Thursday, November 08, 2007

Did Overstock.com CEO Patrick Byrne cook the company's numbers and mislead investors? (Part 4)

Yesterday, Overstock.com released its 10-Q for the third quarter of fiscal year 2007. While, I have not had the time to thoroughly review Overstock.com latest 10-Q yet, I noticed an interesting new disclosure relating to Regulation G.

In a previous blog post entitled, "Did Overstock.com CEO Patrick Byrne cook the company's numbers and mislead investors? (Part 1)," I detailed how Patrick Byrne backtracked and used in his own words, a "a phony accounting standard--pro forma," the reduction of inventory reserves, and the reversal of previously booked nonrecurring expenses to hype up Overstock.com financial performance for the second quarter of fiscal year 2007. Without, the use of that "phony accounting standard--pro forma," Overstock.com's hyped up turn around would have all but disappeared. In addition, I detailed how the reduction in inventory reserves in the second quarter of fiscal year 2007, wiped away Overstock.com's entire improvement in operating income.

Now Overstock.com has included this new disclosure in its most recent 10-Q for the third quarter of fiscal year 2007 that was not included in its previous 10-Q for the second quarter:

Non-GAAP Financial Measure

Regulation G, Conditions for Use of Non-GAAP Financial Measures, and other SEC regulations regulate the disclosure of certain non-GAAP financial information. Our measure of "EBITDA" is a non-GAAP financial measure. EBITDA, which we reconcile to "Operating loss" in our income statement, is earnings before interest, taxes, depreciation, amortization and stock-based compensation. EBITDA is used in addition to and in conjunction with results presented in accordance with GAAP and should not be relied upon to the exclusion of GAAP financial measures. EBITDA reflects an additional way of viewing our results that, when viewed with our GAAP results, provides a more complete understanding of factors and trends affecting our results. You should review our financial statements and publicly-filed reports in their entirety and not rely on any single financial measure. Our discussion below (i) explains why management believes that presentation of EBITDA provides useful information to investors regarding our financial condition and results of operations, (ii) to the extent material, discloses the additional purposes, if any, for which management uses this non-GAAP measure, and (iii) provides a reconciliation of this measure to our operating losses.

Note: Bold print and italics added by me.

New to the Q3 report but absent from Overstock.com’s previous 10-Q which included non-GAAP pro forma “adjusted EBITDA” was the following cautionary disclosure from above:

EBITDA is used in addition to and in conjunction with results presented in accordance with GAAP and should not be relied upon to the exclusion of GAAP financial measures. EBITDA reflects an additional way of viewing our results that, when viewed with our GAAP results, provides a more complete understanding of factors and trends affecting our results. You should review our financial statements and publicly-filed reports in their entirety and not rely on any single financial measure.

Note: Bold print and italics added by me.

The question is why did Overstock.com feel the need to add this new cautionary disclosure now when such disclosure was absent in the previous 10-Q?

To be continued…

Written by,

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

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