximated the effective interest method. We recorded

agreement. As such, we have no future payment obligations under capital leases at December 31, 2014.

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Overstock.com, Inc.

Notes to Consolidated Financial Statements (Continued)

12. BORROWINGS (Continued)

amortization of discount and debt issuance costs related to this offering totaling zero, $77,000 and $228,000 during the years ended December 31, 2012, 2011 and 2010, respectively. Interest on the Senior Notes was payable semi-annually on June 1 and December 1 of each year. The Senior Notes were scheduled to mature on December 1, 2011 and were unsecured and ranked equally in right of payment with all existing and future unsecured, unsubordinated debt and senior in right of payment to any existing and future subordinated indebtedness.

        We retired all of the remaining $34.6 million of the Senior Notes during the year ended December 31, 2011, for $34.6 million in cash, resulting in a loss of $54,000 on early extinguishment of debt, net of $77,000 of associated unamortized discount. Of the $34.6 million in Senior Notes retired during the year ended December 31, 2011, $10.1 million were held by Chou Associates Management, Inc. or an affiliate of Chou ("Chou") and $21.7 million were held by Fairfax Financial Holdings Limited or an affiliate of Fairfax ("Fairfax"). Chou and Fairfax are beneficial owners of more than 5% of our common stock. We retired $25.4 million of the Senior Notes during the year ended December 31, 2010 for $24.9 million in cash, resulting in a gain of $346,000 on early extinguishment of debt, net of $158,000 of associated unamortized discount.

        As of December 31, 2012 and December 31, 2011, no amount of Senior Notes were outstanding.

13. COMMITMENTS AND CONTINGENCIES


Summary of future minimum lease payments for all operating leases


Minimum future payments under all operating leases as of December 31, 2012,2014, are as follows (in thousands):

Payments due by period
  
 

2013

 $9,452 

2014

 9,899 
Payments due by period:  

2015

 8,320  $11,546

2016

 1,630  9,342

2017

 183  4,963
2018 4,585
2019 3,916

Thereafter

 —  28,521
    $62,873

 $29,484 
   


Rental expense for operating leases totaled $8.5$11.7 million, $8.9$10 million and $8.0$8.5 million for the years ended December 31, 2014, 2013 and 2012, 2011 and 2010, respectively. EstimatedThere is no estimated sublease income of $117,000 is expected over the next five yearsyears.

During 2014, we entered into amendments to extend the leases on our corporate headquarters and a data center space from their previous expiration of which $117,000 is anticipatedJune 30, 2016 to be receivedJanuary 31, 2017 to better coincide with the expected timing of completion of our new corporate headquarters. The minimum future payments due under these amended operating leases are included in the next 12 months.

table above.


Naming rights


During 2011, we entered into a six-year agreement with the Oakland-Alameda County Coliseum Authority ("OACCA") for the right to name the Oakland Alameda County Coliseum. Amounts shown below represent annual payments due OACCA for the naming rights. We have the right to terminate this agreement at our sole option, subject to payment of a termination fee.



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Overstock.com, Inc.

Notes to Consolidated Financial Statements (Continued)

13. COMMITMENTS AND CONTINGENCIES (Continued)

Minimum future payments under the naming rights agreement as of December 31, 2012,2014, are as follows (in thousands):

Payments due by period
  
   

2013

 $1,273 

2014

 1,311 

2015

 1,351  $1,351

2016

 1,391  1,391

2017

 —  —

Thereafter

 —  —
    $2,742

 $5,326 
   


Technology

From time to time we enter into non-cancellable, long-term contractual agreements for technology services. Minimum future payments under these agreements as of December 31, 2014, are as follows (in thousands):
Payments due by period:  
2015 2,324
2016 1,683
2017 —
Thereafter —
  $4,007

Legal Proceedings

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 indemnification obligations to us. However, such contractual obligations may prove unenforceable or non-collectible, and in the eventif 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 February 2, 2007, along with five shareholder plaintiffs, we filed a lawsuit in the Superior Court of California, County of San Francisco against Morgan Stanley & Co. Incorporated, Goldman Sachs & Co., Bear Stearns Companies, Inc., Bank of America Securities LLC, Bank of New York, Citigroup Inc., Credit Suisse (USA) Inc., Deutsche Bank Securities, Inc., Merrill Lynch, Pierce, Fenner & Smith, Inc., and UBS Financial Services, Inc., and later amended the complaint to add Lehman Brothers Holdings Inc. as a defendant. The suit alleged that the defendants, who controlled over 80% of the prime brokerage market, participated in an illegal stock market manipulation scheme and that the defendants had no intention of covering short sell orders with borrowed stock, as they are required to do, causing what are referred to as "fails“fails to deliver"deliver” and that the defendants'defendants’ actions caused and continued to cause dramatic declines in the share price of our stock and that the amount of "fails“fails to deliver"deliver” often exceeded our entire supply of outstanding shares. The suit accused the defendants of violations of California securities laws and common law and violations of California'sCalifornia’s Unfair Business Practices Act. After it filed for bankruptcy on September 2008, we elected not to pursue our claims against Lehman Brothers Holdings. On July 23, 2009, the court sustained defendants'defendants’ demurrer to our amended causes of action for conversion and trespass to chattels. On December 15, 2010, we and the other plaintiffs in the case entered into a settlement agreement with certain of the defendants requiring these defendants to pay in the aggregate $4.5$4.5 million to plaintiffs. Other terms of settlement are confidential. At that time, remaining defendants in the suit were Goldman Sachs


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Overstock.com, Inc.

Notes to Consolidated Financial Statements (Continued)

13. COMMITMENTS AND CONTINGENCIES (Continued)

Group, Inc., Goldman Sachs & Co., Goldman Sachs Execution & Clearing L.P., ("(“Goldman Defendants"Defendants”) Merrill Lynch, Pierce, Fenner & Smith, Inc., Merrill Lynch Professional Clearing Corporation ("(“Merrill Lynch Defendants), and Bank of America Securities LLC. On December 15, 2010, we filed a motion to amend our complaint against the Goldman and Merrill Lynch Defendants to add a cause of action based on the New Jersey Racketeer Influenced and Corrupt Organization (RICO) Act. Defendants challenged the RICO claim by demurrer and eventually the court sustained the demurrer. We thereafter entered a settlement agreement with Bank of America Securities LLC, the terms of which are confidential, and have dismissed the action as to that defendant. On August 19, 2011, the remaining defendants filed a motion for summary judgment. On January 10, 2012, the court granted the motion for summary judgment as to all remaining defendants and the


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judgment has beenwas entered. We have appealed.appealed that decision and each side appealed the trial court’s decisions regarding sealing of certain records in the case. The defendants applied to the court for reimbursement from us of their allowable court costs, and the court ordered costs in the collective amount of $2.4 million. We challenged$689,471. The Court of Appeal heard oral argument of all appeals on August 15, 2014, and issued its decision on November 13, 2014, reversing the application as excessive under California law,trial court’s dismissal and following hearing,summary judgment in favor of Merrill Lynch Professional Clearing Corporation, but the amount was reduced to $689,471, which will be payable only if we do not succeed on our appealcourt upheld the decision dismissing the Goldman Defendants. The Court of Appeal also upheld the trial court’s decision denying the amendment of the summary judgment.complaint to include RICO claims, and in the matter of the sealing of the records, ordered that the relevant portions of the records be made public, subject to the trial court’s determination of which documents were relevant and what third party, private financial information should be redacted. All parties petitioned the California Supreme Court for review of various parts the decision, and the court denied the petitions. The case has been remitted to the Court of Appeal. We anticipate the case will return to the trial court for final trial preparation and trial of our claims against Merrill Lynch Professional Clearing Corporation. The nature of the loss contingencies relating to any court costs ordered against us are described above.

        On May 30, 2008 we filed a complaint in New York state court against the New York State Department of Taxation and Finance, its Commissioner, the State of New York and its governor, alleging that a New York state tax law is unconstitutional. The effect of the New York law is to require Internet sellers to collect and remit New York sales taxes on their New York sales even if the seller has no New York tax "nexus" other than with New York based independent contractors who are Internet advertising affiliates. The complaint asks for the court to declare the law unconstitutional and enjoin its application to us. New York filed a motion to dismiss. We responded to the motion and filed a motion for summary judgment, and both motions were heard simultaneously. On January 12, 2009, the court granted New York's motion to dismiss and denied our motion for summary judgment. We appealed the decision and on November 4, 2010 the New York Appellate Division upheld part of the lower court's ruling rejecting our claims that the law is unconstitutional on its face, but remanded our claims that the law is unconstitutional as applied, for further discovery and proceedings in the lower court. We filed with the New York State Court of Appeals a motion of leave to appeal the portions of the decision upholding the lower court's ruling. On March 15, 2011, the Appellate Division of the New York State Court of Appeals denied our motion for leave to appeal to the New York State Court of Appeals. We have determined not to pursue at the trial court level our claims that the law is unconstitutional as applied. We proceeded with an appeal to the New York State Court of Appeals of the Appellate Division's ruling on our claim that the statute is unconstitutional on its face. The Court heard oral argument on the appeal on February 6, 2013 but has not yet issued its decision.

        On August 12, 2008, we along with seven other defendants, were sued in the United States District Court for the Northern District of California, by Sean Lane, and seventeen other individuals, on their own behalf and for others similarly in a class action suit, alleging violations of the Electronic Communications Privacy Act, Computer Fraud and Abuse Act, Video Privacy Protection Act, and California's Consumer Legal Remedies Act and Computer Crime Law. The complaint relates to our use of a product known as Facebook Beacon, created and provided to us by Facebook, Inc. Facebook Beacon provided the means for Facebook users to share purchasing data among their Facebook friends. The parties extended by agreement the time for defendants' answer, including our answer, and thereafter, the Plaintiff and Facebook proposed a stipulated settlement to the Court for approval, which would resolve the case without requirement of financial contribution from us. On March 17, 2010, over


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Overstock.com, Inc.

Notes to Consolidated Financial Statements (Continued)

13. COMMITMENTS AND CONTINGENCIES (Continued)

objections lodged by some parties, the Court entered an order accepting settlement. Various parties appealed and on September 20, 2012 the Federal Appeals Court for the 9th Circuit upheld the settlement. Appealing parties have petitioned for a rehearing. The Court has not yet ruled on the petition. The nature of the loss contingencies relating to claims that have been asserted against us are described above.

        On November 14, 2008, we filed suit in Ohio state court against the Ohio Tax Commissioner, the Ohio Attorney General and the Governor of Ohio, alleging the Ohio Commercial Activity Tax is unconstitutional. Enacted in 2005, Ohio's Commercial Activity Tax is based on activities in Ohio that contribute to production or gross income for a company whether or not the company has a physical presence in or nexus within the state. Our complaint asked for a judgment declaring the tax unconstitutional and for an injunction preventing any enforcement of the tax. The defendants moved to dismiss the case. On July 28, 2009, the trial court ruled that there was no justiciable controversy in the case, as we had not yet been assessed a tax, and it granted the defendants' motions to dismiss. In September 2009, we received a letter of determination from the Ohio Department of Taxation noting the Department's determination that we are required to register for remitting of the Commercial Activity Tax, and owe $612,784 in taxes, interest, and penalties as of June 30, 2009. The Ohio Department of Taxation issued additional estimated assessments of estimated tax, interest and penalties totaling $146,162 as of December 31, 2012. We have filed protests to challenge the Department's Assessments on constitutional grounds and the matter is currently pending before the Ohio Department of Taxation's Legal Division for administrative review and determination. A hearing on these matters was held November 18, 2011. No administrative ruling has been issued following the hearing. The nature of the loss contingencies relating to claims that have been asserted against us are described above. We believe the determinations to be unlawful and erroneous and are vigorously contesting the determination.

        On March 10, 2009, we were sued in a class action filed in the United States District Court, Eastern District of New York. Cynthia Hines, the nominative plaintiff on behalf of herself and others similarly situated, seeks damages under claims for breach of contract, common law fraud and New York consumer fraud laws. The Plaintiff alleges we failed to properly disclose our returns policy to her and that we improperly imposed a "restocking" charge on her return of a vacuum cleaner. We filed a motion to dismiss based upon assertions that our agreement with our customers requires all such actions to be arbitrated in Salt Lake City, Utah. Alternatively, we asked that the case be transferred to the United States District Court for the District of Utah, so that arbitration may be compelled in that district. On September 8, 2009 the motion to dismiss or transfer was denied, the court stating that our browsewrap agreement was insufficient under New York law to establish an agreement with the customer to arbitrate disputes in Utah. On October 8, 2009, we filed a Notice of Appeal of the court's ruling. The appeal was denied. On December 31, 2010 Hines filed an amended complaint. The amended complaint eliminated common law fraud claims and breach of contract claims and added claims for breach of Utah's consumer protection statute and various other state consumer protection statutes. The amended complaint also asks for an injunction. We filed motions to dismiss and to decertify the class. The court has not ruled on these motions. 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.

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


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Overstock.com, Inc.

Notes to Consolidated Financial Statements (Continued)

13. COMMITMENTS AND CONTINGENCIES (Continued)

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 in this action. On November 11, 2009, the parties stipulated to stay all proceedings in the case until resolution of a reexamination of the patent in question, and also until a previously filed infringement action against Wal-Mart Stores, Inc. and other retailers resulted either in judgment or dismissal. Subsequently, the parties agreed to extend the time for defendants' complaintdefendants to answer until 21 days following a court order to lift the stay to which the parties stipulated. The United States Patent and Trademark Office resolved the reexamination of the patent in question in favor of SpeedTrack, Inc. The case remains stayed, pending the outcome and appeal of the infringement action against Wal-Mart Stores, Inc. and other retailers. On February 22, 2012, the court in the Wal-Mart Stores case granted Wal-Mart Stores'Stores’ motion for summary judgment of non-infringement. The court also granted Speedtrack'sSpeedtrack’s motion for summary judgment on patent validity. Speedtrack is appealingappealed, and the ruling.ruling was upheld. It is not known whether the summary judgments granted in the Wal-Mart Stores case will have an effect on the Speedtrack case in which we are named as one of the defendants. 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 or about September 25, 2009, Alcatel-Lucent USA, Inc. filed suit against us and 12 other defendants in the United States District Court in the Eastern District of Texas. We are alleged to have infringed three patents purportedly related to a communications protocol between a user and server terminals, text input functionalities and search processes. We believe a third party vendor of search products and services sold to us is contractually obligated to indemnify us in this action as it pertains to the search patent. On October 14, 2011, a jury returned a verdict in our favor, finding non-infringement on all asserted claims, on all patents, and finding of invalidity of the Alcatel-Lucent patent, having to do with a communications protocol. On November 29, 2011, Alcatel-Lucent filed a motion for a new trial which was denied. Alcatel-Lucent has filed an appeal which we will oppose. The appeal is now in the briefing stage.


On September 29, 2010, a trustee in bankruptcy filed against us an adversary proceeding in the matter of In re: Petters Company, Inc., a case filed 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'strustee’s complaint alleges such transfers occurred in at least one note transaction whereby we transferred at least $2.3$2.3 million and received in return transfers totaling at least $2.5 million. The trustee does not specify a date for the transactions; however we believe that any alleged transaction with the Petters Company would have taken place in excess of seven years from the date of the filing of the adversary proceeding.$2.5 million. The case is in its earlydiscovery stages. We filed a motion to dismiss on statute of limitations and other grounds. The court consolidated the issues in our motion with issues raised by motion in similar trustee-filed cases. The court issued legal rulings on these consolidated legal issues, and has not ruled uponallowed portions of the motioncase to dismiss.proceed to the discovery stage. 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.

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. These district attorneys seeksought damages and an injunction under claims for violations of California consumer protection laws, alleging


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Overstock.com, Inc.

Notes to Consolidated Financial Statements (Continued)

13. COMMITMENTS AND CONTINGENCIES (Continued)

we made untrue or misleading statements concerning our pricing, price reductions, sources of products and shipping charges. The complaint asksasked for damages in the amount of not less than $15$15 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 suit iscourt 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 discovery stage. Trialamount 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 tentatively for September 9, 2013.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 September 11, 2011, Droplets, Inc. filed suit against us and eight other defendants in the United States District Court in the Eastern District of Texas for infringement of a patent covering strings of programming code downloaded from a

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server to a client computer. The case was tried and on January 16, 2015 the jury rendered a verdict of infringement assessing damages in the amount of $4.0 million. The court may also order injunctive relief, the payment of pro and post-judgment interest, future royalties, attorney fees and costs. We intend to appeal. The nature of the loss contingencies relating to claims that have been asserted against us are described above. We intend to vigorously defend this action and pursue our indemnification rights with our vendors.
On February 11, 2013, RPost Holdings, Inc., RPost Communications Limited, and RMail Limited, filed suit against us in the United States District Court in 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 which accepted the defense. We answered the complaint. The case is in its early stages. 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 13, 2011, Select Retrieval, LLCJanuary 31, 2014, Guardian Media Technologies LTD filed suit against us and 79 other defendants in the United States District Court forin the Eastern District of DelawareTexas for infringement of patents covering parental control features in DVD players and televisions. The suit relates to two prior lawsuits with Guardian filed in 2008, and in 2013, which were previously dismissed. The case was settled for a patent coveringnominal amount and is now dismissed.
On September 30, 2013, Altaf Nazerali filed suit against us in the hierarchical displaySupreme Court of interactive linksBritish Columbia for vicarious liability for defamation, liable and slander. The suit relates to alleged representations about Nazerali found on a webpage. We filed a motion to dismiss which was denied.the website www.deepcapture.com. The suit alleges that the representations were made by our Chief Executive Officer, Patrick Byrne, and two other employees. The case is in its earlydiscovery stages. A trial is scheduled in April 2015. 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.

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 attorneys' fees and costs. The case is in its discovery stages. 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, if any, with our vendors.

        On November 18, 2011 Smartfit Solutions, LLC filed suit against us and 43 other defendants in the United States District Court for the Eastern District of Texas for infringement of a patent covering certain "methods for presenting exercise protocols to a user and evaluating the effectiveness of the same." We tendered the defense of this action to an indemnitor which accepted the defense. We have answered the complaint. The case is in its early stages. 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 January 27, 2012, Pragmatus Telecom, LLC filed suit against us in the United States District Court for the District of Delaware for infringement of two patents covering a system for coordinating data and voice communications via customer contact channel changing system using voice over IP and infringement of one patent for coordinating data and voice communications via customer contact channel changing system. We have answered the complaint. We tendered the defense of the case to an indemnitor, who has accepted the defense and moved to stay the case against us pending the disposition of a declaratory action which the indemnitor brought against Pragmatus Telecom. The case against us was stayed July 10, 2012, pending resolution of the declaratory action. 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 March 1, 2012, H-W Technology, L.C. filed suit against us in the United States District Court in the Northern District of Texas for infringement of a patent entitled "Internet Protocol (IP) Phone with Search and Advertising Capability." We have answered the complaint. The case is in its early stages. The nature of the loss contingencies relating to claims that have been asserted against us are


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Overstock.com, Inc.

Notes to Consolidated Financial Statements (Continued)

13. COMMITMENTS AND CONTINGENCIES (Continued)

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, if any, with our vendors.

        On May 2, 2012, Execware LLC filed suit against us in the United States District Court for the District of Delaware for infringement of a patent entitled: "Integrated Dialog Box for Rapidly Altering Presentation of Parametric Text Data Objects on a Computer Display." We have answered the complaint. The case is in its early stages. 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 May 10, 2012, Lodsys Group, LLC filed suit against us and seven other defendants in the United States District Court for the Eastern District of Texas for infringement of a patent covering method and system for gathering information from units of a commodity across a network. We tendered the defense of this action to an indemnitor which resolved the matter with no payment from us. The case has been dismissed.

        On July 16, 2012, Digitech Image Technologies, LLC filed against us and forty-five other defendants in the United States District Court for the Central District of California for infringement of a patent covering the imaging technology that facilitates prediction of color and location within digital cameras. We tendered defense of the case to an indemnitor which accepted the defense. Following a ruling in our favor, the case was dismissed and in September 2012, Digitech filed a new complaint in the same court on the same infringement claims. In the new action, our indemnitor continues to defend the case. The case is in its early stages. 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 cooperate with our indemnitor and vigorously defend this action.

        On July 19, 2012, Data Carriers, LLC filed suit against us in the United States District Court for the District of Delaware for infringement of a patent covering the "autocomplete" features of our website. We believe a third party vendor is contractually obligated to indemnify us in this action. We have answered the complaint. The case is in its early stages. 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.

We establish liabilities when a particular contingency is probable and estimable. At December 31, 2012,2014, we have accrued $2.9$12.5 million in light of these 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.

        We recognized a reduction in legal expenses of $88,000, zero and $4.5 million during the years ended December 31, 2012, 2011 and 2010 respectively, related to the settlement of legal matters.


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Overstock.com, Inc.

Notes to Consolidated Financial Statements (Continued)

14. INDEMNIFICATIONS AND GUARANTEES

During our normal course of business, we have made certain indemnities, commitments, and guarantees under which we may be required to 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, 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.



15. STOCKHOLDERS' EQUITY


Common Stock


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Each share of common stock has the right to one vote. The holders of common stock are also entitled to receive dividends whenever funds are legally available and when declared by the board of directors, subject to prior rights of holders of all classes of stock outstanding having priority rights as to dividends. No dividends have been declared or paid on our common stock through December 31, 2012.

2014.



16. STOCK AND DEBT REPURCHASE PROGRAM

        We retired all of the remaining $34.6 million of the Senior Notes during the year ended December 31, 2011, for $34.6 million in cash, resulting in a loss of $54,000 on early extinguishment of debt, net of $77,000 of associated unamortized discount. Of the $34.6 million in Senior Notes retired during the year ended December 31, 2011, $10.1 million were held by Chou Associates Management, Inc. or an affiliate of Chou ("Chou") and $21.7 million were held by Fairfax Financial Holdings Limited or an affiliate of Fairfax ("Fairfax"). Chou and Fairfax are beneficial owners of more than 5% of our common stock. We retired $25.4 million of the Senior Notes during the year ended December 31, 2010 for $24.9 million in cash, resulting in a gain of $346,000 on early extinguishment of debt, net of $158,000 of associated unamortized discount.

17. STOCK-BASEDBASED 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 on a straight line basis 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, 2012, 20112014, 2013 and 2010.2012. At December 31, 2012, 2.82014, 2.7 million shares of stock remained available for future grants under the Plan. We settle stock option exercises with newly issued common shares.


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Overstock.com, Inc.

Notes to Consolidated Financial Statements (Continued)

17. STOCK-BASED AWARDS (Continued)

The following is a summary of stock option activity (in thousands)thousands, except per share data):


 2012 2011 2010  2014 2013 2012

 Shares Weighted
Average
Exercise
Price		 Shares Weighted
Average
Exercise
Price		 Shares Weighted
Average
Exercise Price		  Shares 
Weighted
Average
Exercise
Price
 Shares 
Weighted
Average
Exercise
Price
 Shares 
Weighted
Average
Exercise Price

Outstanding—beginning of year

 405 $17.58 496 $18.09 721 $20.29  273
 $17.30
 364
 $17.34
 405
 $17.58

Granted at fair value

 — — — — — — 

Exercised

 — — — — (90) 17.05  (30) 17.08
 (89) 17.45
 —
 —

Expired/Forfeited

 (41) 20.06 (91) 20.55 (135) 30.41  (19) 18.00
 (2) 17.08
 (41) 20.06
             

Outstanding—end of year

 364 $17.34 405 $17.58 496 $18.09  224
 $17.27
 273
 $17.30
 364
 $17.34
             

Options exercisable at year-end

 364 $17.34 404 $17.59 472 $18.08  224
 $17.27
 273
 $17.30
 364
 $17.34

The following table summarizes information about stock options as of December 31, 20122014 (in thousands, except per share data):

Options OutstandingOptions Outstanding Options Exercisable Options Outstanding Options Exercisable
SharesShares Weighted
Average
Exercise
Price		 Weighted
Average
Remaining
Contract Life		 Aggregate
Intrinsic
Value		 Shares Weighted
Average
Exercise
Price		 Weighted
Average
Remaining
Contract Life		 Aggregate
Intrinsic
Value		  
Weighted
Average
Exercise
Price
 
Weighted
Average
Remaining
Contract Life
 
Aggregate
Intrinsic
Value
 Shares 
Weighted
Average
Exercise
Price
 
Weighted
Average
Remaining
Contract Life
 
Aggregate
Intrinsic
Value
364 $17.34 4.16 $13 364 $17.34 4.16 $13 
224 $17.27
 2.15 $1,590
 224
 $17.27
 2.15 $1,590

Stock options vest over four years at 28% at the end of the first year and 2% each month thereafter. During the years ended December 31, 2012, 20112014, 2013 and 2010,2012, we recorded stock based compensation related to stock options of $0, $0 and $3,000, $200,000 and $1.6 million, respectively.

        Total unrecognized compensation costs related to nonvested stock option awards was approximately zero, $3,000 and $239,000 as of December 31, 2012, 2011 and 2010, respectively.

The aggregate intrinsic value in the table above represents the total pretax intrinsic value, based on our stock price of $14.31$24.27 as of December 31, 2012,2014, which would have been received by the option holders had all option holders exercised their options as of that date.


The total intrinsic value of options exercised during the years ended December 31, 2014, 2013 and 2012 2011was $126,000, $728,000, and 2010 was zero, zero, and $381,000,$0, respectively. The total cash received from employees as a result of employee stock option exercises during the years ended December 31, 2012, 20112014, 2013 and 20102012 were approximately zero, zero,$511,000, $1.6 million, and $1.5 million,$0, respectively. In connection with these exercises, there was no tax benefit realized due to our net operating loss position.


Restricted Stock Unit Activity

Awards



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For the years ended December 31, 2012, 20112014, 2013 and 2010,2012, we granted 795,000, 268,000242,000, 275,000 and 302,000795,000 restricted stock units, respectively. The cost of restricted stock units is determined using the fair value of our common stock on the date of the grant and we recognize compensation expense is recognized straight-line over the three yearthree-year vesting schedule.schedule on a straight line basis 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, 2014, 2013 and 2012 2011was $28.24, $16.12 and 2010 was $6.75, $15.47 and $13.17, respectively.


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Overstock.com, Inc.

Notes to Consolidated Financial Statements (Continued)

17. STOCK-BASED AWARDS (Continued)

The following is a summary oftable summarizes restricted stock unitaward activity (amounts in thousands, except per share data)(in thousands):


 2012 2011 2010 2014 2013 2012

 Units Weighted
Average
Grant Date
Fair Value		 Units Weighted
Average
Grant Date
Fair Value		 Units Weighted
Average
Grant Date
Fair Value		 Units Weighted
Average
Grant Date
Fair Value		 Units Weighted
Average
Grant Date
Fair Value		 Units Weighted
Average
Grant Date
Fair Value

Outstanding—beginning of year

 522 $13.40 685 $12.08 640 $11.35 704
 $10.79
 1,003
 $8.81
 522
 $13.40

Granted at fair value

 795 6.75 268 15.47 302 13.17 242
 28.24
 275
 16.12
 795
 6.75

Vested

 (240) 12.11 (318) 12.20 (185) 11.52 (301) 11.87
 (339) 10.23
 (240) 12.11

Forfeited

 (74) 8.25 (113) 13.88 (72) 11.50 (67) 17.70
 (235) 9.38
 (74) 8.25
             

Outstanding—end of year

 1,003 $8.81 522 $13.40 685 $12.08 578
 $16.70
 704
 $10.79
 1,003
 $8.81
             

        The restricted


Restricted stock units granted in 2014 vest over three years at 33.3% at the end of each of the first, second and third year. Restricted stock units granted in 2013 vest over three years at 40% at the end of the first year, 30% at the end of the second year and 30% at the end of the third year. Restricted stock units granted in or prior to 2012 vest over three years at 25% at the end of the first year, 25% at the end of the second year and 50% at the end of the third year. Each restricted stock unit represents the right to one share of common stock upon vesting. During the years ended December 31, 2012, 20112014, 2013 and 2010,2012, we recorded stock based compensation related to restricted stock units of $3.5$4.0 million, $2.8$3.3 million and $3.5 million, respectively. Changes to the estimated forfeiture rate are accounted for as a cumulative effect of change in the period of such change.

        On January14, 2013, we granted 240,000 additional restricted stock units. These restricted stock units vest over three years at 40% at the end of the first year, and 30% at the end of the second and third years.

18.



17. 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. EmployeesDuring the years ended December 31, 2013 and 2012, employees who havehad completed a half-yearsix months of service and arewere 21 years of age or older arewere qualified to participate in the plan. We matchplan which provided matches of 50% of the first 6% of each participant's contributions to the plan subject to IRS limits. ParticipantThese contributions are immediately vested. Our contributionswill vest based on the participant's years of service at 20% per year over five years. Participant contributions vest immediately. During the year ended December 31, 2014, we changed the plan to reduce the required service period to three months, to increase our match to 100% of the first 6% of each participant's contributions to the plan subject to IRS limits, and to vest our matching contributions immediately. Our matching contribution totaled $653,000, $991,000$2.4 million, $1.0 million and $770,000$653,000 for the years ended December 31, 2014, 2013 and 2012, 2011 and 2010, respectively. In addition,No discretionary contributions totaling zero, zero, and $471,000were made to eligible participants for the years ended December 31, 2014, 2013 and 2012, 2011 and 2010, respectively, were made to eligible participants as of the end of each respective calendar year.

        In December 2009, we implementedrespectively.


We have a Non QualifiedNon-Qualified Deferred Compensation planPlan for senior management. The plan allows eligible members of senior management to defer their receipt of compensation from us, subject to the restrictions contained in the plan. Participants are 100% vested in their deferred compensation amounts and the associated gains or losses. For our contributions, if any, and the associated gains or losses, the participants shall vest in those deferred compensation amounts according to a vesting schedule that we shall determine at the time our contribution is made. As of December 31, 2012,2014, we have not made any contributions into the NQDC Plan. Participants are generally eligible to receive distributions from the plan two plan years subsequent to the plan year their


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Overstock.com, Inc.

Notes to Consolidated Financial Statements (Continued)

18. EMPLOYEE RETIREMENT PLAN (Continued)

initial deferral contribution is made. Deferred compensation amounts are held in a "rabbi trust," which invests primarily in mutual funds. The trust assets, which consist primarily of mutual funds, are recorded in our consolidated balance sheets because they are subject to the claims of our creditors. The corresponding deferred compensation liability represents the amounts deferred by the plan participants plus or minus any earnings or losses on the trust assets. The trust's assets totaled $264,000$90,000 and $302,000$138,000 at December 31, 20122014 and December 31, 2011,2013, respectively, and are included in Other current and long-term assets in the consolidated balance sheets. Gains and losses on these investments were immaterial for the years ended December 31, 2012, 20112014, 2013 and 2010.

19.2012.



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18. OTHER INCOME (EXPENSE), NET


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


 Years ended December 31,  Years ended December 31,

 2012 2011 2010  2014 2013 2012

Gift card and Club-O rewards breakage

 $3,308 $971 $909  $2,439
 $1,187
 $3,308
Other (1) 35
 23
Loss on precious metals (1,269) (1,457) —

Sublease income

 355 573 575  —
 —
 355

Gain (loss) from early retirement of convertible senior notes

 — (54) 346 

Loss from early retirement of finance obligations

 — (1,199) — 

Other

 23 (13) 258 
       

Total other income, net

 $3,686 $278 $2,088 
       
Total other income (expense), net $1,169
 $(235) $3,686

20.



19. INCOME TAXES

The provision (benefit) for income taxes for 2014, 2013 and 2012 consists of the following (in thousands):


 Years ended December 31,  Years ended December 31,

 2012 2011 2010  2014 2013 2012

Current:

       

Federal

 $416 $(254)$226  $210
 $196
 $416

State

 39 69 133  385
 239
 39

Foreign

 30 43 —  68
 51
 30
       

Total current

 485 (142) 359  663
 486
 485

Deferred:

       

Federal

 $— $— $—  3,777
 (62,150) —

State

 — — —  (36) (6,370) —
       

Total deferred

 — — —  3,741
 (68,520) —
       

Total provision (benefit) for income taxes

 $485 $(142)$359  $4,404
 $(68,034) $485
       

The provision (benefit) for income taxes for 2014, 2013 and 2012 differ from the amounts computed by applying the U.S. federal income tax rate of 35% to income before income taxes for the following reasons (in thousands):
  Year ended December 31,
  2014 2013 2012
U.S. federal income tax provision at statutory rate $4,622
 $5,720
 $5,303
Adjustment to reserves in prior years (1) —
 4,418
 —
Non-deductible fines and penalties (112) 2,387
 —
Other 336
 242
 (1,764)
Lobbying expenses 266
 209
 —
Stock based compensation expense (43) (176) 1
Research and development credit (2,050) (6,069) —
State income tax expense, net of federal benefit 385
 (4,828) 44
Change in valuation allowance 1,000
 (69,937) (3,099)
Income tax provision (benefit) $4,404
 $(68,034) $485
 ___________________________________________
(1)Adjustments to reserves in prior years includes (1) the effects of reconciling income tax amounts recorded in our Consolidated Statements of Operations and Consolidated Income (Loss) to amounts reflected on our tax returns, including any adjustments to the Consolidated Balance Sheets; and (2) reductions to the net operating losses ("NOLs") from previous acquisitions.


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Overstock.com, Inc.

Notes

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 Consolidated Financial Statements (Continued)

20. INCOME TAXES (Continued)

be paid or recovered.


The components of our deferred tax assets and liabilities as of December 31, 20122014 and 20112013 are as follows (in thousands):

 
 December 31, 
 
 2012 2011 

Deferred tax assets and liabilities:

       

Net operating loss carry-forwards

 $69,158 $76,455 

Temporary differences:

       

Accrued expenses

  4,469  3,317 

Reserves and other

  7,464  5,705 

Depreciation and amortization

  (1,398) (1,860)
      

  79,693  83,617 

Valuation allowance

  (79,693) (83,617)
      

Net asset

 $— $— 
      
  December 31,
  2014 2013
Deferred tax assets:    
Net operating loss carryforwards $50,952
 $56,859
R&D tax credits 7,382
 5,332
AMT and other tax credits 850
 639
Accrued expenses 10,924
 5,773
Reserves and other 3,119
 4,565
Gross deferred tax assets 73,227
 73,168
Valuation allowance (1,000) —
Total deferred tax assets 72,227
 73,168
Deferred tax liabilities:    
Fixed assets (5,786) (3,291)
Prepaid expenses (1,275) (1,357)
Total deferred tax liabilities (7,061) (4,648)
Total deferred tax assets, net $65,166
 $68,520

        As a result of our history of losses, a valuation allowance has been provided for the full amount of our net deferred tax assets as we believe that it is more likely than not that these benefits will not be realized. We recorded a tax provision of $485,000 for the year ended December 31, 2012, for federal alternative minimum taxes, state and foreign taxes.


At December 31, 20122014 and 2011,2013, we had U.S. federal net operating loss carry-forwardsNOL carryforwards of approximately $174.1$155.0 million and $192.5$166.2 million and state net operating loss carry-forwardsNOL carryforwards of approximately $151.6$144.0 million and $176.1$154.7 million, respectively, which may be used to offset future taxable income. Of the total federal and state NOLs, $20.6 million was generated from stock option deductions and are not reflected in our deferred tax assets. The net tax benefit of $7.9 million will be credited to additional paid-in capital in our consolidated balance sheets under the "with-and-without" method of utilization for tax attributes. We utilize the with-and-without approach in determining if and when such excess tax benefits are currently reviewing whether we had any ownership changes. Ownership changes under IRS Code Section 382 would limitrealized. Under this approach excess tax benefits related to stock-based compensation are the amount of net operating losses that couldlast to be used in any annual period.realized. Our carry-forwardsNOLs begin to expire in 2018.

        The income tax provision differs from2018 to 2034 if unused. In accordance with an Internal Revenue Code section 382 study completed during 2014, the amount computed by applying the U.S. federal income tax rate of 35% to loss before income taxes for the following reasons (in thousands):

 
 Year ended December 31, 
 
 2012 2011 2010 

U.S. federal income tax provision (benefit) at statutory rate

 $5,303 $(6,853)$4,940 

State income tax expense, net of federal benefit

  44  45  86 

Stock based compensation expense

  1  70  484 

Other

  (1,764) 30  73 

Change in valuation allowance

  (3,099) 6,566  (5,224)
        

Income tax provision (benefit)

 $485 $(142)$359 
        
NOL carryforwards indicated above are not limited in future periods.

At December 31, 2014 and 2013, we had federal research credit carryforwards of approximately $7.8 million and $6.0 million and state research credit carryforwards of approximately $4.2 million and $3.3 million, respectively, which may be used to offset future income tax. These tax credits expire at various dates between 2021 and 2034. We do not have any indefinite lived intangibles and the remaining deferred tax assets have no expiration date.

Each quarter we assess the recoverability of our deferred tax assets under ASC 740. We are required to establish a valuation allowance for 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 tax planning strategies. We have concluded based on all available positive and negative evidence it is more likely than not the Company’s deferred tax assets as of December 31, 2014 arising from ordinary income and deductions and tax credits will be realized in the future. We have also concluded it is unlikely the Company’s deferred tax asset arising from unrealized capital losses will be realized in the future. On the basis of this evaluation, as of December 31, 2014, a valuation allowance of $1.0 million has been recorded to record only the portion of the deferred tax asset that is more likely than not to be realized. This assessment required significant judgment and estimates about our ability to generate revenue, gross profit, operating income and taxable income in future periods. Except as otherwise disclosed, there are no known trends, events, transactions or other 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.


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Overstock.com, Inc.

Notes to Consolidated Financial Statements (Continued)

20. INCOME TAXES (Continued)

        We are subject to audit by

A reconciliation of the IRSbeginning and various states for periods since inception. We do not believe there will be any material changes in our unrecognizedending tax positions over the next 12 months.contingencies, excluding interest and penalties, as of December 31, 2014 and 2013 is as follows (in thousands):
  Year ended December 31,
  2014 2013 2012
Beginning balance $2,968
 $231
 $231
Additions for tax positions related to the current year 959
 2,737
 —
Additions for tax positions taken in prior years 201
 —
 —
Ending balance $4,128
 $2,968
 $231

Accrued interest and penalties on tax contingencies as of December 31, 2014 and 2013 were $184,000 and $127,000, respectively. Our policy is to recognize interest and penalties accrued on any unrecognized tax positions as a component of income tax expense.

        A reconciliation of


The Company is subject to taxation in the beginningUnited States and ending tax contingencies, excluding interestseveral state and penalties, is as follows (in thousands):

 
 Year ended December 31, 
 
 2012 2011 2010 

Beginning balance

 $231 $191 $112 

Additions for tax positions related to the current year

  —  —  — 

Additions for tax positions taken in prior years

  —  40  79 
        

Ending balance

 $231 $231 $191 
        

        The interest and penalties accrued on tax contingencies as of December 31, 2012 and 2011 were $97,000 and $82,000, respectively.foreign jurisdictions. Tax years beginning in 20102011 are subject to examination by taxing authorities, although net operating lossNOL and credit carry forwardscarryforwards from all years are subject to examinations and adjustments for at least three years following the year in which the attributes are used.

21.


We operate under an income tax holiday in Ireland, which is effective through December 31, 2015. The impact has been tax savings of approximately $15,000 and $3,000 for December 31, 2014 and 2013.

The Company intends to reinvest the earnings of its non-U.S. subsidiaries in those operations. As of December 31, 2014, the Company has not made a provision for U.S. or additional foreign withholding taxes on approximately $142,000 of indefinitely reinvested foreign earnings. Generally, such amounts become subject to U.S. taxation upon the remittance of dividends to the U.S. and under certain other circumstances. It is not practicable to estimate the amount of deferred taxes related to investments in these foreign subsidiaries.

20. RELATED PARTY TRANSACTIONS


On occasion, Haverford-Valley, L.C. (an entity owned by our Chairman of the Board)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, 2012, 20112014, 2013 and 20102012 we reimbursed Haverford-Valley L.C. $93,000, $122,000,$270,000, $170,000, and $139,000,$93,000, respectively, for these expenses.

        We retired all of the remaining $34.6 million of the Senior Notes during the year ended December 31, 2011, for $34.6 million in cash, resulting in a loss of $54,000 on early extinguishment of debt, net of $77,000 of associated unamortized discount. Of the $34.6 million in Senior Notes retired during the year ended December 31, 2011, $10.1 million were held by Chou Associates Management, Inc. or an affiliate of Chou ("Chou") and $21.7 million were held by Fairfax Financial Holdings Limited or an affiliate of Fairfax ("Fairfax"). Chou and Fairfax are beneficial owners of more than 5% of our common stock. We retired $25.4 million of the Senior Notes during the year ended December 31, 2010 for $24.9 million in cash, resulting in a gain of $346,000 on early extinguishment of debt, net of $158,000 of associated unamortized discount.

22.



21. BUSINESS SEGMENTS

Segment information has been prepared in accordance with ASC Topic 280Segment Reporting. Segments were determined based on how we manage the business. There were no inter-segment sales or transfers during the years ended December 31, 2012, 20112014 and 2010.2013. We evaluate the performance of our segments and allocate resources to them based primarily on gross profit. The table below


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Overstock.com, Inc.

Notes to Consolidated Financial Statements (Continued)

22. BUSINESS SEGMENTS (Continued)

summarizes information about reportable segments for the years ended December 31, 2012, 20112014, 2013 and 20102012 (in thousands):


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 Year ended December 31, 
Year ended  
 December 31,
Direct Partner Total
2014 
  
  
Revenue, net$147,460
 $1,349,643
 $1,497,103
Cost of goods sold129,253
 1,088,791
 1,218,044
Gross profit$18,207
 $260,852
 $279,059
Operating expenses 
  
 (267,136)
Other income, net 
  
 1,282
Provision for income taxes 
  
 4,404
Consolidated net income 
  
 $8,801
     
2013 
  
  
Revenue, net$156,032
 $1,148,185
 $1,304,217
Cost of goods sold136,282
 920,275
 1,056,557
Gross profit$19,750
 $227,910
 $247,660
Operating expenses 
  
 (231,095)
Other loss, net 
  
 (221)
Benefit for income taxes 
  
 (68,034)
Consolidated net income 
  
 $84,378

 Direct Fulfillment
partner		 Total      

2012

  
  
  

Revenue, net

 $155,516 $943,773 $1,099,289 $155,516
 $943,773
 $1,099,289

Cost of goods sold

 140,536 760,323 900,859 140,536
 760,323
 900,859
       

Gross profit

 $14,980 $183,450 $198,430 $14,980
 $183,450
 $198,430

Operating expenses

     (186,269) 
  
 (186,269)

Other income (expense), net

     2,993 

Provision (benefit) for income taxes

     485 
   

Net income

     $14,669 
   

2011

 

Revenue, net

 $163,609 $890,668 $1,054,277 

Cost of goods sold

 149,660 725,529 875,189 
       

Gross profit

 $13,949 $165,139 $179,088 

Operating expenses

     (196,622)

Other income (expense), net

     (2,046)

Provision (benefit) for income taxes

     (142)
   

Net loss

     $(19,438)
   

2010

 

Revenue, net

 $209,646 $880,227 $1,089,873 

Cost of goods sold

 187,124 713,109 900,233 
       

Gross profit

 $22,522 $167,118 $189,640 

Operating expenses

     (174,675)

Other income (expense), net

     (717)

Provision (benefit) for income taxes

     359 
   

Net income

     $13,889 
   
Other income, net 
  
 2,993
Provision for income taxes 
  
 485
Consolidated net income 
  
 $14,669

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

The fulfillment partner segment includes revenues, direct costs and cost allocations associated with sales fulfilled from warehouses maintainedof inventory owned by our fulfillment partners. Costs for this segment include product costs, outbound freight and fulfillment costs, credit card fees and customer service costs.

Assets have not been allocated between the segments for our internal management purposes and, as such, they are not presented here.


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Overstock.com, Inc.

Notes to Consolidated Financial Statements (Continued)

22. BUSINESS SEGMENTS (Continued)

For the years ended December 31, 2014, 2013 and 2012, 2011 and 2010, over 99%substantially all of our sales revenues were madeattributable to customers in the United States of America.States. At December 31, 20122014 and December 31, 2011,2013, substantially all of our fixed assets were located in the United StatesStates.



22. SUBSEQUENT EVENTS

In conjunction with our crypto-initiatives, in January 2015 we purchased a noncontrolling interest in a privately held entity. The amount of America.

the investment totaled $5 million. We will recognize the investment as a cost method investment. Earnings from the investment will be recognized to the extent of dividends received, and we will recognize subsequent impairments to the investment if they are other than temporary.



23. QUARTERLY RESULTS OF OPERATIONS (unaudited)


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The following tables set forth our unaudited quarterly results of operations data for the eight most recent quarters for the period ended December 31, 2012.2014. We have prepared this information on the same basis as the consolidated statements of operations and the information includes all adjustments


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Overstock.com, Inc.

Notes to Consolidated Financial Statements (Continued)

23. QUARTERLY RESULTS OF OPERATIONS (unaudited) (Continued)

that we consider necessary for a fair statement of its financial position and operating results for the quarters presented.


 Three Months Ended  Three Months Ended

 March 31,
2012		 June 30,
2012		 September 30,
2012		 December 31, 2012  
March 31,
2014
 
June 30,
2014
 
September 30,
2014
 December 31,
2014

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

Consolidated Statement of Operations Data:

         

Revenue, net

         

Direct

 $40,897 $33,936 $34,215 $46,468  $38,047
 $33,215
 $33,592
 $42,606

Fulfillment partner

 221,470 205,600 221,137 295,566 
         
Partner 303,160
 299,330
 319,399
 427,754

Total net revenue

 262,367 239,536 255,352 342,034  341,207
 332,545
 352,991
 470,360
         

Cost of goods sold

         

Direct

 37,630 31,108 30,684 41,114  33,097
 29,473
 29,385
 37,298

Fulfillment partner

 177,229 165,259 178,126 239,709 
         
Partner 244,114
 240,447
 256,548
 347,682

Total cost of goods sold

 214,859 196,367 208,810 280,823  277,211
 269,920
 285,933
 384,980
         

Gross profit

 47,508 43,169 46,542 61,211  63,996
 62,625
 67,058
 85,380
         

Operating expenses:

         

Sales and marketing

 14,475 13,512 14,899 20,581  23,392
 23,543
 25,428
 37,098

Technology

 15,638 15,122 16,085 18,622  19,601
 21,408
 22,202
 23,047

General and administrative

 14,822 14,516 13,828 14,093  15,296
 15,881
 17,073
 23,527

Restructuring

 98 — (45) 23  (360) —
 —
 —
         

Total operating expenses

 45,033 43,150 44,767 53,319  57,929
 60,832
 64,703
 83,672
         

Operating income

 2,475 19 1,775 7,892  6,067
 1,793
 2,355
 1,708

Interest income

 29 27 30 30  41
 37
 36
 38

Interest expense

 (208) (253) (194) (154) (7) (12) (11) (9)

Other income (expense), net

 432 719 1,213 1,322  459
 524
 (350) 536
         

Net income before income taxes

 2,728 512 2,824 9,090  6,560
 2,342
 2,030
 2,273
         

Provision for income taxes

 9 42 131 303  2,590
 433
 413
 968
         

Net income

 $2,719 $470 $2,693 $8,787 
         

Deemed dividend related to redeemable common stock

 — — — — 

Net income attributable to common shares

 $2,719 $470 $2,693 $8,787 
         
Consolidated net income 3,970
 1,909
 1,617
 1,305
Less: Net loss attributable to noncontrolling interests —
 —
 —
 (53)
Net income attributable to stockholders of Overstock.com, Inc. $3,970
 $1,909
 $1,617
 $1,358

Net income per common share—basic:

         

Net income per share—basic

 $0.12 $0.02 $0.11 $0.37 
Net income attributable to common shares—basic $0.17
 $0.08
 $0.07
 $0.06

Weighted average common shares outstanding—basic

 23,392 23,437 23,447 23,450  23,926
 24,009
 24,027
 24,031

Net income per common share—diluted:

         

Net income per share—diluted

 $0.12 $0.02 $0.11 $0.37 
Net income attributable to common shares—diluted $0.16
 $0.08
 $0.07
 $0.06

Weighted average common shares outstanding—diluted

 23,414 23,464 23,754 24,064  24,339
 24,247
 24,283
 24,399

Comprehensive income

 $2,719 $470 $2,693 $8,787 
         


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Overstock.com, Inc.

Notes to Consolidated Financial Statements (Continued)

23. QUARTERLY RESULTS OF OPERATIONS (unaudited) (Continued)



 Three Months Ended  Three Months Ended

 March 31,
2011		 June 30,
2011		 September 30,
2011		 December 31,
2011		  
March 31,
2013
 
June 30,
2013
 
September 30,
2013
 
December 31,
2013

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

Consolidated Statement of Operations Data:

         

Revenue, net

         

Direct

 $48,161 $33,443 $34,749 $47,256  $41,942
 $36,250
 $35,681
 $42,159

Fulfillment partner

 217,309 201,549 204,989 266,821 
         
Partner 270,052
 256,954
 265,745
 355,434

Total net revenue

 265,470 234,992 239,738 314,077  311,994
 293,204
 301,426
 397,593
         

Cost of goods sold

         

Direct

 43,030 30,231 32,472 43,927  37,149
 31,842
 30,777
 36,514

Fulfillment partner

 172,356 164,991 168,893 219,289 
         
Partner 215,909
 203,523
 211,499
 289,344

Total cost of goods sold

 215,386 195,222 201,365 263,216  253,058
 235,365
 242,276
 325,858
         

Gross profit

 50,084 39,770 38,373 50,861  58,936
 57,839
 59,150
 71,735
         

Operating expenses:

         

Sales and marketing

 15,425 13,655 13,822 18,911  18,705
 19,208
 22,463
 31,233

Technology

 16,660 16,808 17,171 16,404  18,160
 17,920
 17,259
 18,449

General and administrative

 17,986 16,725 15,321 17,734  15,088
 16,585
 15,970
 20,526
         
Restructuring (432) (39) —
 —

Total operating expenses

 50,071 47,188 46,314 53,049  51,521
 53,674
 55,692
 70,208
         

Operating income (loss)

 13 (7,418) (7,941) (2,188)
Operating income 7,415
 4,165
 3,458
 1,527

Interest income

 52 46 23 40  34
 32
 34
 27

Interest expense

 (676) (630) (662) (517) (51) (37) (33) 8

Other income (expense), net

 189 220 553 (684) 345
 (150) 165
 (595)
         

Net loss before income taxes

 (422) (7,782) (8,027) (3,349)
         
Net income before income taxes 7,743
 4,010
 3,624
 967

Provision (benefit) for income taxes

 22 16 (240) 60  46
 312
 91
 (68,483)
         

Net loss

 $(444)$(7,798)$(7,787)$(3,409)
         

Deemed dividend related to redeemable common stock

 (10) (2) — — 

Net loss attributable to common shares

 $(454)$(7,800)$(7,787)$(3,409)
         

Net loss per common share—basic:

 

Net loss per share—basic

 $(0.02)$(0.34)$(0.33)$(0.15)
Consolidated net income 7,697
 3,698
 3,533
 69,450
Less: Net loss attributable to noncontrolling interests —
 —
 —
 —
Net income attributable to stockholders of Overstock.com, Inc. $7,697
 $3,698
 $3,533
 $69,450
Net income per common share—basic:        
Net income per share—basic $0.33
 $0.16
 $0.15
 $2.92

Weighted average common shares outstanding—basic

 23,215 23,265 23,276 23,278  23,594
 23,714
 23,766
 23,780

Net loss per common share—diluted:

 

Net loss per share—diluted

 $(0.02)$(0.34)$(0.33)$(0.15)
Net income per common share—diluted:        
Net income per share—diluted $0.32
 $0.15
 $0.14
 $2.84

Weighted average common shares outstanding—diluted

 23,215 23,265 23,276 23,278  24,016
 24,283
 24,446
 24,430

Comprehensive loss

 $(444)$(7,798)$(7,787)$(3,409)
         



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Schedule II
Valuation and Qualifying Accounts
(dollars in thousands)


 Balance at
Beginning of
Year		 Charged to
Expense		 Deductions Balance at
End of Year		 
 
Balance at
Beginning of
Year
 
Charged to
Expense
 Deductions 
Balance at
End of Year
Year ended December 31, 2014        
Deferred tax valuation allowance $—
 $1,000
 $—
 $1,000
Allowance for sales returns 13,232
 117,932
 115,633
 15,531
Allowance for doubtful accounts 152
 359
 —
 511
Year ended December 31, 2013        
Deferred tax valuation allowance $79,693
 $—
 $79,693
 $—
Allowance for sales returns 10,618
 95,807
 93,193
 13,232
Allowance for doubtful accounts 797
 161
 806
 152

Year ended December 31, 2012

         

Deferred tax valuation allowance

 $83,617 $— $3,924 $79,693  $83,617
 $—
 $3,924
 $79,693

Allowance for sales returns

 10,899 79,785 80,066 10,618  10,899
 79,785
 80,066
 10,618

Allowance for doubtful accounts

 574 249 26 797  574
 249
 26
 797

Year ended December 31, 2011

 

Deferred tax valuation allowance

 $77,051 $6,566 $— $83,617 

Allowance for sales returns

 11,525 83,129 83,755 10,899 

Allowance for doubtful accounts

 2,048 268 1,742 574 

Year ended December 31, 2010

 

Deferred tax valuation allowance

 $80,245 $— $3,194 $77,051 

Allowance for sales returns

 11,923 88,473 88,871 11,525 

Allowance for doubtful accounts

 1,730 780 462 2,048 


108