Overstock.com 2003 Annual Report Download - page 26

estimating valuation allowances and accrued liabilities, specifically, the reserve for returns, the allowance for doubtful accounts and the
allowance for obsolete and damaged inventory;
accounting for income taxes; and
valuation of long-lived and intangible assets and goodwill.
Revenue recognition. We derive our revenue from three sources: (i) direct revenue, which consists of merchandise sales made to consumers and
businesses that are fulfilled from our warehouse; (ii) fulfillment partner revenue, which consists of revenue from the sale of merchandise shipped by
fulfillment partners directly to consumers and other businesses; and (iii) warehouse revenue, which consists of sales of residual products from large bulk
purchases of inventory. Both direct revenue and fulfillment partner revenue are recorded net of returns, coupons redeemed by customers, and other discounts.
With regards to our fulfillment partner revenue, prior to July 1, 2003, we did not own or physically handle the merchandise sold in these transactions, as
the merchandise was shipped directly by a third party vendor, who also handled all customer returns related to those sales. Beginning July 1, 2003, we took
responsibility for all returned items relating to these sales, and we now handle the resale of any returned items. As a result, beginning July 1, 2003, we are
considered to be the primary obligor for these sales transactions, and we assume the risk of loss on the returned items. We now record revenue from sales
transactions involving our fulfillment partners on a gross basis, rather than recording a commission on sales as we did prior to July 1, 2003. Similar to the
manner in which we generate consumer fulfillment partner revenue, we generate B2B fulfillment partner revenue when we sell the merchandise of third
parties through our B2B Website.
For sales transactions, we comply with the provisions of Staff Accounting Bulletin 101 "Revenue Recognition", as amended, which states that revenue
should be recognized when the following revenue recognition criteria are met: (1) persuasive evidence of an arrangement exists; (2) the product has been
shipped and the customer takes ownership and assumes the risk of loss; (3) the selling price is fixed or determinable; and (4) collection of the resulting
receivable is reasonably assured. We generally require payment by credit card at the point of sale. Any amounts received prior to when we ship the goods to
customers are deferred.
Reserve for returns, allowance for doubtful accounts and the allowance for obsolete and damaged inventory. Our management must make estimates of
potential future product returns related to current period revenue. Management analyzes historical returns, current economic trends and changes in customer
demand and acceptance of our products when evaluating the adequacy of the sales returns and other allowances in any accounting period. The reserve for
returns was $1.1 million as of December 31, 2003.
From time to time, we may grant credit to certain of our business customers on normal credit terms. We perform ongoing credit evaluations of our
customers' financial condition and maintain an allowance for doubtful accounts receivable based upon our historical collection experience and expected
collectibility of all accounts receivable. As of December 31, 2003, we recorded an allowance for doubtful accounts receivable of $650,000.
Overstock writes down its inventory for estimated obsolescence or damage equal to the difference between the cost of inventory and the estimated
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. Our inventory balance was $29.9 million, net of allowance for obsolescence or damaged
inventory of $1.1 million as of December 31, 2003.
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Accounting for income taxes. Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and
liabilities and any valuation allowance recorded against our net deferred tax assets. As of December 31, 2003, we have recorded a full valuation allowance of
$25.7 million against our net deferred tax asset balance due to uncertainties related to our deferred tax assets as a result of our history of operating losses. The
valuation allowance is based on our estimates of taxable income by jurisdiction in which we operate and the period over which our deferred tax assets will be
recoverable. In the event that actual results differ from these estimates or we adjust these estimates in future periods, we may need to change the valuation
allowance, which could materially impact our financial position and results of operations.
Valuation of long-lived and intangible assets and goodwill. Effective January 1, 2002, we have adopted SFAS No. 142 Goodwill and Other Intangible
Assets. Under this standard, goodwill is no longer amortized, but must be tested for impairment at least annually. Other long-lived assets must also be
evaluated for impairment when management believes that an asset has experienced a decline in value that is other than temporary. Future adverse changes in
market conditions or poor operating results of underlying investments could result in losses or an inability to recover the carrying value of the asset that may
not be reflected in an asset's current carrying value, thereby possibly requiring an impairment charge in the future. There were no impairments of goodwill or
long-lived assets during 2001, 2002, or 2003. Net intangible assets and goodwill amounted to $3.0 million as of December 31, 2003.
Results of Operations
The following table sets forth our results of operations expressed as a percentage of total revenue for 2001, 2002 and 2003.
Year ended December 31,
2001 2002 2003
(as a percentage of total revenue)
Direct revenue 88.1% 84.9% 57.2%
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