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Overstock.com (O.co): Is Insolvency Looming?

Overstock.com (NASDAQ:OSTK), also known as O.co, faces possible insolvency if current earnings trends continue and it cannot restructure two loans with U.S. Bank, its biggest creditor by March 31, 2012 at the latest. In an apparent effort to mask its weakening net working capital position, it played a shell game to window dress its balance sheet at the end of the third quarter (September 30, 2011). Overstock.com owed U.S. Bank $20.329 million under the “Master Lease Agreement” (sale-leaseback) and another $17 million under a “Financing Agreement” (line of credit). Therefore, the company owes U.S. Bank $37.329 million under two loan agreements.

 

Last week Overstock.com surprised investors by reporting a third quarter $7.8 million net loss (diluted earnings per share of negative $0.33) compared to a net loss of $3.4 million (diluted earnings per share of negative $0.15) in the previous year’s third quarter. Its net loss was $0.10 per share higher than was projected by Wall Street analysts. So far, Overstock.com has lost $16 million in the first nine months of the year compared to only a $1.1 million dollar loss during the previous year's nine month period.

 

"Likely" breach of debt covenant buried in footnotes

 

As I described in my last blog post, the company buried news of an impending default in its Master Lease Agreement (sale leaseback) with U.S. Bank on page 43 of its footnotes in its third quarter 10-Q report. The Master Lease Agreement with U.S. Bank requires Overstock.com "…to maintain a minimum Total Fixed Charge Coverage annualized ratio of at least 1.20:1.00, based on operating results, measured at the end of each fiscal quarter." The company revealed that, "… based on the results for the first three quarters of 2011, it is likely that we will be out of compliance with the Total Fixed Charge Coverage ratio at December 31, 2011 unless current trends improve substantially. We have held initial and collegial discussions with U.S. Bank regarding this potential non-compliance."

 

The 10-Q report gives a peek into Overstock.com’s "current trends" and since it was filed 27 days into the 92 day fourth quarter. According to the company’s own analysis, the projected fourth quarter numbers don’t look good “unless current trends improve substantially” in the next few weeks.

 

Window dressing its balance sheet

 

At the end of its third quarter, the Overstock.com had $18.4 million of net working capital (current assets minus current liabilities). However, the company would have reported a mere $1.4 million of net working capital had it not played a shell game and window dressed its balance sheet during the third quarter. Apparently, the company wanted to avoid reporting dangerously low net working capital going into the fourth quarter, while at the same time it is trying to renegotiate terms of its Master Lease Agreement (sale leaseback) with U.S. Bank.

 

On September 21, 2011, Overstock.com borrowed $17 million under its Financing Agreement (line of credit) with U.S. Bank and used $7.5 million of internal cash to redeem $24.5 million of convertible debt before its December 1, 2011 due date (10-Q report page 16 and 33). It could have waited until the fourth quarter to redeem its convertible debt when it was due. Further, the convertible debt was unsecured debt, while the amount it borrowed from U.S. Bank is secured debt.

 

The convertible debt was classified on the company's balance sheet as a current liability at the end of its second quarter. The $17 million that it borrowed under its Financing Agreement (line of credit) is a long term debt (noncurrent liability) because payment is due on December 31, 2012 (10-Q report page 42). The company used secured long term debt (noncurrent liability) to replace an unsecured current liability in the quarter before its payment was due.

 

Had Overstock.com not borrowed that $17 million from U.S. Bank to redeem its convertible debentures before the end of the third quarter (September 30, 2011), it would have ended the quarter with a mere $1.4 million in working capital (current assets less current liabilities). In any case, its balance sheet window dressing is temporary, since the $17 million it borrowed will become a current liability by the end of the first quarter of 2012 (March 31, 2012) which is traditionally a weak quarter for the company.

 

Liquidity issues

 

At the end of the third quarter (September 30, 2011), Overstock.com owed U.S. Bank $20.329 million under its Master Lease Agreement (sale leaseback). As I detailed above, the company revealed that if current trends don’t "substantially improve" it "likely" won't be in compliance with certain minimum financial benchmarks required under the agreement. According to the Master Lease Agreement, an "Event of Default" includes the "...failure of Lessee to perform any term, covenant or condition of the Lease...." In such a case, if the company cannot restructure its Master Lease Agreement with U.S. Bank, the lender can require the company to immediately pay "…the entire amount of rent and other sums…."

 

$14.485 million of the $20.329 million Overstock.com owed U.S. Bank under its Master Lease Agreement (sale leaseback) was classified as long term debt (noncurrent liability) as of the end of the third quarter (September 30, 2011). As I detailed above, Overstock.com had only $18.4 million of net working capital at the end of the third quarter. By window dressing its balance sheet, the company made it appear that it had adequate net working capital to pay all amounts due under that agreement in the event of a potential default. Even if we set aside the window dressing issue, the company barely had enough net working capital to pay all amounts due under the Master Lease Agreement in the event of a potential default.

 

The company is required to have $30 million in compensating balances deposited at U.S. Bank against its Master Lease Agreement (sale leaseback) and Financing Agreement (line of credit). Excluding those $30 million compensating cash balances, the company had only $95.8 million of current assets available to cover $101.6 million of current liabilities as of the end of its third quarter. (Note: The $101.6 million current liabilities amount excludes $5.8 million of current liabilities under the Master Lease Agreement).

 

In other words, Overstock.com could have a difficult time paying debts as they come due if continues to maintain $30 million in compensating cash balances at U.S. Bank. Further, the $17 million it borrowed under the Financing Agreement becomes classified at a current liability in the first quarter of 2012 which will reduce net working capital by the same amount.

 

Overstock.com may have to reduce its $30 million of compensating balances on deposit with U.S. Bank. However, if the company does not maintain its compensating balances with U.S. Bank it would default on both loan agreements totaling $37.3 million. Therefore, Overstock.com also may have to renegotiate its Financing Agreement (line of credit) with U.S. Bank.

 

Other issues

 

Overstock.com also has to contend with an ongoing investigation by the Securities and Exchange Commission into securities law violations after this blog exposed it fabricating its earnings. So far, every single financial report issued from its inception to Q3 2009 had to be restated up to three times due to violations of Generally Accepted Accounting Principles.

 

The company is being sued by District Attorneys from seven California District Attorneys who are alleging consumer fraud. They are seeking at least $15 million of restitution, fines, penalties, and cost reimbursements from the company for allegedly defrauding consumers. The Judge in that case had to compel an uncooperative Overstock.com to turn over information to the California District Attorneys.

 

Earlier in the year, Google penalized Overstock.com for improperly gaming its search algorithm to boost its search rankings.

 

Two weeks ago, Overstock.com CEO Patrick Byrne, Deep Capture LLC, and Mark Mitchell, a writer for Deep Capture, were sued in a Canadian court for defamation. Deep Capture LLC is an affiliate of Overstock.com and its website was used to promote Byrne's delusional conspiracy theories and libel company critics. The judge ordered the Deep Capture website shut down.

 

Written by,

 

Sam E. Antar

 

Read more: http://www.businessinsider.com/overstockcom-oco-is-insolvency-looming-2011-10#ixzz1cUpMHsPN

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Probably not a good idea to short a company (that in the worst case scenario would need $35M), where the CEO is worth $50M, his father is worth over a billion, and the largest shareholders manage over $22B in investment capital...Prem and Francis! 

 

Do you really think that if Byrne called up Prem or Francis and offered them convertible notes, or even better preferred shares with a decent yield, that they wouldn't jump on it?  Not to mention that a principal of Hamblin-Watsa, Sam Mitchell, sits on the board of Overstock. 

 

Hopefully, Sam Antar and his cronies decide to short the hell out of this, because I would be thoroughly entertained to watch them lose all of their money!  Cheers!

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Guest ValueCarl

As the result of personal experience with a security on the receiving end of Watsa, Chou's lending practices, I think I will short OVERSTOCK myself should they become the loaners of last resort!  ;)

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Those debt covenants will be breached on a 4 quarter rolling basis.  But they will probably be back within that range after the 4th quarter of 2011, once those receivables come in during the 1st quarter 2012.  Antar will take anything he can and try to blow it up into a huge mess.  Overstock has enough cash to just pay the debt off entirely after the 4th quarter when they get their biggest inflows of operating cash flow. 

 

Overstock needs to do better...no doubt about that...but to blow it up into what Antar's saying is silly.  They are currently in negotiations with U.S. bank regarding the covenants, and I suspect that some adjustment will occur where U.S. bank will give them some leeway, with them returning to within the credit covenants in the next six months. 

 

The whole Google penalty and then Overstock's decision to switch to the O.co brand is what really hurt them this year.  They lost about 5% of their revenue in the 1st quarter because of the penalty, and their visibility naturally went down in the 2nd because of that as well.  The stupid idea of ramping up the O.co brand was poorly executed, and Byrne stated that himself in the latest conference call.  Customers were confused and probably put off by the push.  Overstock's own brand is pretty darn good, and there was no reason to switch.  They could have just used the O.co url as an alternative.  Cheers!   

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The stupid idea of ramping up the O.co brand was poorly executed, and Byrne stated that himself in the latest conference call.  Customers were confused and probably put off by the push.  Overstock's own brand is pretty darn good, and there was no reason to switch.  They could have just used the O.co url as an alternative. 

 

I'd have a hard time trusting management that actually thought the whole O.co thing was a good idea.

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  • 3 weeks later...

Looks like Francis still has faith in Overstock: http://sec.gov/cgi-bin/browse-edgar?action=getcompany&CIK=0001130713&type=&dateb=&owner=include&count=40

 

The O.co fiasco has been a rebranding nightmare for the company here in the U.S. I find the shortcut O.co useful, but i guess it confused many shoppers. Still holding my underwater shares.

 

I wonder why they never put any marketing dollars behind O.biz. The site seems to have the most potential of all the experiments that overstock has toyed around with.

 

And a few pet peeves:

 

It would seem logical for the overstock.biz domain to direct to O.biz and not overstock.com. They should also (in my opinion) add the O.biz tab to their overstock.com website. I would think that would be a very cheap way to get additional awareness of the business site. The "Cars" and "insurance" tabs have got to go, in my opinion.

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  • 1 month later...

I'd like to add my first hand experience with Overstock.com. I ordered from Overstock.com before, thus, it sends me ad emails almost everyday. I do not want to receive these emails and I click on unsubscribe. But, it continues to send  me emails almost everyday. I have to set up gmail filters to automatically delete emails from overstock.com. Obviously, I was annoyed by the practice.

 

Retailing is hard enough, online retailing is harder. Online shoppers can compare prices so easily, just by make several clicks. Although I admire Prem and Chou, I personally will not invest in Overstock.

 

Disclaimer: I have no position in overstock (long or short).

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  • 1 month later...
Guest ValueCarl

My apologies to the board for posting a double link surrounding Sam The Spam Artist's SCAM tied to his yesterday diatribes in addition to today's newest release where he accelerates the attack. I just thought the comment section was moving along interestingly for those who read "comment" sections in conjunction with the author's article. In my opinion, of course, because I am not a CONVICTED FELON!  >:( 

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Sam the Spam and his friends are getting really scared about something..........

 

 

http://seekingalpha.com/article/382951-overstock-com-was-ineligible-to-file-a-registration-statement-last-december

 

Overstock's web traffic rebounded significantly in the 4th quarter, after the Google penalty in the 1st quarter hurt them and the O.co branding confused their customers in the 2nd Q.  In fact, see the enclosed chart on Overstock's traffic over the last two years, and you'll see that in the 4th Q 2012, the peak in the shopping season began earlier and lasted longer.  As long as they didn't undercut their pricing, chances are they did as well, if not better than 4th Q 2011.  I suspect Sam and his associates are hoping to squeeze some money out of their shorts before the results come out.  Cheers!

Overstock.com_Traffic_Rank_-_2_Years_Ending_February_2012.pdf

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Guest ValueCarl

Great data points, Sanjeev. I found this interesting, and am wondering what Dr. Byrne along with his team are doing to correct it? I have a recommendation, but I wouldn't dare mention it on this thread, for fear of the negative ramifications which might ensue afterwards possibly even making me disappear by turning into cyber dust like my good friend, Ben Graham recently!  :'(   

 

Average Load Time for

Overstock.com

Slow (1.955 Seconds), 68% of sites are faster.

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Guest ValueCarl

Patrick's CREW just gave, "Sam, I Am" a CONVICTED FELANNE, a FAT PITCH to run with, especially if he wants to write a new two page 3,000 character diatribe on the psychology of public corporations reporting on Fridays in front of weekends so their stocks find a RESPITE from the selling on "bad news" earnings reports!

 

Can Sam the Spam, I Am such a Scam, as well as CONVICTED FELANNE adhere to such a PLAN? Go ahead Sam, have a field day with it! 

 

http://www.4-traders.com/OVERSTOCK-COM-INC-10372/news/OVERSTOCK-COM-INC-Overstock-com-Scheduled-to-Release-Its-FY-and-Q4-2011-Financial-Results-on-March-2-14044123/

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Patrick's CREW just gave, "Sam, I Am" a CONVICTED FELANNE, a FAT PITCH to run with, especially if he wants to write a new two page 3,000 character diatribe on the psychology of public corporations reporting on Fridays in front of weekends so their stocks find a RESPITE from the selling on "bad news" earnings reports!

 

Can Sam the Spam, I Am such a Scam, as well as CONVICTED FELANNE adhere to such a PLAN? Go ahead Sam, have a field day with it! 

 

http://www.4-traders.com/OVERSTOCK-COM-INC-10372/news/OVERSTOCK-COM-INC-Overstock-com-Scheduled-to-Release-Its-FY-and-Q4-2011-Financial-Results-on-March-2-14044123/

 

Hi Carl,

 

They are reporting before the markets open on Friday, so there is nothing to write about.  I think the critics are mainly bothered by companies that report on Fridays AFTER market close...not before.  Cheers!

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Guest ValueCarl

Overstock.com Chairman and CEO Patrick M. Byrne said, "We've made O.info the place to find helpful information about our products. The site features unique customer reviews with insights into the appearance, function and fit of a product.  Each product has an overall rating as well as individual user ratings to help make the shopping experience easier for consumers, particularly when deciding among similar products. So whether you're just beginning your research for a purchase or you're ready to buy, the information you need is just a click away with O.info."

 

Along with consumer goods, O.info contains in-depth information on cars, travel, insurance and business products.

 

The O.info domain was acquired in September 2011 from Afilias Limited, the official .info domain registry.

 

Roland LaPlante, CMO of Afilias, said, "Overstock.com has a focused branding strategy for its Web properties including the use of single-character 'O' domains like O.info. The .info domain has been available for more than a decade and has more than eight million users. In fact, .info is the most popular new generic top-level domain (gTLD) assigned by the Internet Corporation for Assigned Named and Numbers (ICANN)."

 

Read more here: http://www.sacbee.com/2012/02/28/4296838/overstockcom-launches-oinfo-consumer.html#storylink=cpy

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Guest ValueCarl

Provide a little ground cover for the Cabal's LAP DOGS! This a Dr. Byrne thread; therefore, it is right to utilize BYRNE LANGUAGE in advance of BURNING these BASTARDS!  >:(

 

Such a silly game, as there is NOT one morsel of good data relating to numbers or "VALUE" in this piece of trash. Throw it in the garbage pail, and light a flame to it and them, while you're at it!   

 

http://www.forbes.com/sites/greatspeculations/2012/02/29/big-lots-flexing-into-earnings-overstock-may-backfire-for-bulls/

 

For its part, the extreme oversold conditions in Overstock.com may tempt some into looking at the stock as a potential special situations trade.  Seen this way, Friday’s earnings announcement could be a catalyst that forces short sellers to cover and sends the stock soaring for a brief period as traders rush to buy back shares.

 

That said, high probability traders and more active investors would do well to avoid filling their shopping carts with stocks like Overstock.com. While a ‘special situations’ trade every now and then can be a great way to take advantage of oversold (and overbought extremes), waiting for a pullback in bull market territory – such as the one that could follow any disappointment in Big Lots’ Friday report – likely is the smarter play to trade in and trade out of this active stock.

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Guest ValueCarl

http://finance.yahoo.com/news/overstock-com-reports-fy-q4-130000409.html

 

 

Key FY 2011 metrics (comparison to FY 2010):

Revenue:  $1,054M vs. $1,090M (3% decrease);

Gross margin: 17.0% vs. 17.4% (40 basis point decrease);

Gross profit:  $179.1M vs. $189.6M (6% decrease);

Sales and marketing expense: $61.8M vs. $61.3M (1% increase);

Contribution (non-GAAP measure): $117.3M vs. $128.3M (9% decrease);

G&A/Technology expense: $134.8M vs. $113.9M (18% increase);

Net income (loss): $(19.4)M vs. $13.9M ($33.3M decrease); and

Diluted EPS: $(0.84)/share vs. $0.59/share ($1.43 decrease).

 

Key Q4 2011 metrics (comparison to Q4 2010):

Revenue:  $314.1M vs. $348.9M (10% decrease);

Gross margin: 16.2% vs. 17.0% (80 basis point decrease);

Gross profit:  $50.9M vs. $59.4M (14% decrease);

Sales and marketing expense: $18.9M vs. $17.3M (10% increase);

Contribution (non-GAAP measure): $32.0M vs. $42.2M (24% decrease);

G&A/Technology expense: $34.1M vs. $27.4M (24% increase);

Net income (loss): $(3.4)M vs. $14.9M ($18.3M decrease); and

Diluted EPS: $(0.15)/share vs. $0.63/share ($0.78 decrease).

 

 

http://www.sec.gov/Archives/edgar/data/1130713/000104746912002034/a2207595z10-k.htm

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