Wednesday, October 03, 2007

Patrick Byrne, the CEO of Overstock.com: A history of deception, deceit, and distortion - Part 1: The Early Days

Having never met Overstock.com CEO, Patrick Byrne, I cannot determine when his hyping, spinning, and deceptions began and when they end.

In my new series of blog posts, I will carefully examine in detail Patrick Byrne's comments from before Overstock.com went public to the present. Upon careful analysis, I have found a continuous pattern of deceitful, inconsistent, and contradictory statements made by Patrick Byrne that more often than not conflict with other disclosures made by him and Overstock.com.

Most of Patrick Byrne's deceitful, inconsistent and contradictory statements cited in this blog post (part 1 of my series) predate Overstock.com's IPO in June 2002, predate Overstock.com's litigation defendant Gradient Analytics' initial coverage of Overstock.com, and predate Overstock.com litigation defendant Rocker Partners' initial short position of Overstock.com.

My cousin, Crazy Eddie Antar used to say that, "people live on hope." Like Eddie, Patrick Byrne's hyping seems to reflect the behavior of a penny stock promoter, since his comments often have no bearing in reality. Overstock.com constantly misses targets set by Byrne. Patrick Byrne's statements are often inconsistent with each other and in many cases contradict other facts on hand. In most cases Patrick Byrne's contradictions cannot be reconciled with other disclosures by him and Overstock.com. His different versions of events cannot coexist, leading me to question whether is simply promoting hope without regard for reality.

Throughout its entire operating history, Overstock.com has continually raised capital, burned cash, and continued to lose money while Patrick Byrne sells people hope. We need to ask: is Patrick Byrne, CEO of Overstock.com, delusional, deceitful, or just plain dumb?

Many people may think that prior acts dating back seven years from today are beyond the statute of limitations for possible charges of underlying securities law violations. However, from my own experience in the Crazy Eddie fraud, such prior acts are still clearly relevant, since the SEC is not bound by any statute of limitations on acts relating to underlying violations of securities law. Patrick Byrne has recently admitted to being the target of a Securities and Exchange Commission investigation of possible wrongdoing in contrast to his previous denials. Any information about his deceptions is clearly relevant to its investigation.

Let's examine the two worlds of Patrick Byrne's GAAP accounting before we continue

Overstock.com has two revenue categories: direct revenue and fulfillment partner revenues. Direct revenues are generally reported at the amount of sales proceeds less sales returns and discounts. However, until the second half of fiscal year 2003, Overstock.com did not have any inventory risk relating to its fulfillment partner sales category. The company acted as an intermediary and let fulfillment partners sell merchandise through its web site. Therefore, under GAAP, Overstock.com could only report the commissions that the company received from its fulfillment partner sales, since Overstock.com did not own the inventory relating to such sales.

Until the second half of fiscal year 2003, Overstock.com reported in its financial statements as revenues, only the commissions it had received from fulfillment partner sales as revenues in its financial statements. Starting in the third quarter of fiscal year 2002, Overstock.com assumed a sliver of inventory risks by handling limited sales returns from fulfillment partner sales. As a result of the limited inventory risk, Overstock.com would begin recognizing fulfillment partner sales the full value, less sales return allowances. While the revenue recognition change would not affect profit levels, it would greatly increase sales (top line performance) as reported in Overstock.com's financial statements under GAAP.

On March 5, 2002, Overstock.com filed form S-1 in connection with its planned initial public offering. By June 4, 2002, Overstock.com closed its initial public offering. Before to the release of Overstock.com's historical financial reports, in connection with its planned IPO in March 2002, Patrick Byrne gave a series of interviews where he painted a glowing picture of Overstock.com's current and future financial prospects.

During the various interviews as detailed below, Patrick Byrne cited both current sales and projected future sales as he hyped Overstock.com's business prospects. The sales figures cited by Patrick Byrne, both current and future sales expectations, seem to make no sense in relation to the GAAP sales figures later released by Overstock.com in its
S-1 and S-1A, as the company prepared to go public. His claims of Overstock.com's profitability also contradicted the company's later disclosures in its SEC filings. Despite Byrne's numerous assertions that the firm was profitable before its IPO, the company lost money in every single year before and after the public offering.

As I will analyze in detail, Patrick Byrne at times apparently used a non GAAP accounting measure, known as non GAAP pro forma gross value merchandise sales, to hype up Overstock.com's top line performance in most interviews. Patrick Byrne does not indicate in his various interviews before Overstock.com filed form S-1 for its planned initial public offering in March 2002, whether he is using GAAP or non GAAP metrics to describe sales. So readers would have had no idea that the CEO had inflated his own company's sales figures. If Patrick Byrne had used GAAP in describing Overstock.com's sales metrics, almost all of his statements about current and future sales would have obviously had no basis in reality. Even if Patrick Byrne was using non GAAP metrics to describe sales, most of his statements still would have no basis in reality.

By using non GAAP pro forma gross value merchandise sales, Patrick Byrne can report Overstock.com's fulfillment partner sales at the full amount of such transactions, rather than the much smaller commissions that the company collected in brokering such sales. While the use of non GAAP pro forma merchandise sales does not increase profits, it does add credibility to Patrick Byrne's contentions that Overstock.com was rapidly growing its top line.

For a simplified example, let's assume that a fulfillment partner sold $100 of merchandise on Overstock.com's web site and the company collected a $15 commission. Under GAAP, Overstock.com should recognize $15 in revenues. Under Patrick Byrne's non GAAP pro forma "gross merchandise sales" metric, he describes Overstock.com as having $100 of sales. Under GAAP, if $1 of such sales were returned, Overstock.com would report $14 in revenues. However, by using non GAAP proforma revenue accounting to discuss its operations, the company would still claim it had $100 in sales even though GAAP sales were reduced should be 85% lower due to the difference in accounting basis, and another 1% lower as a result of returns, as shown in the above example. In addition, if every dollar from fulfillment partner sales was returned, Overstock.com would report $0 in GAAP sales but still report $100 in non GAAP pro forma gross merchandise sales.

Overstock.com prepares to go public

On March 5, 2002, Overstock.com filed form S-1 in connection with its planned initial public offering. By June 4, 2002, Overstock.com closed its initial public offering. Prior to the release of Overstock.com's historical financial reports in connection with its planned IPO in March 2002, Patrick Byrne gave a series of interviews where he painted a glowing picture of Overstock.com's current and future financial prospects. However, Overstock.com was actually losing money and sales were nowhere near as high as the CEO had stated.

An article in E-Commerce Times, written by Keith Regan, published the day after the S-1 was filed took note of Patrick Byrne's statements hyping Overstock.com's financial performance in the 14 months prior to the company's planned initial public offering:

Although the company began to call itself profitable halfway through 2000, its SEC filing shows that it actually lost $8 million in 1999, $21 million in 2000 and $13 million in 2001.

Note: Bold print and italics added by me.

E-Commerce Times was referring to previous statements made by Patrick Byrne in an interview published on July 11, 2001 entitled, "Look Who's Making Money Online - Without Heavy Lifting." That interview and other interviews prior to Overstock.com filing form S-1 for its planned IPO will be analyzed below.

Until Overstock.com filed its form S-1 in March 2002 for its planned initial public offering, almost any person listening to or reading Patrick Byrne's interviews would not know that Overstock.com was perennially losing money. In addition, after careful analysis, it appears that Patrick Byrne had used non GAAP pro forma sales to hype up Overstock.com's top line performance in various interviews without making adequate disclosure prior to Overstock.com's IPO. While Patrick Byrne had claimed that the company started making money, Overstock.com was still losing money.

Overstock.com's History of Losses

According to Overstock.com's S-1 filed in March 2002, during Overstock.com's entire history, the company had lost money:

  • Fiscal Year Ended December 31, 1997: $661 thousand net loss
  • Fiscal Year Ended December 31, 1998: $1.4 million net loss
  • Fiscal Year Ended December 31, 1999: $8.4 million net loss
  • Fiscal Year Ended December 31, 2000: $21.3 million net loss
  • Fiscal Year Ended December 31, 2001: $13.8 million net loss

In addition, it is very likely that Overstock.com lost money in every quarter of its pre-IPO existence. Overstock.com's S-1A presents interim reports for each quarter of fiscal years 2000 and 2001. According to those filings, Overstock.com had lost money in each and every quarter during fiscal years 2000 and 2001. The company did not detail quarterly financial data in its S-1A for fiscal years 1997-1999. In annual financial data, according to Overstock.com's S-1A, for each fiscal year from 1997 to 1998, the company had massive net losses resulting from relatively large operating expenses in relation to its gross profit margins.

Revenues were relatively minor at about $739 thousand in fiscal year 1997 and dropped to $584 thousand in fiscal year 1998. In fiscal year 1997, Overstock.com's operating expenses exceeded its gross profits by a factor of almost ten and in fiscal year 1998, the company's operating expenses exceeded its gross profits by about a factor of about twenty four. In fiscal year 1999, Overstock.com had negative gross profit margins while its operating expenses went up by over a factor of five from the previous fiscal year.

We can see now why Patrick Byrne was selling hope. That's all he had to work with.

December 6, 2000: ZDNet News interview

According to an article in ZDNet News entitled, "E-tailers lose ... and Overstock.com wins," by Larry Dignan:

Privately held Overstock.com said Wednesday that it has become the first pure-play e-tailer to turn a profit. And the company's CEO said Overstock.com will grow sales to $20 million a month by the end of the first quarter [2001].

Overstock.com buys close-out inventory and resells it cheap. The demise of e-tailers has helped fuel Overstock.com's growth. The more e-tailers go bankrupt, the more Overstock.com can buy inventory for pennies on the dollar.

So far, the strategy has worked well. In an interview, Overstock.com CEO Patrick Byrne didn't disclose the size of the profit, but just the fact that the company is in the black says a lot. In the last month [November 2000], Overstock.com's sales have jumped from $4 million to $9 million a month and early indicators show the company's sales are growing exponentially. The company said it can stay at break-even with $4 million in sales.

Byrne also noted that Overstock.com took $27 million to turn a profit.

Note: Bold print and italics added by me. Bracketed information added by me for clarity.

Patrick Byrne's claim that "the company is in the black" is implausible

Patrick Byrne's claim to ZDNet News that Overstock.com had turned "a profit" is implausible considering that in each quarter of fiscal year 2000 the company had lost over $4 million on negative gross profit margins. If indeed Overstock.com did turn a profit for any length of time, whether days, weeks, or even a month, it was clearly a glitch and not sustainable.

Review Overstock.com's history of quarterly losses for 2000:

  • Q1 2000: $6.5 million net loss
  • Q2 2000: $4.1 million net loss
  • Q3 2000: $4.5 million net loss (last full quarter prior to December 2000 ZDNet interview)
  • Q4 2000: $6.2 million net loss (interview took place during this quarter)

The only remotely conceivable period that Overstock.com could have been profitable ahead of this interview was a brief period from October 1 to November 30 (the first two months of the last quarter) since the interview took place sometime before December 6 and Overstock.com lost about $6.2 million during the entire fourth quarter.

But even still, Byrne's own statements that it "took $27 million to turn a profit," imply that the period of alleged profit had to be even shorter. By the end of the third quarter of fiscal year 2000 (the last full quarter prior to the ZDNet News interview), Overstock.com had racked up cumulative losses totaling about $25.6 million. If as Byrne had claimed, Overstock burned $27 million in capital before becoming profitable, then the company lost approximately $1.4 million before the alleged profit. Further, since it lost $6.2 million for the full fourth quarter, Overstock apparently lost all of the supposed profit from whatever brief period just prior to the interview... and then some.

Whatever the case, Overstock.com reported a record net loss for the entire fiscal year of $21.3 million, compared to a loss of about $8.4 million in the entire previous fiscal year. In every quarter of fiscal year 2000, the company had negative gross profit margins, which means that it sold its merchandise below its cost basis. This begs the question, how on earth could Byrne claim that Overstock was profitable?

Patrick Byrne's claim that, "last month [November 2000]... Overstock.com's sales have jumped from $4 million to $9 million" is inconsistent with other disclosures

We have no way of knowing from Patrick Byrne's comments to ZDNet whether he meant GAAP sales or non GAAP pro forma gross merchandise value sales (which inflates top line performance).

Regardless, Patrick Byrne apparently contradicts himself in an interview with Forbes Magazine, entitled "E-Tail's Undertaker," published a couple of days later, when he claimed that November 2000 sales totaled only "$7.8 million." Obviously, that's a far cry from the $9 million in sales claimed above. But, in the Forbes interview, Patrick Byrne also claimed that he "didn't use any tricky accounting to get there." Therefore, it seems the only way that Overstock.com could have $9 million in sales in November 2000, as he claimed in the ZDNet News interview, was if Byrne was referring to tricky accounting (non GAAP pro forma gross value merchandise sales) in the ZDNet News interview. Thus, he appears to mix GAAP and non GAAP sales measurements in his various interviews as it suits him without making it apparent to anyone who might be depending on his statements in making an investment decision.

It is also possible that Byrne was not using a different accounting metric in his interview with Forbes. However, if Patrick Byrne was not referring to GAAP sales in his Forbes Magazine interview but was instead using non GAAP metrics when he claimed that November 2000 sales were $7.8 million, then Byrne has two conflicting claims for November 2000 sales: $9 million (ZDNet News interview) or $7.8 million (Forbes Magazine interview). These two stories cannot coexist.

Perhaps Patrick Byrne would like to tell us which of the two metrics he was using in those interviews?

Patrick Byrne's statement that Overstock.com "can stay at break-even with $4 million in sales" was implausible if not completely untruthful.

During the entire peak holiday season, fourth quarter of 2000, Overstock.com's GAAP sales averaged about $5 million per month and its non GAAP pro forma gross value merchandise sales averaged about $6.8 million per month. However, Overstock.com had lost about $6.2 million during the fourth quarter of fiscal year 2000 even though its sales exceeded the $4 million quoted by Byrne under both GAAP and non GAAP sales measures. Therefore, we have to ask, how could Byrne asser that Overstock.com could stay at break-even with $4 million in monthly sales, if it did not achieved break-even with average monthly sales above $4 million? The simple fact is that it could not. Worse, in future quarters and full years, as sales grew, Overstock.com continued losing money because its expenses would grow at an even faster rate.

What on earth was Patrick Byrne thinking? Was he thinking? Or was he just selling hope again?

Patrick Byrne's claim that "Overstock.com will grow sales to $20 million a month by the end of the first quarter [2001]," had no rational basis and was completely unrealistic

How could Patrick Byrne reasonably expect sales levels beginning "at the end" of the first quarter of fiscal year 2001 to at least triple the previous peak holiday season sales during the final quarter of fiscal year 2000? Later years would always show that Overstock's sales had a steep fallback in the first quarter of each new year. It was unlikely that things were any different in the pre-IPO days. Things would be no different in 2000.

Overstock.com's GAAP sales during the last quarter of fiscal year 2000 (the peak holiday season) averaged only about $5 million per month and non GAAP pro forma sales averaged about $6.8 million per month. In the first quarter of fiscal year 2001, Overstock.com's GAAP sales had totaled about $9.6 million and averaged about $3.2 million per month. During the same quarter, Overstock.com's non GAAP pro forma gross value merchandise sales totaled only about $15.9 million or about $5.3 million a month. Both Overstock.com's GAAP and inflated non GAAP pro forma sales fell far short of Byrne's hype of $20 million per month by the end of the first quarter of fiscal year 2001.

Overstock.com's GAAP sales for the entire fiscal year 2001 also totaled only $40 million and non GAAP pro forma gross value merchandise sales totaled only $69.3 million. Both amounts were way below the $200 million plus in sales in fiscal year 2001 sales implied by Byrne's statement that, "Overstock.com will grow sales to "$20 million a month by the end of the first quarter."

Overstock.com's fiscal year 2001 GAAP sales (after December 2000 ZDNet interview) by quarter were:

  • Q1 2001: $9.6 million (average $3.2 million)
  • Q2 2001: $7.4 million (average $2.5 million)
  • Q3 2001: $8.7 million (average $2.9 million)
  • Q4 2001: $14.3 million (average $4.8 million)

Overstock.com's fiscal year 2001 non GAAP proforma gross value merchandise sales (after December 2000 ZDNet interview) by quarter were:

  • Q1 2001: $15.9 million (average $5.3 million)
  • Q2 2001: $12.9 million (average $4.3 million)
  • Q3 2001: $15.6 million (average $5.2 million)
  • Q4 2001: $24.9 million (average $8.3 million)

Under any measure, GAAP or non GAAP sales, Overstock.com did not come close to matching Byrne's unrealistic sales projections that Patrick Byrne hyped in the ZDNet News article. Was he just selling hope again?

December 8, 2000: Forbes Magazine Interview

According to an article entitled, "E-tail's Undertaker," written by Penelope Patsuris, Patrick Byrne claimed:

Overstock.com's formula netted it about $75,000 in earnings on sales of $7.8 million for the month of November [2000], and Byrne vows he didn't use any tricky accounting to get there. "It's not a lot of money, but given what other people are doing and the money that's been lost, it's pretty good," he says. By March, Byrne expects the site to earn about $1 million a month.

Note: Bold print and italics added by me. Bracketed information added by me for clarity.

Patrick Byrne's claim that Overstock.com had $75,000 in earnings in November 2000 was either implausible or a one hit wonder.

If you believe Patrick Byrne, November 2000 must have been quite a good month for Overstock.com. If Overstock.com had "$75,000 in earnings on sales of $7.8 million for the month of November [2000]," it must have lost a fortune in October and/or December 2000. According to Overstock.com's S-1, filed on March 5 2002 in connection with its planned initial public offering, Overstock.com had a net loss of about $6.2 million in the last quarter of fiscal year 2000.

During the entire fourth quarter of fiscal year 2000, Overstock.com had reported GAAP revenues of $15.1 million. If, in fact Byrne was citing GAAP revenues when he claimed that November 2000 sales were $7.8 million, the combined total of both October sales and peak season December sales were only $7.3 million. Overstock.com would have lost about $6.3 million on GAAP combined sales in October and December 2000 of $7.3 million while earning $75 thousand on sales of $7.8 million in November 2001. This hardly seems likely. But it gets worse.

In each quarter of fiscal year 2000, Overstock.com reported negative gross profit margins. In other words, the company's cost of goods sold exceeded its sales in every quarter of that fiscal year. Overstock.com's operating expenses averaged almost $2 million per month during the fourth quarter. If Overstock.com had earned $75 thousand of GAAP profits in November 2000, it required unusually high and quite possibly record gross margins (probably over 25%) to cover operating expenses. Such gross profit margins would be significantly higher than Overstock.com's past and future performance.

Likewise, for Patrick Byrne's unlikely profit to have occurred in November 2000, Overstock.com would have had to dump merchandise in October and December 2000 at deep discounts and below inventory cost, since the company had negative gross profit margins for the entire quarter. Does Patrick Byrne really expect us to believe this story?

In the unlikely event that Overstock.com had it fact earned a $75,000 profit in November 2000, it appeared to be a temporary glitch or rather a one hit wonder, since the company had net losses in each quarter of fiscal year 2000 on negative gross profit margins and net losses continued thereafter. This begs the question. Even if Overstock miraculously reported a $75,000 profit in November 2000, was it reasonable for Byrne to declare the firm profitable when he knew full well that the company had sold product below cost in every quarter prior to November 2000, and very likely in October 2000? Or was Byrne materially misleading those who would invest in the company's upcoming IPO?

Patrick Byrne's expectation of "$1 million a month" in earnings had no rational basis and appears to be nothing but hype

Overstock.com's GAAP sales averaged only $5 million per month and its non GAAP proforma gross value merchandise sales averaged $6.8 million per month in the last quarter of fiscal year 2000. During that quarter, Overstock.com lost $6.2 million despite Patrick Byrne's claim in the December 2000 ZDNet interview that Overstock.com's break-even was $4 million in sales.

It is inconceivable how Byrne could make such a bold and baseless prediction. In order to achieve the profits that Patrick Byrne claimed Overstock.com would soon obtain, the company's sales would have to rise to unrealistic levels approaching $10 million per month. It should come as no surprise then that Overstock.com did not earn "$1 million a month" from March 2001 onward as touted by Patrick Byrne. In fact, the opposite turned out to be true. Instead, the company later reported net losses in each quarter of fiscal year 2001 or about $1 million or more a month in net losses:

  • Q1 2001: $3.3 million net loss
  • Q2 2001: $3.8 million net loss
  • Q3 2001: $3.8 million net loss
  • Q4 2001: $2.9 million net loss

December 29, 2000: E-Commerce Times

Almost at the very end of the fourth quarter of fiscal year 2000, Patrick Byrne still claimed that Overstock.com was profitable. In an article entitled, "E-Commerce 2000: Dredging Up the Positive," E-Commerce Times reported:

Small companies like Shoebuy.com, perfume seller Fragrancenet.com and discounter Overstock.com made e-commerce news by reporting profits in the midst of pervasive dot-com gloom.

Note: Bold print and italics added by me.

At that time, Overstock.com had yet to report an annual profit in its history and the company most probably never had a profitable quarter since its inception in 1997. As detailed above, in every quarter of fiscal year 2000, before the E-Commerce Times article, Overstock.com lost over $4 million on negative gross profit margins. In the fourth quarter (when the E-Commerce Times article was published) Overstock.com lost about $6.2 million.

Given that Byrne's interview occurred just prior to year end, shouldn't the CEO have known that the firm lost money in Q4-just as it had in every prior year and quarter for which the company reported in its S-1 filing? Overstock.com's claim of profitability to E-Commerce Times just two days before the end of the quarter simply could not have been true. What on earth was Patrick Byrne thinking? Was he hyping the company ahead of its IPO? Regardless, it is hard to imagine any scenario under which his statements could be considered anything but deceitful.

May 2001: Entrepreneur Magazine Interview

In a May 2001 interview with Entrepreneur Magazine entitled, "Sales from the Crypt," by Robert J. McGarvey, Patrick Byrne had claimed that:

We have reached this milestone by focusing on value rather than hype....We have established the fundamentals of a long term and sustainable business. We're proud to say that we used up only $27 million in capital before we became profitable, while other top e-tailers have burned through hundreds of millions and even billions of dollars in capital and have not yet figured out a way to make a profit.

Note: Bold print and italics added by me.

"Value rather than hype"? Who is Patrick Byrne trying to fool? While Patrick Byrne has criticized other companies for hyping their prospects, it appears he had no issue about his own hyping of Overstock.com's financial performance and future prospects, as he sold people hope.

An examination of Overstock.com's S-1 filed on March 5, 2002 in connection with its planned initial public offering, shows that Overstock.com reported growing losses in the last four fiscal years prior to the Entrepreneur Magazine interview in May 2001. The company also would lose money in the first quarter prior to the interview, and in the quarter in which the interview took place.

Overstock.com's losses grew from about $645 thousand in fiscal year 1997 to about $21.3 million in fiscal year 2000. In the last full quarter (first quarter of fiscal year 2001) before Patrick Byrne's Entrepreneur Magazine interview was published, Overstock.com reported a net loss of about $3.3 million. In the quarter that took place during the interview (second quarter fiscal year 2001) the company reported net losses of about $3.8 million. The company had net losses of about $13.8 million during the entire fiscal year 2001.

In this May 2001 article, Byrne was still claiming that it "took $27 million to turn a profit." How could Patrick Byrne still claim in the May 2001 Entrepreneur Magazine interview that Overstock.com was still profitable, and that the firm had only burned $27 million getting there, when the S-1 filing clearly shows that his statement was false?

Overstock.com also lost money in every quarter overlapping both interviews. By the ended of the second quarter of fiscal year 2001, the last full quarter prior to the May 2001 Entrepreneur Magazine interview, Overstock.com had cumulative net losses of about $35 million. Is there any other explanation besides deceitfulness?

June 11, 2001: Wall Street Transcript Interview

In an
interview with the Wall Street Transcript, Patrick Byrne continued to paint the portrait of a growing, thriving, and profitable Overstock.com. He had glowing assessments about Overstock.com's future.

The Wall Street Transcript question:

Can you give us some idea of how you expect the company to grow over the next few years?

Patrick Byrne's response:

Sure. Two years ago [1999] we did $2 million and last year [2000] we did $36 million. We expect to do at least $120 million this year [2001], and the B2B business may allow us to blow that away then the $400 million range next year [2002], and want to be closing in on $1 billion by the year after [2003]. Most interestingly, I think we can achieve that with little or no added capital.

The Wall Street Transcript question:

Perhaps you can give us some idea of the character of the company and what needs to be done with it.

Patrick Byrne's response:

....I can't say it strongly enough: all we think about is, how do we buy better while getting more revenue and running with tighter expenses so we make more money.

Later, the Wall Street Transcript had asked Patrick Byrne:

Where would you like to see the company in the year 2004? If you were looking around then, what would you like to see?

Patrick Byrne's response:

I would want to see us well over $400 million and as profitable as hell. Making a ton of money. I want to see that next year [2002].

Note: Bold print and italics added by me. Bracketed information added by me for clarity.

How can Patrick Byrne say "so we can make more money" when Overstock.com had not yet made a dime?

The fact of the matter is, according to the S-1 filing, the company lost money in every fiscal year and very likely in every quarter from inception to the date of the Wall Street Transcript June 2000 interview.

  • Fiscal Year 1997: net loss: $661 thousand
  • Fiscal Year 1998: net loss $1.4 million
  • Fiscal Year 1999: net loss $8.4 million
  • Fiscal Year 2000: net loss $13.8 million,
  • Fiscal Year 2001 first quarter net loss: $3.8 million (right before Wall Street Transcript interview)
  • Fiscal Year 2001 second quarter net loss: $3.3 million (during Wall Street Transcript interview)

Worse, as detailed below, Overstock.com never came close to matching Patrick Byrne's glowing hyped up expectations of future performance touted to the Wall Street Transcript.

Let's start with Byrne's assertion about full year 2000 sales. Overstock.com reported only about $25.5 million in GAAP revenues for 2000 and not the $36 million in revenues that Patrick Byrne had claimed during the December 2001 Wall Street Transcript interview (above). Does Patrick Byrne know his own company's revenues?

Only with the benefit of hindsight, by carefully reading Overstock.com's March 2002 S-1 and later amended S-1's relating to its planned initial public offering released months after the Wall Street Transcript interview, can we understand which accounting basis Patrick Byrne was using to describe sales in his June 2001 Wall Street Transcript interview.

By examining Overstock.com's S-1, we can determine that Patrick Byrne was not referring to GAAP sales but instead used a non GAAP proforma sales figure called gross value merchandise sales. The $36 million in sales that he claimed Overstock.com had achieved in fiscal year 2000 were not GAAP sales. Patrick Byrne was using fiscal year 2000 non GAAP sales as a benchmark to discuss Overstock.com's present and future sales. Therefore, Patrick Byrne used a pro forma non GAAP measure called "gross value merchandise sales" that had the effect of inflating the company's top line financial performance to hype Overstock.com's current and future prospects. The problem is that, without disclosing the non-GAAP nature of the metric, Byrne materially mislead potential investors.

Let's compare what happened in fiscal year 2001 with Patrick Byrne's remarks to the Wall Street Transcript in June 2001

Patrick Byrne had claimed that he expected Overstock.com's sales for fiscal year 2000 to total $120 million. In the last full quarter prior to Patrick Byrne's June 2001 Wall Street Transcript interview (above), Overstock.com had reported only about $9.5 million in GAAP sales and only $15.9 million of non GAAP pro forma gross value merchandise sales. So here we are, almost half way into the fiscal year, and Patrick Byrne unrealistically claims to the Wall Street Transcript that Overstock.com would achieve sales of "at least $120 million." What was he thinking?

Overstock.com's GAAP revenues for fiscal year 2001 ended up at about $40 million, far below the $120 million of revenues that Byrne was hyping in the interview. If Patrick Byrne had used pro forma non GAAP gross merchandise sales to project future sales, Overstock.com still fell far short his $120 million projection at $69.3 million. Later, as described below, towards the end of the fiscal year, Patrick Byrne reduced his sales expectation to $100 million and Overstock.com's sales still fell far below his reduced expectations.

Patrick Byrne had claimed in the May 2001 Entrepreneur Magazine article that Overstock.com was "became profitable" and in the June 2001 Wall Street Transcript interview that the company needed to make "more money." However, Overstock.com had reported losses in every year through 2000. It also reported net losses in each quarter of fiscal year 2001: Q1: $3.3 million, Q2: $3.8 million, Q3: $3.8 million, and Q4: $3.0 million.

In the following month, Patrick Byrne continued to tout Overstock.com's supposed profitability as cited in an E-Commerce Times article, analyzed next.

July 11, 2001: E-Commerce Times

In an article entitled, "Look Who's Making Money Online - Without the Heavy Lifting," E-Commerce Times reported:

While dot-com failures such as Kozmo and Boo.com were collapsing after spending millions of dollars each in venture capital, the privately held Overstock had raised and spent $27 million before starting to make money.

The trick, said chief executive officer Patrick Byrne, is that the e-tailer's business plan always focused on profits. He said Overstock figured it needed to sell $6 million worth of goods monthly to be profitable, a level it surpassed halfway through 2000.

Note: Bold print and italics added by me.

The "business plan has always focused on profits"? Is Patrick Byrne delusional? The company hadn't earned an annual profit up until that point, and all evidence indicates that it hadn't earned a quarterly profit until then either. Overstock still hasn't earned an annual profit to this day. Was this just a case of selling hope?

In fact, none of the figures quoted by Byrne in this interview make any sense. Compare Patrick Byrne's July 2001 E-Commerce Times interview with his December 2000 ZDNet interview, when Byrne had claimed that Overstock.com's sales had jumped to "$9 million a month" and needed only $4 million in monthly sales to break-even:

Overstock.com's sales have jumped from $4 million to $9 million a month and early indicators show the company's sales are growing exponentially. The company said it can stay at break-even with $4 million in sales.

Note: Bold print and italics added by me.

As detailed below, Overstock.com's sales did not grow "exponentially" as Patrick Byrne claimed it would to ZDNet News in December 2000 and the company did not achieve sustained sales of $6 million a month or the profitability claimed by Byrne to E-Commerce Times in July 2001. Note also that Byrne's breakeven story had also changed. Now he asserts that the company needs $6 million in sales a month to be profitable, versus just over $4 million required to be profitable (i.e., more than break even) a few short months ago.

Let's examine Overstock.com's sales starting from the middle of fiscal year 2000 to the second quarter ended June 30, 2001 (which ended 11 days before the E-commerce interview was published):

GAAP sales quarterly sales were:

  • Q3 2000: $4.3 million (average $1.4 million sales a month)
  • Q4 2000: $15.1 million (average $5.0 million sales a month)
  • Q1 2001: $9.6 million (average $3.2 million sales a month)
  • Q2 2001: $7.4 million (average $2.5 million sales a month)

Non GAAP pro forma gross value merchandise sales by quarter were:

  • Q3 2000: $7.4 million ($2.5 million average monthly sales)
  • Q4 2000: $20.5 million ($6.8 million average monthly sales)
  • Q1 2001: $15.9 million ($5.3 million average monthly sales)
  • Q2 2001: $12.9 million ($4.3 million average monthly sales)

Based on the above, it is implausible that Overstock.com ever "surpassed" the "$6 million worth of goods monthly to be profitable" a level Byrne claimed it had surpassed "halfway though 2000."

Overstock.com reported net losses:

  • Q3 2000: $4.5 million (last full quarter prior to December 2000 ZDNet interview)
  • Q4 2000: $6.2 million (ZDNet interview took place during this quarter)
  • Q1 2001: $3.3 million
  • Q2 2001: $3.8 million (last full quarter prior to E-Commerce Times interview)

Even in the peak fourth quarter holiday season, when Overstock.com averaged about $5 million in GAAP sales per month and $6.8 million in non GAAP sales per month, the company lost $6.2 million. In every quarter from the second half of fiscal year 2000 to the quarter when Patrick Byrne's was interviewed by E-Commerce Times, Overstock.com lost money. Was Patrick Byrne being deceitful? Selling hope? Or was he just blissfully unaware of actual company results?

October 31, 2001: Deseret News

According to an article in the Deseret News, published on October 31, 2001, entitled, "Some e-tailers thriving," written by Justin Pope:

...Salt Lake-based Overstock. com, say business for the Web closedown industry -- where sites resell excess inventories and canceled orders at deep discounts -- has never been better..... At Overstock.com, the 10th-largest retailer on the Web, traffic rose by about 1 million unique visitors per month in September to 5.5 million. CEO Patrick Byrne expects a 60 percent increase in sales to $8 million in October. For the year, he expects $100 million in sales, down from previous hopes but far more than the $36 million last year.

Note: Bold print and italics added by me.

By comparing to the S-1 filing, it is apparent that Patrick Byrne was citing non GAAP sales rather than GAAP sales to paint a picture of a thriving Overstock.com in the Deseret News article. He used Overstock.com's fiscal year 2000 non GAAP pro forma sales of $36 million as a benchmark to discuss Overstock.com's sales for fiscal year 2001.

In late October 2001, Patrick Byrne was expecting that month's non GAAP pro forma gross value merchandise sales to be $8 million. If Byrne's October 2001 non GAAP pro forma sales expectation was achieved, Overstock.com's non GAAP pro forma sales for the first ten months of the fiscal year would have totaled about $52.4 million ($44.4 million of non GAAP pro forma sales at the end of the third quarter plus October non GAAP pro forma sales expectation of $8 million). Therefore, Overstock.com would require a virtually unattainable total of $47.6 million in non GAAP pro forma sales during the last two months of the year to reach Byrne's full year target of $100 million.

Since Byrne had expected non GAAP pro forma gross merchandise value sales in October 2001 to increase 60% to $8 million, we can calculate that October 2000 non GAAP sales were about $5 million. Therefore, Overstock.com's non GAAP pro forma gross merchandise value sales totaled about $20.6 million for the first ten months of the previous fiscal year 2000 ($15.6 million of non GAAP pro forma sales at the end of the third quarter plus October non GAAP pro forma sales of $5 million).

Based on Patrick Byrne's comments, Overstock.com required an unlikely 131% increase in non GAAP pro forma gross merchandise sales during the last two months of the 2001 fiscal year ($47.6 million in future non GAAP pro forma sales vs. last years $20.6 million of non GAAP pro forma sales). However, Overstock.com ended fiscal year 2001 with $69.3 million in non GAAP pro forma gross merchandise sales, almost 30% below Byrne's revised expectations.

By any analysis, it is hard to imagine how Byrne could have expected to meet even the revised projection of $100 million in pro forma sales. Was he just selling hope? Was he hyping Overstock ahead of the IPO?

December 5, 2001: USA Today

On December 5, 2001, in an article in USA Today by Michelle Kessler entitled, "How to play the overstock market," Patrick Byrne claimed:

Sales at Overstock.com have risen 350% this year compared with 2000 because "manufacturers have all this stuff they're sitting on" that they couldn't sell, says CEO Patrick Byrne. "They're dumping it to us at 25% of the retail price."

Note: Bold print and italics, added by me.

Patrick Byrne's claim that Overstock.com sales rose 350% in 2001 compared to 2000 cannot be supported based on other disclosures

Into the last month of the fiscal year, Patrick Byrne has claimed that sales had risen so far by 350% over the previous fiscal year. However, Overstock.com's GAAP sales for the first nine months of 2001 had risen about 147% to about $25.7 million from $10.4 million in the previous year period. If we use non GAAP pro forma gross value merchandise sales, such sales rose about 185% to about $44.4 million from about $15.6 million in the previous year. Whether Patrick Byrne used GAAP or non GAAP pro forma sales measurements in his USA today interview, Overstock.com's sales increase fell far short of what Patrick Byrne had claimed.

In an interview with Business 2.0 Magazine entitled "Amazon Hunter," published on March 1, 2001, Patrick Byrne had claimed "We did $11 million in December" 2001 and "we doubled 2000's sales...in December." Therefore, we can calculate that December 2000 sales were about $5.5 million.

If Patrick Byrne had cited GAAP sales to both the Deseret News and Business 2.0 Magazine, Overstock.com's GAAP sales during the first eleven months of fiscal year 2001 would have totaled about $29.0 million ($40 million full fiscal year 2001 sales less $11 million December 2001 sales).

GAAP sales during the first 11 months of fiscal year 2000 would have totaled about $20 million ($25.5 million full fiscal year 2000 sales less $5.5 million December 2000 sales). Therefore, GAAP sales would have increased during the first eleven months fiscal year 2001 to $29.0 million from $20 million compared to the previous fiscal year or only a 45% increase and still far short of 350%.

If Patrick Byrne had cited non GAAP sales to both the Deseret News and Business 2.0 Magazine, Overstock.com's GAAP sales during the first eleven months of fiscal year 2001 would have totaled about $58.3 million ($69.3 million full fiscal year 2001 sales less $11 million December 2001 sales). Non GAAP sales during the first 11 months of fiscal year 2000 would have totaled about $34.5 million ($40.0 million full fiscal year 2000 sales less $5.5 million December 2000 sales). Therefore, non GAAP sales would have increased during the first eleven months fiscal year 2001 to $58.3 million from $34.5 million compared to the previous fiscal year or only a 69% increase and still far short of 350%.

December 10, 2001: Newsday

On December 10, 2001, according to a Newsday article entitled, "Online Merchants Cheering Brisk Sales; Those offering bargains say business is especially good," written by Elizabeth Sanger, Patrick Byrne continued to claim that Overstock.com had been profitable as of November 10 and was doing $100 million in revenues:

Byrne said 2-year-old Overstock has been profitable since Nov. 10 [2001], which is something of a feat in the industry. Sales have ballooned to $100 million this year from $2.5 million in 1999.

Note: Bold print and italics added by me. Bracketed information added by me for clarity.

But according to the S-1 filing, Overstock.com had lost about $10.9 million in the first nine months of fiscal year 2001 or from January to September 2001. Overstock.com lost $2.9 million in the last quarter of fiscal year 2001 despite Patrick Byrne’s claim that the company was profitable from November 10, 2000 to the December 10, 2001 Newsday interview. Again, Byrne appears to have been telling a whopper.

Patrick Byrne's statement that "sales have ballooned to $100 million" is inconsistent with other facts and cannot be supported.

In his interview with Business 2.0 Magazine entitled, “Amazon Hunter,” published on March 1, 2001, Patrick Byrne had claimed that December 2001 sales totaled $11 million and that such sales doubled from the previous fiscal year. If Patrick Byrne was using GAAP to cite sales to both Newsday and Business 2.0, we can calculate that GAAP sales for the first eleven months of 2001 were $29.0 million ($40 million full year 2001 sales less $11 million December 2001 sales). If GAAP sales totaled only $29 million in the first eleven months of 2000, it is inconceivable that Overstock.com could generate enough December sales for the company to achieve a total of $100 million by the end of the year.

Since Patrick Byrne claimed to Business 2.0 Magazine that “we doubled 2000’s sales…in December” we can calculate that December 2000 sales were $5.5 million. If you add December 2000 sales of $5.5 million to GAAP sales for the first eleven months of fiscal year 2001 of $29.0 million, then Overstock.com’s trailing twelve month GAAP sales would have totaled only $34.5 million, also far short of $100 million in sales.

If Patrick Byrne was using non GAAP pro forma sales measurements to cite sales to both Newsday and Business 2.0, we can calculate that non GAAP pro forma sales for the first eleven months of 2001 were $58.3 million ($69.3 million full year 2001 sales less $11 million December 2001 sales). If non GAAP pro forma sales totaled only $58.3 million in the first eleven months of 2000, it is inconceivable that Overstock.com could generate enough December sales for the company to achieve a total of $100 million by the end of the fiscal year.

Further assuming that Byrne was quoting non-GAAP figures, if you add December 2000 sales of $5.5 million to non-GAAP sales for the first eleven months of fiscal year 2001 of $58.3 million, then Overstock.com’s trailing twelve month non-GAAP sales would have totaled only $63.8 million, far short of the $100 million in sales reported by Byrne.

The bottom line is that, whatever the basis for computing sales, Patrick Byrne’s prediction was incredibly far off the mark. Also, if Byrne was using non-GAAP sales amounts, without disclosing that fact, then his assertions were materially misleading.

December 11, 2001: Fox News "Your World with Neil Cavuto" interview

Patrick Byrne’s pattern of deception would continue through the end of 2001. On December 11, 2001, during the Fox News show, "
Your World with Neil Cavuto," in response to questions from Brenda Buttner, Patrick Byrne claimed:

We've grown from $3,000 a month two years ago to $10 to $11 million this month [2001]. We're profitable.

Brenda Buttner asked:

Your real honest-to-goodness profit, not pro forma?

Patrick Byrne responded:

None of that stuff.

Note: Bold print and italics added by me. Bracketed information added by me for clarity

Let's go back to what happened in fiscal year 2001

As described above Overstock.com’s own S-1 filing shows that it had never experienced a profitable year from inception. The company reported no profitable quarters dating at least as far back as March 2000, and very likely never experienced a profitable quarter, from its inception. As of December 11, 2001, over eleven months into the year, Patrick Byrne was still claiming to Fox News that Overstock.com was profitable on a GAAP basis, without the use of non GAAP pro forma accounting. Still, at that time, Overstock.com had lost money in every quarter of fiscal year 2001, including those before and during the December 2001 Fox News interview.

According to Overstock.com's S-1 filed in connection with its planned IPO a few months later, in the third quarter of fiscal 2001 (the last full quarter prior to the Fox News interview), the company lost about $3.8 million. During the fourth quarter of fiscal year 2001, Overstock.com lost about $3 million. For the entire fiscal year 2001, Overstock.com reported a $13.8 million net loss. However, as late as December 11, 2001, Patrick Byrne was still claiming that Overstock.com was GAAP "profitable." Where on earth was Byrne getting his figures from?

It’s also not clear what Patrick Byrne meant when he said "none of that stuff". Did he mean to imply that he was now using GAAP accounting for every metric such as revenue and profits? Or did he mean to limit his use of GAAP to describe Overstock.com's profitability? He gives no indication in the Fox News interview if he is using either GAAP or non GAAP pro forma metrics to describe sales. Based on Byrne's various other interviews detailed in this blog item, at a minimum he apparently interchangeably mixes both GAAP and non GAAP metrics to tout Overstock.com's financial prospects, without disclosing the different accounting methods he is using.

From an interview with Business 2.0 magazine entitled, “Amazon Hunter,” months later in March 2002, we figure out that Patrick Byrne had apparently used non GAAP metrics to cite revenues in that interview and the Fox News interview, while using GAAP to cite profits. Using non GAAP pro forma sales, without full disclosure, implicitly inflates Overstock.com's top-line performance to support Patrick Byrne's various claims that Overstock.com was profitable at certain times. Worse, it also appears that the profit figures he cites are just plain wrong… and materially misleading.

March 1, 2002: Business 2.0 Magazine “Amazon Hunter” interview shortly before Overstock.com's IPO

During the interview Patrick Byrne for this article was asked by Owen Thomas:

How were your holiday sales?

Patrick Byrne responded:

We did $11 million in December [2001]. When I joined Overstock two years ago, we were doing $3,000 a month.

Owen Thomas asked a follow up question:

And compared with the year before?

Patrick Byrne's response:

We doubled 2000's sales, both in December and for the year.

Note: Bold print and italics added by me. Bracketed information added by me for clarity.

Patrick Byrne uses non-GAAP sales to tout December 2001 results

A few days later on March 5, 2002, Overstock.com reported in its S-1 for its initial public offering that GAAP sales actually declined in the last quarter of 2001 to $14.3 million from $15.1 million. Therefore, if Patrick Byrne used GAAP in reporting sales of $11 million in December 2001, Overstock.com could only have combined GAAP sales in October and November 2001 of $3.3 million. In his December 2000 interview with Forbes Magazine, Patrick Byrne had claimed that previous year November 2000 sales without “any tricky accounting” were $7.8 million. Therefore, the combined total of October and November 2001 sales would have to be less than half of Overstock.com’s previous years November 2000 sales.

For the entire year 2001, Overstock.com's GAAP sales grew to about $40 million from about $25.5 million in the previous fiscal year 2000, or a 57% increase. During that same fiscal year, Overstock.com's non GAAP pro forma merchandise sales grew to $69.3 million from about $36.1 million in the previous fiscal year, or about a 92% increase. The sales amount that closely matches Byrne's description of sales growth is Overstock.com's non GAAP pro forma gross value merchandise sales. Unless Patrick Byrne used non GAAP pro forma sales to describe revenues, his claim that fiscal year 2000 sales had "doubled" would have been way off the mark at only a 57% increase in sales. So we can conclude that, most likely, Patrick Byrne was again using non-GAAP sales to tout his December 2001 performance.

Let's go back to Patrick Byrne's March 1, 2002 Business 2.0 Magazine interview

The article stated:

Last year was tough for retailers, but a banner season for bargain hunters -- and surprisingly good for e-commerce. Patrick Byrne, CEO of excess merchandise reseller Overstock.com, exploited all these trends to ring up a profit on sales of roughly $80 million. He'll be stalking even bigger game in the months to come.

In the interview, Owen Thomas asked:

Are you profitable?

Patrick Byrne's response:

Yes, that's real GAAP profit, not Amazon-bullshit-accounting profit.

Note: Bold print and italics added by me.

Patrick Byrne’s claim of roughly $80 million of sales and GAAP profits

In his interview with Business 2.0 Magazine, published on March 1, 2002, Byrne had claimed that Overstock.com had, “a profit on sales of roughly $80 million.”

However, for fiscal year 2001, GAAP sales totaled only about $40 million and non GAAP pro forma sales totaled only about $69.3 million.

Even if you move forward from the March 1, 2002 Business 2.0 Magazine interview and include Overstock.com’s trailing twelve month non GAAP pro forma sales from April 1, 2001 to March 31, 2002, such sales for that period totaled only about $75.4 million.

It seems most likely that Patrick Byrne was using a non GAAP pro forma gross value merchandise sales since it is the only sales measurement that comes close to the sales figures he cited in his Business 2.0 Magazine interview. Still, his mix of GAAP and non-GAAP metrics was materially misleading. It is also clear that Overstock.com was nowhere near profitable by any metric.

Patrick Byrne’s claim that Overstock.com had real GAAP profits “not Amazon-billshit-accounting profit”

A few days later on March 5, 2002, Overstock.com filed its S-1 in connection with its planned initial public offering. Overstock.com reported in its S-1 that as far back as the first quarter of fiscal year 2000 to the latest quarter ending in December 2001 (during eight separate previous quarters), that it had losses of at least $3 million and as much as $6.4 million each quarter. In the three fiscal years 1997, 1998, and 1999, Overstock.com's net losses exceeded its revenues and it is virtually inconceivable that it made GAAP profits during any quarterly period from 1997 to 1999.

During the first quarter of 2002, which ended 30 days after the magazine interview was published; Overstock.com had a net loss of about $3 million. It is inconceivable that Patrick Byrne had any rational basis for claiming that Overstock.com was profitable under GAAP during the Business 2.0 Magazine interview.

To sum it up Patrick Byrne did not disclose to Business 2.0 Magazine was that he was using non GAAP pro forma sales (which inflates top-line performance) to support his claim that Overstock.com was GAAP profitable (see above). It turns out that during fiscal year 2001, Overstock.com had not been profitable for any quarter prior to his Business 2.0 magazine interview or the quarter during that interview. True to form, Byrne was again being deceitful. What is surprising though is that he would continue to materially mislead investors just days ahead of filing the company’s S-1.

March 5, 2002: Overstock.com files form S-1 for its planned IPO in March

On March 5, 2002, Overstock.com filed SEC form S-1 in connection with its planned initial public offering. Despite Patrick Byrne’s many claims that Overstock.com was profitable as detailed above the company reported:

We have a history of significant losses. If we do not achieve or maintain profitability, our financial condition and our stock price could suffer.

We have a history of losses and we may continue to incur operating and net losses for the foreseeable future. We incurred net losses of $13.8 million in the fiscal year ended December 31, 2001. As of December 31, 2001, our accumulated deficit was $44.1 million. We will need to generate significant revenues to achieve and maintain profitability, and we may not be able to do so. Even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis in the future.

Note: Bold print and italics added by me.

An article in E-Commerce Times entitled "Overstock.com Follows PayPal's IPO Path," written by Keith Regan, published the next day took note of Patrick Byrne’s previously inconsistent and misleading statements:

Although the company began to call itself profitable halfway through 2000, its SEC filing shows that it actually lost $8 million in 1999, $21 million in 2000 and $13 million in 2001.

Note: Bold print and italics added by me.

Overstock.com’s underwriter was WR Hambrecht and Company. Gordon Macklin (now deceased), joined Overstock.com’s Board of Directors. According to Overstock.com’s S-1:

Mr. Macklin was Chairman of Hambrecht and Quist Group, a venture capital and investment banking company, from 1987 until 1992.

Note: Bold print and italics added by me.

Both WR Hambrecht and Hambrecht and Quist Group were founded by Bill Hambrecht. Byrne would also later state that Macklin was “a friend, a lifelong mentor.” (Did Overstock CEO Cross the Line, Herb Greenberg, CBS Marketwatch, October 26, 2004). Other members on the board at that time included the CEO’s father, John Byrne, Patrick Byrne himself, and early Overstock investor Gary Kennedy.

Overstock.com had a cozy relationship with its auditors, too. Both Jason C. Lindsey (Overstock.com’s current President) and David Chidester (Overstock.com’s current CFO) left PriceWaterhouseCoopers (the company’s auditors) to join Overstock.com in key accounting and financial positions in 1998 and 1999 respectively.

Other analysts took note of Overstock.com’s history of losses. They learned that Overstock.com was a money loser and not a money maker as had been touted by Patrick Byrne. According to an E-Commerce Times article entitled, "Overstock.com Tries To Jump-Start IPO in Tough Market," published on May 7, 2002, while Overstock.com was still attempting to pull off its IPO, Morningstar.com analyst George Nichols told the publication:

I'm not sure how much appetite is out there for a money-losing dot-com, particularly in this market….

Note: Bold print and italics added by me.

The E-Commerce Times article points out:

During the first three months of 2002, Overstock had revenue of just over $10 million and lost about $3 million. The company booked $35 million in sales during all of 2001.

Note: Bold print and italics added by me.

Notice that the article quotes GAAP revenues and not the non GAAP pro forma revenues likely touted by Byrne in the interviews and articles I detailed above.

Later in that same E-Commerce Times article, Morningstar.com analyst George Nichols is quoted as saying:

Their growth rates have been unimpressive. Investors are likely to give Overstock a lukewarm reception at best.

Note: Bold print and italics added by me.

Let's go back to Patrick Byrne's Wall Street Transcript interview to see if Overstock.com’s future performance matched Patrick Byrne’s hyped up sales talk

In light of Mr. Nichols’ conclusions, it is important to go back and review Patrick’s Byrne’s prior projections for Overstock sales and profits. Take, for example, the Wall Street Transcript interview where Patrick Byrne claimed:

I would want to see us well over $400 million and as profitable as hell. Making a ton of money. I want to see that next year [2002].

Later, during the Wall Street Transcript interview, Patrick Byrne was asked:

You've said already that the business of going public is a mute point. Let's just ask the final question this way: What would be your appeal to investors? What would be the three or four most important things that you would say to investors?

Patrick Byrne responded:

I don't mean to say it's a total mute point about the IPO because I do think that if we can go public and take $50 million into our bank account, it will accelerate us two years. But what I would say to investors who were considering investing in us is that we are not right for most investors, for people who think in terms of exit strategies and public comparables and quarterly earnings. We simply focus on just earning a ton of money on a small amount of invested capital. "Earning" money, GAAP profits, not just flipping stock to some bigger fool.

Note: Bold print and italic added by me.

Let's see what happened in fiscal year 2002

On June 4, 2002, Overstock.com completed its initial public offering and the company received a cash infusion of over $26 million in new capital. In his Wall Street Transcript interview, Patrick Byrne had claimed that Overstock.com could expect at least "$400 million range" in revenues in fiscal year 2002 "with little or no added capital."

For fiscal year 2002, Overstock.com reported about $91.8 million in GAAP revenues and about $154.5 million in non GAAP pro forma gross merchandise sales, far below "the $400 million range" in revenues that was touted by Byrne during the Wall Street Transcript interview. Despite the infusion of about $35 million in cash, Overstock.com's revenues (GAAP or non GAAP pro forma revenues) didn't even come close to the target he had touted to the Wall Street Transcript.

For fiscal year 2002, Overstock.com reported a net loss of about $4.6 million. Patrick Byrne had claimed that he wanted to see Overstock.com as "profitable as hell" and "making a ton of money" by fiscal year 2002 with "little or no added capital." With a net loss of $4.6 million, Overstock.com was not "profitable as hell" and did not make a "ton of money."

However, Overstock.com probably had its first ever profitable quarter in the peak last quarter of the year. In an interview with Business Week Magazine published on October 1, 2002, Patrick Byrne said, "I'm expecting profits in this year's fourth quarter, and to remain profitable." However, Overstock.com would have only one more profitable quarter in the future during the last quarter of 2004. Otherwise in every other quarter, and in every single full year that followed that interview, Overstock.com would continue to lose money.

Let's continue and see what happened in fiscal year 2003

On January 28, 2003, Overstock.com received another cash infusion of about $24 million by selling about 1.725 million new shares. Overstock.com received in about one year about $50 million in new cash that Patrick Byrne had claimed he needed to "accelerate" the company's performance by "two years."

However, despite the infusion of over $50 million in cash in little over one year, Overstock.com was still falling far short of the financial performance that Byrne had claimed the company could achieve with "little or no added capital."

In addition, in the third quarter of 2003, Overstock.com changed its revenue recognition policy for its fulfillment partner revenues category. The company began reporting such revenues on a "gross basis" as opposed to a "net basis." As previously discussed above, Overstock.com previously reported only the commission received from fulfillment partner sales as revenue under GAAP in its financial statements. However, Patrick Byrne had often discussed Overstock.com revenues in terms of gross merchandise sales, a non GAAP pro forma metric, without adequately informing his audience.

Overstock.com began to handle returns of merchandise from its fulfillment sales and since the company had a relatively small measure of inventory risk, the company claimed it could now report such sales at gross amounts less certain allowances for returns and discounts under GAAP. Going forward, Overstock.com's GAAP revenues would be roughly equivalent to its non GAAP pro forma sales.

Based on a liberal application of GAAP as opposed to the "principles at the conservative edge of GAAP" in financial reporting as Byrne has claimed on Overstock.com's web site, the company's GAAP revenues rose dramatically. However, despite the fact that Overstock.com was now reporting its fulfillment revenues on a gross basis, its revenues (GAAP or non GAAP pro forma sales) still fell far short of the hyped up expectations that Byrne had told the Wall Street Transcript.

In 2003, Overstock.com achieved only about $238.9 million in GAAP revenues and about $294.8 million in pro forma non GAAP sales. Overstock.com was not "closing in on $1 billion" in revenues as hyped by Patrick Byrne to the Wall Street Transcript with "little or no added capital. Despite the infusion of about $50 million in cash, Byrne's hyped up revenue expectations did not accelerate by two years. In fact, to this day, Overstock.com has yet to achieve over $805 million in annual GAAP revenues or over $868 million in non GAAP pro forma revenues, despite continued hyping by Byrne (as late as March 2006) that Overstock.com would achieve over $1 billion in GAAP revenues.

Overstock.com's net losses widened in fiscal year 2003 to $11.9 million from $4.6 million in the previous fiscal year, or about a 158% increase in losses. Overstock.com had received the $50 million that Patrick Byrne has claimed that the company needed to make "a ton of money" and yet its net loss more than doubled in 2003 to $11.9 million from $4.6 million.

What happened in fiscal year 2004?

During, Overstock.com received additional influxes of cash equity of about $112 million and about $116 million in proceeds from issuing convertible debt. Now, Overstock.com had about $112 million in excess capital and $116 million in convertible debt, well beyond the $50 million Patrick Byrne claimed that Overstock.com needed to "make a ton of money."


In 2004 Overstock.com, helped by its change in revenue recognition policy in the previous fiscal year, reported GAAP revenues of about $494.6 million. Overstock.com's non GAAP pro forma merchandise sales ended up at $541.4 million for the fiscal year. Overstock.com reported a net loss of about $5.0 million. Overstock.com had over six times the $50 million in capital that Patrick Byrne said it needed to "accelerate us [the company] two years." Overstock.com was not making the "ton of money" that Patrick Byrne had claimed it could.

In fact despite Patrick Byrne's claims to Entrepreneur Magazine in May 2001, E-Commerce Times in July 2001, Fox News in December 2001, and Business 2.0 Magazine in March 2002 that Overstock.com had become profitable, the company lost about $13.8 million in 2001, lost about $4.6 million in 2002, lost about $11.9 million in 2003, and now had lost about $5.2 million in 2004. Overstock.com probably had only its second GAAP profitable quarter in its history during the peak final quarter of fiscal year 2004. But, even with over six times the new capital Byrne claimed he needed, the acceleration of Overstock.com’s financial performance as touted by Patrick Byrne, never materialized. Overstock.com still did not "make a ton of money." In fact, it still hadn’t made a dime over any annual period and Overstock.com’s losses would widen in the next two fiscal years.

What happened in fiscal year 2005?

In 2005, Overstock.com would report about $804 million in GAAP revenue or non GAAP proforma sales of $868 million. Despite the company's increase in sales, its net loss would more than quadruple to about $24.9 million from about $5.2 million in the previous year. Overstock.com was not making a "ton of money."

What happened in fiscal year 2006?

In 2006, Overstock.com would suffer even more massive losses, this time quadrupling again to over $100 million. GAAP revenues had dropped to about $796 million from $804 million from the previous year. The company's non GAAP pro forma sales decreased to $839 million from $868 million. The results were so bad, in fact, that during 2006, Overstock.com required a cash infusion of about $64 million from new equity.

As the disaster of 2006 unfolded, in an interview with Practical Ecommerce, published on November 1, 2006, Patrick Byrne had implied that Overstock.com’s revenues had exceeded his predictions from day one despite his hyping of the company’s growth prospects to the Wall Street Transcript in June 2001 and others prior to the company’s IPO in June 2002.

We grew, even after we went public, at 100 percent a year, and it was crazy. I would have to think short term, quarter-to quarter, and try to back into our resources. I was wrong in two ways. The growth projection didn’t come out quite right; growth exceeded the projection.

Note: Bold print and italics added by me.

I have no idea how Byrne was able to conclude that Overstock’s sales had exceeded his expectations. Either he was lying in his interview with the Wall Street Transcript, or he lied to Practical Ecommerce .

A Pattern of Misses

Patrick Byrne was asked during his Business 2.0 Magazine interview in March 2002, right before Overstock.com filed plans for its initial public offering:

Business 2.0 Magazine: What's your dream?

Patrick Byrne: Taking over Amazon. We could make it profitable overnight.

Well, Amazon.com has became a business powerhouse giant with over $10 billion of annual of sales and almost $190 million in profits in its last fiscal year. Overstock.com never achieved the predicted $1 billion of sales by 2003 as claimed by Patrick Byrne in his Wall Street Transcript interview and still looses money.

Since its initial public offering in March 2002, Overstock.com has received cash infusions of $226 million in new equity and $116 million in new convertible debt. As of June 30, 2007, Overstock.com had an accumulated deficit of about $233.8 million. With the likely exception of two quarters (Q4 2002 and Q4 2004 - peak season quarters) Overstock.com has not had a GAAP profitable quarter to date. The company has also lost money in every single year since inception. Overstock.com's quarterly revenues have declined year over year for more than a year.

While hyping Overstock.com's prospects during the December 2001 Wall Street Transcript interview, Patrick Byrne had claimed:

God, if we had $50 million in the bank this ball game would be over. I could use it to be making more money than eBay.

Note: Bold print and italics added by me.

Therefore, I go back to a question I asked above:

Is Patrick Byrne, CEO of Overstock.com, delusional, deceitful, or just plain dumb?

As detailed above, Patrick Byrne has told the Wall Street Transcript in June 2001:

We simply focus on just earning a ton of money on a small amount of invested capital. "Earning" money, GAAP profits, not just flipping stock to some bigger fool.

Note: Bold print and italics added by me.

However, to this date Overstock.com has not earned "a ton of money" while raising a ton of capital, has not had any annual "GAAP profits." The only way Patrick Byrne seems to be keeping the ship afloat is by "flipping stock to some bigger fool."

To be continued: Patrick Byrne, the CEO of Overstock.com: A historical pattern of hype, inconsistencies, contradictions, and deceit - Part 2.

Written by:

Sam E. Antar (former Crazy Eddie CFO & convicted felon)

For additional information in my blog:

08/20/07: Did Overstock.com CEO Patrick Byrne cook the company's numbers and mislead investors? (Part 1)

08/22/07: Did Overstock.com CEO Patrick Byrne cook the company's numbers and mislead investors? (Part 2)

08/23/07: Did Overstock.com CEO Patrick Byrne cook the company's numbers and mislead investors? (Part 3 - The end game)

09/25/07: Overstock.com vs. Gradient and Rocker Part 1: Patrick Byrne and his Three Stooges

For additional information in other blogs:

Tracy Coenen: Index to Overstock.com posts

Gary Weiss: Index to Overstock.com posts

O-Smear Blog

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