Overstock.com 2010 Annual Report Download - page 67

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Table of Contents
During 2008, we discovered that we had underbilled our fulfillment partners for certain fees and charges related to returns during the years ended
December 31, 2007 and 2008, due to a systems issue.
Of the total $5.5 million underbilling, $2.8 million related to the year ended December 31, 2007 and $2.7 million related to the year ended December 31,
2008.
We contacted the affected fulfillment partners and in our negotiations with them over several months, we agreed to forgive the $2.8 million related to the
2007 amounts and to seek to recover the $2.7 million related to 2008 over time from our future sales of the fulfillment partners' products during the remainder
of 2008 and 2009. As a result of the negotiations we later agreed to forgive an additional $375,000. We recovered a total of $2.3 million through
December 31, 2009, including $1.8 million during the three months ended December 31, 2008 and $615,000 during the year ended December 31, 2009. We
have recorded the amounts recovered related to 2008 in the period that they originated.
During our review of our partner billing system for returns, we additionally discovered that we had underbilled our fulfillment partners for certain fees
and charges related to returns during the fourth quarter of 2008 and the year ended December 31, 2009 totaling approximately $187,000 and $1.6 million,
respectively. We have 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.
Cost of goods sold includes stock-based compensation expense of $167,000 and $198,000 for the years ended December 31, 2009 and 2008,
respectively.
Direct Gross Profit—Gross profit for our direct business increased 2% to $20.0 million for the year ended December 31, 2009, from $19.7 million for the
year ended December 31, 2008, and gross margin increased to 13.3% from 11.4%. For the three month periods ended December 31, gross profit increased
53% to $6.6 million in 2009 from $4.3 million in 2008, and gross margin increased to 11.9% from 8.8%.
Fulfillment Partner Gross Profit—Our fulfillment partner business generated gross profit of $144.7 million and $124.5 million for the years ended
December 31, 2009 and 2008, respectively, an increase of 16%, and gross margin increased to 19.9% from 19.0%. For the three month periods ended
December 31, gross profit increased 29% to gross profit of $48.5 million in 2009 from $37.7 million in 2008, and gross margin decreased to 18.1% from
18.3%.
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.
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