Overstock.com 2002 Annual Report Download - page 22

Amortization of stock-based compensation — 1.6 3.2
Total operating expenses 75.1 47.3 24.4
Operating loss (84.1) (33.9) (4.4)
Interest income 0.9 1.2 0.4
Interest expense (0.3) (1.8) (0.5)
Other income (expense), net (0.1) 0.1 (0.5)
Net loss (83.6)% (34.4)% (5.0)%
(1) Amounts include stock based compensation of —% 0.2% 0.4%
(2) Amounts exclude stock based compensation as follows:
Sales and marketing expenses —% 0.0% 0.1%
General and administrative expenses — 1.6 3.1
—% 1.6% 3.2%
Comparison of Years Ended December 31, 2001 and 2002
Revenue
Total revenue grew from $40.0 million in 2001, to $91.8 million in 2002, representing growth of 129%. During this same period, direct revenue
increased from $35.2 million to $77.9 million or a 121% growth, and commission revenue grew from $4.0 million to $12.4 million representing growth of
212%. Warehouse revenue was $795,000 in 2001 and $1.5 million in 2002, representing growth of 84%. The increase in total revenue was due primarily to an
increase in the number of both direct and commission orders and in the average order size. This increase was also a result of the growth of our B2C business
due to increased marketing efforts and increased sales to other businesses, including Safeway, Inc. The increase in warehouse revenue from 2001 to 2002 was
due primarily to an establishment of a permanent location for our warehouse store at our warehouse facility in July of 2002. For the warehouse sale in 2001,
we liquidated part of a large inventory purchase from Toytime.com during January of that year. For the warehouse sale in 2002, we liquidated the remnants of
the Gear.com inventory that occurred during the latter end of the first quarter and the first part of the second quarter of 2002. The gross merchandise sales of
goods sold directly by us and on behalf of third parties were $69.3 million in 2001 and $154.5 million in 2002, an increase of 123%.
Cost of Goods Sold
Cost of goods sold increased in absolute dollars from $34.6 million to $73.4 million in 2002. This represents a decrease, as a percent of total revenue,
from 87% in 2001 to 80% in 2002. The decrease in cost of goods sold as a percentage of total revenue in 2002 compared to 2001 was primarily a result of
economies of scale achieved through an increased number of sales transactions and efficiencies in operations. These efficiencies include, but are not limited
to, efficiencies in the actual costs paid to suppliers for goods, freight and handling costs, the costs of customer service and returns. The decrease is also
attributable to an increase in commission revenue as a percentage of total revenue (from 10% in 2001 to 13% in 2002), as commission revenue has higher
gross margins than direct revenue. Cost of goods sold also includes $78,000 and $373,000 of stock-based compensation for the years ended December 31,
2001 and 2002, respectively.
Operating Expenses
Sales and marketing. Sales and marketing expenses increased on an absolute dollar basis from $5.8 million in 2001, to $8.7 million in 2002 primarily
as a result of our increased online marketing expenditures, including fixed payment arrangements in connection with online marketing relationships.
However, this represents a decrease as a percent of total revenue from 15% to 9%. The decrease in marketing costs as a percentage of total revenue as
compared to 2001 reflects an effort by our management to focus advertising expenditures on campaigns that it believes are the most cost-effective to increase
net sales, such as targeted online advertising, as well as negotiating reduced rates charged to us for online marketing.
General and administrative. General and administrative expenses increased from $9.4 million in 2001, to $10.8 million in 2002 representing 24% and
12% of total revenue, respectively. The increase in absolute dollars was due primarily to new business development and the staffing necessary to manage and
support our growth. General and administrative personnel increased from 65 employees at the end of 2001, to 84 employees at the end of 2002. The decrease
in general and administrative expense as a percentage of total revenue was a result of economies of scale achieved through increased sales volume and the
allocation of general and administrative expenses over a substantially larger revenue base.
Amortization of goodwill. Effective January 2002, we adopted SFAS No. 142, which requires that goodwill no longer be amortized. Hence, we did not
record any goodwill amortization during fiscal year 2002. During 2001, $3.1 million was recorded as amortization of goodwill for the fiscal year ended
December 31, 2001. Goodwill resulted from the acquisition of Gear.com in November 2000.
Amortization of stock-based compensation. Amortization of stock-based compensation was approximately $649,000 and $2.9 million in 2001 and
2002, respectively. We attribute this increase primarily to amortization of non-cash deferred stock-based compensation recognized relating to options grants
during the respective periods.
Interest income, interest expense and other income (expense). Interest income was $461,000 in 2001 compared to $403,000 in 2002. Interest expense
decreased from $729,000 in 2001 to $465,000 in 2002, primarily as a result of the reduction in notes payable. Other income (expense) changed from income
of $29,000 in 2001 to expense of $444,000 primarily because the company paid $439,000 of selling costs on behalf of the selling shareholder as part of the
initial public offering.