Edgar Filing: OVERSTOCK.COM, INC

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q/A

(Mark One)

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

	For the quarterly period ended June 30, 2008

	Or

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

	For the transition period from to

Commission file number: 000-49799

OVERSTOCK.COM, INC.

(Exact name of registrant as specified in its charter)

Delaware		87-0634302
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification Number)

6350 South 3000 East

Salt Lake City, Utah 84121

(Address, including zip code, of

Registrant’s principal executive offices)

Registrant’s telephone number, including area code: (801) 947-3100

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

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

Large accelerated filer o		Accelerated filer x

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

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

There were 22,812,317 shares of the Registrant’s common stock, par value $0.0001, outstanding on August 1, 2008.

Table of Contents

EXPLANATORY NOTE

Overstock.com, Inc. (the “Company”) is amending its Quarterly Report on Form 10-Q (“Form 10-Q” or “Original Filing”) for the quarter ended June 30, 2008, to restate its consolidated financial statements and other financial information for the quarters ended June 30, 2007 and 2008 to correct errors related to the accounting for customer refunds and credits and the accounting for gift cards issued to customers. This Amendment to Form 10-Q (“Amendment”) amends the Quarterly Report on Form 10-Q for the quarter ended June 30, 2008, as filed on August 4, 2008.

The Company’s decision to restate the aforementioned financial information was made on October 20, 2008 as a result of management’s identification of errors related to the accounting for customer refunds and credits. Management subsequently determined that a portion of the error previously believed to be related to the accounting for customer refunds and credits was actually related to the accounting for gift cards issued to customers. As more fully described in Note 3 of the financial statements (see Item 1 of Part I, “Financial Statements (Unaudited) (Restated)” – Note 3 – “Restatement of Financial Statements”) management, including its CEO (principal executive officer) and Senior Vice President, Finance (principal financial officer), concluded, and the Board of Directors agreed with management’s conclusions that:

The Company’s controls were not designed or operating effectively to ensure all refunds and credits issued to customers and gift cards issued to customers were completely and accurately recorded in the consolidated financial statements. These control failures impacted accounts receivable and deferred revenue in the consolidated balance sheet as well as revenue and returns expense (a component of revenue), in the consolidated statement of operations. As a result, revenue, net of returns expense, was misstated in the consolidated statement of operations and accounts receivable and deferred revenue were misstated in the consolidated balance sheet as of and for the years ended December 31, 2007, 2006, 2005, and 2004 and the related interim periods and as of June 30, 2008 and the three and six months ended June 30, 2008. The amounts of these errors were determined to be material to the consolidated financial statements.

In addition, from the Company’s inception through the third quarter of 2007, the Company had recorded revenue based on product ship date. As disclosed the Annual Report on Form 10-K for the year ended December 31, 2007, the Company determined that it should not record revenue until product delivery date because risk of loss transfers to the customer upon delivery and acceptance. In the fourth quarter of 2007, the Company performed a detailed analysis of this error and determined that the impact of this error on any prior annual or interim period was not material and the impact of recording the cumulative effect of the error in the fourth quarter of 2007 was immaterial to the full year. Therefore, the Company recorded the cumulative effect of the error in the fourth quarter of 2007. As the Company is now restating its previously issued consolidated financial statements to correct accounting errors related to customer refunds and credits and gift cards issued to customers, it has reversed the cumulative effect of the correction of the error in the fourth quarter of 2007 and restated all prior periods to reflect revenue recognition based on the product’s estimated delivery date in its consolidated financial statements for the years ended December 31, 2007, 2006, 2005, 2004 and 2003 (see Item 1 of Part I, “Financial Statements (Unaudited) (Restated)” — Note 3 — “Restatement of Financial Statements”). The Company also recorded other miscellaneous adjustments as part of this restatement that were previously identified but determined to be immaterial.

In addition, the control failures described above constitute a material weakness in the Company’s internal control over financial reporting as of June 30, 2008 (see Item 4 of Part I, “Controls and Procedures (Restated)”).

Except as required to reflect the effects of the restatement for the items above, no additional modifications or updates in this Amendment have been made to the Original Filing on Form 10-Q. Information not affected by the restatement remains unchanged and reflects the disclosures made at the time of the Original Filing. This amendment does not describe other events occurring after the original filing, including exhibits, or modify or update those disclosures affected by subsequent events. This Amendment should be read in conjunction with the Company’s filings made with the SEC subsequent to the filing of the Original Filing, as those filings may have been amended, as information in such reports and documents may update or supersede certain information contained in this Amendment. Accordingly, this Amendment only amends and restates Item 1, 2 and 4 of Part I of the Original Filing, in each case, solely as a result of, and to reflect, the restatement, and no other information in the Original Filing is amended hereby. Additionally, pursuant to the rules of the SEC, Item 6 of Part II of the Original Filing has been amended to contain currently dated certifications of the Chief Executive Officer and Senior Vice President, Finance. As required by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002, the certifications of our Chief Executive Officer and Senior Vice President, Finance, are attached to this Amendment as Exhibits 31.1, 31.2, 32.1 and 32.2.

Table of Contents

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION	4

Item 1. Financial Statements (Unaudited) (Restated)	4

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Restated)	32

Item 3. Quantitative and Qualitative Disclosures about Market Risk	49

Item 4. Controls and Procedures (Restated)	50

PART II. OTHER INFORMATION	51

Item 1. Legal Proceedings	51

Item 1A. Risk Factors	51

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	66

Item 3. Defaults upon Senior Securities	66

Item 4. Submission of Matters to a Vote of Security Holders	66

Item 5. Other Information	66

Item 6. Exhibits (Restated)	66

Signature	67

Table of Contents

PART 1. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Overstock.com, Inc.

Consolidated Balance Sheets (unaudited)

(in thousands)

	December 31,			June 30,
	2007			2008
	(Restated)			(Restated)
Assets
Current assets:
Cash and cash equivalents	$	101,394		$	56,679
Marketable securities	46,000			30,020
Cash, cash equivalents and marketable securities	147,394			86,699
Accounts receivable, net	11,208			9,977
Notes receivable (Note 5)	1,506			250
Inventories, net	25,643			14,036
Prepaid inventory	3,572			2,648
Prepaid expenses	7,572			10,481
Total current assets	196,895			124,091
Property and equipment, net	27,197			21,318
Goodwill	2,784			2,784
Other long-term assets, net	86			30
Notes receivable (Note 5)	4,181			4,453
Total assets	$	231,143		$	152,676
Liabilities and Stockholders’ Equity (Deficit)
Current liabilities:
Accounts payable	$	70,358		$	31,217
Accrued liabilities	37,155			24,522
Deferred revenue	22,965			20,263
Capital lease obligations	3,796			—
Total current liabilities	134,274			76,002
Other long-term liabilities	3,034			2,975
Convertible senior notes	75,623			75,795
Total liabilities	212,931			154,772
Commitments and contingencies (Notes 8 and 9)
Stockholders’ equity (deficit):
Preferred stock, $0.0001 par value, 5,000 shares authorized, no shares issued and outstanding as of December 31, 2007 and June 30, 2008	—			—
Common stock, $0.0001 par value, 100,000 shares authorized, 25,423 and 25,496 shares issued as of December 31, 2007 and June 30, 2008, respectively	2			2
Additional paid-in capital	333,909			337,659
Accumulated deficit	(252,327		)	(264,410		)
Treasury stock, 1,605 and 2,713 shares at cost as of December 31, 2007 and June 30, 2008, respectively	(63,278		)	(75,218		)
Accumulated other comprehensive loss	(94		)	(129		)
Total stockholders’ equity (deficit)	18,212			(2, 096		)
Total liabilities and stockholders’ equity (deficit)	$	231,143		$	152,676

The accompanying notes are an integral part of these consolidated financial statements.

Table of Contents

Overstock.com, Inc.

Consolidated Statements of Operations (unaudited)

(in thousands, except per share data)

	Three months ended June 30,						Six months ended June 30,
	2007			2008			2007			2008
	(Restated)			(Restated)			(Restated)			(Restated)

Revenue
Direct revenue	$	43,658		$	39,832		$	90,648		$	91,596
Fulfillment partner revenue	105,513			149,004			220,679			300,055

Total revenue	149,171			188,836			311,327			391,650

Cost of goods sold
Direct(1)	36,456			34,871			77,925			79,674
Fulfillment partner	86,523			120,756			182,600			244,796

Total cost of goods sold	122,979			155,627			260,525			324,470

Gross profit	26,192			33,209			50,802			67,180

Operating expenses:
Sales and marketing(1)	7,962			14,244			19,246			29,263
Technology(1)	15,237			15,311			30,210			29,827
General and administrative(1)	10,429			10,867			21,118			20,430
Restructuring	6,194			—			12,283			—

Total operating expenses	39,822			40,422			82,857			79,520

Operating loss	(13,630		)	(7,213		)	(32,055		)	(12,340		)

Interest income	1,078			740			2,068			2,044
Interest expense	(1,027		)	(888		)	(2,056		)	(1,789		)
Other income, net	—			2			—			2

Loss from continuing operations	(13,579		)	(7,359		)	(32,043		)	(12,083		)
Loss from discontinued operations	(300		)	—			(3,924		)	—

Net loss	$	(13,879	)	$	(7,359	)	$	(35,967	)	$	(12,083	)

Net loss per common share — basic and diluted:
Loss from continuing operations	$	(0.57	)	$	(0.32	)	$	(1.35	)	$	(0.52	)
Loss from discontinued operations	$	(0.02	)	$	—		$	(0.17	)	$	—
Net loss per common share – basic and diluted	$	(0.59	)	$	(0.32	)	$	(1.52	)	$	(0.52	)
Weighted average common shares outstanding — basic and diluted	23,689			22,750			23,642			23,048

(1) Includes stock-based compensation from stock based awards as follows (Note 12):

Cost of goods sold — direct	$	114	$	50	$	221	$	99
Sales and marketing	$	85	$	86	$	163	$	170
Technology	$	188	$	220	$	365	$	434
General and administrative	$	750	$	862	$	1,461	$	1,849

The accompanying notes are an integral part of these consolidated financial statements.

Table of Contents

Overstock.com, Inc.

Consolidated Statements of Stockholders’ Equity (Deficit)

and Comprehensive Loss (unaudited)

(in thousands)

	Common stock			Additional Paid-in			Accumulated			Treasury stock					Accumulated Other Comprehensive
	Shares	Amount		Capital			Deficit			Shares		Amount			Income (loss)			Total
Balance at December 31, 2007 (Restated)	25,423	$	2	$	333,909		$	(252,327	)	(1,605	)	$	(63,278	)	$	(94	)	$	18,212
Exercise of stock options	73	—		924			—			—		—			—			924
Treasury stock issued for 401(k) matching contribution	—	—		(41		)	—			2		60			—			19
Stock-based compensation to employees and directors	—	—		2,252			—			—		—			—			2,252
Stock-based compensation to consultants in exchange for services	—	—		315			—			—		—			—			315
Stock-based compensation for performance share plan	—	—		300			—			—		—			—			300
Purchase of treasury stock	—	—		—			—			(1,110	)	(12,000		)	—			(12,000		)
Comprehensive loss (Restated):
Net loss (Restated)	—	—		—			(12,083		)	—		—			—			(12,083		)
Net unrealized loss on marketable securities	—	—		—			—			—		—			(3		)	(3		)
Cumulative translation adjustment	—	—		—			—			—		—			(32		)	(32		)
Total comprehensive loss (Restated)																		(12,118		)
Balance at June 30, 2008 (Restated)	25,496	$	2	$	337,659		$	(264,410	)	(2,713	)	$	(75, 218	)	$	(129	)	$	(2,096	)

The accompanying notes are an integral part of these consolidated financial statements.

Table of Contents

Overstock.com, Inc.

Consolidated Statements of Cash Flows (unaudited)

(in thousands)

	Three months ended						Six months ended						Twelve months ended
	June 30,						June 30,						June 30,
	2007			2008			2007			2008			2007			2008
	(Restated)			(Restated)			(Restated)			(Restated)			(Restated)			(Restated)

Cash flows from operating activities of continuing operations:
Net loss	$	(13,879	)	$	(7,359	)	$	(35,967	)	$	(12,083	)	$	(109,459	)	$	(24,152	)
Adjustments to reconcile net loss to cash provided by (used in) operating activities of continuing operations:
Loss from discontinued operations	300			—			3,924			—			8,898			—
Depreciation and amortization	7,974			5,887			15,745			12,384			35,046			26,134
Loss on disposition of property and equipment	1			—			1			—			1			—
Stock-based compensation to employees and directors	1,137			1,068			2,210			2,252			4,284			4,564
Stock-based compensation to consultants for services	135			329			140			315			129			364
Stock-based compensation for performance share plan	—			150			—			300			—			(250		)
Issuance of common stock from treasury for 401(k) matching contribution	113			—			715			19			890			(202		)
Amortization of debt discount and deferred financing fees	86			85			172			172			311			344
Asset impairment and depreciation (other non cash restructuring)	2,169			—			2,169			—			2,960			—
Restructuring charges	4,025			—			10,114			—			14,997			—
Notes receivable accretion	—			(136		)	—			(272		)	—			(544		)
Changes in operating assets and liabilities, net of effect of discontinued operations:
Accounts receivable, net	613			(700		)	8,697			1,231			686			(2,644		)
Inventories, net	1,152			3,934			6,944			11,607			54,745			2,890
Prepaid inventory	477			(80		)	117			924			1,119			(524		)
Prepaid expenses	700			(363		)	(1,262		)	(2,909		)	913			(1,746		)
Other long-term assets, net	176			—			266			—			744			205
Accounts payable	4,667			(1,622		)	(30,421		)	(39,141		)	(2,647		)	3,129
Accrued liabilities	4,125			36			(19,164		)	(12,633		)	(5,211		)	623
Deferred revenue	968			(927		)	(7,701		)	(2,702		)	1,006			4,744
Other long-term liabilities	—			147			—			(59		)				(252		)

Net cash provided by (used in) operating activities of continuing operations	14,939			449			(43,301		)	(40,595		)	9,412			12,683

Cash flows from investing activities of continuing operations:
Purchases marketable securities	(21,381		)	(18,823		)	(21,381		)	(25,362		)	(21,381		)	(79,198		)
Sales and maturities of marketable securities	3,400			18,428			3,400			41,339			3,400			67,197
Expenditures for property and equipment	(1,439		)	(5,136		)	(1,916		)	(6,449		)	(13,450		)	(7,176		)
Proceeds from the sale of discontinued operations, net of cash transferred	9,892			—			9,892			—			9,892			—
Collection of note receivable	753			754			4,694			1,256			4,694			1,758
Decrease in cash resulting from de-consolidation of variable interest entity	—			—			—			—			(102		)	—

Net cash (used in) provided by investing activities of continuing operations	(8,775		)	(4,777		)	(5,311		)	10,784			(16,947		)	(17,419		)

Cash flows from financing activities of continuing operations:
Payments on capital lease obligations	(4		)	(2		)	(5,251		)	(3,796		)	(5,454		)	(3,806		)
Drawdown on line of credit	—			1,128			1,169			6,396			14,592			7,650
Payments on line of credit	—			(1,128		)	(1,169		)	(6,396		)	(14,592		)	(7,650		)
Issuance of common stock in offerings, net of issuance costs	—			—			—			—			39,406			—
Purchase of treasury stock	—			—			—			(12,000		)	—			(12,000		)
Exercise of stock options	768			924			1,921			924			2,994			2,233
Net provided by (used in) financing activities of continuing operations	764			922			(3,330		)	(14,872		)	36,946			(13,573		)
Effect of exchange rate changes on cash	36			(9		)	21			(32		)	84			(56		)
Cash (used in) provided by operating activities from discontinued operations	(614		)	—			(204		)	—			1,307			—
Cash used in investing activities of discontinued operations	—			—			(53		)	—			(315		)	—

Net increase (decrease) in cash and cash equivalents	6,350			(3,415		)	(52,178		)	(44,715		)	30,487			(18,365		)
Change in cash and cash equivalents from discontinued operations	614			—			257			—			(993		)	—
Cash and cash equivalents, beginning of period	68,080			60,094			126,965			101,394			45,550			75,044

Cash and cash equivalents, end of period	$	75,044		$	56,679		$	75,044		$	56,679		$	75,044		$	56,679

Supplemental disclosure of cash flow information:
Interest paid	$	1,585		$	1,524		$	2,236		$	2,163		$	4,104		$	3,809
Asset retirement obligation	—			—			—			—			450			—
Deemed dividend on redeemable common stock	—			—			—			—			33			—
Lapse of rescission right on redeemable common stock	—			—			—			—			2,431			—
Promissory note received in exchange for deconsolidation of variable	—			—			—			—			6,702			—
Promissory notes received as proceeds from sale of discontinued operations	6,000			—			6,000			—			6,000			—
Prior year discretionary 401(k) contribution	—			—			—			—			408			—

The accompanying notes are an integral part of these consolidated financial statements.

Table of Contents

Overstock.com, Inc.

Notes to Unaudited Consolidated Financial Statements

1. BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements have been prepared by Overstock.com, Inc. (the “Company”) pursuant to the rules and regulations of the Securities and Exchange Commission regarding interim financial reporting. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements and should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations (Restated) and the audited annual consolidated financial statements and related notes thereto included in the Annual Report on Form 10-K/A for the year ended December 31, 2007. The accompanying unaudited consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments, which are, in the opinion of management, necessary for a fair statement of results for the interim periods presented. Preparing financial statements requires management 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 management’s best knowledge of current events and actions that the Company may undertake in the future, actual results may be different from the estimates. The results of operations for the three and six months ended June 30, 2008 are not necessarily indicative of the results to be expected for any future period or the full fiscal year.

2. ACCOUNTING POLICIES

Principles of consolidation

The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. The consolidated financial statements include the accounts of the Company’s OTravel subsidiary through April 25, 2007 (see Note 5—“Sale of Discontinued Operations”). All significant 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, valuation of investments, receivables valuation, revenue recognition, sales returns, incentive discount offers, inventory valuation, depreciable lives of fixed assets, internally-developed software, valuation of acquired intangibles, income taxes, stock-based compensation, and contingencies. Actual results could differ materially from those estimates.

Revenue recognition

The Company derives revenue primarily from two sources: direct revenue and fulfillment partner revenue. Direct revenue consists of sale of merchandise to both individual consumers and businesses that are fulfilled directly from the Company’s leased warehouses. Fulfillment partner revenue includes listing fees and commissions collected from products being listed and sold through the Auctions section of its Website, advertisement and lead generation revenue derived from its Cars listing site, and advertising revenue generated by its Real Estate site. The Company has organized its operations into two principal segments based on these primary sources of revenue (see Note 13 —“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 the Company’s customers. As the Company ships high volumes of packages through multiple carriers, it is not practical for the Company to track the actual delivery date of each shipment. Therefore, the Company uses estimates to determine which shipments are delivered and therefore recognized as revenue at the end of the period. The delivery date estimates are based on average shipping transit times, which are calculated using the following factors: (i) the shipping carrier (as carriers differ in transit times); (ii) the fulfillment source (either the Company’s warehouses or those of its 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.

The Company evaluates the criteria outlined in EITF Issue No. 99-19, Reporting Revenue Gross as a Principal Versus Net as an Agent, 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 the Company is the primary obligor in a transaction, is subject to inventory risk, has latitude in establishing prices and selecting suppliers, or has several but not all of these indicators, revenue is recorded gross. If the Company is 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 the Company is the primary obligor.

Table of Contents

The Company periodically provides incentive offers to its customers to encourage purchases. Such offers include current discount offers, such as percentage discounts off current purchases and other similar offers. Current discount offers, when accepted by its customers, are treated as a reduction to the purchase price of the related transaction.

Direct revenue

Direct revenue consists of sales of merchandise to both individual consumers and businesses that are fulfilled directly from the Company’s leased warehouses. Direct sales occur primarily through the Company’s Website, but may also occur through other offline channels.

Fulfillment partner revenue

Fulfillment partner revenue consists of merchandise sold through the Company’s Website and shipped by third parties directly to consumers and other businesses from warehouses maintained by the fulfillment partners, as well as revenue from the Auctions, Cars and Real Estate sections of its Website.

The auctions site (added to the Website in September 2004) allows sellers to list items for sale, buyers to bid on items of interest, and users to browse through listed items online. With limited exceptions, the Company is not considered the seller of the items sold on the auctions site and has no control over the pricing of those items. Therefore, for these sales, only the listing fees for items listed and commissions for items sold are recorded as revenue during the period items are listed or sold. Auctions revenues were insignificant during the three and six months ended June 30, 2007 and 2008, and are included in the fulfillment partner segment, as they are not large enough to separate out as its own segment.

The cars listing service (added to the Website in December 2006) allows dealers to list vehicles for sale and allows buyers to review vehicle descriptions, post offers to purchase, and provides the means for purchasers to contact sellers for further information and negotiations on the purchase of an advertised vehicle. Revenue from its cars listing business is included in the fulfillment partner segment, as it is not significant enough to separate out as its own segment.

The real estate listing service (added to the Website in May 2008) allows customers to search active listings across the country. Listing categories include foreclosures, live and on-line auctions, for sale by owner listings, broker/agent listings and numerous aggregated classified ad listings. Advertising revenue from the real estate business is included in the fulfillment partner segment, as it is not significant enough to separate out as its own segment.

Deferred revenue

Payment is generally required by credit card at the point of sale. Amounts received prior to delivery of products or services provided are recorded as deferred revenue. Amounts received in advance for Club O membership fees are recorded as deferred revenue and recognized ratably over the membership period. In addition, the Company sells gift cards and records related deferred revenue at the time of the sale. Revenue from a gift certificate is recognized when a customer redeems it. If a gift certificate is not redeemed, the Company recognizes revenue when the likelihood of its redemption becomes remote, generally two years from the date of issuance.

Internal-Use Software and Website Development

The Company includes in fixed assets the capitalized cost of internal-use software and website development, including software used to upgrade and enhance its Website and processes supporting the Company’s business. As required by Statement of Position (“SOP”) 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use, the Company capitalizes costs incurred during the application development stage of internal-use software and amortizes these costs over the estimated useful life of two to three years. The Company expenses costs incurred related to design or maintenance of internal-use software as incurred.

During the three months ended June 30, 2007 and 2008, the Company capitalized $226,000 and $1.8 million, respectively, of costs associated with internal-use software and website development, which are partially offset by amortization of previously capitalized amounts of $3.7 million and $3.1 million for those respective periods. For the six months ended June 30, 2007 and 2008, the Company capitalized $1.5 million and $2.6 million of costs associated with internal-use software and website development, which are partially offset by amortization of previously capitalized amounts of $7.1 million and $6.2 million, respectively.

Advertising expense

The Company recognizes advertising expenses in accordance with SOP 93-7, Reporting on Advertising Costs. As such, the Company expenses the costs of producing advertisements at the time production occurs or the first time the advertising takes place and expenses 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: (i) a commission for traffic driven to the Website that generates a sale, and (ii) based on the number of clicks on keywords or links to the Company’s Website generated during a given period. Advertising expense included in sales and marketing expenses totaled $7.1

Table of Contents

million and $13.1 million during the three months ended June 30, 2007 and 2008, respectively. For the six months ended June 30, 2007 and 2008, advertising expenses totaled $17.7 million and $27.0 million, respectively.

Restructuring

Restructuring expenses are primarily comprised of lease termination costs and the costs incurred for returning leased facilities back to their original condition in anticipation of subleasing current office space. Statement of Financial Accounting Standard (“SFAS”) No. 146, Accounting for Costs Associated with Exit or Disposal Activities (“SFAS No. 146”), requires that when an entity ceases using a property that is leased under an operating lease before the end of its term contract, 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 4—“Restructuring Expense”).

Fair Value of Financial Instruments

In September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 157, Fair Value Measurements (“SFAS No.157”), which defines fair value, establishes guidelines for measuring fair value and expands disclosures regarding fair value measurements. SFAS No. 157 does not require any new fair value measurements but rather eliminates inconsistencies in guidance found in various prior accounting pronouncements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. In February 2008, the FASB issued FASB Staff Position, or FSP, FAS No. 157-2, Effective Date of FASB Statement No. 157 (“FSP FAS No. 157-2”), which delayed the effective date of SFAS No. 157 to fiscal years beginning after November 15, 2008 and interim periods within those fiscal years for all non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). The Company adopted SFAS No. 157 for fiscal 2008, except as it applies to those non-financial assets and non-financial liabilities as described in FSP FAS No. 157-2, and it did not have a material impact on its consolidated financial position, results of operations or cash flows.

On a quarterly basis, the Company measures at fair value certain financial assets, including cash equivalents and available-for-sale securities. SFAS No. 157 specifies 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 the Company’s 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 the Company to minimize the use of unobservable inputs and to use observable market data, if available, when determining fair value. The fair value of these financial assets and liabilities was determined using the following levels of inputs as of June 30, 2008 (in thousands):

	Fair Value Measurements as of June 30, 2008:
	Total		Level 1		Level 2		Level 3

Assets:

Cash equivalents — Money market mutual funds	$	33,948	$	33,948	$	—	$	—
Available-for-sale securities	30,020		30,020		—		—
Total assets	$	63,968	$	63,968	$	—	$	—

Earnings (loss) per share

In accordance with SFAS No. 128, Earnings 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) for the period by the weighted average number of common and potential common shares outstanding during the period. Potential common shares, composed of incremental common shares issuable upon the exercise of stock options, restricted stock units, convertible senior notes and shares under the Performance Share Plan, are included in the calculation of diluted net earnings (loss) per share to the extent such shares are dilutive.

Table of Contents

The following table sets forth the computation of basic and diluted earnings (loss) per share for the periods indicated (in thousands, except per share amounts):

	Three months ended June 30,						Six months ended June 30,
	2007			2008			2007			2008
	(Restated)			(Restated)			(Restated)			(Restated)

Loss from continuing operations	$	(13,579	)	$	(7,359	)	$	(32,043	)	$	(12,083	)
Loss from discontinued operations	(300		)	—			(3,924		)	—

Net loss	$	(13,879	)	$	(7,359	)	$	(35,967	)	$	(12,083	)

Weighted average common shares outstanding—basic	23,689			22,750			23,642			23,048
Effective of dilutive securities:
Stock options	—			—			—			—
Restricted stock units	—			—			—			—
Convertible senior notes	—			—			—			—
Shares under the Performance Share Plan	—			—			—			—
Weighted average common shares outstanding—diluted	23,689			22,750			23,642			23,048

Net loss per common share—basic and diluted:
Loss from continuing operations	$	(0.58	)	$	(0.32	)	$	(1.35	)	$	(0.52	)
Loss from discontinued operations	$	(0.01	)	$	—		$	(0.17	)	$	—
Net loss per common share—basic and diluted	$	(0.59	)	$	(0.32	)	$	(1.52	)	$	(0.52	)

The stock options, restricted stock units, convertible senior notes outstanding and shares under the Performance Share Plan were not included in the computation of diluted earnings (loss) per share because to do so would have been antidilutive. The number of stock options outstanding at June 30, 2007 and 2008 was 1,290,000 and 1,031,000, respectively. In the first six months of 2008, the Compensation Committee of the Board of Directors approved grants of approximately 12,000 stock options and 485,000 restricted stock units to officers and employees of the Company. As of June 30, 2008, there were 457,000 restricted stock units outstanding (see Note 12 — “Stock Based Awards”). As of June 30, 2008, the Company had $77.0 million of convertible senior notes outstanding, which could potentially convert into 1,010,000 shares of common stock in the aggregate.

Recent accounting pronouncements

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (“SFAS No. 159”). Under SFAS No. 159, companies may elect to measure certain financial instruments and certain other items at fair value. The standard requires that unrealized gains and losses on items for which the fair value option has been elected be reported in earnings. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The Company adopted SFAS No. 159 for fiscal 2008; however, it did not elect to apply the fair value option to any financial instruments or other items upon adoption of SFAS No. 159 during the six months ended June 30, 2008. Therefore, the adoption of SFAS No. 159 did not impact the Company’s consolidated financial position, results of operations or cash flows.

In December 2007, the FASB issued SFAS No. 141 (R), Business Combinations (“SFAS No. 141 (R)”), and SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements (“SFAS No. 160”). SFAS No. 141 (R) requires an acquirer to measure the identifiable assets acquired, the liabilities assumed and any noncontrolling interest in the acquired entity at their fair values on the acquisition date, with goodwill being the excess value over the net identifiable assets acquired. SFAS No. 160 clarifies that a noncontrolling interest in a subsidiary should be reported as equity in the consolidated financial statements. The calculation of earnings per share will continue to be based on income amounts attributable to the parent. SFAS No. 141 (R) and SFAS No. 160 are effective for financial statements issued for fiscal years beginning after December 15, 2008. Early adoption is prohibited. The Company does not expect the adoption of SFAS No. 141 (R) or SFAS No. 160 to impact its financial position and results of operations or cash flows.

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133 (“SFAS No. 161”). SFAS No. 161 requires enhanced disclosures about a company’s derivative and hedging activities, in particular: 1) how and why derivative instruments are utilized; 2) how derivative instruments and related hedged items are accounted for under SFAS No. 133 and its related interpretations; and 3) how derivative instruments and related hedged items affect a company’s financial position, financial performance and cash flows. SFAS No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early adoption encouraged. The Company has no derivative instruments. Therefore, the Company does not expect the adoption of SFAS No. 161 to impact its financial position and results of operations or cash flows.

Table of Contents

In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles (“SFAS No. 162”). The current GAAP hierarchy was established by the American Institute of Certified Public Accountants, and faced criticism because it was directed to auditors rather than entities. The issuance of this statement corrects this and makes some other hierarchy changes. This statement is effective 60 days following the Securities and Exchange Commission’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles. The FASB does not expect that this statement will result in a change to current practice.

3. RESTATEMENT OF FINANCIAL STATEMENTS

Overstock.com, Inc. (the “Company”) is restating its consolidated financial statements and other financial information for the quarters ended June 30, 2007 and 2008 to correct errors related to the accounting for customer refunds and credits and the accounting for gift cards issued to customers.

The Company’s decision to restate the aforementioned financial statements was made as a result of management’s identification of errors related to the accounting for customer refunds and credits. On October 20, 2008, management, including the CEO (principal executive officer) and Senior Vice President, Finance (principal financial officer), concluded, and the Board of Directors agreed with management’s conclusions that certain refunds and credits issued to customers were not completely and accurately recorded in the consolidated financial statements.

Management subsequently determined, and the Board of Directors adopted management’s conclusion, that a portion of the error previously believed to be related to the accounting for customer refunds and credits was actually related to the accounting for gift cards issued to customers and that gift cards issued to customers were not completely and accurately recorded in the consolidated financial statements.

These errors impacted accounts receivable and deferred revenue in the consolidated balance sheet as well as revenue and returns expense (a component of revenue), in the consolidated statement of operations. As a result, revenue, net of returns expense, was misstated in the consolidated statement of operations for the three and six months ended June 30, 2008 and 2007 and accounts receivable and deferred revenue were misstated in the consolidated balance sheet as of June 30, 2008 and December 31, 2007. The amounts of these errors were determined to be material to the consolidated financial statements.

The effect of these error corrections on the Consolidated Results of Operations for the quarter ended June 30, 2008 is to decrease the net loss by $896,000 (including reducing $107,000 of direct revenue and increasing $101,000 of fulfillment partner revenue and increasing $119,000 of direct cost of goods sold and $771,000 of fulfillment cost of goods sold). The effect of these error corrections on the Consolidated Results of Operations for the six months ended June 30, 2008 is to reduce the net loss by $81,000 (including increasing $174,000 of direct revenue and $1.9 million of fulfillment partner revenue and increasing $608,000 of direct cost of goods sold and $3.2 million of fulfillment cost of goods sold).

The effect of these error corrections on the Consolidated Results of Operations for the quarter ended June 30, 2007 is to increase the net loss by $3,000 (including increasing $215,000 of direct revenue and $1.0 million of fulfillment partner revenue and increasing $220,000 of direct cost of goods sold and $1.0 million of fulfillment partner cost of goods sold). The effect of these error corrections on the Consolidated Results of Operations for the six months ended June 30, 2007 is to increase the net loss by $891,000 (including decreasing $133,000 of direct revenue and increasing $222,000 of fulfillment partner revenue and increasing $189,000 of direct cost of goods sold and $791,000 of fulfillment cost of goods sold).

In addition, from the Company’s inception through the third quarter of 2007, the Company had recorded revenue based on product ship date. In the fourth quarter of 2007, the Company determined that it should not record revenue until product delivery date because risk of loss transfers to the customer upon delivery and acceptance. In the fourth quarter of 2007, the Company performed a detailed analysis of this error and determined that the impact of this error on any prior annual or interim period was not material and the impact of recording the cumulative effect of the error in the fourth quarter of 2007 was immaterial to the full year. Therefore, the Company recorded the cumulative effect of the error in the fourth quarter of 2007. As the Company is now restating its previously issued consolidated financial statements to correct accounting errors related to customer refunds and credits and gift cards issued to customers, it has reversed the cumulative effect of the correction of the error in the fourth quarter of 2007 and restated all prior periods to reflect revenue recognition based on the product’s estimated delivery date in its consolidated financial statements for the years ended December 31, 2007, 2006, 2005, 2004 and 2003. The Company also recorded other miscellaneous adjustments as part of this restatement that were previously identified but determined to be immaterial.

The effect of this error correction relating to product delivery date on the Consolidated Results of Operations for the quarters ended June 30, 2007 is to increase the net loss by $108,000 (including deferring $135,000 of direct revenue and $902,000 of fulfillment partner revenue and deferring a corresponding $85,000 of direct cost of goods sold and $844,000 of fulfillment partner cost of goods sold). The effect of the error correction on Consolidated Results of Operations for the six months ended June 30, 2007 is to decrease the net loss by $75,000 (including recognizing $1.5 million of direct revenue and $2.8 million of fulfillment partner revenue and recognizing a corresponding $2.1 million of direct cost of goods sold and $2.2 million of fulfillment partner cost of goods sold). There was no effect of this error correction on the Consolidated Results of Operations for the three or six months ended June 30, 2008 as this error was corrected by the Company during the fourth quarter of 2007.

Table of Contents

The restated consolidated statements of operations, balance sheets and statements of cash flows have been restated as follows:

Consolidated Statements of Operations

(in thousands, except per share data)

	Quarter Ended June 30, 2008
	As Previously Reported			Adjustments			As Restated

Revenue
Direct	$	39,939		(107		)	$	39,832
Fulfillment partner	148,903			101			149,004

Total revenue	188,842			(6		)	188,836

Cost of goods sold
Direct	34,752			119			34,871
Fulfillment partner	119,985			771			120,756

Total cost of goods sold	154,737			890			155,627

Gross profit	34,105			(896		)	33,209

Operating expenses:
Sales and marketing	14,244			—			14,244
Technology	15,311			—			15,311
General and administrative	10,867			—			10,867
Restructuring	—			—			—

Total operating expenses	40,422			—			40,422

Operating loss	(6,317		)	(896		)	(7,213		)

Interest income	740			—			740
Interest expense	(888		)	—			(888		)
Other income, net	2			—			2

Loss from continuing operations	(6,463		)	(896		)	(7,359		)
Loss from discontinued operations	—			—			—
Net loss	(6,463		)	(896		)	(7,359		)
Deemed dividend related to redeemable common shares	—			—			—

Net loss attributable to common shares	$	(6,463	)	$	(896	)	$	(7,359	)

Net loss per common share — basic and diluted
Loss from continuing operations	$	(0.28	)	$	(0.04	)	$	(0.32	)
Loss from discontinued operations	$	—		$	—		$	—
Net loss per common share – basic and diluted	$	(0.28	)	$	(0.04	)	$	(0.32	)
Weighted average common shares outstanding — basic and diluted	22,750						22,750

Table of Contents

Consolidated Statements of Operations

(in thousands, except per share data)

	Six Months Ended June 30, 2008
	As Previously Reported			Adjustments			As Restated

Revenue
Direct	$	91,422		174			$	91,596
Fulfillment partner	298,165			1,889			300,054

Total revenue	389,587			2,063			391,650

Cost of goods sold
Direct	79,066			608			79,674
Fulfillment partner	241,630			3,166			244,796

Total cost of goods sold	320,696			3,774			324,470

Gross profit	68,891			(1,711		)	67,180

Operating expenses:
Sales and marketing	29,263			—			29,263
Technology	29,827			—			29,827
General and administrative	20,430			—			20,430
Restructuring	—			—			—

Total operating expenses	79,520			—			79,520

Operating loss	(10,629		)	(1,711		)	(12,340		)

Interest income	2,044			—			2,044
Interest expense	(1,789		)	—			(1,789		)
Other income, net	2			—			2

Loss from continuing operations	(10,372		)	(1,711		)	(12,083		)
Loss from discontinued operations	—			—			—
Net loss	(10,372		)	(1,711		)	(12,083		)
Deemed dividend related to redeemable common shares	—			—			—

Net loss attributable to common shares	$	(10,372	)	$	(1,711	)	$	(12,083	)

Net loss per common share — basic and diluted
Loss from continuing operations	$	(0.45	)	$	(0.07	)	$	(0.52	)
Loss from discontinued operations	$	—		$	—		$	—
Net loss per common share – basic and diluted	$	(0.45	)	$	(0.07	)	$	(0.52	)
Weighted average common shares outstanding — basic and diluted	23,048						23,048

Table of Contents

Consolidated Statements of Operations

(in thousands, except per share data)

	Quarter Ended June 30, 2007
	As Previously Reported			Adjustments			As Restated

Revenue
Direct	$	43,578		80			$	43,658
Fulfillment partner	105,389			124			105,513

Total revenue	148,967			204			149,171

Cost of goods sold
Direct	36,321			135			36,456
Fulfillment partner	86,343			180			86,523

Total cost of goods sold	122,664			315			122,979

Gross profit	26,303			(111		)	26,192

Operating expenses:
Sales and marketing	7,962			—			7,962
Technology	15,237			—			15,237
General and administrative	10,429			—			10,429
Restructuring	6,194			—			6,194

Total operating expenses	39,822			—			39,822

Operating loss	(13,519		)	(111		)	(13,630		)

Interest income	1,078			—			1,078
Interest expense	(1,027		)	—			(1,027		)
Other income, net	—			—			—

Loss from continuing operations	(13,468		)	(111		)	(13,579		)
Loss from discontinued operations	(300		)	—			(300		)
Net loss	(13,768		)	(111		)	(13,879		)
Deemed dividend related to redeemable common shares	—			—			—

Net loss attributable to common shares	$	(13,768	)	$	(111	)	$	(13,879	)

Net loss per common share — basic and diluted
Loss from continuing operations	$	(0.57	)	$	(0.01	)	$	(0.58	)
Loss from discontinued operations	$	(0.01	)	$	—		$	(0.01	)
Net loss per common share – basic and diluted	$	(0.58	)	$	(0.01	)	$	(0.59	)
Weighted average common shares outstanding — basic and diluted	23,689						23,689

Table of Contents

Consolidated Statements of Operations

(in thousands, except per share data)

	Six Months Ended June 30, 2007
	As Previously Reported		Adjustments	As Restated

Revenue
Direct	$	89,279	1,369	$	90,648
Fulfillment partner	217,618		3,061	220,689

Total revenue	306,897		4,430	311,327

Cost of goods sold