Overstock.com 2004 Annual Report Download - page 45

income. An additional $14.4 million of net operating losses are limited under Internal Revenue Code Section 382 to $799,000 a year. These carryforwards
begin to expire in 2019.
Comparison of Years Ended December 31, 2002 and 2003
Revenue
As previously described, beginning July 1, 2003, customer returns from sales shipped by our fulfillment partners are returned directly to us and processed
through our Salt Lake City warehouse, rather than returned to our fulfillment partners. As a result of this change in business practices, we now record sales
transactions shipped by our fulfillment partners on a gross basis instead of on a net basis. Therefore, from the third quarter 2003 forward, revenue recorded in
accordance with accounting principles generally accepted in the United States ("GAAP") will increase significantly from our results as reported in previous
SEC filings. Additionally, as illustrated in the table above that sets forth our results of operations expressed as a percentage of total revenue, direct revenue as
a percentage of total revenue decreased significantly while fulfillment partner revenue as a percentage of total revenue increased. As a result, we believe that
for year-over-year comparison purposes, gross bookings (non-GAAP) comparisons may be more informative than GAAP revenue comparisons, as gross
bookings were not affected by the change in business practices.
Total revenue grew from $91.8 million in 2002, to $238.9 million in 2003, representing growth of 160%. During this same period, direct revenue
increased from $79.4 million to $138.1 million, or 74% growth, and fulfillment partner revenue grew from $12.4 million to $100.8 million, representing
growth of 714%. The significant increase in total revenue was due primarily to the change in our business practices described above, coupled with an increase
in the number of both direct and fulfillment partner orders and sales to other businesses. This increase was also a result of the growth of our B2C business due
to increased marketing efforts, including the initiation of a nationwide television and radio advertising campaign that began in the third quarter of 2003 and
continued through the fourth quarter. Gross bookings totaled $294.8 million and $154.5 million for the years ended December 31, 2003 and 2002,
respectively, representing an increase of 91%. Gross bookings differ from GAAP revenue in that gross bookings represent the gross sales price of goods sold
by the Company before returns, sales discounts and before payments to fulfillment partners prior to July 1, 2003.
Cost of Goods Sold and Gross Margins
As a result of the fulfillment partner returns policy change that occurred beginning the third quarter of 2003, we now record sales transactions shipped by
our fulfillment partners on a gross basis instead of on a net basis as we have historically done. Therefore, GAAP revenue increased significantly beginning in
the third quarter of 2003, which resulted in a significant increase in cost of goods sold and hence, a decrease in gross margins from previous quarters. These
margins will now more closely resemble margins we receive from our direct revenue. As a result, we believe that for year-over-year comparison purposes,
gross profit dollar comparisons may be more informative than gross margin percentage comparisons.
Cost of goods sold increased in absolute dollars, from $73.4 million in 2002 to $213.5 million in 2003, and as a percent of total revenue, from 80% to
89%, respectively. This increase in cost of goods sold, as a percent of total revenue, was primarily a result of the change in our business practices described
above. In addition, cost of goods sold increased as a percentage of total revenue due to the growth in sales of BMV products, which account for approximately
12% of total revenue in 2003, compared to less than 1% in 2002. These combined changes correlate to gross margins of 20% and 11% for the years ended
December 31, 2002 and 2003, respectively. Cost of goods sold also includes stock-based compensation of $373,000 and $90,000 for the years ended
December 31, 2002 and 2003, respectively.
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