Wednesday, May 28, 2008

Overstock.com Continues to Violate SEC Regulation G and Materially Overstate EBITDA in Q1 2008

If the Securities and Exchange Commission Division of Corporation Finance had examined Overstock.com’s (NASDAQ: OSTK) non-GAAP financial disclosures such as EBITDA, they would have found violations of SEC Regulation G governing non-GAAP financial measures that caused EBITDA to be materially overstated in the company’s second, third, and fourth quarter fiscal year 2007 financial reports. Instead, they focused only on Overstock.com’s revenue accounting practices up to fiscal year 2007 and discovered that the company had intentionally violated GAAP in reporting revenue as far back as fiscal 2000. In Overstock.com’s Q1 2008 earnings release and 10-Q report the company continued to improperly remove from its EBITDA calculation, certain stock-based expenses in violation of Regulation G. As a result, Overstock.com’s reported Q1 2008 EBITDA of $3.524 million was materially overstated by $1.339 million or about 61%.

In previous blog posts (here, here, and here), I detailed Overstock.com’s SEC Regulation G violations and resulting overstatements of EBITDA in its second, third, and fourth quarter fiscal year 2007 financial reports. In this blog post, I will analyze the SEC Division of Corporation Finance’s review of noncompliant EBITDA calculations for two another companies: CGG Veritas (NYSE: CGV) and CKX Inc. (NASDAQ: CKXE). Afterwards, I will compare their similar noncompliant EBITDA disclosures to Overstock.com’s noncompliant EBITDA disclosures.

Before we begin, please note that Audit Committee member Joseph J. Tabacco Jr. was notified via email, Cc’d to the SEC, several times last year about Overstock.com’s SEC Regulation G violations and he acknowledged reading such emails by returning read receipts to me. Therefore, Overstock.com cannot claim ignorance as an excuse for violating SEC Regulation G and materially overstating EBITDA. In addition, in Overstock.com's response to certain inquiries from the SEC Division of Corporation Finance noted the importance of EBITDA in helping investors evaluate the company’s financial performance by disclosing, “A multiple of EBITDA is currently the most standard measure of valuation in the industry.”

Why did Overstock.com continue to violate SEC Regulation G and as a result overstate EBITDA in Q1 2008? As detailed in previous blog items (here, here, here, and here), on Friday, April 18, 2008, Overstock.com issued a blatantly misleading surprise earnings release intentionally timed with the expiration of options to manipulate the market (i.e., as a "short squeeze"). Apparently, Overstock.com’s callous disregard of SEC Regulation G and resulting overstatement of EBITDA is yet another act by the company in furtherance of CEO Patrick Byrne’s manipulative and vindictive self-described campaign to “knee the shorts in the groin….for fun and amusement.”

Patrick Byrne once said, "...I think 'EBITDA' is the stupidest thing I ever heard emanate from Wall Street (no small feat)...." Now, in contrast to Patrick Byrne's previous comments about EBITDA, Overstock.com misuses EBITDA in violation of SEC Regulation G to materially overstate the company's financial performance. Patrick Byrne's so-called "gold standard" in communicating "with candor" Overstock.com's financial performance to investors is nothing more than a ruse or a wall of false integrity built to fool gullible investors and Wall Street analysts into trusting the representations of the company's unprincipled management team.

Worst yet, two key company officers have dumped stock as the price Overstock.com’s shares have continued to rise after its materially misleading Q1 2008 earnings release. On April 23 and 24, 2008 Jonathan E. Johnson, Senior Vice President – Corporate Affairs and Legal unloaded 55,922 shares of Overstock.com common shares and pocketed gross proceeds totaling about $957,000 after lying to Wired.com magazine about the comparability of the company’s revenues in its Q1 2008 earnings report. In that recent earnings release, Overstock.com compared Q1 2008 GAAP revenues to Q1 2007 non-GAAP revenues without making an appropriate disclosure. Johnson claimed to Wired.com that Q1 2007 revenues were reported in compliance with GAAP when in fact they were not restated to conform to GAAP. On May 13, David K. Chidester, Senior Vice President – Finance sold 2,766 shares and pocketed gross proceeds totaling about $77,000.

The SEC Division of Corporation Finance has required CGG Veritas to properly report EBITDA in compliance with SEC Regulation G

Let’s examine the SEC Division of Corporation Finance’s review of EBITDA disclosures by CGG Veritas, and afterwards compare that company’s noncompliant EBITDA disclosures with Overstock.com’s noncompliant EBITDA disclosures. CGG Veritas, like Overstock.com, had improperly removed certain stock-based compensation expenses from EBITDA causing its EBITDA computation to be overstated. The SEC notified CGG Veritas that its EBITDA calculation in the company's fiscal year 2006 annual report was not in compliance with SEC Regulation G guidance:

Form 20-F for the year ended December 31, 2006 Operating and Financial Review and Prospects, page 37 EBITDA, page 55

1. With regard to your disclosure of a non-GAAP measure labeled EBITDA:

• The acronym EBITDA refers specifically to earning before interest, tax, depreciation and amortization. However, your measure also adjusts earnings for stock option expense. We will not object to your using such a measure as a liquidity measure but request that you rename it to avoid investor confusion.

• Your disclosure states that you provide this non-GAAP measure because investors use it to determine your operating cash flow and historical ability to meet debt service and capital expenditure requirements. As a measure of liquidity, therefore, your measure should be compared to the most directly comparable liquidity measure, which we believe would be net cash provided by operating activities as presented on your consolidated statements of cash flows.

Please comply in future filings. Refer to the requirements of Regulation S-K, Item 10(c).

Note: Bold print and italics added by me.

CGG Veritas responded to the SEC:

In response to the Staff’s comment, we will in future filings refer to the non-GAAP measure in question as “EBITDAS”, which we will define as “earnings before interest, tax, depreciation, amortization and share-based compensation cost”, and will reconcile to net cash provided by operating activities as presented on the Company’s consolidated statements of cash flows.

Note: Bold print and italics added by me.

Therefore, the SEC instructed CGG Veritas that EBITDA can only mean earnings (meaning net income or loss) before interest, taxes, depreciation, and amortization. No other items can be removed from earnings to compute EBITDA. If a company such as CGG Veritas and Overstock.com wants to remove stock-based compensation expense from its EBITDA calculation, such a non-GAAP measure cannot be called EBITDA.

The SEC Division of Corporation Finance was referring to Regulation G guidance provided by their "Frequently Asked Questions Regarding the Use of Non-GAAP Financial Measures" when they informed CGG Veritas that "EBITDA refers specifically to earning before interest, tax, depreciation and amortization." According to the SEC's Regulation G guidance:

Question 14: Section I of the adopting release describes EBIT as "earnings before interest and taxes" and EBITDA as "earnings before interest, taxes, depreciation and amortization." What GAAP measure is intended by the term "earnings"? May measures other than those intended by the description in the release be characterized as "EBIT" or "EBITDA"? Does the exception for EBIT and EBITDA from the prohibition in Item 10(e)(1)(ii)(A) of Regulation S-K apply to these other measures?

Answer 14: "Earnings" is intended to mean net income as presented in the statement of operations under GAAP. Measures that are calculated differently than those described as EBIT and EBITDA in the adopting release should not be characterized as "EBIT" or "EBIDTA." Instead, the titles of these measures should clearly identify the earnings measure being used and all adjustments. These measures are not exempt from the prohibition in Item 10(e)(1)(ii)(A) of Regulation S-K.

Note: Bold print and italics added by me.

Therefore, the intended meaning of “earnings” for EBITDA under Regulation G is “net income as presented in the statement of operations under GAAP.” EBITDA can only be computed as earnings (meaning net income or loss) before interest, taxes, depreciation, and amortization and the SEC requires that “measures that are calculated differently than those described as…EBITDA in the adopting release should not be characterized as EBITDA.” That is, both CGG Veritas and Overstock should compute EBITDA starting from net income or loss and adding back only interest, taxes, depreciation, and amortization (there were no taxes for Overstock.com to add back).

However, in a direct violation of this requirement, CGG Veritas improperly used operating income rather than net income as the starting point in calculating its noncompliant EBITDA and furthermore improperly removed stock-based compensation from its noncompliant EBITDA calculation. Similarly, Overstock.com improperly used operating loss rather than net loss as the starting point in calculating its noncompliant EBITDA and furthermore improperly removed stock-based compensation from its noncompliant EBITDA calculation.

In the case of CGG Veritas, the company responded to the SEC by calculating EBITDA starting from net income rather than operating income and renaming their non-GAAP financial measure as EBITDAS or “earnings before interest, taxes, depreciation, amortization and share-based compensation cost.” In addition, since CGG Veritas considered its EBITDAS disclosure as a “measure of liquidity,” the company was required to reconcile it to net cash provided by operating activities as presented on the Company’s consolidated statements of cash flows.

Overstock.com continues to violate SEC Regulation G and overstate EBITDA

Meanwhile, Overstock.com continues to make two crucial errors in its EBITDA computations despite my email notifications to Audit Committee member Joseph J. Tabacco Jr. First, Overstock.com improperly reconciled EBITDA to operating loss rather than net loss, causing its EBITDA computation to be overstated by the amount of losses from discontinued operations. Second, Overstock.com improperly removed stock-based compensation expense from EBITDA causing its EBITDA computation to be overstated by the amount of stock-based compensation expense. See Overstock.com’s Q1 2007 and Q1 2008 EBITDA computations below from the company’s recent earnings release and 10-Q:

Items (in thousands)

Quarter Ended 03/31/07

Quarter Ended 03/31/08

Operating Income or (Loss)

$ (17,720)

$ (4,312)

Depreciation and amortization

$ 7,771

$ 6,497

Stock-based compensation

$ 1,073

$ 1,184

Stock-based compensation to consultants for service

$ 5

$ (14)

Stock-based compensation relating to performance shares

$ 0

$ 150

Treasury stock issued to employees for compensation

$ 602

$ 19

EBITDA

$ (8,269)

$ 3,524

In Q1 2007, Overstock.com reported a $3.624 million loss from discontinued operations. However, since Overstock.com improperly reconciled EBITDA to operating loss rather than net loss, the company’s Q1 2007 EBITDA computation was materially overstated by at least the amount of its loss from discontinued operations or $3.624 million. In addition, Overstock.com improperly removed stock-based compensation expenses from EBITDA totaling $1.68 million in Q1 2007 and $1.339 million on Q1 2008 causing further material overstatements of EBITDA, too. Therefore, Overstock.com’s EBITDA was materially overstated in Q1 2007 by $5.304 million or 64.14% and in Q1 2008 by $1.339 million or 61.28%. See the charts below:

Overstock.com's EBITDA computed in compliance with SEC Regulation G:

Items (in thousands)

Quarter Ended 03/31/07

Quarter Ended 03/31/08

Net Income or (Loss)

$ (21,383)

$ (3.909)

Interest expense

$ 1,029

$ 901

Interest Income

$ (990)

$ (1,304)

Depreciation and amortization

$ 7,771

$ 6,497

EBITDA, as required by Regulation G

$ (13,573)

$ 2,185

Overstock.com's material overstatement of EBITDA:

Items (in thousands)

Quarter Ended 03/31/07

Quarter Ended 03/31/08

EBITDA, reported by Overstock.com

$ (8,269)

$ 3,524

EBITDA, as required by Regulation G

$ (13,573)

$ 2,185

Amount of EBITDA overstatement

$ 5,304

$ 1,339

Percentage EBITDA overstatement

64.14%

61.28%

Let’s examine the SEC Division of Corporation Finance’s actions regarding CKX Inc. and how that company complied with Regulation G in response to the SEC’s inquiry

Let’s examine the SEC Department of Corporation Finance’s review of CKX Inc.'s EBITDA calculations. Like Overstock.com, CKX reconciled EBITDA to “income or loss from operations” and similarly they both had losses from discontinued operations. As a result of using operating income or loss from operations rather than net income or loss as the starting point towards computing EBITDA, both CKX and Overstock.com overstated EBITDA by at least the amount of losses from discontinued operations. However, unlike Overstock.com, CKX Inc. did not improperly remove stock-based compensation expense from its noncompliant EBITDA calculations. The SEC notified CKX Inc.:

Reference is made to your presentation of the non-GAAP financial measure, EBITDA, in the table of your historical and pro forma financial information for the year ended December 31, 2004. We note that you define EBITDA as income or loss from continuing operations before interest expense, income tax expense (benefit), depreciation and amortization, and consider it to be an important supplemental measure of your operating performance which is used by management to evaluate the performance of the Company. However, it appears your definition of EBITDA does not comply with the guidance set forth in Question 14 of the “Frequently Asked Questions Regarding the Use of Non-GAAP Financial Measures.” Question 14 states that the term “earnings” is intended to mean net income as presented in the statement of operations under GAAP and further, measures that are calculated differently than those described as EBIT or EBITDA should not be characterized as “EBIT” or “EBITDA.” In this regard, please revise your calculation of EBITDA such that it is computed as net income (loss) (rather than income or loss from continuing operations) before interest expense, income tax expense (benefit), depreciation and amortization. Alternatively, if you believe your current presentation of your non-GAAP measure is appropriate, but has been characterized inappropriately as EBITDA, revise your presentation and supplementally tell us in detail how it complies with FR-65.

Note: Bold print and italics added by me.

Once again, the SEC reiterates how EBITDA must be computed by telling CKX to revise their "calculation of EBITDA such that it is computed as net income (loss) (rather than income or loss from continuing operations) before interest expense, income tax expense (benefit), depreciation and amortization." Any other calculation cannot be called EBITDA.

CKX responded to the SEC:

The Registrant has revised its presentation in the Summary Historical and Pro Forma Financial Data to include operating income before depreciation and amortization ("OIBDA"). All references to EBITDA have been removed. The Registrant has revised its disclosures to reconcile OIBDA to operating income which is the most directly comparable financial measure calculated and presented in accordance with GAAP.

Note: Bold print and italics added by me.

Therefore, CKX renamed its noncompliant EBITDA disclosure as OIBDA or operating income before depreciation and amortization and the company was able to remove losses from discontinued operations from its non-GAAP financial measure.

What is the appropriate term for Overstock.com’s noncompliant EBITDA financial measure? Overstock.com, like CKX, improperly used operating loss as the starting point to compute its noncompliant EBITDA calculation. In addition, Overstock.com, like CGG Veritas improperly removed stock-based compensation expenses from its noncompliant EBITDA calculation. Perhaps Overstock.com's noncompliant EBITDA can be renamed OIBDAS or operating income or loss before depreciation, amortization, and stock-based compensation expense.

Reconciliation requirement

In addition to violating Regulation G’s definition of EBITDA, Overstock.com also violated the SEC’s reconciliation requirement with respect to EBITDA. As detailed above, the SEC required CGG Veritas to reconcile EBITDA to net cash provided by operating activities, since CGG Veritas considered its EBITDA measure as a liquidity measure. Apparently, Overstock.com, like CGG Veritas, considered its noncompliant EBITDA as a liquidity measure and the company should have reconciled EBITDA to net cash provided by operating activities, too. Specifically, Overstock.com disclosed in its Q1 2008 10-Q:

…we believe that EBITDA is an additional measure of actual cash used or cash generated by the operations of the business.

Note: Bold print and italics added by me.

According to Regulation G, a company must reconcile its non-GAAP financial measure with the "most directly comparable financial measure or measures calculated and presented in accordance with GAAP." The SEC provides certain guidance depending on whether or not the non-GAAP EBITDA financial measure is intended to be considered a performance measure or a liquidity measure. If the non-GAAP EBITDA financial measure is a performance measure, the registrant should make the following reconciliation:

Question 15: If EBIT or EBITDA is presented as a performance measure, to which GAAP financial measure should it be reconciled?

Answer 15: Because EBIT and EBITDA exclude recurring charges, companies should consider the answer to Question 8 if they intend to use EBIT or EBITDA as a performance measure. If a company is able to justify such use, EBIT or EBITDA should be reconciled to net income as presented in the statement of operations under GAAP. Operating income would not be considered the most directly comparable GAAP financial measure because EBIT and EBITDA make adjustments for items that are not included in operating income.

Note: Bold print and italics added by me.

Therefore, if EBITDA is used as a performance measure, it should be reconciled to net income or loss as presented in the statement of operations under GAAP. Alternatively, if the non-GAAP measure is intended to be a liquidity measure, the SEC provides the following guidance:

Question 12: Are the requirements in Item 10(e)(1)(i) of Regulation S-K for the prominent presentation of, and reconciliation to, the most directly comparable GAAP financial measure or measures intended to change the staff's historical practice of requiring the prominent presentation of amounts for the three major categories of the statement of cash flows when a non-GAAP liquidity measure is presented?

Answer 12: No. The requirements in Item 10(e)(1)(i) are consistent with the staff's historical practice. The three major categories of the statement of cash flows should be presented when a non-GAAP liquidity measure is presented.

Note: Bold print and italics added by me.

Therefore, according to SEC guidance, "The three major categories of the statement of cash flows should be presented when a non-GAAP liquidity measure is presented." Overstock.com did not reconcile its noncompliant EBITDA to any of the allowable GAAP numbers. Instead, Overstock.com reconciled its noncompliant EBITDA liquidity measure to “Operating Loss.”

To be continued....

Written by,

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

Disclosure: Not long or short Overstock.com, CGG Veritas, or CKX Inc.

Wednesday, May 21, 2008

Warning from a Convicted Felon: Don't Be Fooled by People Who Flaunt Their Integrity

Warning from a convicted felon:

  • White collar criminals build a wall of false integrity around them.
  • White collar criminals measure their effectiveness by the comfort level of their victims.
  • White collar criminals consider your humanity as a weakness to be exploited in the execution of their crimes.

For additional information, you can read my inteview by Susan Tompor in the Detroit Free Press (here).

Written by:

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

Monday, May 19, 2008

Overstock.com and PricewaterhouseCoopers: Errors in Submissions to SEC Division of Corporation Finance

This time it’s outright incompetence and stupidity. Add ineffective Audit Committee oversight, too.

After reading one of the many letters back and forth between the Securities and Exchange Commission Division of Corporation Finance and David Chidester, CFO of Overstock.com (NASDAQ: OSTK), I have found many errors in the company's submissions to the SEC. What's worse is that Overstock.com's auditors, PricewaterhouseCoopers LLP, assisted the company in providing erroneous information to the SEC in response to its inquiries about certain company non-GAAP revenue accounting practices and related disclosures.

As detailed below, Patrick Byrne, CEO, has praised the "unbelievable crystal clear view of the business driven" by CFO David Chidester's "information" and Allison H. Abraham, Audit Committee Chairperson, considers PricewaterhouseCoopers LLP's work "to be consistent and of high quality." However, as you will see from the facts presented below, both Patrick Byrne's claims about the quality of David Chidester's data and Allison H. Abraham claims about the quality of PricewaterhouseCoopers LLP's work are flat out wrong (no surprise).

Before we begin, I need to ask my readers the following questions:

  • If a company reports profits and beats Wall Street analysts’ mean consensus earnings expectations, is it considered a positive surprise?

The answer is yes.

  • If a company reports a loss that is lower than Wall Street analysts’ mean consensus expectations, it is considered a positive surprise?

The answer is yes.

  • If a company reports a loss that is higher than Wall Street analysts’ mean consensus expectations, it is considered a negative surprise?

The answer is yes.

  • If a company beats Wall Street analysts’ mean consensus expectations when it reports profits in one quarter while in another quarter the same company reports losses lower than Wall Street analysts’ mean consensus expectations are both quarters considered as positive surprises?

The answer is yes, except in the insane, inept, incompetent, and unprincipled world of Overstock.com and to borrow a phrase from a well respected blogger Jeff Matthews, “I am not making this up.”

Here we go again. Every time I try to find the answer to a simple question about Overstock.com, I find new problems with the company's disclosures (no surprise). This time I found erroneous information submitted by Overstock.com in a letter to the SEC Division of Corporation Finance. And I just began reading this stuff!

Securities and Exchange Commission Division of Corporate Finance reviews Overstock.com revenue accounting practices and disclosures

As detailed in my last blog post, the Securities and Exchange Commission Division of Corporation Finance released its correspondence with Overstock.com regarding their examination of certain company revenue accounting practices and related financial disclosures. A few months earlier, in January 2008, the SEC discovered that Overstock.com’s revenue accounting was intentionally not in compliance with GAAP and the company’s own revenue recognition disclosures dating as far back as fiscal year 2000.

Overstock.com CFO David Chidester submits erroneous information to the SEC

In a letter to the SEC dated February 26, 2008 David Chidester, Senior Vice President of Finance and a CPA, provided Overstock.com's quantitative materiality analysis of revenue accounting errors effecting both previously reported revenues and earnings per share, dating back to Q1 2004 (see page 15). In one chart, Mr. Chidester compared Wall Street analysts’ mean consensus expectations for earnings per share for Overstock.com against the company’s previously reported non-GAAP earnings per share for fiscal year quarters from 2004 to 2007. Likewise in that chart, he compared Wall Street analysts’ mean consensus expectations for earnings per share for Overstock.com against the company's purportedly corrected changes to GAAP earnings per share for fiscal year quarters from 2004 to 2007. Selected information from Overstock.com’s earnings per share (EPS) materiality analysis is presented below (from page 15 of Overstock.com's letter to the SEC):

Quarter

Analysts' Mean Consensus Expectations for EPS

Reported Non-GAAP EPS Before Revenue Recognition Change

% Surprise

Adjusted EPS After Revenue Recognition Change (purported GAAP)

% Surprise

Q4 2004

$ 0.08

$ 0.12

50.00%

$ 0.11

39.24%

Q1 2005

$ (0.12)

$ (0.22)

83.33%

$ (0.23)

90.89%

Q2 2005

$ (0.22)

$ (0.10)

-54.55%

$ (0.08)

-63.82%

Note: Overstock.com's adjusted earnings per share figures above do not reflect later corrections (see comment 3) required by the SEC to make them in compliance with GAAP. The tables provided by Overstock.com in response to questions by the SEC were not revised by the company.

In Q4 2004, Overstock.com reported that non-GAAP and purported GAAP earnings per share beat Wall Street analysts’ mean consensus expectations and the company considered its financial performance as positive surprises of 50.00% and 39.24%, respectively. Correct so far.

In the next quarter, Q1 2005, Overstock.com reported that non-GAAP and purported GAAP losses per share were higher than Wall Street analysts’ mean consensus expectations and the company considered its financial performance as positive surprises of 83.33 % and 90.89%, respectively. How can Overstock.com report higher than expected earnings in one quarter (Q4 2004) and higher than expected losses in another quarter (Q1 2005) and yet consider both quarters’ financial results as positive surprises?

In the following quarter, Q2 2005, Overstock.com reported that non-GAAP and purported GAAP losses per share were lower than Wall Street analysts’ mean consensus expectations and the company considered its financial performance as negative surprises of 54.55% and 63.82%, respectively. How can Overstock.com report lower than expected losses one quarter (Q2 2005) and consider its financial performance as a negative surprise while reporting higher than expected losses in another quarter and consider its financial performance a positive surprise?

David Chidester's errors are repeated over and over again in his earnings per share materiality analysis chart submitted to the SEC.

Here is where this gets really insaaaaane!!!!!

Before we continue, I will ask two more questions:

  • If a company beats Wall Street analysts’ mean consensus quarterly revenue expectations and at the same time reports losses per share higher than Wall Street expectations, is that company's revenue performance considered as a positive surprise and its earnings performance considered as a negative surprise?

The answer is yes, except of course, in the world of Overstock.com.

  • If a company beats Wall Street analysts’ mean consensus quarterly revenue expectations and in the same quarter reports losses per share below Wall Street expectations, are both revenue and earnings performance considered as positive surprises?

The answer is yes, except again, in the world of Overstock.com.

Now here is where it gets really insane. In another chart, David Chidester compared Wall Street analysts’ mean consensus expectations for revenues against both the company’s previously reported non-GAAP revenues and purported GAAP revenues for fiscal year quarters from 2004 to 2007. In that chart, he got Overstock.com's revenue surprises right. For example, in each of the quarters detailed above (Q4 2004, Q1 2005, and Q2 2005), Overstock.com's previously reported non-GAAP revenues and the purported GAAP revenues beat Wall Street analysts’ mean consensus expectations and the company considered its financial performance as positive surprises. However, in those same quarters, Overstock.com's positive revenue surprises conflict with its earnings per share surprises as detailed above. See the chart below from page 15 of Overstock.com's letter to the SEC.

Quarter

Analysts' Mean Consensus Expectations for Revenues

Reported Non-GAAP Revenues Before Revenue Recognition Change

% Surprise

Adjusted Revenues After Revenue Recognition Change (purported GAAP)

% Surprise

Q4 2004

$ 212.4

$ 221.3

4.19%

$ 219.14

3.18%

Q1 2005

$ 142.4

$ 165.9

16.51%

$ 163.75

15.01%

Q2 2005

$ 147.1

$ 150.6

2.41%

$ 153.40

4.29%

Note: Revenue amounts in $ millions. Overstock.com's adjusted revenue figures above do not reflect later corrections (see comment 3) required by the SEC to make them in compliance with GAAP. The tables provided by Overstock.com in response to questions by the SEC were not revised by the company.

In Q1 2005, Overstock.com reported that non-GAAP and purported GAAP revenues beat Wall Street analysts’ mean consensus expectations and the company considered its financial performance as positive surprises of 16.51% and 15.01%, respectively. However, in that same quarter, Overstock.com reported that non-GAAP and purported GAAP losses per share were higher than Wall Street analysts’ mean consensus expectations and the company considered its financial performance as positive surprises of 83.33 % and 90.89%. How can Overstock.com consider beating revenue expectations as a positive surprise and in the same quarter consider reporting of wider than expected losses as a positive surprise, too?

In Q2 2005, Overstock.com reported that non-GAAP and purported GAAP revenues beat Wall Street analysts’ mean consensus expectations and the company considered its financial performance as positive surprises of 2.41% and 4.29% respectively. However, in that same quarter, Overstock.com reported that non-GAAP and purported GAAP losses per share were lower than Wall Street analysts’ mean consensus expectations and the company considered its financial performance as negative surprises of 54.55% and 63.82%. How can Overstock.com consider beating revenue expectations as a positive surprise and in the same quarter consider reporting of lower than expected losses as a negative surprise?

A legitimate question can be raised: should we add incompetence, carelessness, and stupidity to the list of Overstock.com’s unprincipled management team’s lies, deceptions, false statements and misleading disclosures, inconsistencies, contradictions, and hype, too? The short answer is yes.

The company's CFO, David Chidester, must have his head screwed on backwards. However, during Overstock.com's recent annual meeting of shareholders held on May 13, Patrick Byrne praised the quality of David Chidester's data:

A big part of this turn around has been enabled by super granular data Dave ...has made available to us. He has put to use all of this great technology we built and we have just an unbelievably crystal clear view of the business driven by David's information.

Note: Bold print and italics added by me.

Patrick Byrne's claims about the quality of David Chidester's work are utter nonsense. As the CFO of Overstock.com, David Chidester permitted the company to report revenues in deliberate non-compliance with GAAP. In addition, David Chidester provided erroneous responses to information requested by the SEC Division of Corporation Finance. The double talking CEO of Overstock.com must have his head screwed on backwards, too (no surprise).

Did PricewaterhouseCoopers LLP, Overstock.com's auditors, review this stuff? The short answer is yes and they apparently missed David Chidester's errors (I am just a tiny bit surprised).

PricewaterhouseCoopers assisted Overstock.com in responding to SEC inquiries while the Audit Committee provided the oversight

According to Overstock.com's latest proxy statement:

Audit Fees

The aggregate fees and out-of-pocket expenses PricewaterhouseCoopers LLP billed us for each of the last two fiscal years for professional services for the audits of our annual financial statements, the effectiveness of internal control over financial reporting and reviews of financial statements included in our Reports on Form 10-K and Form 10-Q and for their services assisting us with our responses to accounting comments from the Staff of the SEC and to the SEC's investigation into our accounting and other matters were $611,000 in 2006 and $761,000 in 2007.

Note: Bold print and italics added by me.

PricewaterhouseCoopers LLP received $150,000 in higher fees from Overstock.com compared to the previous year in large part to assist the company in responding to inquiries from the SEC. On May 13, 2008, during the annual meeting of Overstock.com shareholders, Audit Committee Chairperson Allison H. Abraham praised the work of PricewaterhouseCoopers LLP:

The Audit Committee has had substantial opportunity to evaluate the work of PricewaterhouseCoopers and has found it to be consistent and of high quality.

Note: Bold print and italics added by me.

Allison H. Abraham's evaluation of PricewaterhouseCoopers LLP is utter nonsense, too. PricewaterhouseCoopers LLP either missed Overstock.com's deliberate noncompliance with GAAP in reporting revenues or colluded with the company to report non-GAAP revenues. In addition, PricewaterhouseCoopers LLP helped Overstock.com provide erroneous responses to information requested by the SEC Division of Corporation Finance. What's worse is that despite Overstock.com's deliberate noncompliance with GAAP in revenue reporting and errors in responses to the SEC, under PricewaterhouseCoopers LLP's supposedly watchful eye, Allison H. Abraham claims that "The Audit Committee has had substantial opportunity to evaluate the work of PricewaterhouseCoopers and has found it to be consistent and of high quality."

Allison H. Abraham was a member of Overstock.com's Audit Committee last year, too, when the company made the following disclosure in its proxy statement:

The Audit Committee has reviewed and discussed with management and the independent registered public accounting firm (i) the consolidated financial statements for each of the three years in the period ended December 31, 2006, (ii) management's assessment of the effectiveness of the Company's internal control over financial reporting as of December 31, 2006, (iii) PricewaterhouseCoopers LLP's evaluation of management's assessment of the effectiveness of internal control over financial reporting as of December 31, 2006, and (iv) PricewaterhouseCoopers LLP's evaluation of the effectiveness of the Company's internal control over financial reporting as of December 31, 2006. Management has represented to the Audit Committee that the Company's consolidated financial statements were prepared in accordance with generally accepted accounting principles.

Note: Bold print and italics added by me.

Apparently, Overstock.com's Audit Committee took management's word that "the Company's consolidated financial statements were prepared in accordance with generally accepted accounting principles," even though it is clear that management intentionally reported revenues in noncompliance with GAAP and its own revenue recognition disclosures in violation of Securities and Exchange Commission Staff Accounting Bulletin No. 99, No. 101, and No. 104.

I'll ask these questions: Who do you trust more to review Overstock.com's disclosures - CFO David Chidester, PricewaterhouseCoopers LLP, or this convicted felon blogger? Do you trust Overstock.com's Audit Committee's ineffectual oversight of the company's oversight of the Company's financial reporting, internal control and audit functions?

Considering the pattern of lies, deceptions, false statements and misleading disclosures, inconsistencies, contradictions, and hype by Overstock.com's unprincipled management team detailed in this blog and other blogs, I am skeptical that David Chidester, PricewaterhouseCoopers LLP audit team, or Overstock.com's Audit Committee are willing, able, and competent enough to handle their functions and responsibilities.

In the mean time I suggest that David Chidester (CFO and a CPA) purchase the “Accounting for Dummies” book by John A. Tracy, on sale at Overstock.com for $10.65. Mr. Chidester can use a little remedial education in accounting. I suggest that each member of Overstock.com's Audit Committee purchase the "Sarbanes-Oxley for Dummies" book by Jil Gilbert, on sale at Overstock.com for $14.20. Overstock.com's Audit Committee needs to carefully study their responsibilities under the Sarbanes-Oxley Act.

PricewaterhouseCoopers LLP employees need to pay more attention while attending continuing education classes. Otherwise, they will suffer the same fate that Arthur Anderson received as a result of its audits of Enron.

Finally, I respectfully advise the SEC Division of Corporation Finance to carefully re-examine Overstock.com's lawyered up and sanitized disclosures to you, before this convicted felon blogger takes the company's disclosures apart, any further. I suggest that you start by requiring Overstock.com to provide a new and accurate detailed quarter by quarter materiality analysis of the company's revenue accounting errors and related disclosures dating back to day one. Did you notice the relative lack of detailed information provided by Overstock.com in its materiality analysis for fiscal quarters and years 2004 and earlier? In addition, please require Overstock.com to re-adjust its quarterly revenue, cost of goods sold, gross margins, net income or (loss) and earnings per share numbers in its materiality analysis to reflect your corrections (see comment 3) to bring them in compliance with GAAP.

If both CFO David Chidester and PricewaterhouseCoopers LLP audit team cannot get a simple earnings surprise disclosure right and Overstock.com's Audit Committee is unable to provide effective oversight of the Company's financial reporting, internal control and audit functions, imagine what else they screwed up royally on. I'll have plenty to say about that soon.

To be continued…..

Written by,

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

Note: For other up to date coverage of issues on Overstock.com, please read Gary Weiss and Tracy Coenen's blogs.

Disclosure: Not long or short Overstock.com.

Monday, May 12, 2008

Overstock.com and Patrick Byrne: Anatomy of a Stock Market Manipulation Scheme (Part 3)

More pumping and new false statements and disclosures uncovered

My criminal cousin Crazy Eddie Antar once told me that “people live on hope and their hopes and dreams must be fed by through our spin and lies.” Apparently, Overstock.com (NASDAQ: OSTK) CEO Patrick Byrne has adopted my cousin’s despicable mantra as he continues his unabated manipulative schemes to hype his company’s financial prospects, in a deliberate effort to artificially drive up the market value of its common stock.

As detailed in previous blog posts (here, here, and here), Patrick Byrne’s vindictive self-described campaign to “knee the shorts in the groin….for fun and amusement” is an affront to the integrity of our financial markets and raises serious issues of securities law violations for both Byrne and Overstock.com, both of whom are under investigation by the Enforcement Division of the Securities and Exchange Commission. In addition, new information contained in correspondence between the SEC Division of Corporation Finance and Overstock.com, resulting from its review of the company's financial disclosures, show new deceptions by company management and material misstatements of certain previous financial reports and disclosures.

Patrick Byrne's latest pump

Last Thursday, May 8, according to an article in Reuters:

Now he envisions an end to the red ink this year and hopes the online retailer will realize a net profit of $10 million in 2008.

"If we have a good year, I think we can make 1 percent (profit margin)," he said, estimating total sales of $1 billion. "That's different from saying I'm promising to make $10 million this year. But it's definitely possible."

Later, the article goes on the say:

The Utah-based CEO said he expected Overstock to lose 2 cents per dollar in sales in the first three quarters of 2008, but hoped to make it up in the fourth quarter to realize a profit for the year, and then continue profitably in 2009. "It is very realistic. I think we can," he added.

Note: Bold print and italics added by me.

The following day, Overstock.com’s common shares climbed 49 cents to close at $19.34.

In the first quarter of fiscal year 2008, Overstock.com reported a net loss of $3.9 million on revenues of $200.7 million. Now Patrick Byrne wants investors to believe that after two more quarters of losing "2 cents per dollar in sales," that Overstock.com can make up all of the losses of its first three quarters and make an additional $10 million in profits for the full year on $1 billion in revenues. Part of the problem is that Overstock.com's track record has a historically inverse relationship with Patrick Byrne's hype about the company's future performance.

Patrick Byrne’s hype versus Overstock.com’s financial performance: a historically inverse relationship

As detailed in a previous blog post, in the two years prior to Overstock.com's initial public offering in May 2002, Patrick Byrne made a series of statements to several press organizations claiming that Overstock.com was profitable when it was never profitable and hyped the company's future financial prospects with outrageous predictions of future revenue growth and massive profits. Below are some examples.

Way back in June 2000, Patrick Byrne told the Wall Street Transcript that Overstock.com would reach $1 billion in revenues and make a "ton of money" by 2003:

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 on, 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.

Finally, Patrick Byrne concluded the interview with the Wall Street Transcript by claiming that:

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. We're totally focused on execution, running a tight ship, and being as profitable as hell.

Note: Bold print and italics added by me.

On December 6, 2000, Overstock.com issued a press release entitled, "Overstock.com Becomes First Internet Retailer; Achieves Break-Even Using Only $27 Million in Capital," and Byrne claimed:

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.

However, Overstock.com has never had a profitable year in its entire history and its reported revenues have never come close to the $1 billion mark hyped by Byrne. By fiscal year 2005, Overstock.com's reported revenues topped out at $799.3 million while it lost $25.1 million. The company had accumulated losses of $96.8 million from its inception in 1997 to 2005.

In March 2006, Patrick Byrne claimed that Overstock.com:

...should cross the billion-dollar mark.... This year, with a little luck, we should be an EBITDA-profitable year, so I'm kind of comfortable with that.

Note: Bold print and italics added by me.

However, in fiscal year 2006, Overstock.com's reported revenues declined to $788.2 million compared to its peak $799.3 million of reported revenues in the previous year, far below the “billion-dollar mark” hyped by Byrne. Worst yet, Overstock.com reported EBITDA of minus $55.7 million, a far cry from being "EBITDA-profitable," and massive record net losses of $101.8 million. In fiscal year 2007, Overstock.com's reported revenues continued to decline to $760.2 million compared to $799.3 million in the previous fiscal year. In fiscal year 2006, the company reported massive net losses of $45 million and accumulated losses of $243.7 million since its inception in 1997.

More hype and lies uncovered from Overstock.com’s recent Q1 2008 earnings call

It is simply amazing, how many new lies that Patrick Byrne and his management team make up. Every time I try to find the answer to a simple question, I find even more inconsistencies and newer lies. As detailed in a previous blog post, during the first quarter of fiscal year 2008, Overstock.com reported a 27% leap in revenues to $200.7 million compared to $157.9 million in the previous year's first quarter as Patrick Byrne claimed that the company had “returned to above industry-level revenue growth this quarter.”

However, Overstock.com failed to disclose in its earnings release that it compared Q1 2008 GAAP reported revenues to Q1 2007 non-GAAP reported revenues. In addition, Overstock.com failed to disclose in its Q1 2008 earnings release that the company’s hyped up resumption of “industry level growth” was aided by an inordinately low revenue base resulting from a decline in Q1 2007 revenues compared to Q1 2006. Also, Overstock.com did not disclose that Q1 2008 benefited from the early occurrence of Easter holiday sales and an extra shopping day due to the leap year, a benefit not present in the two previous comparable fiscal year quarters.

A few months earlier, in January 2008, Overstock.com had disclosed that the Securities and Exchange Commission Division of Corporation Finance found the company’s revenue accounting practices were not in compliance with GAAP and with its own disclosures dating back to at least fiscal year 2000. Rather than comply with Statement of Financial Accounting Standards No. 154 and restate prior year financial reports to correct previous errors in revenue accounting, Overstock.com chose to make a one-time cumulative adjustment in Q4 2007 which rendered many of its previous financial reports and disclosures incomparable. Worst yet, during the Q1 2008 earnings conference call that followed, Patrick Byrne and David Chidester made up new lies about the comparability of Overstock.com's financial reports and the impact of the SEC imposed revenue recognition change to GAAP on Overstock.com’s reported revenue growth.

According to correspondence between the SEC Division of Corporation Finance and Overstock.com, written before the Q1 2008 earnings call and just released last Friday, the company's base line Q1 2007 GAAP revenues were actually $4.8 million higher at $162.7 million. Therefore, Overstock.com's reported Q1 2008 revenue growth compared to Q1 2007 should have been 23% and not 27% as reported. However, during Overstock.com’s recent Q1 earnings call, Patrick Byrne and David Chidester tried to play down the effect of the SEC imposed change on Overstock.com’s revenue accounting to GAAP. In contrast to Overstock.com’s earlier correspondence to the SEC weeks earlier, during the Q1 2008 earnings call, Byrne and Chidester claimed that Overstock.com’s reported revenue growth in Q1 2008 compared to Q1 2007 had benefited by just $900,000 from the SEC imposed change in revenue reporting to GAAP and that Overstock.com's growth in revenues was a "true 27%" (See below):

David Chidester:

...net effect of the revenue deferral just discussed at the end of Q1 was incremental the revenue by 900,000....

Later on, Patrick Byrne

No. I would not say there is any significant -- this is a true 27%, it wasn't that that 13 million flopped into this quarter and its not apple-to-apples or something like that. The difference from the accounting change is negligible. It wasn't about Easter, it wasn't different things, this is real change.

David Chidester

Yeah, and again I would just clarify that the Q1'07 revenue and Q1'08 revenue are comparable, because again the only effect that Q1 of '07 had no deferral or reversal. Q1'08 had a deferral and a reversal that netted to only a $900,000 difference. So, the two are completely comparable.

Note: Bold print and italics added by me.

In contrast to management's false statements above, Friday's release of correspondence between the SEC Division of Corporation Finance and Overstock.com, clearly shows that the company's change in revenue reporting to GAAP reduced Overstock.com's reported revenue growth by $4.8 million and not $900,000 or about five times higher than the amount claimed by management. In addition, according to Overstock.com’s correspondence with the SEC, Q1 2006 GAAP revenues were $5.2 million higher than previously reported at $183.3 million. The company’s GAAP revenue had declined 11.2% in Q1 2007 compared to Q1 2006. thus over a two year period Overstock.com’s Q1 2008 GAAP revenues grew only a mere 10% or just about 5% a year, hardly what Overstock.com claims to be “industry level growth.”

Are Patrick Byrne’s latest claims about Overstock.com's financial prospects really achievable?

The short answer is most probably no. Despite the false statements and disclosures detailed above, during the Q1 2008 earnings call, Patrick Byrne claimed that Overstock.com’s revenue growth is sustainable:

Yeah, I can say as far as growth goes, I don't believe this is a blip. I don't want to get anybody's hopes up.

Before, we can determine if Overstock.com can achieve $1 billion in revenues and $10 million in profits for fiscal year 2008, we require last year’s revenues as a starting point. Should we use Overstock.com’s previously reported non-GAAP revenues for 2007 or do we use the company’s GAAP compliant revenues as disclosed to the SEC? During the earnings call, Byrne was apparently using Overstock.com’s non-GAAP reported revenues as a baseline to project Overstock.com’s future growth. Instead, I will use Overstock.com’s newly disclosed GAAP compliant revenue figures as a baseline for an “apples to apples” approach to determine if Overstock.com can actually achieve $1 billion in revenues and $10 million in profits for 2008 (See below).

• Q2 2007: GAAP revenues $147.651 million disclosed in correspondence to the SEC versus previously reported non-GAAP revenues $148.967 million in Overstock.com's not restated financial statements

• Q3 2007: GAAP revenues $162.265 million disclosed in correspondence to the SEC versus previously reported non-GAAP revenues $161.930 million in Overstock.com's not restated financial statements

• Q4 2007: GAAP revenues $304.851 million disclosed in correspondence to the SEC before adding the cumulative adjustment to revenues resulting from the SEC imposed revenue recognition change to GAAP

Therefore, based on Overstock.com's GAAP revenues, the company's revenue growth for the remaining three quarters of fiscal year 2008 would have to accelerate from 23% in Q1 2008 to 30% for the remainder of the year. See the chart below:

Selected Financial Information

Q1

Q2

Q3

Q4

Totals

2008 Revenues - Reported Q1 and estimated Q2 to Q4 (in $ 000's)

200,745

191,946

210,945

396,364

1,000,000

2007 Revenues - From correspondence with SEC (in $ 000's)

162,749

147,651

162,265

304,851

777,516

Growth

23.3%

30%

30%

30%

28.6%

However, as detailed above, Q1 2008 revenue growth compared to Q1 2007 was aided by the inordinately low revenue base resulting from a decline in Q1 2007 revenues compared to Q1 2006. In addition, Q1 2008 revenues were helped by an additional shopping day due to the leap year and the early occurrence of Easter, not present in the two previous fiscal quarters. Q2 2008 revenues will also be aided by the inordinately low sales volume base resulting from a decline in Q1 2007 revenues compared to Q2 2006. However, Overstock.com faces tougher revenue comparisons in Q3 2008 and Q4 2008. Unlike Q1 and Q2 2007, Overstock.com's Q3 and Q4 2007 revenues actually increased in comparison with previous year periods. (See the table below):

Selected Financial Information

Q1

Q2

Q3

Q4

Totals

2007 Revenues - From Overstock.com correspondence with the SEC (in $ 000's)

162,749

147,651

162,265

304,851

777,516

2006 Revenues - From Overstock.com correspondence with the SEC (in $ 000's)

183,251

159,809

156,024

289,515

788,598

Growth

-11.1%

-7.6%

4.0%

5.3%

-1.4%

Considering all the factors detailed above, it will be extremely difficult for Overstock.com to grow its revenues at 30% for the remainder of the year in order to achieve $1 billion in total revenues. Even if Overstock.com's revenues reach $1 billion for fiscal year 2008, it is difficult to see how the company can achieve $10 million in net profits as hyped by Byrne. Assuming that Patrick Byrne is right and Overstock.com's revenues reach $1 billion and its loses "2 cents per dollar in sales" for the first three quarters, the company would have to report substantially high record profits in its final quarter or $21.97 million to make up for losses in the first three quarters. (See the table below):

Selected Financial Information

Q1

Q2

Q3

Q4

Total

2008 Revenues - Reported Q1 and estimated Q2 to Q4 (in $ 000's)

200,745

191,946

210,945

396,364

1,000,000

2008 Net Profits or (Losses) - Reported Q1 and estimated Q2 to Q4) (in $000's)

(3,909)

(3,839)

(4,219)

21,967

10,000

Percentage of Net Profits or (Losses) to Revenues

(1.9%)

(2.0%)

(2.0%)

5.5%

1.0%

The last time Overstock.com reported any quarterly profits was in Q4 2004, about 4 years ago. In that quarter, Overstock.com reported profits of $2.695 million on previously reported non-GAAP revenues of $221.3 million. However, according to correspondence between the SEC Division of Corporation Finance and Overstock.com, those profits were materially overstated by at least 10% and possibly as high as 19% due in large part to over-reporting of revenue by $2.16 million in Q4 2004. While Overstock.com previously reported a $4.73 million net loss for the entire 2004 fiscal year, the company's correspondence with the SEC shows that that company's losses should have been $923 higher or losses were materially understated by 19%.

In order for Overstock.com's performance to match Patrick Byrne's latest hype, Overstock.com's Q4 2008 profits would have to exceed its highest of only one of two quarterly profits ever reported by the company by almost a factor of ten.

In Overstock.com's previous Q4 2007, the company reported operating expenses of $53.178 million on GAAP revenues of $304.951 million (Note: GAAP revenues as per Overstock.com correspondence with SEC). Let's assume for the sake of argument that Overstock.com, in the highly unlikely event, can keep its total dollar level operating expenses in Q4 2008 at the same level as Q4 2007, while the company's GAAP revenue rises by $91.513 million or 30% more than the previous comparable period.

Selected Financial Information

Q4 2008

Percentage

Q4 2008 Projected Revenues - 30% increase over previous fiscal year period (in $ 000's)

396,364

100.00%

Less: Q4 2008 Cost of Goods Sold (in $ 000's)

321,219

81.04%

Q4 2008 Gross Margins (in $ 000's)

75,145

18.96%

Q4 2008 Operating Expenses - Same level as previous fiscal year period (in $000's)

53,178

13.42%

Projected Operating Income (in $ 000's)

21,967

5.54%

Note: For simplicity we will ignore non-operating income and expenses such as interest income and interest expense.

Under the assumptions detailed above, Overstock.com would require about 18.96% gross margins in Q4 2008 to match Patrick Byrne's latest hype. In Q4 2007, gross margins were only 16.38% based on Overstock.com's SEC imposed revenue accounting change to GAAP. Therefore, Overstock.com would have to increase Q4 2008 GAAP revenues by 30% compared to Q4 2007, keep its Q4 2008 operating expenses at exactly the same Q4 2007 level in absolute dollars, and increase gross margins by 2.58%, to make a full year $10 million net profit on revenues of $1 billion after losing "2 cents per dollar in sales" in its first three quarters. Not much of a chance (no surprise).

To be continued....

Written by:

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

Note: Please read Gary Weiss and Tracy Coenen's blogs for up to date coverage of Overstock.com.

Disclosure: No position in Overstock.com securities long or short