Overstock.com 2013 Annual Report Download - page 20

Table of Contents
We recently 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.
Since our inception, we established a valuation allowance for our deferred tax assets, primarily due to realized losses and uncertainty regarding our
future taxable income. Determining whether a valuation allowance for deferred tax assets is appropriate requires significant judgment and an evaluation of all
positive and negative evidence. At each reporting period, we assess the need for, or the sufficiency of, a valuation allowance against deferred tax assets. At
December 31, 2013, based on the weight of all the positive and negative evidence, 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 is primarily based 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, a valuation allowance may need to be reestablished
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.
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 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.
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