Overstock.com 2004 Annual Report Download - page 49

Our direct revenue and fulfillment partner revenue have increased in every quarter on a year-over-year basis. The general increase in total revenue is due
to the expansion of our customer base as we attracted more visitors to our Websites, as well as repeat purchases from these customers. We have experienced
significant seasonality in our business, reflecting a combination of seasonal fluctuations in Internet usage and traditional retail seasonality patterns. Internet
usage and the rate of Internet growth may be expected to decline during the summer. Further, sales in the traditional retail industry are significantly higher in
the fourth calendar quarter of each year than in the preceding three quarters. Fulfillment partner revenue increased significantly beginning in the third quarter
of 2003 due to the change in our business practices.
Cost of goods sold as a percentage of total revenue has fluctuated in the quarterly periods reflected above ranging from 83% to 93%. The significant
increases during the 3rd and 4th quarters of 2003 relate specifically to the change in business practices in our fulfillment partner operations and the resulting
shift from recognizing revenue on a commission basis to a gross basis. Gross margins during the periods Q4 2003 through Q4 2004 were: 9.6%, 10.3%,
11.3%, 13.3% and 15.2%, respectively. In comparing the fourth quarters of 2003 and 2004, revenue increased 80% (from $123.2 million to $221.3 million)
while gross profit dollars increased 186% (from $11.8 million to $33.7 million). Our margins improvement stems from our efforts in tightening our logistics
costs and achieving better pricing on merchandise purchased to sell on our Websites.
Total operating expenses as a percentage of gross bookings have generally decreased on a year-over-year basis each quarter during 2004 as compared to
2003 as a result of economies of scale achieved through increased sales volume. In the near future, we expect to continue to devote substantial resources to the
expansion of our sales and marketing efforts, and expect that total operating expenses may increase in absolute dollars in future periods. These expenses as a
percentage of total revenue will vary depending on the level of revenue obtained.
Due to the foregoing factors, in one or more future quarters our operating results may fall below the expectations of securities analysts and investors. In
such an event, the trading price of our common stock would likely be materially adversely affected.
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 the Company's financial
condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to
investors.
Liquidity and Capital Resources
Prior to the second quarter of 2002, we financed our activities primarily through a series of private sales of equity securities, warrants to purchase our
common stock and promissory notes. During the second quarter of 2002, we completed our initial public offering pursuant to which we received
approximately $26.1 million in cash, net of underwriting discounts, commissions, and other related expenses. Additionally, we completed follow-on offerings
in February 2003, May 2004 and November 2004, pursuant to which we received approximately $24.0 million, $37.9 million and $75.2 million, respectively,
in cash, net of underwriting discounts, commissions, and other related expenses. In November 2004, we also received $116.2 million in proceeds from the
issuance of our convertible senior notes in a transaction event exempt from registration under the Securities Act. At December 31, 2004, our cash and cash
equivalents balance was $198.7 million and our marketable securities totaled $88.8 million.
Our operating activities resulted in net cash outflows of $10.4 million for the year ended December 31, 2003 and net cash inflows of $25.0 million for the
year ended December 31, 2004. The
45