Overstock.com 2003 Annual Report Download - page 32

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 during the past two quarters
due to the change in our business practices.
Cost of goods sold as a percentage of total revenue has fluctuated during the eight quarters ended December 31, 2003, ranging from 78% 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.
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Total operating expenses as a percentage of total revenue have decreased on a year-over-year basis each quarter during 2003 as compared to 2002 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, in February 2003, we completed a
follow-on offering pursuant to which we received approximately $24.0 million in cash, net of underwriting discounts, commissions, and other related
expenses. Our cash and cash equivalents balance was $28.8 million at December 31, 2003. We also had marketable securities of $11.5 million at
December 31, 2003.
Our operating activities resulted in net cash outflows of $10.4 million for the year ended December 31, 2003 and net cash inflows of $2.5 million for the
year ended December 31, 2002. The primary use of cash and cash equivalents during 2003 was to fund our normal operations, including net losses of
$11.9 million, and changes in accounts receivable ($3.2 million), inventories ($16.0 million), and prepaid expenses and other assets ($2.3 million). This was
offset by the change in accounts payable ($16.6 million) and accrued liabilities ($2.9 million).
Cash used in investing activities included $6.7 million in capital expenditures for property and equipment, including $2.8 million in the third quarter
2003 for expansion of our existing warehouse facility, a new customer service telephone system ($800,000), and upgrades to the existing internal database
($500,000). These expenditures were offset by a net increase of $10.0 million in cash and cash equivalents from the purchase and sales of marketable
securities. For the year ended December 31, 2003 and 2002, net cash provided by (used in) investing activities amounted to $3.1 million and $(23.3 million),
respectively.
Net cash provided by financing activities during the year ended December 31, 2003 was $25.1 million, consisting primarily of net proceeds of
$24.0 million received from the follow-on public offering which occurred in February 2003 and approximately $1.2 million received from the exercise of
stock options and warrants, offset by $141,000 of payments on capital leases. Net cash provided by financing activities for the year ended December 31, 2002
was $28.2 million, consisting primarily of proceeds from our initial public offering in May 2002 and the issuance of preferred stock in March 2002, offset by
the repayment of $4.5 million of notes payable.
On March 4, 2002, we sold 958,612 shares of our Series A redeemable convertible preferred stock at $6.89 per share for $6.6 million, net of issuance
costs. As the fair value of the common stock to be
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received upon conversion of the preferred stock was greater than the conversion price of the preferred stock at the date the preferred stock was issued, a
beneficial conversion feature resulted in a non-cash charge of approximately $6.6 million which was recorded in the first quarter of 2002. This non-cash
charge was recorded as a deemed dividend, of which $3.7 million is attributable to shares sold to the following related parties; John J. Byrne Jr., a former
director of Overstock; Contex Limited, an entity controlled by Mark Byrne, a brother of Patrick M. Byrne; Haverford Internet LLC, an entity controlled by
Patrick M. Byrne; The Gordon S. Macklin Family Trust, a trust controlled by a director of Overstock; and Rope Ferry Associates, Ltd., an entity owned by
John J. Byrne III and Dorothy M. Byrne, the brother and mother of Patrick M. Byrne. The remaining purchasers of our Series A preferred stock are unrelated
parties that are friends and acquaintances of our officers and directors.
Contractual Obligations and Commitments. The following table summarizes our contractual obligations as of December 31, 2003 and the effect such
obligations and commitments are expected to have on our liquidity and cash flow in future periods: