Monday, September 08, 2008

Are Bidz.com's Stock Buy Backs a Wise Move?

Why are Bidz.com (NASDAQ: BIDZ) insiders selling shares as the company is buying back shares, especially when management has claimed that the company’s shares are undervalued? Legendary investor Warren Buffett, CEO of Berkshire Hathaway (NYSE: BRKA), was once said:

Now, repurchases are all the rage, but are all too often made for an unstated and, in our view, ignoble reason: to pump or support the stock price... We will not repurchase shares unless we believe Berkshire stock is selling well below intrinsic value, conservatively calculated." [Emphasis added.]

Does Bidz.com’s share repurchase program really build “intrinsic value” or is it a short-term ploy “to pump or support the stock price” as insiders sell their shares?

During the Q2 2008 earnings call, CFO Lawrence Kong claimed:

As of July 31, 2008, we had repurchased a total of approximately 1,024,000 shares in the open market for a total of $8.8 million at an average price of $8.58 per share. We continue to repurchase in the open market under the stock repurchase program and still have approximately $11.2 million for additional share repurchases under our current program. The stock repurchase program reflects our continued confidence in the market opportunity and strategy and what [inaudible] appears to be at the undervaluation of our stock at current levels. We believe our stock to be a strong investment opportunity and a good use of our cash resources. [Emphasis added.]

Lawrence Kong claimed that, “We believe our stock to be a strong investment opportunity…..” Yet, most recently on September 3, 2008, Lawrence Kong sold 53,801 shares and pocketed gross proceeds of $239,764 or about $8.98 per share. Kong and other Bidz.com insiders have unloaded about 480,000 shares so far this year, pocketing gross proceeds in excess of $5.2 million, while the company has been repurchasing its stock (Source: SEC Form 4 Reports).

In some instances, Bidz.com has paid more money per share to buy back its shares, than the price per share received by insiders who sold their shares. For, example, in May and June 2008, Bidz.com repurchased 54,000 shares and paid $501,714 or about $9.29 per share. By comparison, Lawrence Kong recently sold 53,801 shares at an average price of $8.98 per share.

In certain other instances, other insiders have also sold their shares for less money per share than the company, at times, paid to buy back shares on the open market. For example, in February 2008, CEO David Zinberg sold 5,000 shares at $7.50 per share for gross proceeds of $37,500. That same month, Marina Zinberg (Vice President and sister of David Zinberg) sold 15,000 shares at $7.49 per share and received gross proceeds of $112,350. In March 2008, Bidz.com repurchased 433,827 shares at an average price per share of $8.11.

Does Bidz.com management personally hold the same views on the value of company stock as officially espoused by the company?

Examining Share repurchases for the six months ended June 30, 2008

While Lawrence Kong has claimed that Bidz.com’s share repurchase program is a “good use of our cash resources,” during the six-months ended June 30, 2008, the company utilized significant financial resources to repurchase shares of common stock. That resulted in very low cash balances at the end of Q2 2008 and the company had to draw on its line of credit to make certain inventory purchases.

During the first six months of fiscal year 2008, BIDZ.com repurchased 823,297 shares, paying $6.965 million or an average price of $8.46 per share (Source: Q1 2008 10-Q report and Q2 2008 10-Q report). During that same period, reported net income was $8.22 million and net cash provided by operating activities was $3.342 million. Therefore, the company’s expenditures for share repurchases amounted to 85% of reported net income and more than twice the amount of net cash provided by operating activities. At the end of the second quarter, the Bidz.com cash balance dropped $5.975 million to a mere $618,000 from $6.593 million in the previous quarter.

As of June 30, 2008, Bidz.com’s reported net working capital of $31.877 million. However, the company’s working capital comprised almost entirely of inventory totaling $54.732 million, which took on average about 120 days to sell during the six-month period. In a previous blog post, I raised serious questions about Bidz.com’s compliance with GAAP in valuing inventory.

In addition, by June 2008, the company spent a cumulative total of $7.85 million to repurchase 923,297 shares since the beginning of its stock repurchase program in 2007. The stock repurchase program reduced available net working capital by about 20%. With relatively low cash balances totaling $618,000 and most of its working capital tied up in low turnover inventory, Bidz.com had to utilize its line to credit to make certain inventory purchases. As of June 30, 2008, Bidz.com owed $5.6 million under its line of credit.

During the Q2 2008 earnings call, CFO Lawrence Kong claimed:

Our positive cash flow and revolving line of credit provide us with strong liquidity to continue to successfully grow the business. [Emphasis added.]

However, as detailed above, about twice the amount of net cash provided by operating activities was utilized to buy back stock during the first six-months of the fiscal year. During the six-month period ended June 30, 2008, Bidz.com expended $6.965 million or $3.623 million in excess of cash flows of $3.342 million to repurchase its common stock. The end result was a low cash balance of $618,000 and and line of credit balance of $5.6 million. In effect, Bidz.com's share repurchases are being financed in part with short term credit. It is a risky move to use a revolving line of credit to fund stock repurchases and the same time use it to provide funds to operate a business.

Are Bidz.com's share repurchases really a good long term use of shareholder resources at this time? I don't think so.

To be continued….

Written by,

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

Disclosure: Not long or short Bidz.com securities

Wednesday, September 03, 2008

What Utah Attorney General Mark Shurtleff Does Not Want Anyone to Know

One of the many divisions reporting to Utah Attorney General Mark Shurtleff is the Tax and Revenue Division. According to the Utah Attorney General’s Office web site, the Tax and Revenue Division:
  • Represents the Tax Commission, Department of Financial Institutions, the Insurance Department and state agencies that issue bonds and
  • Handles tax litigation and bankruptcy.
In particular, the web site boasts that, “Attorneys in the Tax and Revenue Division provide legal support for the [Utah] Tax Commission.” The web site goes on to claim that the Tax Division is “is vigilant about auditing and collecting taxes so honest taxpayers do not have to pay an unfair share of the state's expenses.” In other words, Utah Attorney General Mark Shurtleff is in charge of all litigation involving the collection of state taxes.

We need to ask, “How diligent Mark Shurtleff is in paying his own taxes in the past?”

From 1990 to 1993, Mark Shurtleff was a private practice trial lawyer in California. Was he starving from practicing law? I ask this question because the State of California imposed a tax lien on him for nonpayment of taxes. That makes him a tax delinquent.

On February 20, 1996, the state of California imposed a tax lien (Case number 96077277) on Mark Shurtleff of $11,093 for back taxes. At least a few months later he was able to scrounge up some bucks have that lien released (Case number 960259624) on May 23, 1996.

By 1996, Mark Shurtleff was the Assistant Attorney General for the State of Utah. Was he making more money as a government official than as a private trial lawyer? Why didn’t he pay his taxes earlier or rather before a tax lien was imposed on him? Apparently, as a government official, he believed that it was time to clean up his act. Not so fast.

Acts of vandalism

As I detailed in a previous blog post, in 1998 Mark Shurtleff decided to run for a position on the Salk Lake City Commission. According to the Salt Lake Tribune and Deseret News, police caught him red handed in the act of tearing down his opponent’s campaign signs. Now, as Attorney General for the state of Utah, he posts videos of arrests of criminal suspects on his web site. I wonder how Mark Shurtleff would have felt if the police had videotaped his prior act of vandalism for everyone to see.

Selling favors to contributors

Now, Mark Shurtleff is running for re-election as Utah Attorney General. According to an audio biography on the Utah Attorney General Mark Shurtleff’s website, “Mark wanted to serve others and make a difference in his life.” True to his word, Utah Attorney General Mark Shurtleff has abused the integrity of his office to serve the personal interests of certain campaign contributors.

It is perfectly legitimate for companies to donate monies to politicians to help further their political interests. However, it is not legitimate for elected officials to accept large sums of money to do favors for corporate contributors using state resources.

In another blog post, I detailed how Utah Attorney General Mark Shurtleff colluded with campaign contributor Overstock.com to deliberately defame me because of my exposure and criticism of the company’s misdeeds.

Just a few days after receiving a $5,000 payment from Overstock.com, Mark Shurtleff wrote an “open letter” on his office’s letterhead to Overstock.com that contained outright lies about my agreement to make a free presentation at his 14th Annual White Collar Crime Conference.

Overstock.com (NASDAQ: OSTK) CEO Patrick Byrne used Shurtleff’s letter in a press release in an attempt to discredit my exposure and criticism of his company’s actions. However, taped recorded conversations with Deputy Attorney General Richard Hamp and Chief Deputy Attorney General Kirk Torgensen completely and categorically rebuffed Utah Attorney General Mark Shurtleff’s outright lies.

Utah has a statute covering “Criminal Defamation.” It states:
(1) A person is guilty of criminal defamation if he knowingly communicates to any person orally or in writing any information which he knows to be false and knows will tend to expose any other living person to public hatred, contempt, or ridicule.
(2) Criminal defamation is a class B misdemeanor.
Imagine if some Republican in Utah had the courage to go against corruption in their party like Alaska Governor and current Republican Vice Presidential candidate Sarah Palin did in Alaska. It would be a nice dose of Shurtleff’s own medicine to see him arrested on videotape for corruption.

Written by:

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

Disclosure: No position in Overstock.com securities. Not a Utah resident.

Tuesday, September 02, 2008

Bidz.com: Questionable and Inconsistent Inventory Disclosures

In previous blog posts, I raised questions about Bidz.com’s (NASDAQ: BIDZ) compliance with GAAP in valuing inventories and the company’s history of inconsistent inventory disclosures. In Bidz.com’s latest 10-Q report for Q2 2008, the company has changed its inventory disclosures yet again. See the comparison of Bidz.com's Q2 2008 and Q1 2008 inventory disclosures below:
Bidz.com Q2 2008 10-Q:

Inventories
Inventories consist mainly of merchandise purchased for resale and are stated at the lower of first-in, first-out (FIFO) cost or market.
Inventory Reserve
The unique nature of our business model where customers set the prices they are willing to pay may result in items selling below our cost, and we provide reserves against our inventory based on the difference between the average selling price and the cost of inventory if the average selling price is lower than the cost of inventory. We also provide reserves for obsolescence and slow moving inventory. [Emphasis added.]

Now, compare Bidz.com’s Q2 2008 inventory disclosure to the company’s inventory disclosure in its Q1 2008 10-Q report:

Inventories
Inventories consist mainly of merchandise purchased for resale and are stated at the lower of first-in, first-out (FIFO) cost or market.
Inventory Reserve
The unique nature of our business model where customers set the prices they are willing to pay may result in items selling below our cost, and we provide reserves against our inventory equal to the difference between the average selling price and the cost of inventory if the average selling price is lower than the cost of inventory held for one year or less. We provide reserves for obsolescence and slow moving inventory at 100% of the cost of inventory held for more than one year. [Emphasis added.]

In Q2 2008, Bidz.com reported inventory reserves “based on the difference between the average selling price and the cost of inventory if the average selling price is lower than the cost of inventory.” In comparison, during Q1 2008 and certain prior periods, Bidz.com reported inventory reserves “equal to the difference between the average selling price and the cost of inventory if the average selling price is lower than the cost of inventory held for one year or less.” In addition, in Q2 2008 unlike Q1 2008 and certain prior periods, apparently Bidz.com did not write down the entire cost of inventory “held for more than one year.”

Why did Bidz.com change its inventory disclosures?

Subtle changes in company disclosures are no accident, since management, attorneys, and external auditors usually carefully review such disclosures.

For example, in Q1 2008 and certain prior quarters, Bidz.com wrote down the value of its inventory held less than one year “equal to the difference between the average selling price and the cost of inventory if the average selling price is lower than the cost of inventory.” However, as I described in a previous blog post, such inventory disclosures did not seem to comply with GAAP. Average selling price is not the same as net realizable value, since "average selling price" does not deduct the cost of completion and cost of disposal of inventory.

Therefore, in Q1 2008 and certain prior periods, Bidz.com possibly overstated the value of certain inventory held less than one year by the amount of the cost of completion and disposal of such inventory. In addition, according to Accounting Research Bulletin No. 43, BIDZ.com can only use net realizable value to report inventory at the lower of cost or market, if the current replacement cost of inventory is greater than its net realizable value.

As I detailed above, in Q2 2008 Bidz.com changed its calculation of inventory reserves to “reserves against our inventory based on the difference between the average selling price and the cost of inventory if the average selling price is lower than the cost of inventory.” By using the language “based on” rather than “equal to” the average selling price, in Q2 2008 unlike Q1 2008 and certain prior periods, Bidz.com now apparently further reduces its inventory value to take into account the costs of completion and disposal when it writes down such inventory to market. However, as detailed above, the company cannot arbitrarily use net realizable value to write down the costs of its inventory to market.

Inventory held more than one year

In Q1 2008 and certain prior periods, BIDZ.com disclosed that “We provide reserves for obsolescence and slow moving inventory at 100% of the cost of inventory held for more than one year.” In Q2 2008, the company did not provide any specific disclosure relating to inventory held more than one year. Instead, in Q2 2008 unlike Q1 2008, Bidz.com apparently provided reserves against its entire inventory “based on the difference between the average selling price and the cost of inventory if the average selling price is lower than the cost of inventory.”

Bidz.com’s Q1 2008 and certain prior period inventory disclosures for inventory held for over a year did not appear to comply with GAAP. According to Accounting Research Bulletin No. 43, the lowest amount that inventory can be valued at is net realizable value (estimated selling price less cost of completion and disposal) minus normal profit margins. Therefore, BIDZ.com's method of valuing inventory over a year old seemed arbitrarily based on the age of such inventory, rather than the application of GAAP. Unless such inventory cannot be sold under any circumstances, BIDZ.com cannot "record reserves of 100% of the cost of inventory held more than one year." Therefore, in this specific case, such inventory held for more than a year was possibly understated.

Since Bidz.com apparently no longer writes down the full value of inventory held for more than a year, we need to ask how the company reversed its previous full write downs of such inventory. Did the company sell out all inventory held for more than a year of did they readjust their reserves to a number “based on” the average selling price?

In Q2 2008, inventory total inventory reserves decreased to $509,000 in Q2 2008 from $919,000 in Q1 2008 or about a 45% decrease. In Q2 2008, Inventory reserves as a percentage of gross inventories decreased to 0.9% from 2.6% or about a 65% decrease in relative inventory reserves.

Other developments

A new Barron’s article (subscription required) written by Bill Alpert, details the shady pasts including criminal records of certain partners and associates of Biz.com CEO David Zinberg. Rachael Granby from Seeking Alpha provides further commentary on the Barron's article.

Written by:

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

Disclosure: Not long or short Bidz.com.