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Overstock.com and Patrick Byrne: Phony Accounting and False and Misleading Disclosures - New Lies

It seems that Overstock.com (NASDAQ: OSTK), company CEO Patrick Byrne, and its unprincipled management team is a bottomless pit of lies, distortions, inconsistencies, and false and misleading disclosures. Today, after the market close, Overstock.com released its 10-K report for fiscal year 2007, on the very last day the report was due.

In my previous blog item entitled, “Overstock.com and Patrick Byrne: Phony Accounting and False and Misleading Disclosures - Revenues,” I detailed how Overstock.com intentionally departed from GAAP and its own disclosures in reporting revenues in violation of Securities and Exchange Commission Staff Accounting Bulletin No. 99. Not only did Overstock.com intentionally depart from GAAP in reporting revenues, it seems that the company, at the very least, can't get its numbers straight and CEO Patrick Byrne is an outright liar (no surprise).

On January 30, 2008, Overstock.com reported in a press release:

Note regarding our Q4 and 2007 financial results:

From the company's inception through the third quarter of 2007, we have recorded revenue based on product ship date. In the fourth quarter of 2007, in response to an accounting comment from the staff of the SEC, we retrospectively changed our policy to recognize revenue based on estimated product delivery date. We have recorded the cumulative effect of this change in the fourth quarter of 2007.

We performed a detailed analysis of the impact of this change through the fourth quarter of 2007, and we have preliminarily determined that the impact of this change is immaterial to prior periods. As a result, for the full year 2007, we have recorded revenue of $768.8 million, which comprises of $777.5 million of revenue under the revised revenue recognition policy, less $8.7 million, the cumulative effect of revenue that would have been deferred as of the end of 2006. Our consolidated balance sheet at December 31, 2007 reflects $5.0 million of deferred revenue related to shipments in transit as of that date; we also reduced gross profit and net income in Q4 related to the revenue deferral by approximately $800K. Going forward, each quarter, we will make a similar deferral based on estimated product delivery date.

Note: Bold print and italics added by me.

Now let's compare Overstock.com's press release to Overstock.com's latest 10-K disclosure:

As a result, we recorded the cumulative effect of this correction in the fourth quarter of 2007. This change resulted in a deferral of $13.7 million of revenue (including $3.7 million of direct revenue and $10.0 million of fulfillment partner revenue), and a decrease in cost of goods sold of $11.6 million ($3.1 million direct and $8.5 million fulfillment partner), which reduced gross profit and increased net loss by $2.1 million (see Item 15 of Part IV, "Financial Statements"—Note 2—"Summary of Significant Accounting Policies"—"Revenue Recognition").

Note: Bold print and italics added by me.

Therefore, Overstock.com now claims that deferred revenues resulting from company's intentional noncompliance with GAAP is $13.7 million as reported in the recent 10-K compared to $5.0 million as previously reported in its press release, or about $8.7 million higher. As detailed below, Overstock.com's disclosure problems are compounded by Patrick Byrne's lie on an internet message board.

On March 1, 2008, on the Motely Fool message board for Overstock.com, Patrick Byrne was asked the following question by a blogger known as UnusuallyReasonable:

...why is Overstock.com being told to do its revenue recognition in a manner that differs from other companies similarly situated? Amazon does theirs at shipment. The SEC rules that I can find online and have posted a few times now(*) seem to back up that method. Why is Overstock being told to change? Is it because of the large role partner fulfillment plays in your business?

Note: Bold print and italics added by me.

Later that day, Patrick Byrne, using the alias Hannibal100, posted a response:

3) "Is it because of the large role partner fulfillment plays in your business?" No, there is no connection between this issue and partner business.

Note: Bold print and italics added by me.

As detailed above, Patrick Byrne claimed that "...there is no connection between this issue" or rather Overstock.com's deliberate noncompliance with GAAP and its fulfillment "partner business." However, Overstock.com's 10-K report issued today, contradicts Byrne's claims on the Motley Fool message board. The company's fulfillment partner sales were not reported in compliance with GAAP. See below:

This change resulted in a deferral of $13.7 million of revenue (including $3.7 million of direct revenue and $10.0 million of fulfillment partner revenue), and a decrease in cost of goods sold of $11.6 million ($3.1 million direct and $8.5 million fulfillment partner), which reduced gross profit and increased net loss by $2.1 million.

Note: Bold print and italics added by me.

As I said, Patrick Byrne is a bottomless pit of lies.

To be continued....

Written by,

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

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